Blueprint
UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the
Securities
Exchange Act of 1934 (Amendment No. __)
Filed
by the Registrant ☑
Filed
by a Party other than the
Registrant ☐
Check
the appropriate box:
☑
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Preliminary
Proxy Statement
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☐
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Confidential,
for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
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☐
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Definitive
Proxy Statement
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☐
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Definitive
Additional Materials
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☐
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Soliciting
Material Pursuant to §240.14a-12
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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
(Name
of Registrant as Specified In Its Charter)
Payment
of Filing Fee (Check the appropriate box):
☐
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No fee
required.
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☑
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Fee
computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.
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1)
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Title
of each class of securities to which transaction applies: Fusion
Common Stock, par value $0.01 per share
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2)
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Aggregate number of securities to which transaction applies:
In
connection with the Merger, Fusion will issue to the seller’s
a number of shares equal to 3 times (i) the number of shares of
Fusion Common Stock outstanding as of the closing of the Merger,
plus (ii) the number of shares of Common Stock issuable upon
conversion of all shares of Fusion preferred stock, plus (iii) the
number of shares of Fusion Common Stock issuable upon the exercise
of all in-the-money warrants (as adjusted for stock splits and
calculated using the treasury stock method). As of the date of this
filing, that number of shares of Fusion Common Stock equals
74,199,771.
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3)
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Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which
the filing fee is calculated and state how it was determined):
The maximum
aggregate value was determined based on 74,199,771 shares of Fusion
Common Stock to be issued to the seller’s at the closing of
the Merger multiplied by $2.48 per share. In accordance with
Section 14(g) of the Securities Exchange Act of 1934, as amended,
the filing fee was determined by multiplying .0001245 by the sum
calculated in the preceding sentence.
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4)
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Proposed
maximum aggregate value of transaction:
$184,015,432.08
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5)
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Total
fee paid: $22,909.92
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☐
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Fee
paid previously with preliminary materials.
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☐
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Check
box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting
fee was paid previously. Identify the previous
filing by registration statement number, or the Form or Schedule
and the date of its filing.
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1)
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Amount
previously paid:
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2)
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Form,
Schedule or Registration Statement No.:
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3)
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Filing
Party:
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4)
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Date
Filed:
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PRELIMINARY PROXY
STATEMENT - SUBJECT TO COMPLETION
Dated December
, 2017
420 Lexington Avenue, Suite 1718
New York, New York 10170
(212) 201-2400
MERGER PROPOSED -- YOUR VOTE IS VERY IMPORTANT
Dear Fellow Stockholders:
I am pleased to invite you to attend the annual
meeting of stockholders (referred to as the Annual
Meeting) of Fusion
Telecommunications International, Inc., a Delaware corporation
(referred to as Fusion or the Company) to be held at 3:00 p.m., local time, on
[●], 2018. The Annual Meeting will be held at the Company's
executive office located at 420 Lexington Avenue, Suite 1718, New
York, New York, 10170.
On August 26, 2017, Fusion and its wholly-owned
subsidiary Fusion BCHI Acquisition LLC (referred to as
Merger
Sub) entered into an Agreement
and Plan of Merger (as subsequently amended thereafter referred to
as the Merger
Agreement) with Birch
Communications Holdings, Inc., a Georgia corporation (referred to
as BCHI) pursuant to which, among other things, BCHI will
be merged with and into Merger Sub (referred to as the
Merger) with Merger Sub continuing as the surviving
company and a wholly-owned subsidiary of Fusion. If the Merger is
completed, at the effective time of the Merger (referred to as
the Effective
Time), all of the shares of
common stock, par value $0.01 per share, of BCHI issued and
outstanding immediately prior to the Effective Time (other than any
shares to be cancelled pursuant to the Merger Agreement) will be
converted automatically into the right to receive, in the
aggregate, a number of fully paid and non-assessable shares of
Fusion’s common stock, par value $0.01 per share (referred to
as the Fusion Common
Stock), equal to three (3)
times the number of shares of (i) Fusion Common Stock issued and
outstanding immediately prior to the Effective Time
plus
(ii) the number of shares of Fusion
Common Stock issued or issuable upon the conversion of all classes
or series of Fusion preferred stock outstanding immediately prior
to the Effective Time plus (iii) the number of shares of Fusion Common Stock
issuable upon the exercise of all in-the-money warrants of Fusion
(as adjusted for stock splits and calculated using the treasury
stock method) (referred to, collectively, as the
Merger
Shares). Upon completion of the
Merger, BCHI Holdings LLC, a Georgia limited liability company
formed by the current shareholders of BCHI to hold their Merger
Shares (referred to as BCHI
Holdings), will own
approximately 75% of the total number of shares of Fusion Common
Stock then outstanding.
From
and after the Effective Time, the size of the Board of Directors of
Fusion (referred to as the Board) will be fixed at nine directors.
Four directors, including at least one director who satisfies the
Nasdaq listing standards’ independence requirements, will be
nominated by a nominating committee comprised of the Fusion
directors
serving on the Board on the date of the nomination (referred to as
the Fusion Committee), and
four directors, including at least one director who satisfies the
Nasdaq listing standards’ independence requirements, will be
nominated by BCHI Holdings. The ninth director, who must satisfy
the Nasdaq listing standards’ independence requirements, will
be nominated by BCHI Holdings subject to the reasonable consent of
the Fusion Committee. Matthew D. Rosen, Fusion’s current
Chief Executive Officer, will serve as the post-Merger Chairman of
the Board, and Holcombe T. Green, Jr., a principal stockholder of
BCHI, will serve as the post-Merger Vice Chairman of the Board. At
the Effective Time, all other members of Fusion’s current
Board will resign. Matthew D. Rosen will be the Chief Executive
Officer of the post-Merger Fusion, Gordon Hutchins, Jr.
will be President and Russell Markman will be the Chief Operating
Officer. The other executive officers of post-merger Fusion
will be
determined prior to the closing of the Merger by mutual agreement
of Fusion and BCHI Holdings. As of the date of this proxy
statement, no other executive officers have been chosen. Following
completion of the Merger, the headquarters of the combined company
will be located at 420 Lexington Avenue, New York, New York 10170,
Fusion’s current headquarters.
Shares
of the Fusion Common Stock are currently listed on The Nasdaq
Capital Market® under the symbol "FSNN." Prior to completion
of the Merger, Fusion intends to file an initial listing
application with Nasdaq relating to the combined company, pursuant
to Nasdaq's “change of control” rules. After completion
of the Merger, Fusion will be renamed "Fusion Connect, Inc." but
will continue to be referred to as Fusion and expects to continue
to trade on The Nasdaq Capital Market® under the symbol
"FSNN." We believe that this name change better reflects the
Company's image, brand and cloud services focus. On [●],
2017, the last trading day before the date of this proxy statement,
the closing sale price of the Fusion Common Stock was $[●]
per share. You are urged to obtain a current market quotation for
the shares of Fusion Common Stock.
The
obligations of Fusion and BCHI to complete the Merger are subject
to the satisfaction or waiver of certain conditions set forth in
the Merger Agreement. Copies of the Merger Agreement and each of
the amendments to the Merger Agreement dated September 15, 2017,
September 29, 2017 and October 27, 2017 are attached as
Annex
A to the enclosed proxy statement, and you are encouraged to
read these documents in their entirety.
At the Annual Meeting, holders of shares of Fusion
Common Stock and Fusion’s Series B-2 Senior Cumulative
Convertible Preferred Stock, par value $0.01 per share (referred to
as the Series B-2 Preferred
Stock and, together with the
Fusion Common Stock, referred to as the Voting
Shares) will be asked to
consider and vote on the following matters:
●
a proposal to adopt
the Merger Agreement and approve (i) the Merger, (ii) the
issuance of the Merger Shares, and (iii) the other transactions
contemplated by the Merger Agreement (Proposal No. 1);
●
a proposal to adopt
an amendment to Fusion’s certificate of incorporation, a copy
of which is attached as Annex
B to the enclosed proxy statement to effectuate a
reverse stock split of the issued and outstanding shares of Fusion
Common Stock at a ratio of up to 5:1 (referred to as the
Certificate of Amendment),
to the extent determined necessary by the Board to comply with the
Nasdaq listing requirements in connection with the post-Merger
listing of the Fusion Common Stock on The Nasdaq Capital
Market® (Proposal No. 2);
●
a proposal to adopt
an amended and restated certificate of incorporation of the Company
(referred to as the Restated
Charter) to, among other things, (i) increase the number of
authorized shares of Fusion Common Stock from 90,000,000 to
150,000,000, a copy of which is
attached as Annex C to the enclosed proxy
statement, and (ii) change the Company’s name to
“Fusion Connect, Inc.” (Proposal No. 3);
●
a proposal to
adjourn the Annual Meeting, if necessary, to solicit additional
votes in favor of the proposals to adopt the Merger Agreement, to
adopt the Certificate of Amendment and to adopt the Restated
Charter (Proposal No.
4);
●
a proposal to
approve, on an advisory basis, certain compensation that may be
paid to certain of Fusion’s named executive officers as a
result of the Merger (Proposal No. 5);
●
a proposal to elect
eight (8) directors to hold office until the earliest to occur of
(i) the election and qualification of their successors and (ii)
their earlier resignation, death, or removal from office
(Proposal No.
6);
●
a proposal to ratify the selection of
EisnerAmper LLP as the Company’s independent registered
public accounting firm for the fiscal year ending December 31, 2017
(Proposal No. 7);
and
●
such other business
as may properly come before the stockholders at the Annual Meeting
or any adjournment or postponement thereof.
Certain
Fusion stockholders have entered into to a support agreement with
BCHI, whereby such stockholders agreed, among other things, to vote
their Voting Shares in favor of the adoption of the Merger
Agreement and the approval of the transactions contemplated
thereby, including the Merger and the issuance of the Merger
Shares. At the time of
execution of the support agreement, these shares represented 9.8%
of the votes entitled to be cast at the Annual Meeting. The
shareholders of BCHI have approved the Merger by written consent in
lieu of a meeting.
The
Board believes that the proposed business combination with BCHI
will enhance Fusion’s market position, add important customer
scale and revenue and significant network and infrastructure
assets, as well as generate significant cost synergies and reduce
Fusion’s debt leverage ratio.
After
careful consideration, the Board has (i) determined that the Merger
Agreement and the transactions contemplated thereby, including the
Merger and the issuance of the Merger Shares, are fair to,
advisable and in the best interests of Fusion and its stockholders,
(ii) approved the execution, delivery and performance by Fusion of
the Merger Agreement and the consummation of the transactions
contemplated thereby, including the Merger and the issuance of the
Merger Shares, and (iii) directed that the Merger Agreement be
submitted to Fusion’s stockholders for adoption. The
Board’s reasons for reaching these determinations are
described in more detail in the enclosed proxy
statement.
Accordingly, the Board recommends that you
vote “FOR” the proposal to adopt the Merger Agreement
and approve the Merger, the issuance of the Merger Shares and the
other transactions contemplated by the Merger Agreement
(Proposal No.
1). The Board also recommends
that you vote “FOR” the proposal to adopt the Certificate of
Amendment (Proposal No.
2), “FOR” the proposal to adopt the Restated Charter
(Proposal No.
3), “FOR” the proposal to adjourn the Annual
Meeting, if necessary, to solicit additional votes in favor of the
proposals to adopt the Merger Agreement, to adopt the Certificate
of Amendment and to adopt the Restated Charter (Proposal No.
4), and
“FOR” each of the other proposals described in
this proxy statement.
Your vote is very important
regardless of the number of shares that you own.
The Merger cannot be completed unless
the proposal to adopt the Merger Agreement and approve the Merger,
the issuance of the Merger Shares and the other transactions
contemplated by the Merger Agreement, as well as the
proposal to adopt the Certificate of Amendment and the proposal to
adopt the Restated Charter are each approved by the required vote
at the Annual Meeting. Whether or not you plan to
attend the Annual Meeting, please submit your proxy as soon as
possible to make sure that your shares are represented at the
Annual Meeting. Information
about the Annual Meeting, the Merger Agreement and the transactions
contemplated thereby, including the Merger and the issuance of
the Merger Shares, and the other business to be
considered by stockholders at the Annual Meeting, is contained in
the enclosed proxy statement. You are urged to read the enclosed
proxy statement (including the exhibits thereto) carefully in its
entirety.
Sincerely,
/s/ Matthew D. Rosen
Matthew D. Rosen
Chief Executive Officer
Neither the U.S. Securities and Exchange Commission nor any state
securities regulatory agency has approved or disapproved of the
Merger Agreement or the other transactions described in this proxy
statement, passed upon the merits or fairness of the Merger, or
passed upon the adequacy or accuracy of the disclosure in the proxy
statement. Any representation to the contrary is a criminal
offense.
This proxy statement is dated [●], 2017 and is first being
mailed to stockholders on or about
[●], 2017.
420 Lexington Avenue, Suite 1718
New York, New York 10170
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON
[●], 2018
To the
Stockholders of Fusion Telecommunications International,
Inc.:
The
2017 annual meeting of stockholders (referred to as the
Annual Meeting)
of Fusion
Telecommunications International, Inc., a Delaware corporation
(referred to as Fusion or
the Company), will be held
at 3:00 p.m., local time, on
[●], 2018. The Annual Meeting will be held at the
Company's executive office located at 420 Lexington Avenue, Suite
1718, New York, New York, 10170, for the following
purposes:
1. to
consider and vote on a proposal to adopt the Agreement and Plan of
Merger, dated as of August 26, 2017, as amended on September 15,
2017, September 29, 2017 and October 27, 2017, and as it may be
amended from time to time (collectively referred to as the
Merger Agreement), by and
among Fusion, Fusion BCHI Acquisition LLC, a Delaware limited
liability company and a wholly-owned subsidiary of Fusion (referred
to as Merger Sub), and
Birch Communications Holdings, Inc., a Georgia corporation
(referred to as BCHI), and
to approve (i) the Merger of BCHI with and into Merger Sub
(referred to as the Merger), with Merger Sub continuing as
the surviving company in the Merger and as a wholly-owned
subsidiary of Fusion, (ii) the issuance of a number of fully paid and non-assessable shares
of Fusion’s common stock, par value $0.01 per share (referred
to as the Fusion Common
Stock), equal to three (3)
times (A) the number of shares of Fusion Common Stock issued and
outstanding immediately prior to the effective time of the Merger
(referred to as the Effective
Time), plus (B) the number of shares of Fusion Common Stock
issued or issuable upon the conversion of all shares of all classes
or series of Fusion’s preferred stock outstanding immediately
prior to the Effective Time, plus (C) the number of shares of Fusion Common Stock
issuable upon the exercise of all in-the-money warrants of Fusion
(as adjusted for stock splits and calculated using the treasury
stock method) (collectively referred to as the Merger
Shares), and (iii) the
other transactions contemplated by the Merger Agreement
(Proposal No.
1);
2. to
consider and vote on a proposal to adopt an amendment to
Fusion’s certificate of incorporation to effectuate a reverse
stock split of the issued and outstanding shares of Fusion Common
Stock at a ratio of up to 5:1 (referred to as the Certificate of Amendment), to the
extent determined necessary by the Board of Directors of Fusion
(referred to as the Board)
to comply with the listing requirements of the NASDAQ Stock Market
(referred to as Nasdaq) in
connection with the post-Merger listing of the Fusion Common Stock
on The Nasdaq Capital Market® (Proposal No. 2);
3. to
consider and vote on a proposal to adopt an amended and restated
certificate of incorporation of the Company (referred to as the
Restated Charter) to, among
other things, (i) increase the number of authorized shares of
Fusion Common Stock from 90,000,000 to 150,000,000 and (ii) change
the Company’s name to “Fusion Connect, Inc.”
(Proposal No.
3);
4.
to consider and vote on a proposal to adjourn the
Annual Meeting, if necessary, to solicit additional votes in favor
of the proposals to adopt the Merger Agreement, to adopt the
Certificate of Amendment and to adopt the Restated Charter
(Proposal No.
4);
5.
to consider and vote on a proposal to approve, on an
advisory basis, certain compensation
that may be paid to certain of Fusion’s named executive
officers as a result of the Merger (Proposal No. 5);
6. to
elect eight (8) directors to hold office until the earliest to
occur of (i) the election and qualification of their successors and
(ii) their earlier resignation, death, or removal from office
(Proposal No.
6);
7. to
ratify the selection of EisnerAmper LLP as the Company’s
independent registered public accounting firm for the fiscal year
ending December 31, 2017 (Proposal No. 7);
and
8. to
transact such other business as may properly come before the Annual
Meeting and any adjournment or postponement thereof.
Proposals No. 1, 2
and 3 require the affirmative "FOR" vote by holders of a majority
of the Voting Shares issued and outstanding as of the Record Date
and entitled to vote thereon, voting as a single class, Proposals
No. 4, 5 and 7 require the affirmative "FOR" vote of a majority of
the votes cast at the Annual Meeting by the holders of the Voting
Shares present in person or represented by proxy at the Annual
Meeting and entitled to vote thereon, voting as a single class.
With respect to Proposal No. 6, directors shall be elected by a
plurality of the votes cast at the Annual Meeting by the holders of
the Voting Shares present in person or represented by proxy at the
Annual Meeting and entitled to vote thereon, voting as a single
class.
The
Board has fixed
[●], 2017 as the record date (referred to as the
Record Date) for
determining stockholders entitled to vote at the Annual Meeting or
any adjournment or postponement thereof. Only holders of record of
shares of Fusion Common Stock and Fusion’s Series B-2 Senior
Cumulative Convertible Preferred Stock, par value $0.01 per share
(referred to as the Series B-2
Preferred Stock and, together with the Fusion Common Stock,
referred to as the Voting
Shares), at the close of business on the Record Date will be
entitled to notice of and to vote at the Annual Meeting and any
adjournment or postponement thereof. A complete list of holders of
Voting Shares entitled to vote at the Annual Meeting will be
available for examination by any Fusion stockholder at the
Company's executive office located at 420 Lexington Avenue, Suite
1718, New York, New York, 10170, for purposes pertaining to the
Annual Meeting, during normal business hours, for a period of ten
days before the Annual Meeting and at the time and place of the
Annual Meeting.
The Board recommends that you vote
“FOR” the proposal to adopt the Merger Agreement
and approve the Merger, the issuance of the Merger Shares and the
other transactions contemplated by the Merger Agreement
(Proposal No.
1), “FOR” the proposal to adopt the Certificate of
Amendment (Proposal No.
2), “FOR” the proposal to adopt the Restated Charter
(Proposal No.
3), “FOR” the proposal to adjourn the Annual
Meeting, if necessary, to solicit additional votes in favor of the
proposals to adopt the Merger Agreement, to adopt the Certificate
of Amendment and to adopt the Restated Charter (Proposal No.
4), “FOR” the proposal to approve, on
an advisory basis, certain compensation that may be paid to certain
Fusion named executive officers as a result of the Merger
(Proposal No. 5),
“FOR” the election of each of the eight
director nominees (Proposal No. 6), and
“FOR” the proposal to ratify the
selection of EisnerAmper LLP as Fusion’s independent
registered public accounting firm for the fiscal year ending
December 31, 2017 (Proposal No. 7).
Your vote is very important, regardless of the
number of shares you own. The Merger cannot be completed
unless the proposal to adopt the Merger Agreement as well as the
proposal to adopt the Certificate of Amendment and the proposal to
adopt the Restated Charter are each approved by the required vote
at the Annual Meeting. Whether or
not you expect to attend the Annual Meeting, Fusion urges you to
vote your shares online, by phone or by mail by completing and
returning the accompanying proxy card as promptly as possible to
ensure your shares are voted at the Annual Meeting. If you
choose to attend the Annual Meeting, you may then vote in person if
you so desire, even though you may have executed and returned the
proxy. Any stockholder who executes such a proxy may revoke it at
any time before it is exercised. A proxy may be revoked at any time
before it is exercised by (1) delivering written notice of
revocation to Fusion, attention: Philip D. Turits, Corporate
Secretary, (2) delivering a duly executed proxy bearing a later
date, or (3) attending the Annual Meeting and voting in
person.
Information about
the Annual Meeting, the Merger Agreement and the transactions
contemplated thereby, including the Merger and the issuance of
Merger Shares, and the other business to be considered by Fusion
stockholders at the Annual Meeting is contained in the enclosed
proxy statement. You are urged to read the enclosed proxy statement
(including the exhibits thereto) carefully in its entirety. If you
have any questions concerning the Merger or the other matters to be
considered at the Annual Meeting, would like additional copies of
the proxy statement or need help voting your shares, please contact
the Company’s Corporate Secretary, Philip D. Turits, at
212-201-2407 or via email at pturits@fusionconnect.com.
By
Order of the Board of Directors,
/s/ PHILIP
D. TURITS
Philip
D. Turits, Secretary and Treasurer
New
York, New York
[●], 2017
ADDITIONAL INFORMATION
The
proxy statement incorporates by reference important business and
financial information about Fusion from other documents that are
not included in or delivered with this proxy statement. The proxy
statement, the Company’s Annual Report on Form 10-K and
10-K/A for the year ended December 31, 2016, the Company’s
Quarterly Reports on Form 10-Q for the fiscal quarters ended March
31, 2017, June 30, 2017 and September 30, 2017 and the means to
vote by Internet are available at www.proxyvote.com.
This information is available to you without charge upon your
written or oral request. You can also obtain the documents
incorporated by reference into this proxy statement through the
Securities and Exchange Commission (referred to as the SEC) website at www.sec.gov or
by requesting them in writing or by telephone at the following
addresses and telephone numbers:
By
Mail:
Fusion
Telecommunications International, Inc.
420
Lexington Avenue, Suite 1718
New
York, New York, 10170
Attention:
Corporate Secretary
By
Telephone:
(212)
201-2407
To
receive timely delivery of the documents in advance of the Annual
Meeting, you should make your request no later than
[●], 2018.
SUBMITTING PROXIES ELECTRONICALLY OR BY TELEPHONE
Fusion
stockholders of record as of the close of business on
[●], 2017, the record date for the Annual
Meeting (referred to as the Record
Date), may submit their proxies by telephone or Internet by
following the instructions on their proxy card or voting
instruction form. If you have any questions regarding whether you
are eligible to submit your proxy by telephone or by Internet,
please contact Philip D. Turits, Corporate Secretary, by telephone
at (212) 201-2407 or via email at pturits@fusionconnect.com.
PROXY STATEMENT FOR THE 2017 ANNUAL MEETING OF
STOCKHOLDERS
TABLE OF CONTENTS
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Page No.
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Additional Information
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i
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Submitting Proxies Electronically or by Telephone
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i
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Questions and Answers About the Annual Meeting and the
Merger
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1
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Summary
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12
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Parties to the Merger
Agreement
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12
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The Merger Agreement and the
Merger
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13
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The Annual Meeting
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21
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Summary Selected Historical Financial Data
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25
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Summary Unaudited Pro Forma Condensed Combined Consolidated
Financial Information
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30
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Market Price and Dividend Information
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35
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Forward Looking Statements
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37
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The Annual Meeting
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38
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Date, Time and Place of the Annual
Meeting
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38
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Purpose of the Annual
Meeting
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38
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Recommendation of the
Board
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38
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Record Date
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39
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Quorum and Required Vote
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39
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Treatment of Abstentions, Non-Voting
and Incomplete Proxies
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39
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Voting
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40
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Revocation of Proxies
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41
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Postponement and
Adjournment
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41
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Voting by Fusion Directors and
Executive Officers
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42
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Appraisal Rights
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42
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Solicitation of Proxies
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42
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Other Business
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42
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Householdings
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42
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Additional Assistance
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43
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The Merger
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43
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Rationale for the Merger
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43
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Background of the Merger
|
43
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Reasons for the Merger and
Recommendation of the Board
|
48
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Opinion of FTI Capital Advisors,
LLC
|
51
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Management Projections
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57
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Financing of the Merger
|
59
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Accounting for the
Merger
|
59
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Effects on Fusion if the Merger is
Not Consummated
|
60
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Interests of Fusion’s Officers
and Directors in the Merger
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60
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Regulatory Matters
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63
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Material U.S. Federal Income Tax
Consequences
|
64
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Nasdaq Listing
|
65
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The Merger Agreement
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65
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Structure of the
Merger
|
65
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Effective Time; Marketing
Period
|
66
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Consideration to be Received in the
Merger
|
66
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Exchange and Payment
Procedures
|
67
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Directors/Members and Officers of the
Surviving Company and Other Subsidiaries
|
67
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Board of Directors of Post-Merger
Fusion
|
67
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Executive Officers of Fusion
Following the Merger
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67
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Representations and
Warranties
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68
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Covenants Relating to the Conduct of
the Business of the Parties
|
69
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Efforts to Complete the Merger;
Filings; Other Actions
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71
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Preparation of the Proxy
Statement
|
72
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Stockholders’
Meeting
|
72
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No Solicitation of
Transactions
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72
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Access to Information
|
74
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Employee Matters
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74
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Indemnification of Officers and
Directors
|
75
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Nasdaq Listing; Reverse
Split
|
75
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Financing
|
75
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Certain Additional
Covenants
|
76
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Conditions to the Merger
|
76
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Termination and No
Termination Fees
|
78
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Fees and Expenses
|
79
|
Amendment and Supplement
|
79
|
Governing Law; Jurisdiction
|
79
|
Specific Performance
|
79
|
Amendments to the Merger
Agreement
|
79
|
Agreements Related to the Merger Agreement
|
80
|
Stockholders’
Agreement
|
80
|
Registration Rights
Agreement
|
80
|
Support Agreement
|
81
|
Indemnity Agreement
|
81
|
Consumer Spin-Off and Carrier Spin-Off
|
82
|
Consumer Spin-Off
|
82
|
Carrier Spin-Off
|
83
|
Proposal No. 1 – Adoption of the Merger
Agreement
|
84
|
Effects on Other
Proposals
|
84
|
Required Vote and Board
Recommendation
|
84
|
Proposal No. 2 – Approval of an Amendment to the Certificate
of Incorporation of Fusion to Effect a Reverse Stock
Split
|
85
|
Background and Reasons for the
Proposal
|
85
|
The Board’s Discretion to
Effect the Reverse Stock Split
|
86
|
Effects of the Reverse Stock Split on
Fusion Common Stock
|
86
|
Manner of Effecting the Reverse Split
Proposal
|
87
|
Fractional Shares
|
88
|
Potential Anti-Takeover
Effect
|
88
|
No Appraisal Rights
|
88
|
Certain Federal Income Tax
Consequences
|
88
|
Effect on Other
Proposals
|
88
|
Required Vote and Board
Recommendation
|
89
|
Proposal No. 3 – Amended and Restated Certificate of
Incorporation
|
90
|
Background of and Reasons for the
Proposal
|
90
|
Name Change
|
90
|
Increase in Authorized Shares of
Fusion Common Stock
|
90
|
Other Amendments Contemplated by the
Restated Charter
|
92
|
No Dissenter’s
Rights
|
92
|
Effect on Other
Proposals
|
92
|
Required Vote and Board
Recommendation
|
92
|
Proposal No. 4 – Adjournment of the Annual
Meeting
|
93
|
Required Vote and Board
Recommendation
|
93
|
Proposal No. 5 – Advisory Vote on Merger-Related Compensation
of Fusion’s Named Executive Officers
|
94
|
Background and Reasons for the
Proposal
|
94
|
Effects on Other
Proposals
|
94
|
Required Vote and Board
Recommendation
|
94
|
Executive Officers of Fusion
|
95
|
Executive Compensation
|
97
|
Fiscal 2016 Summary Compensation
Table
|
97
|
Employment Agreements, Termination of
Employment and Change-In-Control Arrangements
|
98
|
Determination of Executive
Compensation
|
98
|
2016 Equity Incentive
Plan
|
99
|
2009 and 1998 Stock Option
Plans
|
100
|
Outstanding Equity Awards at 2016
Year-End
|
100
|
Equity Compensation Plan
Information
|
102
|
Proposal No. 6 – Election of Directors
|
103
|
Nominees for Election of
Directors
|
103
|
Director Background and
Qualifications
|
103
|
Required Vote and Board
Recommendation
|
105
|
Corporate Governance
|
106
|
Board of Directors
|
106
|
Board Meetings and
Attendance
|
106
|
Annual Meeting
Attendance
|
106
|
Stockholder Communications with
Directors
|
106
|
Code of Ethics
|
106
|
Board Committees
|
107
|
Compensation Committee
|
107
|
Stockholder Nomination of
Directors
|
108
|
Director Qualifications
|
108
|
Strategic and Investment Banking
Committee
|
108
|
Board Role in Risk
Oversight
|
108
|
Certain Relationships, Related Transactions and Director
Independence
|
109
|
Officer and Director Loans to
Company
|
109
|
Director Independence
|
109
|
2016 Director
Compensation
|
109
|
Engagement for Tax
Services
|
110
|
Proposal No. 7 – To Ratify the Selection of EisnerAmper LLP
as Our Independent Registered Public Accounting Firm for the Fiscal
Year Ending December 31, 2017
|
111
|
Reason for the Proposal
|
111
|
Audit and Audit-Related
Fees
|
111
|
Tax Related Fees
|
111
|
All Other Fees
|
111
|
Audit Committee Pre-Approval of Audit
and Permissible Non-Audit Services of Independent
Accountants
|
111
|
Required Vote and
Recommendation
|
112
|
Audit Matters
|
113
|
Audit Committee
|
113
|
Audit Committee Report
|
114
|
Voting Securities and Principal Holders Thereof
|
115
|
Principal Stockholders
|
115
|
Other Matters
|
117
|
Section 16(A) Beneficial Ownership Reporting
Compliance
|
117
|
Stockholder Proposals for the 2018 Annual Meeting
|
117
|
Where You Can Find More Information
|
117
|
Birch Communications Holdings, Inc. Description of
Business
|
119
|
Birch Communications Holdings, Inc. Financial
Statements
|
F-1
|
Birch Communications Holdings, Inc. Management’s Discussion
and Analysis of Financial Condition and Results of
Operations
|
F-46
|
Annex A – Merger Agreement, Merger Agreement Amendments and
Ancillary Agreements
|
A-1
|
Annex B –Form of Certificate of Amendment
|
B-1
|
Annex C
–Form of Restated Charter
|
|
Annex D – Opinion of FTI Capital Advisors, LLC
|
D-1
|
PROXY STATEMENT FOR THE 2017 ANNUAL MEETING OF
STOCKHOLDERS
QUESTIONS AND ANSWERS ABOUT THE ANNUAL MEETING AND THE
MERGER
In this proxy statement, unless the
context otherwise requires, the term “Fusion,”
the “Company,”
“we,” “us,” and “our” refer to Fusion Telecommunications
International, Inc., a Delaware corporation. The term
“BCHI”
refers to Birch Communications Holdings, Inc., a Georgia
corporation, and the term “Merger
Sub” refers to Fusion
BCHI Acquisition LLC, a Delaware limited liability company and
wholly-owned subsidiary of Fusion. The term
“Surviving
Company” refers to Merger
Sub following consummation of the proposed Merger. The term
“Merger
Agreement” refers to the
Agreement and Plan of Merger, dated as of August 26, 2017, as
amended on September 15, 2017, September 29, 2017 and October 27,
2017 and as it may be further amended from time to time, by and
among Fusion, BCHI and Merger Sub. The term Board means the Board
of Directors of Fusion from time to time constituted. The terms
“you” and the “Fusion
Stockholders” refer to
holders of shares of Fusion’s common stock, par value $0.01
per share (the “Fusion Common
Stock”) and holders of
Fusion’s Series B-2 Senior Cumulative Convertible Preferred
Stock, par value $0.01 per share (the “Series B-2 Preferred
Stock” and, together with
the Fusion Common Stock, referred to as the
“Voting
Shares”).
The following questions and answers briefly
address some commonly asked questions about the 2017 Annual Meeting
of Fusion Stockholders (referred to as the Annual Meeting), the
Merger Agreement, the Merger and the other matters to be considered
at the Annual Meeting. These questions and answers do not contain
all of the details that may be important to you as a Fusion
Stockholder. Therefore, we encourage you to carefully read this
entire proxy statement, its annexes and the documents referred to
or incorporated by reference in, this proxy statement. You may
obtain the information incorporated by reference in this proxy
statement, without charge, from Fusion by following the
instructions under “Where You Can Find More
Information” on page 117
hereof.
Except where specifically noted, the following information and all
other information contained in this proxy statement does not give
effect to the reduction of the number of issued and outstanding
shares of Fusion Common Stock as a result of the proposed reverse
stock split, as described in “Proposal No. 2 -- Approval of An Amendment to
the Certificate of Incorporation of Fusion to Effect a Reverse
Stock Split,” beginning on page 85 in this proxy
statement.
Q:
|
What is the Merger?
|
A:
|
Fusion, BCHI and Merger Sub have entered into the Merger Agreement.
A copy of the Merger Agreement is attached hereto
as
Annex A. The Merger
Agreement contains the terms and conditions of the proposed
business combination between Fusion and BCHI. Under the Merger
Agreement, subject to satisfaction (or waiver, to the extent
permissible under the Merger Agreement and applicable law) of the
conditions set forth in the Merger Agreement and described in this
proxy statement, BCHI will be merged with and into Merger Sub
(referred to as the Merger), with Merger Sub continuing as the surviving
company in the Merger and a wholly-owned subsidiary of
Fusion.
|
Q:
|
What are the Merger Shares?
|
A:
|
If the Merger is completed, at the effective time of the Merger
(referred to as the Effective
Time), all of the shares of
common stock, par value $0.01 per share, of BCHI issued and
outstanding immediately prior to the Effective Time (other than any
shares to be cancelled pursuant to the Merger Agreement) will be
converted automatically into the right to receive, in the
aggregate, a number of fully paid and non-assessable shares of
Fusion Common Stock equal to three (3) times (i) the number of
shares of Fusion Common Stock issued and outstanding immediately
prior to the Effective Time, plus (ii) the number of shares of Fusion Common Stock
issued or issuable upon the conversion of all shares of all classes
or series of Fusion’s preferred stock outstanding immediately
prior to the Effective Time, plus (iii) the number of shares of Fusion Common Stock
issuable upon the exercise of all in-the-money warrants of Fusion
(as adjusted for stock splits and calculated using the treasury
stock method) (collectively, referred to as the Merger
Shares). Upon completion of the
Merger, BCHI Holdings LLC, a Georgia limited liability company
formed by the current shareholders of BCHI to hold their Merger
Shares (referred to as BCHI
Holdings), will own
approximately 75% of the total number of shares of Fusion Common
Stock then outstanding.
|
Q:
|
Why am I receiving these materials?
|
A:
|
The Company is delivering these proxy materials to you in
connection with its solicitation of proxies for use at the
Annual Meeting. At the Annual Meeting, Fusion’s Stockholders
will be asked to approve, among other things, proposal to adopt the
Merger Agreement and approve the Merger, the issuance of the Merger
Shares and the other transactions contemplated by the Merger
Agreement. The Merger cannot occur without the required approval by
the Fusion Stockholders of each of Proposal Nos. 1, 2 and
3.
|
Q:
|
Why is Fusion seeking Fusion Stockholder approval for the Merger
and the issuance of the Merger Shares?
|
A:
|
The Merger Agreement requires that Fusion obtain approval of its
stockholders for the Merger and the other transactions contemplated
by the Merger Agreement.
In addition, the Fusion Common Stock is listed on The Nasdaq
Capital Market®, and Fusion is
subject to the listing rules of the NASDAQ Stock Market (referred
to as Nasdaq), as follows:
● Nasdaq
Rule 5635(b) requires stockholder approval of any issuance or
potential issuance of securities when the issuance will result in a
“change of control” of the issuer. Nasdaq has
previously indicated that the acquisition of, or right to acquire,
by a single investor or affiliated investor group, as little as 20%
of the common stock (or securities convertible into or exercisable
for common stock) or voting power of an issuer could constitute a
change of control.
● Stockholder
approval is also required under Nasdaq Rule 5635(a) prior to the
issuance of securities in connection with the acquisition of the
stock or assets of another company if, among other things, the
number of shares of common stock to be issued is or will be equal
to or in excess of 20% of the number of shares of common stock
outstanding before the issuance of the stock or
securities.
● In
addition, Nasdaq Rule 5635(d) requires stockholder approval if a
listed company issues common stock (or securities convertible into
or exercisable for common stock) in a private placement equal to
20% or more of the common stock or 20% or more of the voting power
outstanding before the issuance for less than the greater of book
or market value of the stock.
The
number of Merger Shares to be issued to BCHI Holdings will
exceed 20% of the shares of Fusion
Common Stock issued and outstanding immediately prior to the
Effective Time. Moreover, as described above, the proposed issuance
of the Merger Shares will result in a change in control of Fusion
within the meaning of Nasdaq Rule 5635(b). Accordingly,
approval of the issuance of the Merger Shares in the Merger by
Fusion Stockholders is required under the Nasdaq listing
rules.
|
Q:
|
When and where is the Annual Meeting?
|
A:
|
The Annual Meeting will take place at 3:00 p.m., local time, on
[●], 2018 at the Company’s executive
office located at 420 Lexington Avenue, Suite 1718, New York, New
York.
|
Q:
|
Who is entitled to attend the Annual Meeting?
|
|
All
holders of shares of Fusion Common Stock and Series B-2 Preferred
Stock as of the close of business on
[●], 2017, the record date for the Annual
Meeting (referred to as the Record
Date) are entitled to receive notice of, attend the Annual
Meeting and any adjournment or postponement thereof, and vote at
the Annual Meeting.
You are
entitled to attend and vote at the Annual Meeting only if you were
a Fusion Stockholder as of the Record Date or hold a valid proxy
for the Annual Meeting.
|
A:
|
What is included in the proxy materials?
|
|
This
proxy statement includes information that we are required to
provide you under the rules of the SEC, which information is
intended to assist you in determining how to vote your Voting
Shares at the Annual Meeting. The proxy materials
include:
● this proxy
statement, including a copy of the Merger Agreement and the other
documents attached as an annex to this proxy
statement;
● our Annual Report
on Form 10-K and Form 10-K/A for the fiscal year ended December 31,
2016 and our Quarterly Reports on Form 10-Q for the fiscal quarters
ended March 31, 2017, June 30, 2017 and September 30, 2017, which
are incorporated by reference in this proxy statement, as described
under “Where You Can Find
More Information” on page
117 hereof;
and
● the proxy card or a
voting instruction form for the Annual Meeting.
|
Q:
|
What items of business will be considered and voted on at the
Annual Meeting?
|
A:
|
At the
Annual Meeting, Fusion Stockholders present in person or
represented by proxy and entitled to vote thereon will be
asked:
● to
consider and vote on a proposal to adopt the Merger Agreement and
approve (i) the Merger, (ii) the issuance of the Merger Shares, and
(iii) the other transactions contemplated by the Merger Agreement
(Proposal No.
1);
● to
consider and vote on a proposal to adopt an amendment to
Fusion’s certificate of incorporation to effectuate a reverse
stock split of the issued and outstanding shares of Fusion Common
Stock at a ratio of up to 5:1 (referred to as the
Certificate of
Amendment), to the extent
determined necessary by the Board to comply with Nasdaq listing
requirements in connection with the post-Merger listing of the
Fusion Common Stock on The Nasdaq Capital Market®
(Proposal No.
2);
● to
consider and vote on a proposal to adopt an amended and restated
certificate of incorporation of the Company (referred to as
the Restated
Charter) to, among other
things, (i) increase in the number of authorized shares of Fusion
Common Stock from 90,000,000 to 150,000,000 and (ii) change the
Company’s name to “Fusion Connect, Inc.”
(Proposal No.
3);
●
to consider and vote on a proposal to
adjourn the Annual Meeting, if necessary, to solicit additional
votes in favor of the proposals to adopt the Merger Agreement, to
adopt the Certificate of Amendment and to adopt the Restated
Charter (Proposal No.
4);
● to
consider and vote on a proposal to approve, on an advisory
basis, certain compensation that may be paid to certain of
Fusion’s named executive officers as a result of the Merger
(Proposal No.
5);
● to
elect eight (8) directors nominated by the Board to hold office
until the earliest to occur of (i) the election and qualification
of their successors, and (ii) their earlier resignation, death, or
removal from office (Proposal No.
6);
● to
ratify the selection of EisnerAmper LLP as the Company’s
independent registered public accounting firm for the fiscal year
ending December 31, 2017 (Proposal No. 7);
and
● to
transact such other business as may properly come before the
stockholders at the Annual Meeting or any adjournment or
postponement thereof.
|
Q:
|
How can I vote for the various proposals?
|
A:
|
For
each of the proposals to be considered and voted on at the Annual
Meeting, except the election of directors (Proposal No. 6), you may vote
“FOR,”
“AGAINST”
or “ABSTAIN.”
In the
election of directors (Proposal No. 6), you may vote
“FOR”
all or some of the nominees, or your vote may be
“WITHHELD”
with respect to one or more of the nominees.
|
Q:
|
How does the Board recommend that I vote?
|
A:
|
After careful consideration, the Board has (i) determined that the
Merger Agreement and the transactions contemplated thereby,
including the Merger and the issuance of the Merger Shares, are
fair to, advisable and in the best interests of Fusion and its
stockholders, (ii) approved the execution, delivery and performance
by Fusion of the Merger Agreement and the consummation of the
transactions contemplated thereby, including the Merger and the
issuance of the Merger Shares, and (iii) directed that the
Merger Agreement be submitted to the Fusion Stockholders for
adoption. The Board’s reasons for recommending the Merger are
set forth in more detail under the section entitled
“The Merger – Reasons for the Merger and
Recommendation of the Board” on page
48.
Accordingly, the Board recommends that you vote your Voting
Shares:
● “FOR”
the proposal to adopt the Merger Agreement and approve the Merger,
the issuance of the Merger Shares and the other transactions
contemplated by the Merger Agreement (Proposal No.
1);
● “FOR”
the proposal to adopt the Certificate of Amendment (Proposal No.
2);
● “FOR”
the proposal to adopt the Restated Charter (Proposal No.
3);
● “FOR”
the proposal to adjourn the Annual Meeting, if necessary, to
solicit additional votes in favor of the proposals to adopt the
Merger Agreement, to adopt the Certificate of Amendment and to
adopt the Restated Charter (Proposal No. 4);
and
● “FOR”
the proposal to approve, on an advisory basis, certain compensation
that may be paid to certain of Fusion’s named executive
officers as a result of the Merger (Proposal No.
5).
In addition, the Board recommends that you vote your Voting
Shares:
● “FOR”
the election of the eight directors nominated by the Board
(Proposal No. 6);
and
●
“FOR” the proposal to ratify the selection of
EisnerAmper LLP as Fusion’s independent registered public
accounting firm for the fiscal year ending December 31, 2017
(Proposal No.
7).
|
Q:
|
Who is entitled to vote at the Annual Meeting?
|
|
Only
holders of shares of Fusion Common Stock and Series B-2 Preferred
Stock as of the Record Date are entitled to vote on all
matters that come before the Annual Meeting. Voting Shares can be
voted only if the Fusion Stockholder is present at the Annual
Meeting in person or represented by proxy. As described
below, the voting procedures may be different for stockholders of
record and beneficial owners.
|
A:
|
How many votes do I have?
|
|
Except
as otherwise specified to the contrary in this proxy statement,
the holders of shares of Fusion Common Stock and the holders
of shares of Series B-2 Preferred Stock will vote as a single class
on each matter submitted to a vote of stockholders at the Annual
Meeting. Each share of Fusion Common Stock that you own as of the
Record Date entitles you to one vote. Each share of
Series B-2 Preferred Stock that you own as of the Record Date
entitles you to 200 votes, which is the number of Fusion Common
Shares into which a share of Series B-2 Preferred Stock may be
converted as of the Record Date.
As of
the Record Date, there were
[●] issued and outstanding shares of Fusion
Common Stock, which are entitled in the aggregate to
[●] votes, and
[●] issued and outstanding shares of Series B-2
Preferred Stock, which are entitled in the aggregate to[●]
votes. The Voting Shares issued and outstanding as of the Record
Date are collectively entitled to a total of
[●] votes at the Annual
Meeting.
|
Q:
|
Why is the number of shares shown as owned by me online different
from the number of shares in my records?
|
A:
|
The
number of shares of Fusion Common Stock shown on www.proxyvote.com
may be
different from the number of shares of Fusion Common Stock shown in
your records because the number of shares shown in that database,
as well as all of the per share information contained in this proxy
statement, gives effect to a 50:1 reverse split of the Fusion
Common Stock that occurred in May 2014.
|
Q:
|
What is the difference between holding Voting Shares as a
stockholder of record and as a beneficial owner?
|
A:
|
If your Voting Shares are registered directly in your name with
Fusion’s transfer agent, Continental Stock Transfer &
Trust Company, you are considered, with respect to those shares,
the “stockholder of record” and the proxy materials
have been made available to you directly by Fusion.
If your Voting Shares are held in a brokerage account or by a
broker, bank or other nominee (referred to as an
Organization),
you are considered the “beneficial owner” of those
Voting Shares held in “street name” and the proxy
materials have been forwarded to you by your broker, bank or other
nominee who is considered, with respect to those shares, the
stockholder of record. As the beneficial owner, you have the right
to direct your broker, bank or other nominee on how to vote your
Voting Shares by following the voting instructions on the form that
you receive from your broker, bank or other nominee. You may not
vote your Voting Shares by returning a proxy card directly to the
Company or by voting in person at the Annual Meeting unless you
obtain a “legal proxy” from the Organization that holds
your Voting Shares giving you the right to vote those
shares.
|
Q:
|
If my Voting Shares are held by an Organization in “street
name,” will my Organization vote my Voting Shares for
me?
|
A:
|
If your Voting Shares are held by an Organization in “street
name,” you must provide your broker, bank or other nominee
with instructions on how to vote your shares. Please follow the
instructions provided by your broker, bank or other nominee
regarding the voting of your Voting Shares.
Banks, brokers and other nominees that hold shares in “street
name” for a beneficial owner typically have the authority to
vote in their discretion only on “routine” matters and
are not allowed to exercise their discretion on matters that are
determined to be “non-routine” without specific
instructions from the beneficial owner. If your Voting Shares are
held by an Organization in “street name” and you do not
provide your Organization with voting instructions, your shares may
constitute “broker non-votes.” Broker non-votes are
shares held by a bank, broker or other nominee that are represented
at the Annual Meeting, but with respect to which the bank, broker
or other nominee has not received instructions from the beneficial
owner to vote on a particular proposal and the bank, broker or
other nominee does not have discretionary voting power on such
proposal. In tabulating the voting results for any particular
proposal, shares that constitute broker non-votes are not
considered votes cast with respect to that proposal.
Under current Nasdaq rules, Fusion believes that banks, brokers or
other nominees do not have discretionary authority to vote on any
proposals to be voted on at the Annual Meeting, other than with
respect to Proposal No. 7. Therefore, if you do not instruct your
bank, broker or other nominee as to how to vote your Voting Shares,
your bank, broker or other nominee will not vote your shares on any
of the proposals to be voted on at the Annual Meeting, other than
Proposal No. 7, which will have the same effect as a vote
“AGAINST”
Proposal Nos. 1, 2 and 3, but will have no effect on Proposal Nos.
4, 5, 6 and 7.
|
Q:
|
How can I vote my Voting Shares in person at the Annual
Meeting?
|
A:
|
You may
vote your Voting Shares held in your name as a stockholder of
record in person at the Annual Meeting. You may vote
your Voting Shares held beneficially in “street name”
in person at the Annual Meeting only if you obtain a “legal
proxy” from the Organization that holds your Voting Shares
giving you the right to vote those shares. Even if
you plan to attend the Annual Meeting, we recommend that you also
submit your proxy or voting instructions as described below so that
your vote will be counted if you later decide not to attend the
Annual Meeting.
|
Q:
|
How can I vote my Voting Shares without attending the Annual
Meeting?
|
A:
|
Whether
you hold Voting Shares directly as the stockholder of record or
beneficially in street name, you may direct how your shares are
voted without attending the Annual Meeting. If you are a
stockholder of record, you may vote by proxy. You
can vote by proxy by telephone, over the Internet or by mail
pursuant to instructions provided in the proxy
card. If you hold your Voting Shares beneficially in
“street name,” you must follow the voting instructions
provided to you by the Organization through which you hold your
Voting Shares.
|
Q:
|
What happens to my vote if I sell my Voting Shares before the
Annual Meeting?
|
A:
|
The Record Date for determining stockholders entitled to vote at
the Annual Meeting is earlier than the date of the Annual Meeting.
If you transfer your Voting Shares after the Record Date but before
the Annual Meeting, unless special arrangements (such as provision
of a proxy) are made between you and the person to whom you
transfer your Voting Shares and each of you notifies Fusion in
writing of such special arrangements, you will retain your right to
vote such shares at the Annual Meeting but will transfer all other
rights of ownership of those shares to the person to whom you
transfer your Voting Shares.
|
Q:
|
Can I change my vote or revoke my proxy?
|
A:
|
If you
are a stockholder of record, you may
revoke your vote at any time prior to taking the vote at
the Annual Meeting by:
● granting a new
proxy bearing a later date by following the instructions provided
in the proxy card, which will automatically revoke the previous
proxy;
● providing a written
notice of revocation to Fusion’s Corporate Secretary, 420
Lexington Avenue, Suite 1718, New York, New York 10170;
or
● attending the
Annual Meeting and voting in person.
If you
hold Voting Shares beneficially in street name, you may change your
vote at any time prior to the taking of the vote at the Annual
Meeting by:
● submitting new
voting instructions to the Organization through which you hold your
Voting Shares by following the instructions they provided;
or
● if you have
obtained a legal proxy from the Organization through which you hold
your Voting Shares giving you the right to vote your Voting Shares,
by attending the Annual Meeting and voting in person using the
valid legal proxy.
Note
that with respect to both stockholders of record and
beneficial owners, attendance at the Annual Meeting will not cause
your previously granted proxy to be revoked unless you specifically
so request or vote in person at the Annual Meeting.
|
Q:
|
I share an address with another Fusion Stockholder, and we received
only one paper copy of the proxy materials. How may I obtain an
additional copy of the proxy materials?
|
A:
|
We have
adopted a procedure called “householding,” which has
been approved by the SEC. Under this procedure, we
deliver a single copy of the proxy materials to multiple Fusion
Stockholders who share the same address unless we receive contrary
instructions from one or more of those Fusion
Stockholders. This procedure reduces our printing costs,
mailing costs and fees. Fusion Stockholders that
participate in householding will continue to be able to access and
receive separate proxy cards. Upon written request of a
Fusion Stockholder, we will promptly deliver a separate copy of the
proxy materials. Fusion Stockholders may request such a
change by sending the Company an e-mail at proxymaterial@fusionconnect.com or
by contacting Fusion’s Corporate Secretary by mail at 420
Lexington Avenue, Suite 1718, New York, New York 10170 or by phone
at 212-201-2407.
Fusion
Stockholders who hold Voting Shares in street name may contact the
Organization through which they hold their Voting Shares to request
information about householding.
|
Q:
|
What is a quorum and how many
Voting Shares must be present in person or represented by proxy to
conduct business at the Annual Meeting?
|
A:
|
In accordance with Fusion’s by-laws, in order for any matter
to be considered at the Annual Meeting, there must be a quorum
present. The holders of a majority of the voting power of the
outstanding Voting Shares, present in person or represented by
proxy at the Annual Meeting, will constitute a quorum at the Annual
Meeting.
|
Q:
|
What vote is required to approve each of the
proposals?
|
|
|
A:
|
Proposal
Nos. 1, 2 and 3 require the affirmative “FOR”
vote by holders of a majority of the voting power of the Voting
Shares issued and outstanding as of the Record Date and entitled to
vote thereon, voting as a single class.
Proposal
Nos. 4, 5 and 7 require the affirmative “FOR”
vote of a majority of the votes cast at the Annual Meeting by the
holders of the Voting Shares present in person or represented by
proxy at the Annual Meeting and entitled to vote thereon, voting as
a single class.
|
|
With
respect to Proposal No. 6, directors are elected by a plurality of
the votes cast at the Annual Meeting by the holders of Voting
Shares present in person or represented by proxy at the Annual
Meeting and entitled to vote thereon, voting as a single
class. A plurality does not require that a specific
percentage of votes be received, but rather, results in the
election of those directors receiving the most votes
cast.
In
connection with the execution and delivery of the Merger Agreement,
certain Fusion Stockholders entered into a support agreement with
BCHI, whereby those Fusion stockholders have agreed, among other
things, to vote their Voting Shares in favor of the Merger, the
issuance of the Merger Shares and the other transactions
contemplated by the Merger Agreement. At the time of execution of
the Support Agreement, these shares represented, in the aggregate,
9.8% of the votes entitled to be cast at the Annual
Meeting.
|
Q:
|
What if I abstain from voting or do not vote?
|
A:
|
An
abstention, which occurs when a Fusion Stockholder attends the
Annual Meeting, either in person or by proxy, but abstains from
voting, will not be considered a vote cast for any proposal. Thus,
abstentions will not affect the outcome of Proposal Nos. 4, 5, 6
and 7, but will have the same effect as a vote “AGAINST”
Proposal Nos. 1, 2 and 3.
If you
are a Fusion Stockholder and you fail to attend the Annual Meeting,
whether in person or by proxy, or fail to vote at the Annual
Meeting (and do not abstain), that will not affect the outcome of
Proposal Nos. 4, 5, 6 and 7 (assuming a quorum is present), but
will have the same effect as a vote “AGAINST”
Proposal Nos. 1, 2 and 3.
|
Q:
|
What if I don’t vote for a proposal on the proxy that I
submit?
|
A:
|
Unless you give other instructions on your proxy card that you
submit, or unless you give other instructions when you submit your
proxy by Internet or by phone, the persons named as proxies will
vote your shares “FOR” each of Proposal Nos. 1, 2, 3, 4, 5 and 7,
and “FOR” each of the eight director nominees
identified elsewhere in this proxy statement. If any other business
properly comes before the Annual Meeting or any adjournments or
postponements thereof, the persons named as proxies will vote your
Voting Shares in accordance with the recommendations of the
Board.
|
Q:
|
Is the Merger subject to the satisfaction of any
conditions?
|
A:
|
Yes. In addition to the
adoption of the Merger Agreement by the Fusion Stockholders, the
Merger is subject to the satisfaction of certain other conditions
set forth in the Merger Agreement, including the receipt of certain
regulatory approvals. For a description of these conditions, please
see the section entitled “The Merger Agreement—Conditions to the
Merger” beginning on page
76 of this proxy
statement.
|
Q:
|
When is the Merger expected to be completed?
|
A:
|
Fusion expects to complete the Merger after all conditions to the
Merger set forth in the Merger Agreement are satisfied or waived,
including the receipt of the required stockholder approvals at the
Annual Meeting and the receipt of the required regulatory
approvals. Fusion currently expects to complete the Merger in the
first quarter of 2018. It is possible, however, that factors
outside of Fusion’s control could result in the Merger being
completed at a later time or not being completed at
all.
|
Q:
|
Do any of Fusion’s directors or executive officers have
interests in the Merger that may differ from, or be in addition to,
my interests as Fusion Stockholder?
|
A:
|
Yes. In considering the
recommendation of the Board with respect to the proposal to adopt
the Merger Agreement and approve the Merger, the issuance of the
Merger Shares and the other transactions contemplated by the Merger
Agreement, you should be aware that certain Fusion directors and
executive officers have interests in the Merger that are different
from, or in addition to, your interests. The Board, including each
of its independent directors, was aware of and considered these
interests, among other matters, in evaluating, negotiating and
approving the Merger Agreement and the transactions contemplated
thereby, including the Merger and the issuance of the Merger
Shares. See the section entitled “The Merger –
Interests of Fusion’s Officers and Directors in the
Merger” beginning on page 60 of this proxy
statement.
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Q:
|
Who will be the directors of Fusion following the completion of the
Merger?
|
A:
|
From and after the Effective Time, the size of the
Board will be fixed at nine directors, which will be selected in
accordance with the stockholders’ agreement to be entered
into at the closing of the Merger by and among the Company, BCHI
Holdings and certain of Fusion’s existing stockholders, as
follows: (a) four directors, at least one of whom must be an
independent director within the meaning of the Nasdaq listing
standards, will be nominated by BCHI Holdings; (b) four directors,
at least one of whom must be an independent director within the
meaning of the Nasdaq listing standards, will be nominated by the
Fusion Committee; and (c) one director, who must be an independent
director within the meaning of the Nasdaq listing standards, will
be nominated by BCHI Holdings subject to the reasonable consent of
the Fusion Committee. Matthew D. Rosen, Fusion’s
current Chief Executive Officer, will serve as the post-Merger
Chairman of the Board, and Holcombe T. Green, Jr., a principal
stockholder of BCHI, will serve as the post-Merger Vice Chairman of
the Board. At the Effective
Time, all other members of the Board will
resign.
|
Q:
|
Who will be the elected officers of Fusion following
completion of the Merger?
|
A:
|
Matthew D. Rosen will be the Chief Executive Officer of the
post-Merger Fusion, Gordon Hutchins, Jr.
will be President and Russell Markman will be the Chief Operating
Officer. The other
executive officers of post-Merger Fusion will be determined
prior to the closing of the Merger by mutual agreement of Fusion
and BCHI Holdings. As of the date of this proxy statement,
no other executive officers have been chosen.
|
Q:
|
Will the Merger be a taxable transaction to me?
|
A:
|
The
Merger will not result in any taxable gain or loss for U.S. federal
income tax purposes to Fusion or any Fusion Stockholder in his or
her capacity as a Fusion Stockholder.
|
Q:
|
Have the BCHI shareholders approved the Merger?
|
A:
|
Yes. On August 26, 2017, the
shareholders of BCHI executed and delivered a written consent in
lieu of a meeting adopting the Merger Agreement and approving the
Merger and the other transactions contemplated
thereby.
|
Q:
|
What happens if the Merger is not completed?
|
A:
|
If any of the proposals to adopt the Merger Agreement, to adopt
Certificate of Amendment or to adopt the Restated Charter is not
approved by the Fusion Stockholders at the Annual Meeting, or if
the Merger is not consummated for any other reason:
●
the
Company will not issue the Merger Shares to BCHI
Holding;
● BCHI
will not become a part of the business of Fusion and Fusion will
continue to operate as it did prior to entering into the Merger
Agreement;
● the
Company will not file the Restated Charter, as contemplated by
Proposal No. 3, but will file an amendment to the Company’s
existing certificate of incorporation solely to change the name of
the Company to “Fusion Connect, Inc.”
● The
director nominees elected by the Fusion Stockholders at the Annual
Meeting pursuant to Proposal No. 6 will continue to serve as
directors of the Company until the Company’s 2018 annual
meeting of stockholders and until such time as their respective
successors are elected and qualified or until their earlier
resignation, death or removal from office.
Moreover, if the proposal to adopt the Certificate of Amendment is
approved by the Fusion Stockholders at the Annual Meeting, but the
Board subsequently determines that the Merger is not likely to be
consummated for any reason, the Board may determine to abandon the
reverse stock split, in which case the Company will not file the
Certificate of Amendment, as contemplated by Proposal No.
2.
|
Q:
|
Am I entitled to appraisal rights?
|
A:
|
No. Fusion Stockholders are not
entitled to appraisal rights under the Delaware General Corporation
Law, as amended (referred to as the DGCL), in connection with the Merger, the issuance of
the Merger Shares or any other transactions contemplated by the
Merger Agreement, or in connection with any other matters to be
submitted to a vote of Fusion Stockholders at the Annual
Meeting.
|
Q:
|
Will holders of the Merger Shares be able to trade those
shares?
|
A:
|
The
Merger Shares to be issued to BCHI Holdings as consideration in the
Merger will be issued in transactions exempt from registration
under the Securities Act of 1933, as amended (referred to as the
Securities Act), in
reliance on Section 4(a)(2) of the Securities Act or
Regulation D promulgated thereunder, and may not be offered or
sold by the holders of those shares absent registration or an
applicable exemption from registration requirements. As a general
matter, holders of the Merger Shares will not be able to transfer
any of their shares until at least six months after receiving the
Merger Shares, at which time the Merger Shares would first become
eligible to be sold under Rule 144 promulgated under the
Securities Act, assuming the conditions thereof are otherwise
satisfied and subject to the limitations set forth in such
rule.
However, in
connection with the Merger, Fusion has agreed to enter into a
registration rights agreement with BCHI Holdings (referred to as
the Registration Rights
Agreement), pursuant to which, following the completion of
the Merger, Fusion will file with the SEC a shelf registration
statement to register no more than 25% of the total number of the
Merger Shares for resale in the public markets. Upon such shelf
registration statement being declared effective by the SEC, such
Merger Shares will be freely tradeable. For a more detailed summary
of the Registration Rights Agreement and the transactions
contemplated thereby, see the section entitled “Agreements Related to the Merger Agreement
– Registration Rights Agreement” beginning on page
80 of this proxy
statement.
|
Q:
|
Should I send in my stock certificates?
|
A:
|
No. Following the completion of
the Merger, the certificates representing your shares of Fusion
Common Stock will continue to evidence your ownership of such
shares. Also, if the reverse stock split is completed, your
existing stock certificates will automatically be deemed to
represent the post-split number of shares of Fusion Common Stock.
With respect to certificates representing shares of the various
series of Fusion’s preferred stock, which shares will be
converted into shares of Fusion Common Stock prior to the Effective
Time or, if not so converted, cancelled immediately prior to the
Effective Time, you may be required to exchange those stock
certificates for certificates evidencing shares of Fusion Common
Stock. In this case, you will receive further information regarding
such exchange at the appropriate time. Please do not send your Fusion
stock certificates to the Company or its registrar and transfer
agent at this time.
|
Q:
|
What happens if the Annual Meeting is postponed or
adjourned?
|
A:
|
Unless a new Record Date is fixed for such postponement or
adjournment, your proxy will still be valid and may be voted at the
postponed or adjourned Annual Meeting. You will still be able to
change or revoke your proxy at any time until it is
voted.
|
Q:
|
Who will bear the costs of soliciting votes for the Annual
Meeting?
|
A:
|
Fusion
is paying the costs associated with the preparation and
distribution these proxy materials and soliciting votes for the
Annual Meeting. If you choose to vote over the Internet, you
are responsible for any Internet access charges you may
incur. If you choose to vote by telephone, you are
responsible for any telephone charges you may
incur. We intend to retain a proxy solicitor in
conjunction with the Annual Meeting, but have not yet selected the
Company to perform those services. In addition to the
mailing of these proxy materials, the solicitation of proxies or
votes may be made in person, by telephone, or by electronic
communications by our directors, officers and certain of our other
employees, who will not receive any additional compensation for
such solicitation activities.
|
Q:
|
When should I send in my proxy or voting instructions?
|
A:
|
You should send in your proxy card via mail, or submit your proxy
over the Internet or by telephone as soon as possible, so that your
Voting Shares will be voted at the Annual Meeting. If your Voting
Shares are held in “street name” by an Organization,
you should submit your voting instructions to the Organization
through which you hold your Voting Shares, as soon as possible, so
that your Voting Shares will be voted at the Annual
Meeting.
|
Q:
|
How can I attend the Annual Meeting?
|
A:
|
You are
entitled to attend the Annual Meeting if you were a Fusion
Stockholder as of the Record Date or you hold a valid proxy for the
Annual Meeting. If you are not a Fusion Stockholder of
record but hold shares as a beneficial owner in street name, you
must provide proof of beneficial ownership as of the Record Date,
such as your most recent account statement prior to the Record
Date, a copy of the voting instruction form provided by your
Organization, or other similar evidence of ownership.
Since
seating is limited, admission to the Annual Meeting will be on a
first-come, first-serve basis. You must present a valid
photo identification, such as a driver’s license or passport,
for admittance. If you do not provide a photo
identification or comply with the other procedures outlined above,
you will not be admitted to the Annual Meeting. For
security reasons, you and your bags are subject to search prior to
your admittance to the Annual Meeting. The Annual Meeting will
begin promptly at 3:00 p.m., local time, on [●],
2018.
|
Q:
|
Where can I find voting results of the Annual Meeting?
|
A:
|
We will
announce preliminary voting results at the Annual Meeting, and we
will publish final voting results in a Current Report on Form 8-K
filed with the SEC within four business days after the Annual
Meeting.
|
Q:
|
What is the deadline for submitting proposals for or nominating
individuals for election as directors at the Company’s 2018
annual meeting of stockholders?
|
A:
|
As of
the date of this proxy statement, we had not received notice of any
stockholder proposals for the Annual Meeting, and any proposals
received after the date hereof will be considered
untimely.
For a
stockholder proposal to be considered for inclusion in the proxy
statement for our 2018 annual meeting of stockholders, our
Corporate Secretary must receive the written proposal at our
executive office no later than the deadline stated
below. Such proposals must comply with Rule 14a-8 under
the Securities Exchange Act of 1934, as amended (referred to as the
Exchange Act) regarding the
inclusion of stockholder proposals in company proxy materials.
Proposals should be addressed to:
Fusion Telecommunications International, Inc.
Attention: Corporate Secretary- Stockholder Proposal
420 Lexington Avenue, Suite 1718
New York, New York 10170
Under
Rule 14a-8, in order to be timely, a stockholder proposal must be
received at our executive office a reasonable period of time before
we send out our notice for that meeting. Upon receipt of any
proposal, we will determine whether to include such proposal in
accordance with applicable regulations.
|
Q:
|
Who can answer your questions?
|
A:
|
If you
have a question about this proxy statement or the matters described
herein, you may address such question to our Corporate Secretary at
the above address, or may call him at (212) 201-2407.
|
SUMMARY
This summary highlights selected information contained in this
proxy statement and may not contain all of the information that is
important to you. To better understand the Merger and the other
proposals to be considered at the Annual Meeting, you should read
this entire proxy statement carefully, including the Merger
Agreement attached hereto as Annex A and
the other annexes that are referred herein. Additional important
information is also contained in the documents incorporated by
reference into this proxy statement. You may obtain such documents
without charge by following the instructions in the section
entitled “Where You Can Find More
Information” beginning on page 117 of this proxy
statement.
In this proxy statement, unless the
context otherwise requires, the terms “Fusion,”
the “Company,”
“we,” “us” and “our” refer to Fusion Telecommunications
International, Inc., a Delaware corporation. The term
“BCHI”
refers to Birch Communications Holdings, Inc., a Georgia
corporation, and the term “Merger
Sub” refers to Fusion
BCHI Acquisition LLC, a Delaware limited liability company and
wholly-owned subsidiary of Fusion. The term
“Merger
Agreement” refers to the
Agreement and Plan of Merger, dated as of August 26, 2017, as
amended on September 15, 2017, September 29, 2017 and October 27,
2017 and as it may be further amended from time to time, by and
among Fusion, BCHI and Merger Sub. The term
“Board”
means the Board of Directors of Fusion, as from time to time
constituted. The terms “you” and “Fusion
Stockholders” refer to
holders of shares of Fusion’s common stock, par value $0.01
per share (the “Fusion Common
Stock”) and holders of
Fusion’s Series B-2 Senior Cumulative Convertible Preferred
Stock, par value $0.01 per share (the “Series B-2 Preferred
Stock” and, together with
the Fusion Common Stock, collectively, the
“Voting
Shares”).
Parties to the Merger Agreement
Fusion Telecommunications International, Inc.
420
Lexington Avenue
Suite
1718
New
York, New York 10170
(212)
201-2400
Fusion,
through its subsidiaries, offers a comprehensive suite of cloud
communications, cloud connectivity, and managed cloud-based
applications solutions to small, medium and large businesses, and
domestic and international voice services to communications
carriers worldwide. Our advanced, proprietary cloud services
platform enables the integration of leading edge solutions in the
cloud, increasing customer collaboration and productivity by
seamlessly connecting employees, partners, customers and vendors.
We currently operate in two business segments; Business Services
and Carrier Services. As a result of the acquisition of various
cloud services business during the past four years, Fusion has gone
through a significant transformation and has expanded its business
customer base, increased its distribution network and added a
significant number of network facilities and points of presence
expanding its geographic reach.
Additional
information about Fusion is provided in its public filings with the
SEC, which are incorporated by reference herein. For additional
information about Fusion and its business, see the section entitled
“Where You Can Find More
Information” beginning on page 117 of this proxy
statement.
Fusion BCHI Acquisition LLC
420
Lexington Avenue
Suite
1718
New
York, New York 10170
(212)
201-2400
Merger Sub is a recently formed Delaware limited liability company
and wholly-owned subsidiary of Fusion. Merger Sub was formed solely
for the purpose of effectuating the Merger. Merger Sub has not
conducted any business operations other than those incident to its
formation and the transactions contemplated by the Merger
Agreement.
Birch Communications Holdings, Inc.
320 Interstate North Parkway SE
Atlanta, Georgia 30339
(866) 424-5100
BCHI,
through its subsidiaries, provides IP-based communications, cloud
and managed services to businesses in all 50 states, the District
of Columbia and Canada. BCHI provides: voice, broadband,
Internet access, hosted services, managed services, wireless voice,
wireless data and many other communications, cloud and managed
services to its existing customer base of over
customers.
The Merger Agreement and the Merger
Structure of the Merger (see page 65)
Fusion,
BCHI and Merger Sub have entered into the Merger Agreement, which
contains the terms and conditions of the proposed business
combination between Fusion and BCHI. Upon the terms and subject to the
conditions set forth in the Merger Agreement, BCHI will be merged
with and into Merger Sub (referred to as the Merger), with Merger Sub continuing as
the surviving company in the Merger and a wholly-owned subsidiary
of Fusion (referred to as the Surviving Company).
Consideration to be Received in the Merger (see page
66)
Pursuant to the Merger Agreement, at the effective
time of the Merger (referred to as the Effective
Time), all of the shares of
common stock, par value $0.01 per share, of BCHI issued and
outstanding immediately prior to the Effective Time (other than any
shares to be cancelled pursuant to the Merger Agreement) will be
converted automatically into the right to receive, in the
aggregate, a number of fully paid and non-assessable shares of
Fusion Common Stock equal to three (3) times (i) the number of
shares of Fusion Common Stock issued and outstanding immediately
prior to the Effective Time, plus (ii) the number of shares of Fusion Common Stock
issued or issuable upon the conversion of all shares of all classes
or series of Fusion’s preferred stock outstanding immediately
prior to the Effective Time, plus (iii) the number of shares of Fusion Common Stock
issuable upon the exercise of all in-the-money warrants of Fusion
(as adjusted for stock splits and calculated using the treasury
method)(collectively, referred to as the Merger
Shares). Immediately following
the Effective Time, BCHI Holdings LLC, a Georgia limited liability
company formed by the current shareholders of BCHI to hold their
Merger Shares (referred to as BCHI
Holdings), will own
approximately 75% of the total number of shares of Fusion Common
Stock then outstanding.
Board of Directors of Post-Merger Fusion (see page 67)
Effective at or prior to the Effective Time, the
Board of Directors of Fusion (referred to as the
Board)
will consist of nine directors, which will be selected in
accordance with the stockholders’ agreement (referred to as
the Stockholders’
Agreement) to be entered into
at the closing of the Merger by and among the Company, BCHI
Holdings and certain of Fusion’s existing stockholders, as
follows: (a) four directors, at least one of whom must be an
independent director within the meaning of the listing standards of
the NASDAQ Stock Market (referred to as Nasdaq), will be nominated by BCHI Holdings; (b) four
directors, at least one of whom must be an independent director
within the meaning of the Nasdaq listing standards, will be
nominated by the Fusion Committee; and (c) one
director, who must be an independent director within the meaning of
the Nasdaq listing standards, will be nominated by BCHI Holdings
with the reasonable consent of the Fusion Committee.
Matthew D. Rosen will serve as Chairman of the Board, and Holcombe
T. Green, Jr. will serve as Vice Chairman. At the Effective Time,
the current members of Fusion’s Board will resign unless they
have been nominated by the Fusion Committee to serve on the Board
of the post-Merger Fusion.
Executive Officers of Fusion Following the Merger (see page
67)
Matthew
D. Rosen will be the Chief Executive Officer of the post-Merger
Fusion, Gordon Hutchins,
Jr. will be President and Russell Markman will be the Chief
Operating Officer. The other
executive officers of post-Merger Fusion will be determined
prior to the closing of the Merger by mutual agreement of Fusion
and BCHI Holdings. As of the date of this proxy
statement, no other executive officers have been
chosen.
Recommendation of the Board (see page 48)
The Board recommends that you vote
“FOR” the proposal to adopt the Merger Agreement
and approve the Merger, the issuance of the Merger Shares and the
other transactions contemplated by the Merger Agreement. The Board
also recommends that you vote “FOR” the proposal to adopt the Certificate of
Amendment, “FOR” the proposal to adopt the Restated
Charter, “FOR” the proposal to adjourn the Annual
Meeting, if necessary, to solicit additional votes in favor of the
proposal to adopt the Merger Agreement, the proposal to adopt the
Certificate of Amendment and the proposal to adopt the Restated
Charter, and “FOR” each of the other proposals described in
this proxy statement.
Opinion of FTI Capital Advisors, LLC (see page 51)
At a meeting of the Board held on August 25, 2017,
FTI Capital Advisors, LLC (referred to as FTICA) delivered to the Board an oral opinion, which
opinion was subsequently confirmed by delivery of a written
opinion, dated August 26, 2017, to the effect that, as of such
date, and based on and subject to various assumptions,
qualifications and limitations described in their written opinion,
that the aggregate Merger consideration was fair, from a financial
point of view, to the Company and the holders of Fusion Common
Stock (other than the Company and its
affiliates).
The full text of FTICA’s opinion describes
the assumptions made, procedures followed, matters considered and
limitations on the review undertaken by FTICA. The opinion is
attached hereto as Annex
D and is
incorporated herein by reference. The summary of FTICA’s
opinion in this proxy statement is qualified in its entirety by
reference to the full text of such opinion. Fusion Stockholders are
encouraged to read the opinion of FTICA carefully and in its
entirety. FTICA’s opinion was provided for the benefit of the
Board (in its capacity as such) in connection with, and for the
purpose of, its evaluation of the Merger, addresses only the
fairness, from a financial point of view, of the aggregate Merger
consideration to be paid by Fusion in the Merger and does not
address any other terms or other aspects or implications of the
Merger or the other transactions contemplated by the Merger
Agreement (including the Carrier Spin-off and the Consumer
Spin-off, as defined herein). The opinion does not constitute a
recommendation to any Fusion Stockholder as to how such stockholder
should vote or act with respect to the Merger Agreement, the Merger
or any related transaction.
Interests of Fusion’s Officers and Directors in the Merger
(see page 60)
In
considering the recommendation of the Board with respect to the
proposal to adopt the Merger Agreement and related proposals,
Fusion Stockholders should be aware that, aside from their
interests as Fusion Stockholders, Fusion’s directors and
certain executive officers have interests in the Merger that are
different from, or in addition to, those of Fusion Stockholders
generally. These interests relate to:
●
in the case of
Marvin S. Rosen, our Chairman of the Board, the repayment by
Fusion, at or prior to the Effective Time, of the outstanding
principal amount of approximately $930,000 including all accrued
but unpaid interest under a subordinated promissory note, dated
November 14, 2016, issued by Fusion to Mr. Rosen;
●
in the case of
Matthew D. Rosen, our Chief Executive Officer and director, his
appointment as Chairman of the Board and Chief Executive Officer of
post-Merger Fusion;
●
in the case
of [●],
[●] and
[●], their appointment as directors of
the post-Merger Fusion;
●
in the case of
Marvin S. Rosen, Philip D. Turits, Michael J. Del Giudice, Jack
Rosen, Matthew D. Rosen and Paul C. O’Brien, their right to
convert all of their shares of our Series A-1 Cumulative
Convertible Preferred Stock, par value $0.01 per share (referred to
as the Series A-1 Preferred
Stock), our Series A-2 Cumulative Convertible Preferred
Stock, par value $0.01 per share (referred to as the Series A-2 Preferred Stock), our Series
A-4 Cumulative Convertible Preferred Stock, par value $0.01 per
share (the referred to as the Series A-4 Preferred Stock), including
all accrued but unpaid dividends thereon, into shares of Fusion
Common Stock at or prior to the Effective Time and with respect to
each of such directors and William Rubin and Larry Blum, their
rights to convert shares of Series B-2 Preferred Stock into shares
of Fusion Common Stock;
●
in the case of all
non-executive directors, the right to receive,
contingent upon the closing of the Merger, a special
one-time bonus in the amount of $40,000 ($240,000 in the
aggregate); and in the case of certain named executive
officers and certain other members of Fusion management
(other than
Fusion's Chief Executive Officer), the right to
receive, contingent upon the closing of the Merger, a
special one-time transaction bonus of between $7,500 and
$137,500 and totaling
$1,049,000;
●
in the case of all
of our directors and executive officers that have been granted
stock options under certain Fusion stock option plans, their right
to accelerated vesting of such awards upon completion of the
Merger;
●
in the case of
Matthew D. Rosen and Michael Bauer, their existing employment
arrangements provide for certain benefits upon and after the
completion of the Merger, including severance benefits upon a
qualifying termination; and
●
in the case of all
directors and executive officers of Fusion, their right to
continued indemnification and insurance coverage by Fusion after
completion of the Merger.
If the
Merger had closed on [●], 2017, the most recent practicable
date before the date of this proxy statement, the aggregate value
of benefits that the directors and executive officers
as a group would have received that other Fusion stockholders would
not have received would have been approximately $[●]. For
purposes of the preceding sentence, the value of accelerated equity
awards vesting upon closing of the Merger has been determined by
multiplying the closing price of $[●] per share of the Fusion
Common Stock on [●], 2017, the most recent practicable date
before the date of this proxy statement, by the number of shares
subject to the equity awards vesting on an accelerated basis and,
in the case of such stock options, reducing such amount by the
applicable exercise price.
As of the date of
this proxy statement, none of Fusion’s executive officers,
other than
the understanding between the parties that Matthew D.
Rosen will serve as the Chief Executive Officer of
post-Merger Fusion, have entered into any agreements,
arrangements or understandings with Fusion or any of its affiliates
specifically regarding the terms of their employment with, or the
right to participate in the equity of, post-Merger Fusion. However,
Fusion has indicated that it or its affiliates may pursue
agreements, arrangements or understandings with certain of its
executive officers, which may include cash-based and equity-based
compensation and other forms of compensation. Prior to the
Effective Time, Fusion may initiate negotiations with such
executive officers regarding continued employment with post-Merger
Fusion or one of its affiliates, and may enter into definitive
agreements with certain of such executive officers regarding their
employment with post-Merger Fusion.
These
interests create potential conflicts of interest. The Board was
aware of these potential conflicts of interest and considered them,
among other matters, in reaching its decision to approve the Merger
Agreement and the transactions contemplated thereby and to
recommend that Fusion Stockholders vote in favor of adopting the
Merger Agreement.
Conditions to the
Merger (see
page 76)
The
obligations of Fusion, Merger Sub and BCHI to complete the Merger
and the other transactions contemplated by the Merger Agreement are
subject to the satisfaction or waiver (to the extent permitted
under the Merger Agreement and applicable law), at or prior to the
Effective Time, of a number of conditions. These conditions
include:
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●
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|
the
approval of the proposals to adopt (i) the Merger Agreement, (ii)
the Certificate of Amendment, and (iii) the Restated Charter by an
affirmative vote of the holders of at least a majority of the
voting power of the issued and outstanding Voting Shares entitled
to vote thereon;
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●
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the
filing of notices with, or the receipt of required approvals from,
the Federal Communications Commission (referred to as the
FCC) and the public service
commission of various states (referred to as State PSCs) with respect to the Merger
and the other transactions contemplated by the Merger
Agreement;
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●
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the
expiration or early termination of the waiting period applicable to
the consummation of the transactions contemplated by the Merger
Agreement under the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended (referred to as the HSR Act);
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●
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|
the absence of any law, rule, regulation, order, judgment, decree,
injunction or ruling of any governmental entity prohibiting or
making illegal the consummation of the transactions contemplated by
the Merger Agreement;
|
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●
|
|
the funding of the financing necessary to complete the transactions
contemplated by the Merger Agreement, on terms and conditions
satisfactory to Fusion and BCHI;
|
|
●
|
|
the approval of the Merger Shares for listing on
The Nasdaq Capital
Market®;
|
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●
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|
the conversion or cancellation of all classes or
series of Fusion’s preferred stock outstanding immediately
prior to the Effective Time;
|
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●
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|
the Stockholders’ Agreement and the Registration Rights
Agreement being executed and delivered by the parties
thereto;
|
|
●
|
|
BCHI spinning off its consumer and single-line business segments to
the existing BCHI shareholders (referred to as the
Consumer
Spin-off);
|
|
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●
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Fusion either (i) divesting its ownership interest in Fusion Global
Services LLC (referred to as Fusion
Global) through which,
effective as of September 1 2017, Fusion operates its Carrier
Services business and entering into a profit sharing arrangement
with the purchaser of Fusion Global (referred to as the
Carrier
Spin-off) or (ii) dissolving
Fusion Global;
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●
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all nine of the initial members of Fusion’s post-Merger Board
having been determined by the parties in accordance with the
provisions of the Stockholders’ Agreement;
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●
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|
the accuracy of the representations and warranties of each party to
the Merger Agreement as of the date of the Merger Agreement and as
of the Effective Time (except that those representations and
warranties that address matters only as of a particular date need
only be true and correct as of such date), subject to certain
materiality qualifiers;
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●
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the parties having performed in all material respects all of the
covenants and agreements required to be performed by them at or
prior to the Effective Time;
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●
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absence of a material adverse effect on Fusion or BCHI;
and
|
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●
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delivery of a FIRPTA certificate by BCHI to Fusion.
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Financing for the Merger (see
page 75)
Fusion is seeking
approximately $620 million of new financing, the proceeds of which
will be used (i) to repay approximately $458 million borrowed by
BCHI under existing secured credit facilities, (ii) to repay
approximately $97.0 million owed by Fusion under its existing
secured credit facilities, (iii) to pay approximately $40.0 million
of transaction fees and expenses, and (iv) to repay approximately
$5.1 million owed by BCHI under the subordinated notes of BCHI,
dated October 28, 2016, in favor of Holcombe T. Green, Jr., R.
Kirby Godsey and the Holcombe T. Green Jr. 2013 Five-Year Annuity
Trust and approximately $1.0 million owed by the Company under the
subordinated note of the Company, dated November 14, 2016, in favor
of Marvin S. Rosen. The remaining $25.0 million will be used to
fund future working capital and general corporate requirements. The
funding of the financing in the total amount specified above is a
condition to the obligations of Fusion and BCHI to consummate the
Merger. For more information see, “The
Merger Agreement – Conditions to the
Merger”
beginning on page 76 of this proxy
statement.
Fusion and BCHI
are
in active discussions with a number of financial institutions
concerning the financing required to complete the Merger
and are
seeking to obtain commitments covering the total amount of
the required financing within the next forty five days. Fusion cannot
provide any assurance that such commitments will be secured or, if
such commitments are provided, that they will be on terms
acceptable to the Company.
Should acceptable
commitments be obtained, the obligations of the financing parties
to provide the required debt financing will be subject to a number
of conditions, including the execution of definitive financing
documentation, legal due diligence, the accuracy of specified
representations and warranties, payment of applicable fees, costs
and expenses and delivery of customary closing
documents.
No Solicitation of Transactions (see page 72)
The
Merger Agreement contains a customary non-solicitation provision
that prohibits Fusion from (i) soliciting alternative acquisition
proposals from third parties, (ii) participating in discussions and
engaging in negotiations with third parties regarding alternative
acquisition proposals, and (iii) furnishing non-public information
to any third parties seeking to make an alternative acquisition
proposal. However, the Company may take the foregoing actions in
connection with an alternative acquisition proposal that the Board
determines to constitute, or to be reasonably likely to lead to, a
superior proposal (as defined), subject to satisfaction of certain
requirements.
The
Merger Agreement also prohibits the Board from (i) withdrawing its
recommendation in favor of the transactions contemplated by the
Merger Agreement, (ii) failing to include its recommendation in the
proxy statement distributed to Fusion Stockholders, or (iii)
approving or recommending any alternative acquisition proposal.
However, the Board may take the foregoing actions, subject to
satisfaction of certain requirements, in connection with an
alternative acquisition proposal if the Board has determined that
such proposal constitutes a superior proposal and that the failure
to take such actions would be inconsistent with the Board’s
fiduciary duties under applicable law.
Termination and No
Termination Fees (see page
78)
The
Merger Agreement may be terminated and the Merger may be abandoned
at any time prior to the Effective Time, as follows:
●
by
the mutual written consent of Fusion and BCHI duly authorized by
the Board and the board of directors of BCHI,
respectively;
●
by
either Fusion or BCHI, if:
o
the
Merger is not consummated by April 2, 2018, subject to extension
until April 30, 2018, at the election of either party, if necessary
to obtain certain regulatory and antitrust approvals;
o
there is a law or
order in effect prohibiting the Merger that has become final and
non-appealable;
o
Fusion
is unable to obtain the required approval of the Fusion
Stockholders at the Annual Meeting or any adjournment or
postponement thereof; or
o
binding
commitments with respect to the required financing are not received
within 120 days after the signing date of the Merger Agreement
(i.e., by December 24, 2017);
o
BCHI
has breached any of its representations and warranties or failed to
perform any of its covenants or agreements, such that the
conditions to Fusion’s obligation to consummate the Merger
would not be satisfied, and such breach has not been cured (or is
incapable of being cured) within the specified cure period;
or
o
the
Board has changed its recommendation of the Merger Agreement and
Fusion is not in breach of its non-solicitation obligations
thereunder; or
o
Fusion
has breached any of its representations and warranties or failed to
perform any of its covenants or agreements, such that the
conditions to BCHI’s obligation to consummate the Merger
would not be satisfied, and such breach has not been cured (or is
incapable of being cured) within the specified cure period;
or
o
Fusion
has breached its non-solicitation obligations under the Merger
Agreement or the Board has changed its recommendation of the Merger
Agreement.
Neither
Fusion nor BCHI is obligated to
pay the other party a termination fee in the event that the Merger
Agreement is terminated in accordance with its terms.
Material U.S. Federal Income Tax Consequences (see page
64)
The
Merger will not result in any taxable gain or loss for U.S. federal
income tax purposes to Fusion, BCHI or any Fusion Stockholder (in
his or her capacity as a Fusion Stockholder). Any Fusion
Stockholder who is also a stockholder of BCHI should consult its
own tax advisor as to the tax consequences of participating in the
Merger.
As a
result of the Merger, Fusion may be subject to limitations on the
utilization of certain tax attributes. In particular, as a result
of the Merger, there will be an “ownership change”
within the meaning of Section 382 of the Internal Revenue Code of
1986, as amended (referred to as the Code), which generally will limit
Fusion’s use of its current net operating losses for each
year following the Merger to an amount equal to the product of (i)
the value of Fusion immediately prior to the Merger and (ii) the
long-term tax exempt rate (1.93% for ownership changes
occurring in February 2018).
Accounting for the Merger (see page 59)
The
Merger will be treated by Fusion as a “reverse
acquisition” under the acquisition method of accounting in
accordance with accounting principles generally accepted in the
United States. For accounting purposes, BCHI will be considered to be acquiring
Fusion in the Merger.
Appraisal Rights (see
page 42)
Fusion
Stockholders are not entitled to appraisal rights in connection
with the Merger, the issuance of the Merger Shares or any other
transactions contemplated by the Merger Agreement.
Regulatory Matters (see page 63)
A condition to the obligation of Fusion and BCHI
to complete the Merger is that the requisite FCC approvals be
granted and any conditions thereof be satisfied. In order to obtain
required FCC approvals, Fusion and BCHI must file applications
with, and seek approval from, the FCC for the transfer of control
of FCC licenses and authorizations held by Fusion and its
subsidiaries. These applications are required because the
transactions contemplated by the Merger Agreement constitute a
change in control of Fusion, as Holcombe T. Green. Jr., as a
controlling stockholder of BCHI Holdings, will acquire, indirectly through his
control of BCHI Holdings, more than 50% of the Fusion Common Stock
issued and outstanding immediately after the Effective Time. On
October 31, 2017, Fusion and BCHI jointly filed applications
seeking the requisite FCC approvals. Fusion will also make any
filings required to complete the Carrier Spin-off, and BCHI will
make all other filings with the FCC that may be necessary to
complete the Consumer Spin-off.
Another
condition to the obligation of Fusion and BCHI to complete the
Merger is that any State PSC approvals required in connection with
the Merger be granted and any conditions thereof be satisfied, and
that such State PSC approvals be in effect as of the Effective
Time. In order to receive State PSC approvals from the States that
require such approvals in connection with the Merger (referred to
as the Approvals States),
any Fusion subsidiary that holds intrastate telecommunications
authority (each, referred to as a Fusion Licensee) in one or more
Approval States is required to file applications with the PSCs in
such states. Fusion and BCHI currently expect that the Approval
States will include California, Colorado, Georgia, Hawaii, Indiana,
Louisiana, Maryland, Minnesota, Mississippi, Nebraska, New Jersey,
New York, Ohio, Pennsylvania, Tennessee, Texas, Virginia and West
Virginia. In many instances, Fusion and BCHI will have to join in
the application. Further, it is possible that each BCHI subsidiary
that holds intrastate telecommunications authority (each, referred
to as a Birch Licensee) in
one or more Approval States will have to file as well. These
applications will request approval of the transfer of ultimate
indirect control of the Fusion Licensee(s) to BCHI Holdings and its
majority stockholder, Holcombe T. Green, Jr. In certain states,
these applications also may include a request for the PSC’s
consent to the reorganization of the Birch Licensee(s) in
connection with the Merger and/or the transfer to the Fusion
stockholders of a minority interest in certain Birch
Licensee(s).
In
order to comply with any Merger-related regulatory requirements in
the remaining states where a Fusion Licensee and/or a Birch
Licensee holds authority (referred to as the Notification States), the Fusion
Licensee(s), together with Fusion and BCHI (and possibly with any
Birch Licensee authorized in any of these states), must file notice
of the Merger with the respective State PSCs. These filings serve
to notify the State PSCs regarding the transfer of ultimate
indirect control of the Fusion Licensee(s) to BCHI Holdings and its
majority stockholder, Holcombe Green, Jr. In certain Notification
States, these notices also may address the reorganization of the
Birch Licensee(s) in connection with the Merger and/or the transfer
to the Fusion stockholders of a minority interest in certain Birch
Licensee(s).
In
order to comply with the financing approval or notice requirements
of the State PSCs in states that require such approval or notice
with respect to the debt financing proposed in connection with the
Merger (referred to as the Financing Filing States), each Fusion
Licensee and each Birch Licensee that will participate in the
financing and is authorized in the Financing Filing States,
together with Fusion and possibly BCHI, must submit a notice or
application for approval, as applicable, to the relevant State PSC.
Fusion and BCHI currently expect that the Financing Filing States
will include Arizona, Colorado, Delaware, Georgia, Hawaii, Indiana,
Maryland, Nebraska, New Jersey, New Mexico, New York, Pennsylvania,
Rhode Island and Tennessee. Consistent with state law and insofar
as practicable, these notices and applications may be combined with
the Merger-related filings discussed in the preceding
paragraphs.
By
November 30, 2017, Fusion, the Fusion Licensees, BCHI, and the
Birch Licensees (insofar as their participation is required) intend
to file all required notices or applications for approval with the
State PSCs in connection with the Merger, including the related
financing. In addition, with the participation of Fusion and/or the
Fusion Licensee(s) where necessary or appropriate, and subject to
Fusion’s agreement as to strategy, the parties will make all
approval or notification filings with the State PSCs that are
necessary to complete the Consumer Spin-off, unless and insofar as
such filings are jointly waived by the parties.
The
completion of the Merger is also subject to the requirements of the
HSR Act, which provides that certain transactions may not be
completed until the required information has been furnished to the
Antitrust Division of the U.S. Department of Justice and the U.S.
Federal Trade Commission and until certain waiting periods have
been terminated, have expired or approval has been obtained. The
required pre-Merger notification and report form was filed on
October 31, 2017. Early termination of the waiting
period under the HSR Act was granted on November 15,
2017.
Nasdaq Listing (see page 65)
A
condition to Fusion’s and BCHI’s obligations to
complete the Merger is that the Merger Shares be approved for
listing on Nasdaq. The Fusion Common Stock is currently listed on
The Nasdaq Capital Market®, and Fusion is subject to the
Nasdaq listing rules. Nasdaq Rule 5110(a) requires an issuer to
apply for initial listing in connection with a transaction whereby
the issuer combines with a non-Nasdaq entity, resulting in a change
of control of the issuer and potentially allowing the non-Nasdaq
entity to obtain a Nasdaq listing. By letter dated September 22,
2017, Nasdaq advised Fusion that the consummation of the Merger
would constitute a change of control of Fusion within the meaning
of Nasdaq Rule 5110(a) and, therefore, that post-Merger Fusion will
need to apply for initial listing.
Prior
to completion of the Merger, Fusion intends to file the required
listing application with Nasdaq pursuant Rule 5110(a). If such
application is approved by Nasdaq, Fusion anticipates that the
Fusion Common Stock will continue to be listed on The Nasdaq
Capital Market® following the closing of the Merger under the
trading symbol “FSNN.”
Support Agreement (see page 81)
In connection with the execution of the Merger
Agreement, Marvin S. Rosen, Matthew D. Rosen, Philip D. Turits,
Michael J. Del Giudice, Jack Rosen, Larry Blum, Paul O’Brien
and William Rubin (collectively, referred to as the
Principal
Stockholders) entered into a
Support Agreement, dated as of August 26, 2017 (referred to as
the Support
Agreement), with BCHI, pursuant
to which the Principal Stockholders agreed, among other things, at
any meeting of the stockholders of Fusion, to be present (in person
or by proxy) and to vote all of their Voting
Shares:
●
in
favor of the Merger Agreement and any transactions contemplated
thereby (including the Merger);
and,
in certain specified circumstances, in favor of any amendment to
the Merger Agreement; and
●
against
(i) any alternative acquisition proposal that meets certain
thresholds specified in the Support Agreement, (ii) any action that
would reasonably be expected to result in a breach of or failure to
perform any representation, warranty, covenant or agreement of
Fusion under the Merger Agreement, or in any of the conditions to
closing set forth in the Merger Agreement not being satisfied, or
(iii) any action that would prevent or materially delay or would
reasonably be expected to prevent or materially delay, consummation
of the Merger.
The
Support Agreement terminates upon the
earliest to occur of (i) a termination of the Merger Agreement in
accordance with its terms, (ii) the Effective Time, (iii) with
regard to any Principal Stockholder, the entry by Fusion, without
prior written consent of such Principal Stockholder, into any
amendment or modification of the Merger Agreement which results in
(A) a change which is materially adverse to such Principal
Stockholder or (B) the extension of the outside date for completion
of the Merger (except where the outside date is extended in
accordance with the terms of the Merger Agreement), or (iv) the
mutual written agreement of the parties to terminate the Support
Agreement.
At the time of execution of the Support
Agreement, the Principal Stockholders held, in the
aggregate, Voting Shares representing 10.5% of the issued and
outstanding shares of Fusion Common Stock and 9.8% of the votes
entitled to be cast at the Annual Meeting.
For a
further discussion of the Support Agreement, see the section
entitled “Agreements Related
to the Merger Agreement – Support Agreement”
beginning on page 81 of this proxy statement.
Registration Rights Agreement (see page 80)
At the closing of the
Merger (referred to as the Closing),
Fusion and BCHI Holdings will enter into the Registration Rights
Agreement, pursuant to which, upon the terms and subject to the
terms thereof, Fusion will grant certain registration rights to
BCHI Holdings. Under the Registration Rights Agreement, Fusion will
be obligated, among other things, to file a shelf registration
statement covering Merger Shares representing no greater than 25%
of the total number of Merger Shares, and to use reasonable best
efforts to cause such shelf registration statement to be declared
effective by the SEC within 120 days following the Closing. Under
the Registration Rights Agreement, BCHI Holdings will also have
certain customary demand and piggyback registration rights with
respect to the shares of Fusion Common Stock held by BCHI
Holdings.
For a further
discussion of the Registration Rights Agreement, see the section
entitled “Agreements Related
to the Merger Agreement – Registration Rights
Agreement” beginning on page 80 of this proxy
statement.
Stockholders’ Agreement (see page 80)
At the Closing, BCHI Holdings and each of the
Principal Stockholders will enter into the Stockholders’
Agreement. Among other things, the Stockholders’
Agreement will provide that, from and after the Effective Time, the
Board will consist of nine directors, which will be selected as
follows:
●
four directors, at
least one of whom must be an independent director within the
meaning of the Nasdaq listing standards, will be nominated by BCHI
Holdings;
●
four directors, at
least one of whom must be an independent director within the
meaning of the Nasdaq listing standards, will be nominated by
certain of Fusion’s existing stockholders signatories to the
Stockholders’ Agreement (referred to as the Fusion Committee); and
●
one director, who
must be an independent director within the meaning of the Nasdaq
listing standards, will be nominated by BCHI Holdings with the
consent of the Fusion Committee, which may not be unreasonably
withheld.
The
Stockholders’ Agreement will require each party to vote its
respective shares of Fusion Common Stock in favor of electing to
the Board individuals nominated in accordance with the foregoing
provisions. The rights of the Fusion
Committee and BCHI Holdings to nominate directors to the Board as
described above will continue (i) in the case of the Fusion
Committee, until such time as Marvin S. Rosen and Matthew D. Rosen,
collectively beneficially own less than one and one-half percent
(1.5%) of the then issued and outstanding shares of Fusion Common
Stock, and (ii) in the case of BCHI Holdings, until such time as it
and its affiliates collectively beneficially own less than twenty
percent (20%) of the number of shares of Fusion Common Stock owned
by them immediately following the Effective
Time.
For a further discussion of the
Stockholders’ Agreement, see the section entitled
“Agreements Related to the
Merger Agreement – Stockholder’ Agreement”
beginning on page 80 of this proxy
statement.
The Annual Meeting
Purpose of the Annual Meeting (see page 38)
At the Annual Meeting, Fusion Stockholders will be asked to
consider and vote upon the following matters:
●
a proposal to adopt the Merger
Agreement and approve (i) the Merger, (ii) the issuance of the
Merger Shares, and (iii) the other transactions contemplated by the
Merger Agreement (Proposal
No. 1);
●
a proposal to adopt the Certificate of
Amendment (Proposal
No. 2);
●
a proposal to adopt the Restated
Charter (Proposal
No. 3);
●
a proposal to adjourn the Annual
Meeting, if necessary, to solicit additional votes in favor of the
proposals to adopt the Merger Agreement, to adopt the Certificate
of Amendment and to adopt the Restated Charter (Proposal
No. 4);
and
●
a proposal to approve, on an advisory
basis, certain compensation
that may be paid to certain of Fusion’s named executive
officers as a result of the Merger (Proposal
No. 5).
At the Annual Meeting, Fusion Stockholders will also be asked to
consider and vote on two additional proposal unrelated to the
Merger, as follows:
●
a proposal to elect eight (8) directors
nominated by the Board to hold office until the earliest to occur
of (i) the election and qualification of their successors, and (ii)
their earlier resignation, death, or removal from office
(Proposal
No. 6);
and
●
a proposal to ratify the selection of
EisnerAmper LLP as the Company’s independent registered
public accounting firm for the fiscal year ending December 31, 2017
(Proposal
No. 7);
and
In addition, Fusion Stockholders may be asked to consider and vote
on such other business as may properly come before the stockholders
at the Annual Meeting or any adjournment or postponement
thereof.
Date, Time and Place of the Annual Meeting (see page
38)
The
Annual Meeting will be held at 3:00 p.m., local time, on , 2018, at
Fusion’s executive office located at 420 Lexington Avenue,
Suite 1718, New York, New York 10170.
Recommendation of the Board (see page 38)
After careful consideration, the Board has (i)
determined that the Merger Agreement and the transactions
contemplated thereby, including the Merger and the issuance of the
Merger Shares, are fair to, advisable and in the best interests of
Fusion and its stockholders, (ii) approved the execution, delivery
and performance by Fusion of the Merger Agreement and the
consummation of the transactions contemplated thereby, including
the Merger and the issuance of the Merger Shares, and
(iii) directed that the Merger Agreement be submitted to the
Fusion Stockholders for adoption. The Board’s reasons for
recommending the Merger are set forth in more detail under the
section entitled “The Merger –
Reasons for the Merger and Recommendation of the
Board” on page
48 of this proxy
statement.
Accordingly,
the Board recommends that you vote your Voting Shares:
●
“FOR” the proposal to adopt the Merger Agreement
and approve the Merger, the issuance of the Merger Shares and the
other transactions contemplated by the Merger Agreement
(Proposal No.
1);
●
“FOR” the proposal to adopt the Certificate of
Amendment (Proposal No.
2);
●
“FOR” the proposal to adopt the Restated Charter
(Proposal No.
3);
●
“FOR” the proposal to adjourn the Annual
Meeting, if necessary, to solicit additional votes in favor of the
proposals to adopt the Merger Agreement, to adopt the Certificate
of Amendment and to adopt the Restated Charter (Proposal No.
4); and
●
“FOR” the proposal to approve, on an advisory
basis, certain compensation that may be paid to certain of
Fusion’s named executive officers as a result of the
Merger (Proposal No.
5).
In
addition, the Board recommends that you vote your Voting
Shares:
●
“FOR” the election of the eight directors
nominated by the Board (Proposal No.
6); and
●
“FOR” the proposal to ratify the selection of
EisnerAmper LLP as our independent registered public accounting
firm for the fiscal year ending December 31, 2017
(Proposal No.
7).
Record Date (see page 39)
The
Board has fixed on [●], 2017 as the record date (referred to
as the Record Date) for
determining Fusion Stockholders entitled to vote at the Annual
Meeting. All holders of shares of Fusion Common Stock and Series
B-2 Preferred Stock as of the close of business on the Record Date
are entitled to receive notice of, attend the Annual Meeting and
any adjournment or postponement thereof, and vote at the Annual
Meeting. As of the close of business on the Record Date, there were
[●] shares of Fusion Common Stock and [●] shares of
Series B-2 Preferred Stock (each entitled to 200 votes) issued and
outstanding. These Voting Shares are held by approximately holders
of record.
Who Can Vote at the Annual Meeting (see page 40)
Holders
of shares of Fusion Common Stock and Series B-2 Preferred Stock as
of the Record Date are entitled to vote on all matters that
come before the Annual Meeting. Shares can be voted only if the
Fusion Stockholder is present at the Annual Meeting in person or
represented by proxy. A complete list of Fusion
Stockholders entitled to vote at the Annual Meeting will be
available for examination by any Fusion Stockholder at the
Company’s executive office at 420 Lexington Avenue, Suite
1718, New York, New York 10170, during normal business hours, for a
period of no less than ten days prior to the Annual Meeting and
also at the Annual Meeting.
Quorum and Required Vote (see page 39)
In
order for any matter to be considered at the Annual Meeting, there
must be a quorum present. The holders of a majority of the voting
power of the outstanding Voting Shares, present in person or
represented by proxy at the Annual Meeting, will constitute a
quorum at the Annual Meeting.
Proposal Nos. 1, 2 and 3 require the affirmative
“FOR” vote by holders of a majority of the
Voting Shares issued and outstanding as of the Record Date and
entitled to vote thereon, voting as a single
class.
Proposal Nos. 4, 5 and 7 require the affirmative
“FOR” vote of a majority of the votes cast at
the Annual Meeting by the holders of Voting Shares present in
person or represented by proxy at the Annual Meeting and entitled
to vote thereon, voting as a single class.
With
respect to Proposal No. 6, directors shall be elected by a
plurality of the votes cast at the Annual Meeting by the holders of
Voting Shares present in person or represented by proxy at the
Annual Meeting and entitled to vote thereon, voting as a single
class.
Number of Votes (see page 40)
Except as otherwise
specified to the contrary in this proxy statement, the holders
of shares of Fusion Common Stock and the holders of shares of
Series B-2 Preferred Stock will vote as a single class on each
matter submitted to a vote of stockholders at the Annual
Meeting. Each share of Fusion Common Stock is entitled to
one vote. Each share of Series B-2 Preferred Stock is
entitled to 200 votes, which is the number of Fusion Common Shares
into which a share of Series B-2 Preferred Stock may be converted
as of the Record Date.
On the
Record Date, there were [●] issued and outstanding
shares of Fusion Common Stock, which are entitled in the aggregate
to [●] votes, and [●] issued and outstanding shares of
Series B-2 Preferred Stock, which are entitled in the aggregate to
[●] votes. The Voting Shares issued and outstanding as of the
Record Date are collectively entitled to a total of votes at the
Annual Meeting.
Solicitation of Proxies (see page 42)
All
costs associated with the preparation and distribution of this
proxy statement and the other proxy materials and the solicitation
of votes will be paid by Fusion. If a Fusion Stockholder
chooses to vote over the Internet, such Fusion Stockholder is
responsible for any Internet access charges that may be
incurred. If a Fusion Stockholder chooses to vote by
telephone, such Fusion Stockholder will be responsible for any
telephone charges that may be incurred. We intend
to retain a proxy solicitor in conjunction with the Annual Meeting,
but have not yet selected the company to perform those
services. In addition to the mailing of this proxy
statement and the other proxy materials, the solicitation of
proxies or votes may be made in person, by telephone, or by
electronic communications by our directors, officers and certain of
our other employees, who will not receive any additional
compensation for such solicitation activities.
Admission to the Annual Meeting (see page 40)
You are
entitled to attend the Annual Meeting if you were a Fusion
Stockholder as of the Record Date or you hold a valid proxy for the
Annual Meeting. Since seating is limited, admission to
the Annual Meeting will be on a first-come, first-serve
basis. You must present a valid photo identification,
such as a driver’s license or passport, for
admittance. If you do not provide a photo
identification or comply with the other procedures outlined above,
you will not be admitted to the Annual Meeting. For
security reasons, you and your bags are subject to search prior to
your admittance to the Annual Meeting. The Annual Meeting will
begin promptly at 3:00 p.m., local time, on [●],
2018.
Voting by Proxy (see page 40)
Fusion
has arranged for three ways to submit your proxy:
●
over the Internet,
by following the instructions provided on the proxy card (an
Internet vote must be received by 11:59 p.m., New York City time,
on [●], 2018);
●
by mail (proxy
cards submitted by mail must be received before [●], 2018 to
be voted at the Annual Meeting); or
●
by telephone (a
telephonic vote must be made prior to on [●],
2018).
If you
hold your Voting Shares beneficially in “street name,”
you may vote over the Internet, by mail or by telephone by
following the voting instruction form provided to you by the
Organization through which you hold your Voting
Shares.
Revocability of Proxies (see page
41)
Your
proxy is revocable. If you are a Fusion Stockholder as of the
Record Date, you may revoke your proxy at any time
prior to taking the vote at the Annual Meeting by:
●
granting a new
proxy bearing a later date by following the instructions provided
in the proxy card, which will automatically revoke the previous
proxy;
●
providing a written
notice of revocation to Fusion’s Corporate Secretary, 420
Lexington Avenue, Suite 1718, New York, New York 10170;
or
●
attending the
Annual Meeting and voting in person.
If you
hold Voting Shares beneficially in “street name,” you
may change your vote at any time prior to the taking of the vote at
the Annual Meeting by:
●
submitting new
voting instructions to the Organization through which you hold your
Voting Shares by following the instructions provided by that
Organization; or
●
if you have
obtained a legal proxy from the Organization through which you hold
your Voting Shares giving you the right to vote your Voting Shares,
by attending the Annual Meeting and voting in person.
Note
that with respect to both stockholders of record and
beneficial owners, attendance at the Annual Meeting will not cause
your previously granted proxy to be revoked unless you specifically
so request or vote in person at the Annual Meeting.
SUMMARY SELECTED HISTORICAL FINANCIAL DATA
The
following summary selected historical financial information is
being provided to assist you in your analysis of the financial
aspects of the Merger.
The
consolidated statement of operations data of Fusion for the years
ended December 31, 2016 and December 31, 2015, and the
consolidated balance sheet data of Fusion as of December 31,
2016 and 2015 are derived from, and are qualified by reference to,
the audited consolidated financial statements included in
Fusion’s Annual Report on Form 10-K for the fiscal year ended
December 31, 2016, as amended, which is incorporated by
reference into this proxy statement. The data as of and for the
nine months ended September 30, 2017 and 2016 of Fusion is derived
from the unaudited consolidated financial statements included in
Fusion’s Quarterly Report on Form 10-Q, which are
incorporated by reference into this proxy statement, and in the
opinion of Fusion’s management includes all normal and
recurring adjustments that are considered necessary for the fair
presentation of the results for the interim period.
The consolidated statement of operations data of
BCHI for the years ended December 31, 2016, December 31, 2015 and
December 31, 2014, and the consolidated balance sheet data of BCHI
as of December 31, 2016 and 2015 are derived from, and are
qualified by reference to, the audited consolidated financial
statements of BCHI which are attached to
this proxy statement and are incorporated by reference into this
proxy statement. The data as of and for the nine months ended
September 30, 2017 and 2016 of BCHI is derived from unaudited
consolidated financial statements of BCHI, a copy of which is
attached heretoand which are incorporated by reference into this
proxy statement, and in the opinion of BCHI’s management
includes all normal and recurring adjustments that are considered
necessary for the fair presentation of the results for the interim
period.
The information regarding Fusion is only a summary
and should be read in conjunction with its historical consolidated
financial statements and related notes, and the related
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” contained in
Fusion’s Annual Report on Form 10-K for the year ended
December 31, 2016 and Quarterly Report on Form 10-Q for the period
ended September 30, 2017, which are incorporated by reference into
this proxy statements, as well as other information about Fusion
that has been filed with the SEC. See the section entitled
“Where
You Can Find More Information,” beginning on page 117 of this proxy
statement, for information on where you can obtain copies of this
information. The information regarding BCHI is also only a summary
and should be read in conjunction with its historical consolidated
financial statements and related notes, and the related
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” included
at the back of this proxy
statement.
The
historical results included below and elsewhere in this proxy
statement are not necessarily indicative of the future performance
of Fusion, BCHI or the combined company.
Selected Historical Financial Data of Fusion
Fusion Telecommunications International, Inc. and
Subsidiaries
|
|
|
|
|
Consolidated Balance Sheets - USD ($)
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
Cash
and cash equivalents
|
$7,221,910
|
$7,540,543
|
$2,341,634
|
$882,040
|
Accounts
receivable, net of allowance for doubtful accounts
|
9,359,876
|
7,650,141
|
14,359,639
|
8,199,522
|
Prepaid
expenses and other current assets
|
1,084,209
|
1,618,603
|
1,776,072
|
2,457,736
|
Total
current assets
|
17,665,995
|
16,809,287
|
18,477,345
|
11,539,298
|
Property
and equipment, net
|
14,248,915
|
14,055,493
|
13,769,882
|
12,929,148
|
Security
deposits
|
630,373
|
575,038
|
615,585
|
548,288
|
Restricted
cash
|
27,153
|
165,123
|
27,153
|
27,153
|
Goodwill
|
35,689,215
|
27,060,297
|
34,773,629
|
28,049,775
|
Intangible
assets, net
|
63,617,471
|
45,824,399
|
58,760,920
|
42,727,552
|
Other
assets
|
77,117
|
9,808
|
52,231
|
302,053
|
TOTAL ASSETS
|
$131,956,239
|
$104,499,445
|
$126,476,745
|
$96,123,267
|
Current liabilities:
|
|
|
|
|
Notes
payable - non-related parties
|
2,979,167
|
685,780
|
5,687,500
|
685,780
|
Obligations
under asset purchase agreements - current portion
|
546,488
|
300,000
|
603,192
|
433,334
|
Equipment
financing obligations
|
1,002,578
|
959,380
|
1,186,115
|
997,089
|
Accounts
payable and accrued expenses
|
19,722,838
|
13,129,225
|
25,674,946
|
12,610,885
|
Total
current liabilities
|
$24,251,071
|
$15,074,385
|
$33,151,753
|
$14,727,088
|
Long-term liabilities:
|
|
|
|
|
Notes
payable - non-related parties, net of discount
|
31,431,602
|
30,795,746
|
31,822,773
|
30,672,580
|
Notes
payable - related parties
|
875,750
|
1,074,829
|
918,135
|
1,112,445
|
Term
Loan
|
60,731,204
|
24,728,762
|
55,782,094
|
25,000,000
|
Indebtedness
under revolving credit facility
|
3,000,000
|
15,000,000
|
1,500,000
|
15,000,000
|
Obligations
under asset purchase agreements
|
890,811
|
333,333
|
1,265,811
|
861,606
|
Equipment
financing obligations
|
1,237,083
|
2,085,416
|
716,005
|
1,492,558
|
Derivative
liabilities
|
348,650
|
953,005
|
760,965
|
233,934
|
Total
liabilities
|
$122,766,171
|
$90,045,476
|
$125,917,536
|
$89,100,211
|
Stockholders' equity (deficit):
|
|
|
|
|
Preferred
stock, $0.01 par value, 10,000,000 shares authorized, 17,299 and
23,324 shares issued and outstanding (Dec 2015 and Dec 2016) and
14,341 and 17,324 (June 2017 and June 2016)
|
174
|
234
|
143
|
173
|
Common
stock, $0.01 par value, 90,000,000 and 50,000,000 shares
authorized, 20,642,028 and 12,788,971 shares issued and outstanding
(90,000,000/22,505,365 June 2017; 50,000,000/14,975,482 June
2016)
|
206,422
|
127,890
|
222,967
|
150,650
|
Capital
in excess of par value
|
192,233,032
|
184,859,082
|
193,642,257
|
185,764,507
|
Accumulated
deficit
|
(183,249,560)
|
(170,533,237)
|
(193,312,093)
|
(178,892,274)
|
Total
Fusion Telecommunications International, Inc. stockholders'
equity
|
9,190,068
|
14,453,969
|
553,274
|
7,023,056
|
Noncontrolling
interest
|
-
|
-
|
5,935
|
-
|
Total stockholders' equity
|
9,190,068
|
14,453,969
|
559,209
|
7,023,056
|
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
|
$131,956,239
|
$104,499,445
|
$126,476,745
|
$96,123,267
|
Fusion Telecommunications International, INC. and
Subsidiaries
|
|
|
|
|
Consolidated Statements of Operations - USD ($)
|
|
|
|
|
|
|
|
Consolidated Statements Of Operations
|
|
|
|
|
Revenues
|
$122,045,320
|
$101,694,516
|
$110,256,069
|
$95,041,024
|
Cost
of revenues, exclusive of depreciation and amortization, shown
separately below
|
68,058,432
|
56,724,121
|
59,921,649
|
55,875,267
|
Gross
profit
|
53,986,888
|
44,970,395
|
50,334,420
|
39,165,757
|
Depreciation
and amortization
|
13,096,587
|
12,975,981
|
11,149,010
|
8,946,781
|
Selling
general and administrative expenses (including stock-based
compensation)
|
48,524,923
|
41,009,107
|
42,115,158
|
34,102,847
|
Total
operating expenses
|
61,621,510
|
53,985,088
|
53,264,168
|
43,049,628
|
Operating
loss
|
(7,634,622)
|
(9,014,693)
|
(2,929,748)
|
(3,883,871)
|
Other (expenses) income:
|
|
|
|
|
Interest
expense
|
(6,742,143)
|
(6,062,923)
|
(6,468,916)
|
(4,877,828)
|
Loss
on extinguishment of debt
|
(214,294)
|
(2,720,355)
|
-
|
-
|
Gain
(loss) on change in fair value of derivative
liabilities
|
265,383
|
1,843,997
|
(544,486)
|
380,099
|
Loss
on disposal of property and equipment
|
(129,119)
|
(37,444)
|
(253,087)
|
(86,777)
|
Other
income, net
|
128,987
|
101,057
|
177,539
|
120,291
|
Total
other expenses
|
(6,691,186)
|
(6,875,668)
|
(7,088,950)
|
(4,464,215)
|
Loss
before income taxes
|
(14,325,808)
|
(15,890,361)
|
(10,018,698)
|
(8,348,086)
|
Income
tax benefit
|
1,609,485
|
7,660,536
|
(41,111)
|
(10,951)
|
Net
Loss
|
(12,716,323)
|
(8,229,825)
|
(10,059,809)
|
(8,359,037)
|
Less:
Net income attributable to non-controlling interest
|
-
|
-
|
(2,724)
|
-
|
Net loss attributable to Fusion Telecommunications International,
Inc.
|
(12,716,323)
|
(8,229,825)
|
(10,062,533)
|
(8,359,037)
|
Preferred
stock dividends in arrears
|
(2,388,007)
|
(1,578,220)
|
(1,735,798)
|
(2,102,467)
|
Net
loss attributable to common stockholders
|
$(15,104,330)
|
$(9,808,045)
|
(11,798,331)
|
(10,461,504)
|
Loss applicable to common stockholders
|
|
|
|
|
Basic
and diluted loss per common share
|
$(0.98)
|
$(1.32)
|
$(0.54)
|
$(0.72)
|
Weighted average common shares outstanding:
|
|
|
|
|
Basic
and diluted
|
15,406,184
|
8,873,766
|
21,828,816
|
14,536,893
|
Selected Historical Financial Data of BCHI
Birch Communications Holdings, Inc.
|
|
|
|
|
|
Consolidated Balance Sheets - Amounts in Thousands
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
$8,208
|
$8,715
|
$14,240
|
$10,070
|
$5,315
|
Accounts
receivable, net of allowance for doubtful accounts
|
38,317
|
40,376
|
45,777
|
36,089
|
52,136
|
Accounts
receivable - stockholders/employees
|
920
|
920
|
919
|
921
|
922
|
Prepaid
expenses
|
7,760
|
6,130
|
12,417
|
7,975
|
8,065
|
Inventory,
net
|
1,181
|
421
|
623
|
1,310
|
1,100
|
Other
assets
|
1,984
|
2,420
|
2,471
|
1,876
|
476
|
Total
current assets
|
58,370
|
58,982
|
76,447
|
58,241
|
68,014
|
Long-term assets:
|
|
|
|
|
|
Property
and equipment, net
|
110,957
|
133,351
|
152,259
|
97,415
|
123,426
|
Goodwill
|
93,356
|
93,356
|
93,356
|
93,356
|
93,356
|
Intangible
assets, net
|
177,670
|
158,557
|
148,556
|
168,019
|
181,023
|
Other
non-current assets
|
1,673
|
1,493
|
15,428
|
1,407
|
1,493
|
Total
long-term assets
|
383,656
|
386,757
|
409,599
|
360,197
|
399,298
|
Total
assets
|
442,026
|
445,739
|
486,046
|
418,438
|
467,312
|
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
Accounts
payable
|
34,966
|
12,189
|
16,618
|
51,519
|
31,758
|
Accrued
telecommunications costs
|
9,336
|
12,226
|
22,114
|
3,548
|
14,467
|
Deferred
customer revenue
|
14,501
|
14,435
|
15,375
|
12,888
|
16,283
|
Other
accrued liabilities
|
44,143
|
36,628
|
43,898
|
41,569
|
49,067
|
Current
portion of capital leases
|
4,376
|
5,279
|
6,443
|
3,476
|
4,889
|
Current
portion of long-term debt
|
26,500
|
23,643
|
1,246
|
28,823
|
16,875
|
Total
current liabilities
|
133,822
|
104,400
|
105,694
|
141,823
|
133,339
|
Long-term liabilities:
|
|
|
|
|
|
Non-current
portion of long-term debt
|
429,911
|
409,752
|
441,830
|
425,717
|
413,104
|
Non-current
portion of long-term capital lease
|
5,466
|
9,744
|
13,612
|
3,987
|
6,302
|
Other
non-current liabilities
|
17,815
|
7,460
|
2,703
|
16,818
|
7,398
|
Total
non-current liabilities
|
453,192
|
426,956
|
458,145
|
446,522
|
426,804
|
Stockholders’ equity:
|
|
|
|
|
|
Common
stock, $0.01 par value; 10,000 shares authorized
|
26
|
27
|
27
|
26
|
27
|
Additional
paid-in capital
|
6,050
|
7,012
|
6,727
|
6,050
|
7,184
|
Accumulated
deficit
|
(150,866)
|
(92,656)
|
(84,268)
|
(177,453)
|
(100,039)
|
Accumulated
other comprehensive income
|
(198)
|
-
|
(279)
|
1,470
|
(3)
|
Total
stockholders’ equity
|
(144,988)
|
(85,617)
|
(77,793)
|
(169,907)
|
(92,831)
|
Total
liabilities and stockholders’ equity
|
$442,026
|
$445,739
|
$486,046
|
$418,438
|
$467,312
|
Birch Communications Holdings, Inc.
|
|
|
|
|
|
Consolidated Statements of Operations - Amounts in
Thousands
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
$603,579
|
$591,222
|
$422,534
|
$420,572
|
$457,443
|
Cost
of revenue
|
328,408
|
295,532
|
229,868
|
236,057
|
243,648
|
Gross Profit
|
275,171
|
295,690
|
192,666
|
184,515
|
213,795
|
Operating expenses:
|
|
|
|
|
|
Selling,
general and administrative (exclusive of depreciation and
amortization, shown separately below)
|
178,614
|
168,313
|
143,782
|
110,690
|
121,725
|
Depreciation
and amortization
|
70,098
|
61,701
|
39,807
|
61,496
|
51,099
|
Foreign
currency (gain) loss
|
(20)
|
|
|
(461)
|
4
|
Total
operating expenses
|
248,692
|
230,014
|
183,589
|
171,725
|
172,828
|
Operating
income (loss)
|
26,479
|
65,676
|
9,077
|
12,790
|
40,967
|
Other (expense) income:
|
|
|
|
|
|
Interest
expense, net
|
(43,258)
|
(40,525)
|
(20,436)
|
(37,422)
|
(30,217)
|
Other
income (expense)
|
(8,517)
|
2,544
|
88
|
51
|
22
|
Total
other income (expense)
|
(51,775)
|
(37,981)
|
(20,348)
|
(37,371)
|
(30,195)
|
Income
(loss) before income taxes
|
(25,296)
|
27,695
|
(11,271)
|
(24,581)
|
10,772
|
Income
tax expense
|
(1,847)
|
(2,183)
|
(529)
|
(2,008)
|
(1,299)
|
Net
income (loss)
|
(27,143)
|
25,512
|
(11,800)
|
(26,589)
|
9,473
|
Other
comprehensive income:
|
|
|
|
|
|
Cumulative
translation adjustment
|
(198)
|
|
|
1,470
|
(198)
|
Comprehensive
income (loss)
|
$(27,341)
|
$25,512
|
$(11,800)
|
$(25,119)
|
$9,275
|
SUMMARY UNAUDITED PRO FORMA CONDENSED COMBINED
CONSOLIDATED FINANCIAL INFORMATION
The following
unaudited pro forma condensed combined balance sheet as of
September 30, 2017 and the unaudited pro forma condensed
consolidated statements of operations for the year ended December
31, 2016 and the nine months ended September 30, 2017 are derived
from the historical consolidated financial statements of Fusion
after giving effect to the merger transaction with BCHI pursuant to
Merger Agreement, the issuance of the
Merger Shares, the Consumer Spin-off and the Carrier
Spin-off (as such terms are elsewhere herein
defined) the anticipated related financing
transactions.
The
unaudited pro forma condensed combined statements of operations for
the year ended December 31, 2016 and the nine months ended
September 30, 2017 give pro forma effect to the business
combination as if it had occurred on January 1, 2016. The unaudited
pro forma condensed combined balance sheet as of September 30, 2017
assumes that the business combination and the related financing
transactions was effective on September 30, 2017.
The
unaudited pro forma condensed combined statement of operations for
the year ended December 31, 2016 was derived from Fusion's audited
consolidated statement of operations and the audited consolidated
statement of operations of BCHI, in each case, for the year ended
December 31, 2016. The unaudited pro forma condensed combined
balance sheet and statement of operations as of and for the nine
months ended September 30, 2017 were derived from Fusion's
unaudited condensed consolidated financial statements and
BCHI’s unaudited consolidated financial statements, in each
case, as of and for the nine months ended September 30, 2017. In
accordance with the terms of the Merger Agreement, the unaudited
pro forma combined statements of operations for the year ended
December 31, 2016 and the nine months ended September 30, 2017 give
effect to (x) the Consumer Spin-off; and (y) Carrier
Spin-off.
The
unaudited pro forma condensed financial information has been
prepared by the Company using the acquisition method of accounting
under the provisions of Accounting Standards Codification (referred
to as ASC) 805, “Business
Combinations.” As the number of Fusion shares that
will be issued to BCHI shareholders as merger consideration will
result in a change in control of the Company, the transaction is
being accounted for as a reverse acquisition and BCHI has been
treated as the acquirer in the business combination for accounting
purposes. The acquisition accounting is based upon certain
valuation and other estimates. The pro forma adjustments have been
made solely for the purpose of providing unaudited pro forma
condensed financial statements prepared in accordance with the
rules and regulations of the SEC.
The
following unaudited pro forma financial statements are based on,
and should be read in conjunction with:
●
The Company’s
audited financial statements and the related notes thereto for the
year ended December 31, 2016 included in the Company’s Annual
Report on Form 10-K filed on March 20, 2017.
●
The Company’s
unaudited financial statements and the related notes thereto as of
and for the nine months ended September 30, 2017 included in the
Company’s Quarterly Report on Form 10-Q filed on November 13,
2017.
●
The BCHI audited
consolidated financial statements as of and for the year ended
December 31, 2016 and 2015 and the BCHI unaudited consolidated
financial statements as of and for the nine months ended September
30, 2017 appearing elsewhere in this proxy statement.
The pro
forma financial statements give effect to the following
transactions:
●
The Merger as
described elsewhere in this proxy statement.
●
The Consumer
Spin-off and the Carrier Spin-off.
●
The refinancing of
all of the outstanding indebtedness of Fusion and BCHI through a new credit
facility of $620 million with an average interest rate of
8%.
The pro
forma adjustments are based on the information currently available
and the assumptions and estimates underlying the pro forma
adjustments are described in the accompanying notes. The unaudited
pro forma financial statements are for informational purposes only,
are not indications of future performance, and should not be
considered indicative of actual results that would have been
achieved had the forgoing transactions actually been consummated on
the dates or at the beginning of the periods
presented.
Fusion Telecommunications International, Inc.
Unaudited Pro Forma Condensed Combined Balance Sheet
As of September 30, 2017
(in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
Repayment of existing indebtedness
|
Carrier Services Spin-Off
|
|
Reverse Merger Adjustments
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents
|
$ 2,342
|
$ 10,070
|
$ 580,000(a)
|
$ (559,131)(e)
|
$ (148)
|
$ (879)
|
$ -
|
$ 32,254
|
Accounts
receivable, net of allowance for doubtful
accounts
|
14,360
|
36,089
|
-
|
-
|
(4,878)
|
(8,774)
|
|
36,797
|
Inventory
|
|
1,310
|
|
|
|
(168)
|
|
1,142
|
Prepaid
expenses and other current assets
|
1,776
|
9,851
|
-
|
-
|
(11)
|
(763)
|
|
10,853
|
Accounts
receivable - employees/stockholders
|
-
|
921
|
-
|
(921)(e)
|
-
|
-
|
-
|
-
|
Total current assets
|
18,478
|
58,241
|
580,000
|
(560,052)
|
(5,037)
|
(10,584)
|
-
|
81,046
|
Property and equipment, net
|
13,770
|
97,415
|
-
|
-
|
(5)
|
(4,039)
|
3,103(c,d)
|
|
Other assets:
|
|
|
|
|
|
|
|
|
Security
deposits
|
616
|
-
|
-
|
-
|
(3)
|
-
|
-
|
613
|
Restricted
cash
|
27
|
-
|
-
|
-
|
-
|
-
|
-
|
27
|
Goodwill
|
34,774
|
93,356
|
-
|
-
|
-
|
(7,468)
|
31,393(c)
|
|
Intangible
assets, net
|
58,761
|
168,019
|
-
|
-
|
-
|
(37,704)
|
33,349(c,d)
|
|
Other
assets
|
51
|
1,407
|
-
|
-
|
-
|
(264)
|
-
|
1,194
|
Total other assets
|
94,229
|
262,782
|
-
|
-
|
(3)
|
(45,436)
|
64,742
|
376,314
|
TOTAL ASSETS
|
$ 126,477
|
$ 418,438
|
$ 580,000
|
$ (560,052)
|
$ (5,045)
|
$ (60,059)
|
$ 67,845
|
$ 567,604
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Current
portion of long-term debt
|
5,688
|
28,823
|
4,900(a)
|
(34,511)(e)
|
-
|
-
|
-
|
4,900
|
Obligations
under asset purchase agreements - current
portion
|
603
|
-
|
-
|
-
|
-
|
-
|
-
|
603
|
Equipment
financing obligation
|
1,186
|
3,476
|
-
|
(1,186)(e)
|
-
|
-
|
|
3,476
|
Accounts
payable and accrued expenses
|
25,675
|
96,636
|
-
|
-
|
(4,444)
|
(19,446)
|
-
|
98,421
|
Deferred
Revenue
|
-
|
12,888
|
-
|
-
|
-
|
(3,131)
|
-
|
9,757
|
Line of
credit
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
Total Current liabilities
|
33,152
|
141,823
|
4,900
|
(35,697)
|
(4,444)
|
(22,577)
|
-
|
117,157
|
Long-term liabilities:
|
|
|
|
|
|
|
|
|
Notes payable
- non-related parties, net of discount
|
31,823
|
-
|
-
|
(31,823)(e)
|
-
|
-
|
-
|
-
|
Long-term
debt
|
|
425,717
|
(13,700)(f)
|
(412,017)(e)
|
-
|
-
|
|
-
|
Term
loan
|
55,782
|
-
|
575,100(a)
|
(55,782)(e)
|
-
|
-
|
-
|
575,100
|
Indebtedness
under revolving credit facility
|
1,500
|
-
|
|
(1,500)
|
-
|
-
|
|
-
|
Obligations
under asset purchase agreements
|
1,266
|
-
|
-
|
-
|
-
|
-
|
-
|
1,266
|
Other
non-current liabilities
|
-
|
16,818
|
-
|
-
|
-
|
(385)
|
-
|
16,433
|
Notes payable
- related parties
|
918
|
-
|
-
|
(918)(e)
|
-
|
-
|
-
|
-
|
Equipment
financing obligations
|
716
|
3,987
|
-
|
(716)(e)
|
-
|
-
|
-
|
3,987
|
Derivative
liabilities
|
761
|
-
|
-
|
-
|
-
|
-
|
-
|
761
|
Total liabilities
|
125,918
|
588,345
|
566,300
|
(538,453)
|
(4,444)
|
(22,962)
|
-
|
714,704
|
Total stockholders' equity
|
559
|
(169,907)
|
13,700(f)
|
(21,599)(e)
|
(601)
|
(37,097)
|
67,845
|
(147,100)
|
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY
|
$ 126,477
|
$ 418,438
|
$ 580,000
|
$ (560,052)
|
$ (5,045)
|
$ (60,059)
|
$ 67,845
|
$ 567,604
|
|
(in thousands, except share data)
|
|
|
|
|
|
|
|
|
(a)
|
Record
estimated net proceeds from anticipated financing transaction, with
a loss on extinguishment of debt of $1.3 million for redemption
premium on retired Fusion subordinated notes:
|
|
Net
proceeds comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
Term
Loan
|
$
620,000
|
|
|
|
|
|
|
|
|
|
|
|
Facility
fee
|
(40,000)
|
|
|
|
|
|
|
|
|
|
|
|
|
$
580,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
proposed term note will include $490M First Lien and $130M Second
Lien. It will also include a $50M revolver (undrawn at close). The
term loan will bear a blended interest at LIBOR rate plus 7% for a
total
of 8% per annum payable according to the terms of the payment
schedule.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(b)
|
Fair
value of Fusion shares acquired - 24,927,475 shares (including
shares issuable upon conversion of preferred stock and in-the-money
warrants):
|
|
|
Shares
O/S at 9/30/17
|
|
22,296,683
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In-the-money
stock warrants at 9/30/17
|
563,434
|
|
|
|
|
|
|
Share
Issuable upon conversion of PS at 9/30/17
|
2,067,358
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
24,927,475
|
|
|
|
|
|
|
Stock
price at 9/30/17
|
$
2.72
|
|
67,802,732
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
outstanding represent a number of shares issued and outstanding at
9/30/17. In-the-money warrants represents warrants with an exercise
price of $2.72 or less at 9/30/17. Shares issuable upon
conversion
of preferred stock as of 9/30/17 were based upon a conversion
calculation as listed in the preferred stock
agreements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(c)
|
To
assign fair values to Fusion assets acquired and record
goodwill
|
|
|
|
|
|
|
Fair
value of consideration effectively transferred
|
$
67,803
|
|
|
|
|
|
|
|
|
|
|
|
Assets
(less goodwill) acquired
|
123,110
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
assumed
|
(121,474)
|
|
|
|
|
|
|
|
|
|
|
|
Net
assets acquired
|
1,636
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
$
66,167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value of consideration was calculated by multiplying stock price of
$2.72 per share by a total of 24,927,475 shares at 9/30/17. The
number of shares included shares outstanding, in-the money stock
warrants
and shares issuable upon conversion of preferred stock as of
9/30/17. Assets acquired excluded carrier services assets and
included a step up in value based upon a third party
valuation.
|
|
Liability
acquired excluded carrier services liabilities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(d)
|
Reflects
adjustments to recognize the estimated fair value of Fusion assets
as follows:
|
|
|
Customer
relationships
|
53,400
|
|
|
|
|
|
|
|
|
|
|
|
Trademark
|
34,000
|
|
|
|
|
|
|
|
|
|
|
|
Developed
technology
|
4,710
|
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment
|
16,868
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(e)
|
Retire
existing Fusion and Birch debt, including write-off of unamortized
debt discount of $20.3M and payment of redemption premium of $1.3M.
Fusion debt consists of $63M of term loan, $34M of
subordinated
note and $1.5M of a revolver. It also includes approximately $1M of
related party debt and approximately $2M of equipment financing
obligations. Fusions portion of debt discount and redemption
premium
are
$2.9M and $1.3M, respectively. Birch debt consists of $413M of term
loan and $45M revolver. The Birch debt discount is
$17.4M.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(f)
|
Denotes
payment of stock repurchase obligation by Birch shareholders in the
amount of $13.7 million In 2016, Birch entered into an installment
purchase agreement to repurchase 148 shares of common stock from a
former employee for $13.7M. Installments were scheduled as follows:
$1M on 12/31/16, $1.5M on 5/1/17,$1M on 12/31/17, $3M on 5/1/18,
and $7.2M on 5/1/19. No payment had been made due
to convenant
restrictions. Unpaid balance will accrete interest at 4% per
year.
|
|
|
Fusion Telecommunications International, Inc.
|
|
|
|
|
|
Unaudited Pro Forma Condensed Combined Statement of
Operations
|
|
|
|
|
|
For the Year Ended December 31, 2016
|
|
|
(in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refinancing of Existing Indebtedness
|
|
Reverse Merger Adjustments
|
|
|
|
|
|
|
|
|
|
Revenues
|
$ 122,045
|
$ 603,580
|
$ -
|
$ (35,484)
|
$ (110,658)
|
$ -
|
$ 579,483
|
Cost of
revenues (exclusive of depreciation and amortization shown
separately below)
|
68,058
|
328,408
|
-
|
(33,783)
|
(67,286)
|
-
|
295,397
|
Gross Profit
|
53,987
|
275,172
|
-
|
(1,701)
|
(43,372)
|
-
|
284,086
|
Depreciation
and amortization
|
13,097
|
70,098
|
|
(154)
|
(10,814)
|
5,385(e)
|
77,612
|
Impairment
charges
|
|
-
|
-
|
|
-
|
-
|
-
|
Restructuring
charges
|
|
-
|
|
|
|
|
-
|
Selling,
general and administration expenses, including stock-based
compensation
|
48,525
|
178,614
|
|
(2,711)
|
(37,947)
|
754(f)
|
187,235
|
Total
operating expenses
|
61,622
|
248,712
|
-
|
(2,865)
|
(48,761)
|
6,139
|
264,847
|
Operating loss
|
(7,635)
|
26,460
|
-
|
1,164
|
5,389
|
(6,139)
|
19,239
|
Other (expenses) income:
|
|
|
|
|
|
|
|
Interest
expense
|
(6,742)
|
(43,260)
|
(5,762) (b)
|
-
|
|
|
(55,764)
|
Gain on change
in fair value of derivative liability
|
265
|
-
|
-
|
-
|
-
|
-
|
265
|
Loss on
extinguishment of debt
|
(214)
|
-
|
(22,748) (a)
|
-
|
-
|
-
|
(22,962)
|
Other income,
net of other expenses
|
-
|
(8,495)
|
|
-
|
1,418
|
|
(7,077)
|
Total other
(expenses) income
|
(6,691)
|
(51,755)
|
(28,510)
|
-
|
1,418
|
-
|
(85,538)
|
(Loss) income before income taxes
|
(14,326)
|
(25,295)
|
(28,510)
|
1,164
|
6,807
|
(6,139)
|
(66,299)
|
Benefit
(provision) for income taxes
|
1,610
|
(1,848)
|
|
-
|
663
|
|
425
|
Net (loss) income
|
(12,716)
|
(27,143)
|
(28,510)
|
1,164
|
7,470
|
(6,139)
|
(65,874)
|
Preferred
stock dividends in arrears
|
(2,388)
|
-
|
-
|
-
|
-
|
2,388(c)
|
-
|
Net (loss) income attributable to common
stockholders
|
$ (15,104)
|
$ (27,143)
|
$ (28,510)
|
$ 1,164
|
$ 7,470
|
$ (3,751)
|
$ (65,874)
|
Basic and
diluted loss per common share
|
$ (0.98)
|
|
|
|
|
|
$ (0.68)
|
Weighted average common shares
outstanding:
|
|
|
|
|
|
|
|
Basic and
diluted
|
15,406,184
|
|
|
|
|
84,303,716(d)
|
99,709,900
|
(a)
|
Denotes
redemption premium and write off of unamortized debt discount for
indebtedness being refinanced.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(b)
|
Increase
in interest rate based on refinancing, including discount
amortization resulting from facility fee and deferred loan costs of
$37.0 million related to the refinancing.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(c)
|
Remove
preferred dividends as all preferred stock is converted prior to
merger.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(d)
|
Shares
issued to Birch in merger transaction include 22,296,683 of Fusion
shares issued and outstanding, 563,434 of Fusion in-the-money
warrants, 2,067,358 of Fusion shares issuable upon conversion of
preferred
stock and 74,782,425 of new shares to be issued as part of the
transaction.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(e)
|
To
record amortization expense for additional $31.4 million of
intangibles acquired based on a 7 year useful life and the
increased book basis of property and equipment of $3.1 million
based on a 5 year expected life.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(f)
|
To
record merger-related transaction fees incurred in 2017 which
include $0.4M for Fusion and $0.3M for BCHI.
|
Fusion Telecommunications International, Inc.
|
Unaudited Pro Forma Condensed Combined Statement of
Operations
|
For the Nine Months Ended September 30, 2017
|
(in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
Refinancing of Existing Indebtedness
|
|
Reverse Merger Adjustments
|
|
|
|
|
|
|
|
|
|
Revenues
|
$ 110,256
|
$ 420,572
|
$ -
|
$ (22,497)
|
$ (82,983)
|
$ -
|
$ 425,348
|
Cost of
revenues (exclusive of depreciation and amortization shown
separately below)
|
59,922
|
236,057
|
-
|
(21,747)
|
(51,259)
|
-
|
222,973
|
Gross Profit
|
50,334
|
184,515
|
-
|
(750)
|
(31,724)
|
-
|
202,375
|
Depreciation
and amortization
|
11,149
|
61,496
|
|
(340)
|
(11,982)
|
4,039(e)
|
64,362
|
Impairment
charges
|
|
-
|
-
|
|
|
-
|
-
|
Restructuring
charges
|
|
-
|
|
|
|
|
-
|
Selling,
general and administration expenses, including stock-based
compensation
|
42,115
|
110,690
|
|
(1,639)
|
(25,775)
|
(754)(b)
|
124,637
|
Total
operating expenses
|
53,264
|
172,186
|
-
|
(1,979)
|
(37,757)
|
3,285
|
188,999
|
Operating (loss) income
|
(2,930)
|
12,329
|
-
|
1,229
|
6,033
|
(3,285)
|
13,376
|
Other (expenses) income:
|
|
|
|
|
|
|
|
Interest
expense
|
(6,469)
|
(37,422)
|
1,958(a)
|
|
1
|
|
(41,932)
|
Loss on change
in fair value of derivative liability
|
(544)
|
-
|
-
|
-
|
|
-
|
(544)
|
Loss on
disposal of property and equipment
|
(253)
|
-
|
-
|
-
|
|
-
|
(253)
|
Other income,
net of other expenses
|
177
|
512
|
|
(33)
|
(134)
|
|
522
|
Total other
(expenses) income
|
(7,089)
|
(36,910)
|
1,958
|
(33)
|
(133)
|
-
|
(42,207)
|
(Loss) income before income taxes
|
(10,019)
|
(24,581)
|
1,958
|
1,196
|
5,900
|
(3,285)
|
(28,831)
|
Benefit
(provision) for income taxes
|
(41)
|
(2,008)
|
|
-
|
493
|
|
(1,556)
|
Net (loss) income
|
(10,060)
|
(26,589)
|
1,958
|
1,196
|
6,393
|
(3,285)
|
(30,387)
|
Less: Net
income attributable to noncontrolling
interest
|
(3)
|
|
|
|
|
|
|
Net loss attributable to Fusion Telecommunications International,
Inc.
|
(10,063)
|
(26,589)
|
1,958
|
1,196
|
6,393
|
(3,285)
|
(30,387)
|
Preferred
stock dividends in arrears
|
(1,736)
|
-
|
-
|
-
|
-
|
1,736(c)
|
-
|
Net (loss) income attributable to common
stockholders
|
$ (11,799)
|
$ (26,589)
|
$ 1,958
|
$ 1,196
|
$ 6,393
|
$ (1,549)
|
$ (30,387)
|
Basic and
diluted loss per common share
|
$ (0.54)
|
|
|
|
|
|
$ (0.30)
|
Weighted average common shares
outstanding:
|
|
|
|
|
|
|
|
Basic and
diluted
|
21,828,816
|
|
|
|
|
77,881,084(d)
|
99,709,900
|
(a)
|
Decrease
in interest rate based on refinancing, including discount
amortization resulting from facility fee and deferred loan costs of
$37.0 million related to the refinancing.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(b)
|
To
remove merger-related transaction fees incurred in 2017 which
include $0.4M for Fusion and $0.3M for Birch.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(c)
|
Remove
preferred dividends as all preferred stock is converted prior to
merger.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(d)
|
Shares
issued to Birch in merger transaction include 22,296,683 of Fusion
shares issued and outstanding, 563,434 of Fusion in-the-money
warrants, 2,067,358 of Fusion shares issuable upon conversion of
preferred
stock and 74,782,425 of new shares to be issued as part of the
transaction.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(e)
|
To
record amortization expense for additional $31.4 million of
intangibles acquired based on a 7 year useful life for the nine
month period and the increased book basis of property
and equipment of $3.1 million based on a 5 year expected life for
the nine month.
|
|
|
|
|
|
|
|
MARKET PRICE AND DIVIDEND INFORMATION
Market Prices
The Fusion Common Stock is currently listed
on The Nasdaq
Capital Market® under the
symbol “FSNN.” The following table lists for the
calendar quarters indicated the high and low sales prices for the
Fusion Common Stock.
Year Ended
December 31, 2017
|
|
|
First
Quarter
|
$2.02
|
$1.28
|
Second
Quarter
|
$1.90
|
$1.30
|
Third
Quarter
|
$3.57
|
$1.11
|
Fourth Quarter
(through [●], 2017)
|
$
|
$
|
Year Ended December 31, 2016
|
|
|
First
Quarter
|
$3.80
|
$1.69
|
Second
Quarter
|
$2.09
|
$1.20
|
Third
Quarter
|
$2.46
|
$1.30
|
Fourth
Quarter
|
$1.71
|
$0.96
|
Year Ended December 31, 2015
|
|
|
First
Quarter
|
$4.64
|
$3.52
|
Second
Quarter
|
$4.75
|
$2.07
|
Third
Quarter
|
$3.16
|
$1.88
|
Fourth
Quarter
|
$3.44
|
$1.99
|
On
August 25, 2017, the last trading day before the public
announcement of the signing of the Merger Agreement, the closing
sale price of the Fusion Common Stock was $1.23. On
[●], 2017, the latest practicable
date before the date of this proxy statement, the closing sale
price of the Fusion Common Stock was $[●].
BCHI’s common stock is not listed on an exchange and there is
no public trading market for the BCHI common stock.
The
market price for the shares of Fusion Common Stock has fluctuated
since the date of the announcement of the Merger Agreement and is
expected to continue to fluctuate from the date of this proxy
statement to the date of the Annual Meeting. No assurance can be
given concerning the market price of the Fusion Common Stock either
before or after completion of the Merger. The number of Merger
Shares to be issued to BCHI Holding in the Merger is
fixed, but the market price of the Fusion Common Stock and,
therefore, the value of the Merger consideration when received by
BCHI Holding at the Effective Time could be greater than, less than
or the same as the value used by the parties to determine the
number of Merger Shares to be issued in the Merger. Accordingly,
Fusion Stockholders are advised to obtain current market quotations
for the Fusion Common Stock in deciding whether to vote for
adoption of the Merger Agreement.
Following
completion of the Merger, the Fusion Common Stock will continue to
be listed on The Nasdaq Capital Market® and will trade under
Fusion’s new name, “Fusion
Connect, Inc.,” and the existing symbol
"FSNN."
Dividends
Fusion has never declared or paid any cash
dividends on the Fusion Common Stock, nor does it anticipate
doing so in the foreseeable future. Any determination to
pay dividends to holders of Fusion Common Stock in the future will
be at the discretion of the Board, and will be dependent on a
number of factors, including our financial condition, operating
results, capital requirements, general business conditions, the
terms of then outstanding debt and other factors that the Board
considers appropriate. The payment of dividends on the
Fusion Common Stock is also subject to provisions of the DGCL
prohibiting the payment of dividends except out of
surplus.
The
holders of shares of our Series A-1 Preferred Stock, Series A-2
Preferred Stock and Series A-4 Preferred Stock are entitled to
receive cumulative dividends at an annual rate of 8% from the
original date of issuance thereof, payable in arrears, as and when
declared by the Board. To date, the Board has not
declared any dividends on any of the Series A-1 Preferred Stock,
the Series A-2 Preferred Stock or the Series A-4 Preferred
Stock. The holders of our Series B-2 Preferred Stock are
entitled to receive quarterly dividends at an annual rate of 6%,
payable, at our option, either in cash or in shares of Fusion
Common Stock. To date, dividends on the Series B-2 Preferred Stock
have been declared and paid quarterly when due in shares of Fusion
Common Stock. All of the issued and outstanding shares of all
classes or series of Fusion’s preferred stock, including the
Series A-1 Preferred Stock, the Series A-2 Preferred Stock, the
Series A-4 Preferred Stock and the Series B-2 Preferred Stock, will
be converted into shares of Fusion Common Stock prior to the
Effective Time in accordance with their respective terms or, if not
so converted, will be cancelled immediately prior to the Effective
Time. Any
accrued but unpaid dividends with respect to such series of
preferred stock will be included in the calculation of the number
of shares of Fusion Common Stock into which each issued and
outstanding share of such series of preferred stock will be
converted prior to the Effective Time.
BCHI has never declared or paid any cash
dividends on its capital stock but has, in the past, made
Subchapter S tax distributions to its owners. Prior to the
Effective Time, BCHI is
expected to dividend the shares of one or more of its subsidiaries
to the BCHI shareholders in
order to complete the Consumer Spin-off.
FORWARD-LOOKING STATEMENTS
This
proxy statement and the documents which Fusion incorporates by
reference into this proxy statement, as well as the other documents
Fusion files with the SEC, contain forward-looking statements
within the meaning of Section 27A of the Securities Act and
Section 21E of the Section Exchange Act of 1934, as amended,
the Exchange Act, that are based on current expectations,
estimates, forecasts and projections about Fusion’s future
performance, business and beliefs, and management’s
assumptions. These forward-looking statements generally include
statements that are predictive in nature and depend upon or refer
to future events or conditions, and include words such as
“believes,” “plans,”
“anticipates,” “projects,”
“estimates,” “expects,”
“intends,” “strategy,”
“future,” “opportunity,” “may,”
“will,” “should,” “could,”
“potential,” or similar expressions. Statements that
are not historical facts are forward-looking statements.
Forward-looking statements are based on current beliefs and
assumptions that are subject to risks and uncertainties.
Forward-looking statements speak only as of the date they are made,
and Fusion undertakes no obligation to update any of them publicly
in light of new information or future events. Actual results could
differ materially from those contained in any forward-looking
statement as a result of various factors, including, without
limitation: (1) Fusion may be unable to obtain stockholder
approval as required for the proposed Merger; (2) conditions
to the closing of the proposed Merger may not be satisfied and
required regulatory approvals may be significantly delayed or may
not be obtained; (3) the proposed Merger may involve
unexpected costs, liabilities or delays; (4) the business of
Fusion may suffer as a result of uncertainty surrounding the
Merger; (5) Fusion may be adversely affected by other
economic, business, and/or competitive factors; (6) the
occurrence of any event, change or other circumstances that could
give rise to the termination of the Agreement; (7) risks that
the proposed Merger disrupts current plans and operations and the
potential difficulties in employee customer or supplier retention
as a result of the proposed Merger; (8) failure to realize the
expected benefits of the proposed Merger; (9) failure to properly
and effectively integrate the proposed Merger; and (10) other
risks to consummation of the proposed Merger, including the risk
that the Merger may not be consummated within the expected time
period or at all. Additional factors that may affect the future
results of Fusion are set forth in its filings with the SEC,
including its Annual Report on Form 10-K for the year ended
December 31, 2016 and its quarterly reports for the three, six
and nine month periods ended March 31, 2017, June 30, 2017 and
September 30, 2017, which are available on the SEC’s website
at www.sec.gov. You
are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date thereof.
THE ANNUAL MEETING
Date, Time and Place of the Annual Meeting
This
proxy statement is being furnished to the Fusion Stockholders in
connection with the solicitation of proxies by the Board for use at
the Annual Meeting to be held at 3:00 p.m., local time, on
[●], 2018, at the Company's
executive office located at 420 Lexington Avenue, Suite 1718, New
York, New York, 10170.
Purpose of the Annual Meeting
At the
Annual Meeting, Fusion Stockholders will be asked:
●
to consider and
vote on a proposal to adopt the Merger Agreement and approve (i)
the Merger, (ii) the issuance of the Merger Shares, and (iii) the
other transactions contemplated by the Merger Agreement
(Proposal No.
1);
●
to consider and
vote on a proposal to adopt the Certificate of Amendment
(Proposal No.
2);
●
to consider and
vote on a proposal to adopt the Restated Charter (Proposal No. 3);
●
a proposal to
adjourn the Annual Meeting, if necessary, to solicit additional
votes in favor of the proposals to adopt the Merger Agreement, to
adopt the Certificate of Amendment and to adopt the Restated
Charter (Proposal No.
4);
●
to approve, on an
advisory basis, certain compensation
that may be paid to certain of Fusion’s named executive
officers as a result of the Merger (Proposal No. 5);
●
to elect eight (8)
directors nominated by the Board to hold office until the earliest
to occur of (i) the election and qualification of their successors,
and (ii) their earlier resignation, death, or removal from office
(Proposal No.
6);
●
to ratify the
selection of EisnerAmper LLP as the Company’s independent
registered public accounting firm for the fiscal year ending
December 31, 2017 (Proposal No. 7);
and
●
to transact such
other business as may properly come before the Fusion Stockholders
at the Annual Meeting or any adjournment or postponement
thereof.
The
Merger cannot be completed unless the proposal to adopt the Merger
Agreement and approve the Merger, the issuance of the Merger Shares
and the other transactions contemplated by the Merger Agreement, as
well as the proposal to adopt the Certificate of Amendment and the
proposal to adopt the Restated Charter are each approved by the
required vote at the Annual Meeting.
Recommendation of the Board
After careful consideration, the Board has (i)
determined that the Merger Agreement and the transactions
contemplated thereby, including the Merger and the issuance of the
Merger Shares, are fair to, advisable and in the best interests of
Fusion and its stockholders, (ii) approved the execution, delivery
and performance by Fusion of the Merger Agreement and the
consummation of the transactions contemplated thereby by, including
the Merger and the issuance of the Merger Shares, and
(iii) directed that the Merger Agreement be submitted to the
Fusion Stockholders for adoption. The Board’s reasons for
recommending the Merger are set forth in more detail under the
section entitled “The Merger –
Reasons for the Merger and Recommendation of the
Board” on page
48 of this proxy
statement.
Accordingly,
the Board recommends that you vote your Voting Shares:
●
“FOR” the proposal to adopt the Merger Agreement
and approve the Merger, the issuance of the Merger Shares and the
other transactions contemplated by the Merger Agreement
(Proposal No.
1);
●
“FOR” the proposal to adopt the Certificate of
Amendment (Proposal No.
2);
●
“FOR” the proposal to adopt the Restated Charter
(Proposal No.
3);
●
“FOR” the proposal to adjourn the Annual
Meeting, if necessary, to solicit additional votes in favor of the
proposals to adopt the Merger Agreement, to adopt the Certificate
of Amendment and to adopt the Restated Charter (Proposal No.
4); and
●
“FOR” the proposal to approve, on an advisory
basis, certain compensation that may be paid to certain of
Fusion’s named executive officers as a result of the Merger
(Proposal No.
5).
In
addition, the Board recommends that you vote your Voting
Shares:
●
“FOR” the election of the eight directors
nominated by the Board (Proposal No.
6); and
●
“FOR” the proposal to ratify the selection of
EisnerAmper LLP as our independent registered public accounting
firm for the fiscal year ending December 31, 2017
(Proposal No.
7).
Record Date
The
Board has fixed on
[●], 2017 as the record date
(referred to as the Record
Date) for determining Fusion Stockholders entitled to vote
at the Annual Meeting. All holders of shares of Fusion Common Stock
and Series B-2 Preferred Stock as of the close of business on the
Record Date are entitled to receive notice of, attend the Annual
Meeting and any adjournment or postponement thereof, and vote at
the Annual Meeting. As of the close of business on the Record Date,
there were
[●] shares of Fusion Common Stock
and
[●] shares of Series B-2
Preferred Stock issued and outstanding. These Voting Shares are
held by approximately holders of record.
Quorum and Required Vote
In
order for any matter to be considered at the Annual Meeting, there
must be a quorum present. The holders of a majority of the voting
power of the outstanding Voting Shares, present in person or
represented by proxy at the Annual Meeting, will constitute a
quorum at the Annual Meeting.
Proposal Nos. 1, 2 and 3 require the affirmative
“FOR” vote by holders of a majority of the
Voting Shares issued and outstanding as of the Record Date and
entitled to vote thereon, voting as a single
class.
Proposal Nos. 4, 5 and 7 require the affirmative
“FOR” vote of a majority of the votes cast at
the Annual Meeting by the holders of the Voting Shares present in
person or represented by proxy at the Annual Meeting and entitled
to vote thereon, voting as a single class.
With
respect to Proposal No. 6, directors will be elected by a plurality
of the votes cast at the Annual Meeting by the holders of Voting
Shares present in person or represented by proxy at the Annual
Meeting and entitled to vote thereon, voting as a single class. A
plurality does not require that a specific percentage of votes be
received, but rather, results in the election of those directors
receiving the most votes cast.
Treatment of Abstentions, Non-Voting and Incomplete
Proxies
An
abstention will be counted as present in person or represented by
proxy at the Annual Meeting, but will not be considered a vote cast
for any proposal. Thus, abstentions will not affect the outcome of
Proposal Nos. 4, 5, 6 and 7, but will have the same effect as a
vote “AGAINST”
Proposal Nos. 1, 2 and 3.
A
failure to attend the Annual Meeting, whether in person or by
proxy, or to vote at the Annual Meeting (without abstention), will
not be considered a vote cast for any proposal. Thus, it will not
affect the outcome of Proposal Nos. 4, 5, 6 and 7 (assuming a
quorum is present), but will have the same effect as a vote
“AGAINST”
Proposal Nos. 1, 2 and 3.
If a
proxy is received without indication as to how to vote on any
particular proposal, the persons named as proxies will vote your
Voting Shares “FOR” each of Proposal Nos. 1, 2,
3, 4, 5 and 7, and “FOR” each of the eight director
nominees identified in this proxy statement. If any other business
properly comes before the Annual Meeting or any adjournments or
postponements thereof, the persons named as proxies will vote your
Voting Shares in accordance with the recommendations of the
Board.
Voting
Number of Votes
Except as otherwise
specified to the contrary in this proxy statement, the holders
of shares of Fusion Common Stock and the holders of shares of
Series B-2 Preferred Stock will vote as a single class on each
matter submitted to a vote of stockholders at the Annual
Meeting. Each share of Fusion Common Stock is entitled to
one vote. Each share of Series B-2 Preferred Stock is
entitled to 200 votes, which is the number of Fusion Common Shares
into which a share of Series B-2 Preferred Stock may be converted
as of the Record Date.
On the Record Date,
there were [●] issued and outstanding shares of Fusion Common
Stock, which are entitled in the aggregate to [●] votes, and
[●] issued and outstanding shares of Series B-2 Preferred
Stock, which are entitled in the aggregate to [●] votes. The
Voting Shares issued and outstanding as of the Record Date are
collectively entitled to a total of [●] votes
at the Annual Meeting.
Attendance; Admission to the Annual Meeting
All
holders of shares of Fusion Common Stock and Series B-2 Preferred
Stock as of the close of business on the Record Date, including
stockholders of record and beneficial owners of shares of Fusion
Common Stock held in “street name” through an
Organization, are invited to attend the Annual Meeting. You are
also entitled to attend the Annual Meeting if you hold a valid
proxy for the Annual Meeting.
Since
seating is limited, admission to the Annual Meeting will be on a
first-come, first-serve basis. You must present a valid
photo identification, such as a driver’s license or passport,
for admittance. If you do not provide a photo
identification, you will not be admitted to the Annual
Meeting. For security reasons, you and your bags are
subject to search prior to your admittance to the Annual
Meeting.
The
Annual Meeting will begin promptly at 3:00 p.m., local time, on
[●], 2018.
Voting in Person
All
Fusion Stockholders of record as of the Record date will be able to
vote in person at the Annual Meeting. If you are not a
stockholder of record, but instead hold your Voting Shares in
“street name” through an Organization, you must provide
a legal proxy executed in your favor from the Organization that
holds your Voting Shares in order to attend the Annual
Meeting.
Voting by Proxy
To
ensure that your Voting Shares are represented at the Annual
Meeting, Fusion recommends that you provide voting instructions
promptly by proxy, even if you plan to attend the Annual Meeting in
person. Fusion has arranged for three ways to submit your
proxy:
●
over the Internet,
by following the instructions provided in the proxy card (an
Internet vote must be received by 11:59 p.m., New York City time,
on
[●], 2018);
●
by mail (proxy
cards submitted by mail must be received before
[●], 2018 to be voted at the
Annual Meeting); or
●
by telephone (a
telephonic vote must be made prior to on
[●], 2018).
If you
hold your Voting Shares beneficially in “street name,”
the Organization through which you own your shares with
instructions on how to vote your Voting Shares. Please follow the
instructions provided by your Organization regarding the voting of
your Voting Shares.
Organizations
that hold shares in “street name” for a beneficial
owner typically have the authority to vote in their discretion only
on “routine” matters and are not allowed to exercise
their discretion on matters that are determined to be
“non-routine” without specific instructions from the
beneficial owner. If your Voting Shares are held by an Organization
in “street name” and you do not provide your
Organization with voting instructions, your shares may constitute
“broker non-votes.” Broker non-votes are shares held by
a bank, broker or other nominee that are represented at the Annual
Meeting, but with respect to which the bank, broker or other
nominee has not received instructions from the beneficial owner to
vote on a particular proposal and the bank, broker or other nominee
does not have discretionary voting power on such proposal. In
tabulating the voting results for any particular proposal, shares
that constitute broker non-votes are not considered votes cast with
respect to that proposal.
Under current Nasdaq rules, Fusion believes that
banks, brokers or other nominees do not have discretionary
authority to vote on any proposals to be voted on at the Annual
Meeting, other than with respect to Proposal No. 7. Therefore, if
you do not instruct your bank, broker or other nominee as to how to
vote your Voting Shares, your bank, broker or other nominee will
not vote your shares on any of the proposals to be voted on at the
Annual Meeting, other than Proposal No. 7, which will have the same
effect as a vote “AGAINST” Proposal Nos. 1, 2 and 3, but will have no
effect on Proposal Nos. 4, 5, 6 and 7.
Revocation of Proxies
Your
proxy is revocable. If you are a Fusion Stockholder as of the
Record Date, you may revoke your proxy at any time
prior to taking the vote at the Annual Meeting by:
●
granting a new
proxy bearing a later date by following the instructions provided
in the proxy card, which will automatically revoke the previous
proxy;
●
providing a written
notice of revocation to Fusion’s Corporate Secretary, 420
Lexington Avenue, Suite 1718, New York, New York 10170;
or
●
attending the
Annual Meeting and voting in person.
If you
hold Voting Shares beneficially in “street name,” you
may change your vote at any time prior to the taking of the vote at
the Annual Meeting by:
●
submitting new
voting instructions to the Organization through which you hold your
Voting Shares by following the instructions provided by the
Organization; or
●
if you have
obtained a legal proxy from the Organization through which you hold
your Voting Shares giving you the right to vote your Voting Shares,
by attending the Annual Meeting and voting in person.
Note
that with respect to both stockholders of record and
beneficial owners, attendance at the Annual Meeting will not cause
your previously granted proxy to be revoked unless you specifically
so request or vote in person at the Annual Meeting.
Postponement and Adjournment
Although it is not
currently expected, the Annual Meeting may be postponed or
adjourned. In accordance with the Merger Agreement, a postponement
or adjournment of the Annual Meeting may occur only under the
following circumstances:
●
pursuant to
Fusion’s bylaws, if a quorum is not present at the Annual
Meeting, then the meeting may be postponed, recessed or adjourned
by the chairman of the meeting, or by the holders of a majority of
the voting power of the Voting Shares present in person or
represented by proxy at the Annual Meeting;
●
Fusion may
postpone, recess or adjourn the Annual Meeting, if necessary, to
solicit additional proxies in favor of the proposals to adopt the
Merger Agreement, to adopt the Certificate of Amendment and to
adopt the Restated Charter; or
●
to allow reasonable
additional time for the filing and/or mailing of any supplemental
or amended disclosure required under applicable law.
Unless
a new record date is fixed for such postponement or adjournment,
your proxy will still be valid and may be voted at the postponed or
adjourned Annual Meeting. You will still be able to change or
revoke your proxy at any time until it is voted.
Voting by Fusion Directors and Executive Officers
As of
[●], 2017, the most recent
practicable date before the date of this proxy statement, directors
and executive officers of Fusion and their affiliates held in the
aggregate shares of Fusion Common Stock and shares of Series B-2
Preferred Stock, representing in the aggregate approximately
[●]% of the total voting power of the Voting Shares issued
and outstanding on that date.
In
connection with the execution and delivery of the Merger Agreement,
certain directors and executive officers of Fusion entered into the
Support Agreement, whereby those Fusion directors and executive
officers agreed, among other things, to vote their Voting Shares in
favor of the Merger, the issuance of the Merger Shares and the
other transactions contemplated by the Merger Agreement. At the
time of execution of the Support Agreement, these shares
represented 9.8% of the votes entitled to be cast at the Annual
Meeting.
Appraisal Rights
Fusion
Stockholders are not entitled to appraisal rights in connection
with the Merger, the issuance of the Merger Shares or any other
transactions contemplated by the Merger Agreement.
Solicitation of Proxies
All
costs associated with the preparation and distribution of this
proxy statement and the other proxy materials and the solicitation
of votes will be paid by Fusion. If a Fusion Stockholder
chooses to vote over the Internet, such Fusion Stockholder is
responsible for any Internet access charges that may be
incurred. If a Fusion Stockholder chooses to vote by
telephone, such Fusion Stockholder will be responsible for any
telephone charges that may be
incurred.
We intend to retain a proxy
solicitor in conjunction with the Annual Meeting, but have not yet
selected the company to perform those services. In addition
to the mailing of this proxy statement and the other proxy
materials, the solicitation of proxies or votes may be made in
person, by telephone, or by electronic communications by our
directors, officers and certain of our other employees, who will
not receive any additional compensation for such solicitation
activities. Fusion may commence solicitation of proxies on or after
[●], 2017 and will continue to
solicit proxies until the Annual Meeting.
Only
Fusion Stockholders of record as of the Record Date are entitled to
vote at the Annual Meeting.
Other Business
The
Board does not expect to bring any other items before the Annual
Meeting and is not aware of any other matter that may be considered
thereat. However, if any other matter does properly come before the
Annual Meeting, the proxy holders will vote the proxies on such
matter in accordance with the recommendations of the
Board.
Householding
We have
adopted a procedure called “householding,” which has
been approved by the SEC. Under this procedure, we
deliver a single copy of the proxy materials to multiple Fusion
Stockholders who share the same address unless we receive contrary
instructions from one or more of those Fusion
Stockholders. This procedure reduces our printing costs,
mailing costs and fees. Fusion Stockholders that
participate in householding will continue to be able to access and
receive separate proxy cards. Upon written request of a
Fusion Stockholder, we will promptly deliver a separate copy of the
proxy materials. Fusion Stockholders may request such a
change by sending us an e-mail at proxymaterial@fusionconnect.com.
Fusion
Stockholders who hold Voting Shares in street name may contact the
Organization through which they hold their Voting Shares to request
information about householding.
Additional Assistance
If you have any
questions about the Merger or require assistance in submitting your
proxy or voting your shares, please contact our Corporate
Secretary, Philip D. Turits, at 212-201-2407.
If some
or all of your Voting Shares are held beneficially in “street
name” through an Organization, you should also call your
Organization for additional information.
THE MERGER
The
following is a discussion of the proposed Merger and the Merger
Agreement. This is a summary only and may not contain all the
information that is important to you. The discussion of the Merger
is qualified by reference to the Merger Agreement, which is
incorporated by reference in this proxy statement and is attached
hereto as Annex A.
Fusion Stockholders are urged to read this entire proxy statement,
including the Merger Agreement, carefully for a more complete
understanding of the Merger and the other transactions contemplated
by the Merger Agreement.
Rationale for the Merger
Fusion’s goal
is to create shareholder value by gaining scale and extending its
strategy of providing a suite of fully integrated, end-to-end cloud
solutions to small, medium and large businesses and enterprises, as
the industry’s “Single Source for the Cloud.” By
selling multiple cloud services to businesses across a growing
customer base, Fusion expects to continue to execute on its
strategy to increase the company’s average revenue per
customer (“ARPU”), reduce churn and maintain low levels
of churn, expand margins, and generate free cash flow.
Management believes
that this strategy is unique among its peers within the business
cloud solutions segment and represents a highly compelling value
proposition for its customers as the complexity of managing
multiple cloud services from multiple providers is increasingly
becoming a challenge for businesses.
The
proposed acquisition of BCHI represents an opportunity for Fusion
to increase the Company’s scale and utilize
BCHI's large customer base and significant network and
infrastructure assets. The transaction will combine the cloud and
Business Services segments of both companies into a single
“Fusion” brand with integrated sales, marketing and
operations functions that will employ Fusion’s strategy of
providing end-to-end cloud solutions that the Company has developed
over the past seven years. Following the proposed acquisition,
Fusion will be uniquely positioned within the cloud services
industry with significant scale and market presence compared to the
current leaders in its peer group, and with a clear
and powerful value proposition for its customers.
Background of the Merger
Since
2012, Fusion's growth strategy has included the acquisition of
other companies and assets in the rapidly expanding cloud services
market. Fusion continually evaluates potential acquisition
candidates and alternatives for achieving long-term strategic goals
and enhancing stockholder value. Since 2012, Fusion has completed a
number of asset and equity acquisitions, including the acquisition
of Network Billing Systems LLC in 2012, the acquisition of the
cloud-services business assets of Broadvox in 2013, the acquisition
of PingTone Communications, Inc. in 2014, the acquisition of
Fidelity Telecom and certain affiliates in 2015 and the acquisition
of Apptix, Inc. in 2016.
During
the first half of 2017, Fusion continued to evaluate various
strategic options, including potential acquisition targets that
would enhance and compliment Fusion’s existing product mix,
expand its geographic reach and provide scale.
On
April 11, 2017, Matthew D. Rosen, Fusion’s Chief
Executive Officer, was contacted by phone by Lawrence S. Chu, of
Moelis & Company (referred to as Moelis), an investment bank retained by
BCHI, to advise that BCHI was interested in exploring a possible
business combination with the Company and that the parties should
enter into a confidentiality agreement and meet to discuss a
potential transaction. In such call, Mr.
Rosen advised Mr. Chu that the Company would be interested in
learning more about BCHI and the proposed transaction and requested
that Mr. Chu forward such information once a non-disclosure
agreement had been executed by the relevant
parties.
On May
16, 2017, Moelis forwarded a draft confidentiality agreement to
Fusion. Two days later Fusion, Birch Equity Partners, LLC (referred
to as BEPL), and BCI
executed a confidentiality agreement with respect to the possible
business combination.
On May
29, 2017, Moelis emailed Mr. Rosen a copy
of a presentation that (i) included a
general overview of BCHI, including a discussion of its revenue and
revenue mix, EBITDA, network footprint, market focus, go-to-market
strategy, leadership team, customer base and acquisition history,
(ii) included projections as to anticipated revenue, adjusted
EBITDA, cap-ex and free cash flow and debt for 2017 through 2020;
(iii) discussed benefits that BCHI believed could be obtained from
a combination with Fusion, including superior cloud services, cloud
connectivity, bandwidth and fiber offerings, a stable recurring
revenue base, substantial potential cost synergies and revenue
synergies, the ability to implement a cross selling program, the
opportunity to grow the addressable market and the ability to shift
the existing revenue mix towards higher gross margin growth
products. There were no deal terms included in this
presentation.
On June
6, 2017, Mr. Rosen
attended a lunch meeting with Mr. Chu and Vincent Oddo, President
and Chief Executive Officer of Birch Equity Partners, LLC (referred
to as BEPL), at which
meeting
they discussed various aspects of the proposed transaction
including the strategic rationale for the combination, valuation
ranges for each of the companies, percentage ownership of Fusion
stockholders in the combined company, the potential of carving-out
the consumer business from the rest of the BCHI customer base, and
who would lead the combined company. At this meeting, Mr. Rosen
requested that Moelis and BCHI submit a non-binding indication of
interest for further consideration by Fusion’s management and
the Board.
On June
12, 2017, BEPL delivered to Fusion a non-binding indication of
interest proposing a merger between BCHI and Fusion that would
result in Fusion being the parent company of BCHI, with
stockholders of Fusion owning approximately 17% of the combined
company and BCHI shareholders owning 83% of the combined company.
The proposal also provided that the combined company would retain
the “Fusion” name, BCHI shareholders would receive a
$25 million cash dividend at the closing, and the post-Merger Board
would consist of eight members, four of which would be nominated by
BCHI shareholders. The proposal indicated that BEPL was valuing
Fusion at $1.89 per share, representing a 30% premium to the
closing price of the Fusion Common Stock on June 9, 2017, thus
implying a $144 million enterprise value, and valued BCHI at 5.5x
2016 EV/EBITDA, implying a $699 million enterprise value for BCHI.
The BEPL proposal also noted the potential strategic benefits of
the combination, including substantial
cost synergies through the consolidation of overlapping networks,
vendor rationalization and reduced operating costs; meaningful
general and administrative costs savings across various disciplines
within the combined organization; and cross selling opportunities
that could add incremental value to the shareholders of Fusion and
BCHI. In addition, BCHI suggested that the combination would help
de-lever Fusion and provide increased cash flow to invest in the
combined business as well as into complementary inorganic
transactions.
On June 14, 2017,
during a previously scheduled meeting, Mr. Rosen
informed the Board that Fusion had been approached by BEPL
regarding a possible combination and reviewed with the Board the
terms of BEPL's initial proposal. After reviewing the
terms presented by BEPL in its June 12 indication of interest, the
Board requested that Mr. Rosen advice BEPL that the following terms
were unsatisfactory -- the percentage to be held by Fusion’s
existing stockholders post-close, the size of the post-Merger Board
and the $25 million cash dividend to be paid to BCHI shareholders.
The Board requested that Mr. Rosen relay these concerns to BEPL and
instructed Mr. Rosen to continue with his discussion with BEPL to
determine whether an agreement could be reached on these points of
concern.
On June
19, 2017, representatives of Fusion and BCHI attended a meeting at
the offices of Moelis. In attendance at this meeting for BCHI were
Kevin Dotts, James O’Brien, Keith Solden, David Gibson (by
phone) and Vincent Oddo and in attendance for Fusion were Matthew
Rosen, Gordon Hutchins, Jr., Russell Markman, Jon
Kaufman, Brian George, Michael Bauer, Jan Sarro and Lisa
Taranto (via phone).
The purpose of this
meeting was to provide each of Fusion and BCHI with a more in-depth
understanding of the other company and to introduce certain members
of the executive team of each company to their
counterpart.
On June 23, 2017,
Matthew D. Rosen, Holcombe T. Green, Jr.,
the largest stockholder of BCHI, and Mr. Chu attended a dinner
meeting in New York City at which they further discussed the main
terms of the proposed transaction. At this meeting, the
attendees discussed the Board’s concerns and issues with the
June 12 indication of interest and each side presented their
respective positions. No agreement as to revised terms were reached
at this meeting.
Via a
phone conversation on June 24, 2017, Matthew D. Rosen and Mr. Green
reached a verbal understanding regarding the key financial terms of
the transaction, which included an increase in the number of shares
of Fusion Common Stock to be held by Fusion stockholders post-close
from 17% to 25%, an increase to the post-close Board size from
eight to nine directors, with four being appointed by BCHI
shareholders, four by certain Fusion stockholders and one to be
mutually agreed by the parties. The $25 million cash dividend to
BCHI shareholders was also eliminated.
On June
27, 2017, BCI/BCHI opened its virtual data room (hosted by Merrill
Corp.) to Fusion and its advisors. During the next two months,
Fusion and its advisors conducted due diligence on
BCHI.
On July
1, 2017, Fusion opened its virtual data room (hosted by One Hub) to
BCI/BCHI and its advisors. During the next two months, BCHI and its
advisors conducted due diligence on Fusion.
On July
7, 2017, Jones Day distributed a draft Merger
Agreement to Fusion that, among other things, contemplated a double
merger transaction.
On July
10, 2017, Jones Day sent Fusion a revised draft of the Merger
Agreement that eliminated the double merger structure. The draft
Merger Agreement included representations, warranties, covenants
and conditions generally customary for a transaction of this
nature. The draft merger agreement also included a non-solicitation
provision and a termination fee payable by Fusion should Fusion
terminate the agreement and pursue an alternative transaction. The
draft agreement also provided that the parties would be required to
consummate the Merger only if all of the conditions to the closing,
including a financing condition, were satisfied or waived. In
addition, also on July 10, 2017, Jones Day sent Fusion an initial
draft of a Support Agreement, that BCHI was seeking from certain
Fusion stockholders. The draft Support Agreement required that the
specified Fusion stockholders vote their Voting Shares in favor of
the proposed transaction, and included a non-solicitation provision
prohibiting the signatories from taking any actions inconsistent
with the non-solicitation provisions in the Merger Agreement. The
draft Support Agreement also prohibited the signatories from
transferring their Voting Shares during the term of the Support
Agreement. Further, on July 10, 2017, Jones Day also forwarded
Fusion initial drafts of a Registration Rights Agreement and a
Stockholders’ Agreement to be entered into by Fusion, BCHI
Holdings and, in the case of the Stockholders'
Agreement, certain Fusion stockholders at the Effective
Time.
On July
11, 2017, Fusion retained Greenberg Traurig, LLC (referred to as
Greenberg) to act as
special mergers and acquisition counsel, and Kelley Drye &
Warren LLP (referred to as Kelley Drye) as special regulatory
counsel for the proposed transaction.
On July 14, 2017,
several due diligence meetings were held at the offices of BCI in
Atlanta. At one of the meetings, Holcombe T. Green, James O'Brien,
Kevin Dotts, Lawrence Chu (of Moelis) met with Mr. Rosen,
Gordon Hutchins, Jr. and Russell Markman. In attendance at another
meeting were the following BCHI
executives: James O’Brien, Kevin Dotts,
David Gibson, John Treece, Joe Hanes, Keith Soldan, Gordon
Williams, Michelle Ansley, Shawn Murray and Sally Burnside, who met
with Matthew Rosen, Gordon Hutchins and Russell Markman of Fusion.
In addition, on that date a teleconference call was held between
representatives of the Bank of America (a potential funding
source for the Merger) and Holcombe T. Green, R. Kirby
Godsey, Mr. Rosen and Lawrence Chu.
On July
17 and 18, 2017, Mr. Markman, Brian George, Senior Vice President,
Network Engineering and Systems at Fusion; Brian Coyne, Vice
President of Investor Relations at Fusion; and Jan Sarro, Executive
Vice President, Marketing and Corporate Development at Fusion;
attended meetings at the offices of BCI in Atlanta with James
O’Brien, Chief Operating Officer at BCI; David Gibson, Vice
President, Product Development and Product Management at BCI; John
Treece, Vice President, Engineering at BCI; Joe Hanes Vice
President, Advanced Services and Support at BCI; and Sally
Burnside, Vice President, Sales Operations at BCI. Also, Shawn
Murray, Senior Vice President and Chief Sales Officer (who has
since left BCHI) participated in certain of the meetings via
phone.
On July
18, 2017, Fusion retained the services of CitrinCooperman (referred
to as Citrin) to perform a
quality of earnings analysis on BCHI and its subsidiaries. Fusion
had previously retained Citrin to perform quality of earnings
analyses on several of its prior acquisition
transactions.
On July
19, 2017, Greenberg delivered to Jones Day Fusion’s initial
comments to the draft Merger Agreement, which comments, among other
things, eliminated the requirement that the Company’s
outstanding series of preferred stock be converted at closing,
included carve outs and other modifications to the post-closing
operational covenants, and deleted Fusion’s obligation to pay
BCHI a termination fee.
On July
20, 2017, Greenberg delivered to Jones Day Fusion’s initial
comments on the draft Support Agreement which, among other things,
removed an obligation that the Fusion preferred stockholders
convert their preferred shares into shares of Fusion Common Stock,
added a provision making it clear that the Fusion
stockholders were signing the Support Agreement solely
in their individual capacity and not as an officer or director of
the Company, and added certain additional termination
events.
On July 21, 2017,
Greenberg delivered to Jones Day Fusion’s comments on the
draft Stockholders’ Agreement which, among other things,
added a requirement that the ninth member of the Board to be
nominated by BCHI must be independent for
purposes of SEC rules and Nasdaq listing rules and be approved by
each of Messrs. Green and Matthew D. Rosen, modified the standard
used to determine when the rights of the Fusion stockholders to
nominate four directors would cease, and added provisions requiring
that certain actions be taken by a vote of Fusion
stockholders.
On
July 31, 2017, Jones Day delivered to Greenberg a revised draft of
the Merger Agreement, which, among other things, removed the
requirement that the BCHI shareholders receive a $25.0 million cash
dividend at the closing, and instead provided that the BCHI
shareholders would receive paid-in-kind preferred stock with
certain terms to be agreed upon in the Merger
Agreement.
Between
July 12, 2017 and August 2, 2017, certain members of Fusion’s
executive management team and certain members of the executive
management team at BCHI engaged in conversations with various
banks, investment banks and funds regarding funding for the
proposed combination.
On
August 4, 2017, Deutsche Bank Securities, Inc. issued a
“highly confident” letter with respect to financing for
the transaction.
On August 8, 2017,
members of the senior management of Fusion and BCHI and their
outside legal and financial advisors held a conference all to
discuss the separation of BCHI’s consumer business (including
BCHI’s single-line business customers) and a draft asset
purchase agreement in respect of the same previously distributed by
Jones Day. Also on August 8, 2017,
Greenberg delivered a revised draft of the Merger Agreement to
Jones Day which, among other things, removed the requirement that
BCHI shareholders receive preferred stock at the closing of the
Merger, and noted that preferred stock consideration would be
addressed as part of the consideration for the Consumer
Spin-off.
On
August 11, 2017, the Board met telephonically. At this meeting,
certain members of Fusion’s management reviewed with the
Board the structure and key economic terms of the proposed
transaction, including the proposed Merger consideration, the
respective percentages of capital stock of the Company expected to
be held by the existing Fusion and BCHI shareholders following the
closing of the Merger, the Company’s proposed post-closing
governance structure, potential synergies to be realized through
the proposed combination and the status of the debt financing for
the Merger. Fusion’s legal advisor advised the Board on its
legal duties and responsibilities in considering the proposed
transaction, including the directors’ duties of care and
loyalty under Delaware law. Management informed the Board that the
Merger consideration would not include a cash dividend or issuance
of Fusion preferred stock to the BCHI shareholders and that the
proposed transaction would include a spin-off of BCHI’s
consumer business (including BCHI’s single-line business
customers) based on an agreed valuation of the consumer business
equal to 3.5 times EBITDA and that Fusion Global Services
would be spun-off or discontinued before the closing of the
Merger. In addition, the Board was informed that the parties
had received a “highly confident” letter from Deutsche
Bank and that Fusion did not expect to obtain binding financing
commitments prior to signing, but that the parties would use
reasonable best efforts to obtain committed financing prior to the
closing of the Merger and that funding of the debt financing would
be a closing condition to the Merger. The status of the Company's
due diligence on BCHI was discussed as was the status of
Citrin’s quality of earnings analysis. The Board also
reviewed the proposed engagement letter with FTICA and authorized
the Company to retain FTICA on the terms presented to the
Board.
On
August 11, 2017, the Company retained the services of FTICA to act
as financial advisor to Fusion and, on August 12, 2017, it retained
FTICA to deliver a fairness opinion with respect to the proposed
transaction.
On
August 14, 2017, Fusion publicly announced its 2017 second quarter
earnings.
On
August 14, 2017, Fusion retained Kekst and Company Incorporated to
act as corporate communications advisor in connection with the
proposed transaction.
On
August 15, 2017, Greenberg delivered to Jones Day Fusion’s
initial comments on the draft Registration Rights Agreement. These
comments included, among others, a limitation on the number of
shares that would be registered for resale under the shelf
registration statement to be filed within 120 days of the Effective
Time, a proposal that Fusion have a consent right in respect of any
underwriters selected by BCHI Holdings, a floor of $50,000,000 for
an underwritten offering and the deletion of the requirement that
Fusion be responsible for the expenses incurred by the BCHI
shareholders if the Company elected to postpone the filing of a
registration statement requested by BCHI Holdings pursuant to the
Registration Rights Agreement.
On August 17, 2017, Greenberg delivered to Jones Day a revised
draft of the Merger Agreement, which, among other things, included,
as a closing condition, the completion of the Consumer Spin-off and
covenants to negotiate agreements governing such spin-off in the
interim period between the signing of the Merger Agreement and the
closing of the Merger.
On
August 18, 2017, the Board met telephonically. At this meeting the
Board was provided with an update regarding the status of the
transaction documentation, proposed timing with respect to receipt
of the fairness opinion and Citrin’s quality of earnings
report and the status of Fusion’s due diligence on
BCHI.
On
August 21, 2017, copies of the then current drafts of the Merger
Agreement, the Support Agreement, the Stockholders’ Agreement
and the Registration Rights Agreement were circulated by the
Company Secretary to the Board for consideration in advance of the
upcoming Board meeting scheduled for later that week.
On August 24, 2017,
the Board met telephonically. Mr. Rosen, with
assistance from the Company’s General Counsel and Greenberg,
provided an update as to the open items in the draft Merger
Agreement and each of the associated documents, including
Fusion’s request for indemnification against certain pending
litigation and regulatory matters involving BCHI, the method for
completing the spin-off of the BCHI consumer and single-line
business customers to BCHI shareholders, the number of Fusion
shares to be registered for resale under a shelf registration
statement to be filed by Fusion within 120 days of the closing of
the Merger and the process for the selection of the underwriter for
such sales. In addition, Mr. Rosen reviewed the history of the
negotiations between the parties and the structure and materials
terms of the proposed transaction, including a reverse stock split
of the issued and outstanding shares of Fusion Common Stock to the
extent necessary to comply with Nasdaq listing requirements. The
Board was informed that the parties had agreed to an
indemnification proposal that would cover a narrower group of
claims than Fusion had proposed originally, but that Fusion had
negotiated a higher cap on the indemnification protection than that
originally offered by BCHI. The Board also was informed that BCHI
had agreed that completion of the spin-off of the BCHI consumer and
single-line business would be a condition to the closing of the
Merger and that the parties agreed to negotiate the terms and
conditions of the spin-off, including the assets and liabilities
that will contstitute the business to be spun-off during the
interim period between the signing and closing of the transactions
contemplated by the Merger Agreement. Management reported that the
delivery of BCHI’s audited financial statements had been
delayed and that the parties were discussing contractual
protections that could be provided to allow the Merger Agreement to
sign on the anticipated timetable in the event BCHI was unable to
timely deliver the audited financial statements. The Board
discussed such potential contractual protections including
conditioning Fusion’s obligation to close the Merger upon the
BCHI audited financial statements for the fiscal years ended
December 31, 2014 through December 31, 2016 being virtually the
same as BCHI’s unaudited financial statements for the same
period. The Board discussed the structure and material terms of the
transactions contemplated by the Merger Agreement, including the
proposed merger consideration, the percentage of shares of Fusion
Common Stock expected to be held post-Closing by the existing
Fusion stockholders and the approximate number of shares of Fusion
common stock expected to be issued in connection with the Merger.
In addition, Mr. Rosen discussed the synergies projected to be
realized by the combined company from the Merger and stated that
the success of the transactions contemplated by the Merger
Agreement, would depend, in part, on the combined company realizing
the projected synergies. The Board discussed the approvals required
to consummate the proposed transaction, including the approvals
required per the Merger Agreement, the treatment of Fusion’s
outstanding preferred stock in connection with the Merger, the
proposed amendments to Fusion’s charter and the anticipated
timing of the stockholder meeting to vote on the Merger and the
timeline for closing of the Merger. The Board also discussed the
status of the financing needed to complete the transaction and the
expected transaction costs, including certain change in control
payments, transaction bonuses, fees related to the financing and
the expected uses of the proceeds of the financing, including the
repayment, in full, and termination of the principal debt
facilities of Fusion and BCHI and the repayment of a subordinated
promissory note, dated November 14, 2016, issued by Fusion to Marvin
S. Rosen, Fusion’s Chairman of the Board, in the outstanding
principal amount of approximately $930,000. The Board asked certain
questions, including questions about the projected synergies, the
quality of earnings report that had been delivered by Citrin, the
scope of the indemnification protection, the negotiation of the
agreements necessary to effectuate the spin-off, the timing of such
negotiations and the timing of the spin-off and the material terms
of the support agreement to be entered into by the directors
simultaneously with the execution of the Merger Agreement. The
Board also discussed the management of the post-Merger company.
Following these discussions, the Board instructed Mr. Rosen to seek
a right of first offer for Fusion that would require BCHI to offer
Fusion the opportunity to purchase shares of Fusion Common Stock
owned by BCHI Holdings prior to the sale of such shares under the
shelf registration statement.
Also on August 24, 2017 Jones Day
circulated drafts of a side letter concerning the allocation of
potential costs relating to the termination of employment of
BCHI’s chief executive officer and a letter agreement
relating to BCHI Holdings’ agreement to indemnify Fusion for
certain costs associated with specified regulatory and litigation
matters involving BCHI (referred to collectively as the
letter agreements). Later
that day, Greenberg delivered to Jones Day Fusion’s comments
on the letter agreements and had a telephone conference with Jones
Day regarding the possibility of a Fusion right of first offer in
respect of the shares of Fusion Common Stock owned by BCHI. After
speaking with BCHI, Jones Day informed Greenberg that BCHI was
unwilling to agree to a right of first offer because it believed
such a right could decrease the value of such shares and would
unacceptably impede and delay BCHI’s sale of such
shares.
On
August 25, 2017, the Board met telephonically to consider the
proposed transaction with BCHI. Greenberg advised the Board on its
legal duties and responsibilities. Fusion management updated the
Board on issues resolved since the prior meeting, including BCHI
Holdings’ agreement to indemnify Fusion for losses arising
from certain pending regulatory and legal matters in excess of
$500,000 and subject to a cap of $25.0 million. The Board was
informed that any such indemnity claims could be paid by BCHI
shareholders either in cash or via a return of Fusion Common Stock
and discussed how the parties had agreed to value that stock. The
Board also was informed that this indemnity was the only indemnity
protection that the Company would receive from BCHI in the
Merger.Management stated that BCHI had agreed to exclude all
outstanding options and out-of-the money warrants from the
measurement that will be used to calculate the number of shares to
be issued to the BCHI shareholders at the closing of the Merger and
Fusion management discussed the approximate number of shares of
Fusion Common Stock expected to be issued in connection with the
Merger. The
Board discussed certain protections provided to Fusion in the
Registration Rights Agreement that would permit Fusion to delay
registered sales of shares by BCHI Holdings under certain
circumstances. Management also reviewed with the Board
certain issues that remained unresolved, including the treatment of
certain patents relating to the BCHI consumer and single-line
business being spun-off, and certain tax liabilities relating to
such spin-off. Management reviewed due diligence of BCHI and the
Citrin quality of earnings report. The directors asked questions,
including questions about the indemnity protection, the spin-off,
the treatment of Fusion Global Services, the formula for
calculating the exchange ratio for the Merger consideration,
Fusion’s current capitalization, Fusion’s due diligence
of BCHI and the due diligence process. Mr. Rosen informed the Board
that BCHI’s accountants would not be able to deliver audited
financial statements prior to the proposed signing date for the
transaction and that, to avoid delaying the signing of the Merger
Agreement, BCHI had agreed to include in the Merger Agreement a
representation that the audited consolidated financial statements
of BCHI for the fiscal yearsended December 31, 2014 through
December 31, 2016 will not differ in any (other than deminimis)
respect from its unaudited consolidated financial statements of the
same period and that the accuracy of this representation as of the
date of the signing of the Merger Agreement and as of the closing
of the Merger would be a condition to Fusion’s obligation to
close the Merger. The Board was also informed that BCHI agreed that
it would deliver such audited consolidated financial statements to
Fusion as soon as practicable. (Such audited consolidated financial
statements were delivered to Fusion on September 13, 2017 and
Fusion’s management has confirmed that such audited
consolidated financial statements did not differ in any (other than
deminimis) respect from its unaudited financial statement of the
same period.) Representatives of FTICA presented FTICA’s
financial analysis of the consideration being paid in the Merger
and the range of equity value and per share value for Fusion as a
standalone basis and as a combined company and FTICA’s
discounted cash flow analysis, guideline public company analysis,
guideline transaction analysis, the potential synergies projected
by Fusion to be realized by the combined company from the Merger
and the significance of such synergies on its financial analysis.
The Board discussed this analysis and also considered FTICA’s
estimate of the implied values of Fusion’s Common Stock,
including its review of Fusion’s historical trading prices
and target prices suggested by analyst coverage. In evaluating the
consideration being paid in the Merger, the Board also considered
the implied value of the per share consideration, which
FTICA estimated at approximately $3.78
per share, and FTICA’s view that such implied value was
within the range of fair value as indicated by the FTICA analysis.
After this discussion, representatives of FTICA orally rendered to
the Board FTICA’s opinion, which was subsequently confirmed
in writing that, as of that date and based upon and subject to the
qualifications, limitations and assumptions stated in its opinion,
the aggregate Merger consideration to be paid to the shareholders
of BCHI in the Merger was fair, from a financial point of view, to
Fusion and to the holders of the Fusion Common Stock (other than
the Company and its affiliates). For further information regarding
the FTICA opinion, please see the section entitled
“The Merger – Opinion
of FTI Capital Advisors, LLC” beginning on page
51 of this proxy statement.
After FTICA orally rendered its opinion to the Board, Messrs.
Matthew D. Rosen and Marvin S. Rosen were asked to leave the
meeting so that the independent directors could consider the
transactions contemplated by the Merger Agreement. During this
session with the independent directors, Fusion’s outside
counsel again reviewed the directors’ fiduciary
responsibilities in considering the transactions contemplated by
the Merger Agreement. Fusion’s outside counsel also reminded
the Board that Matthew D. Rosen would serve as Chairman and Chief
Executive Officer of the combined company, and of the proposed
repayment, at the closing of the Merger, of a subordinated
promissory note, dated November 14, 2016, issued by Fusion to
Marvin S. Rosen in the outstanding principal amount of
approximately $930,000. Greenberg also reviewed the material terms
of the draft Merger Agreement circulated to the Board earlier in
the week, including the non-solicitation provisions and the
circumstances under which the Board is permitted to consider and
accept alternative proposals and change its recommendation to
stockholders, the financing provisions, the interim operating
covenants, the termination provisions, the proposed governance and
management of the combined company and the fact that no termination
fees are payable by either side under the terms of the Merger
Agreement as well as the material terms of the Support Agreement
and the status and findings of the due diligence performed by
Fusion on BCHI. Following this discussion, the independent
directors unanimously determinedto recommend, among other things,
that (i) the Board approve the Merger Agreement and the
transactions contemplated thereby, including the Merger and the
issuance of the Merger Shares and declared them fair, advisable and
in the best interest of Fusion and its stockholders and that the
Board determine that it is advisable and in the best interest of
Fusion and its stockholders for Fusion to enter into the Merger
Agreement, to consummate the transactions contemplated thereby,
including the Merger and the issuance of the Merger Shares and to
perform its obligations thereunder and to approve, authorize and
ratify the Merger Agreement, (ii) that the Board approve, authorize
and ratify the form, terms, conditions and provisions of the
Certificate of Amendment (subject to its approval by the Fusion
Stockholders) to the extent
determined necessary by the Board to comply with Nasdaq listing
requirements in connection with the post-Merger listing of the
Fusion Common Stock on Nasdaq, and (iii) that the Board
determine that the Restated Charter is advisable and in the best
interest of Fusion and its stockholders and approve, authorize and
ratify the Restated Charter. Following the unanimous adoption of
such resolutions by the independent directors, Messrs. Matthew D.
Rosen and Marvin S. Rosen returned to the meeting and were informed
of the resolutions of the independent directors. The transactions
contemplated by the Merger Agreement were discussed by the entire
Board. For a more detailed analysis of the factors the Board
considered in making its determinations see the section entitled “The Merger –
Reasons for the Merger and Recommendation of the
Board” on page 48 of this
proxy statement.
Following these
discussions, the Board unanimously (i)
determined that the Merger Agreement and the transactions
contemplated thereby, including the Merger and the issuance of the
Merger Shares, are fair to, advisable and in the best interests of
Fusion and its stockholders, (ii) approved the execution, delivery
and performance by Fusion of the Merger Agreement and the
consummation of the transactions contemplated thereby, including
the Merger and the issuance of the Merger Shares, and
(iii) directed that the Merger Agreement be submitted to the
Fusion Stockholders for adoption. The Board, among other things,
also unanimously approved, authorized and ratified the form,
terms, conditions and provisions of the Certificate of Amendment
and the Restated Charter, determined that the Certificate of
Amendment and the Restated Charter, are advisable and in the best
interest of Fusion and its stockholders and approved, authorized
and ratified the Certificate of Amendment and the Restated
Charter.
On
August 26, 2017, Jones Day and Greenberg finalized the Merger
Agreement, the Support Agreement, the Stockholders’ Agreement
and the Registration Rights Agreement and the parties executed and
delivered to each other the Merger Agreement, the Support Agreement
and the letter agreements.
On the
morning of August 28, 2017, prior to the opening of the U.S.
financial markets, Fusion advised Nasdaq of the proposed
transaction and issued a press release announcing the
Merger.
On
September 15, 2017, the parties to the Merger Agreement entered
into an amendment to the Merger Agreement to provide that the
filings required to be made under the HSR Act and to obtain
approval of the FCC must be made within seven business days after
receipt of satisfactory binding commitment letters from a financing
source.
On
September 29, 2017, the parties to the Merger Agreement entered
into an amendment to the Merger Agreement to provide that the
filings required to be made with the State PSCs must be made within
seven business days after receipt of satisfactory binding
commitment letters from a financing source.
On
October 27, 2017, the parties to the Merger Agreement
entered into an amendment to the Merger Agreement to (i) further
adjust the dates by which the parties will file the required
filings under the HSR Act, with the FCC and the State PSC’s,
(ii) extend to December 24, 2017, the date on which the parties may
terminate the Merger Agreement if committed financing has not been
secured, (iii) amend the provisions regarding Fusion’s
proposed reverse stock split to provide for a range of ratios
rather than a fixed ratio and (iv) fix a reference error in the
definition of "Superior Proposal" which should have read "15%" not
"20%".
In October 2017,
BCHI approved an employee retention plan designed to incentivize
key employees of BCHI to remain with BCHI through July 5, 2018
(referred to as the “Commitment Date”). Under this
retention plan, the 72 participants will receive a retention bonus
ranging from $4,000 to $162,500 ($1,145,000 in total). For
participant’s that receive a retention bonus of $10,000 or
more, such bonus will be paid in two equal installments on January
5, 2018 and on the Commitment Date and for participant’s that
receive a retention bonus of less than $10,000, such bonus amount
will be paid in full on January 5, 2018. In the event that a
participant voluntarily terminates his/her employment or he/she is
terminated by BCI for good reason following receipt of his/her
payment, fifty percent (50%) of that amount is subject to claw back
by BCI (i) at all times prior to the Commitment Date in the case of
participant’s that receive a payment of less than $10,000,
and (ii) within ninety days after payment, in the case of all other
participants. Also in October 2017, BCHI approved a special
one-time transaction bonus for 23 key employees of BCHI. Under this
bonus plan, the participants will receive amounts ranging from
$5,000 to $165,500 ($855,000 in total) if the Merger is
consummated. Amounts due under this special bonus plan will be paid
within ten days following closing of the Merger. Each of these
plans is subject to approval by Fusion.
On November 10, 2017, the Compensation
Committee met and determined to recommend that the Board approve an
incentive plan to enable Matthew D. Rosen to obtain a 5% equity
interest in the Company as required by the terms of his employment
agreement. The Compensation Committee determined to recommend that
such equity interest be granted in the form of stock options. The
Compensation Committee also recommended that the payment of certain
one-time transaction completion bonuses to certain members of the
Company’s management team as compensation for the additional
work performed in connection with the transactions contemplated by
the Merger Agreement and a one-time bonus payable to each
non-executive director of the Company in recognition of their years
of service and in recognition that such compensation is appropriate
given that the Company’s non-executive directors have never
been paid cash honorariums or director fees. These management and
director bonuses are contingent on completion of the
Merger. On November 13, 2017, the Board approved the
special transaction bonus plan recommended by the Compensation
Committee for certain members of Fusion’s senior management
team and non-executive directors. This plan provides for a special
one-time cash bonus payment to the 27 designated management
participants and the 6 non-executive director participants solely
in the event the Merger is completed. The amounts payable under
this plan range from $7,500 to $137,500 for management participants
and provides for a payment of $40,000 to each non-executive
director ($240,000 in total). The total amount payable under the
plan is $1,289,000.
The
bonus amount established for each management participant was
determined on the basis of that participant’s position at
Fusion and his/her involvement with the BCHI acquisition
transaction. The Company’s Chief Executive Officer is not a
participant in this bonus plan. The Board elected to include the
non-executive directors in this plan as a means to recognize their
dedicated services to Fusion in the past, the strategic guidance
provided by these directors in connection with the BCHI
transaction, and in recognition that their services have been
provided without cash compensation. For a review of the stock
options granted to member of the Board in 2016, see
“Certain Relationships,
Related Transactions and Director Independence - 2016 Director
Compensation” beginning on page 109 of
this proxy statement.”
On
November 14, 2017, the Compensation Committee determined that
Matthew D. Rosen should receive a one-time transaction completion
bonus as compensation for the additional work undertaken by him in
connection with the transactions contemplated by the Merger
Agreement, subject to approval of the Board and BCHI and instructed
the Chairman of the Compensation Committee to engage a compensation
consultant to assist in determining the appropriate amount of the
bonus.
Following execution
of the Merger Agreement on August 26, 2017, Fusion and BCHI have
been engaged in active discussions with, and have undergone
substantial financial diligence by, numerous large financial
institutions that are interest in financing all or a portion of the
financing required to complete the Merger. To date, however, Fusion
and BCHI have not selected the financial institution(s) that will
lead the financing efforts.
Reasons for the Merger and Recommendation of the Board
The Board carefully evaluated the Merger Agreement
and the transactions contemplated thereby. The Board determined
that the Merger Agreement and the transactions contemplated
thereby, including the Merger and the issuance of the Merger
Shares, were fair to, advisable and in the best interests of Fusion
and its stockholders. At a meeting held on August 25, 2016, the
Board unanimously approved the execution, delivery and performance
by Fusion of the Merger Agreement and the consummation of the
transactions contemplated thereby, including the Merger and the
issuance of the Merger Shares, and directed that the Merger
Agreement be submitted to the Fusion Stockholders for adoption. In
the course of reaching its recommendation, the Board consulted with
various members of Fusion’s senior management, its outside
financial and legal advisors and considered a number of substantive
factors, both positive and negative, and potential benefits and
detriments of the Merger and the other transactions contemplated by
the Merger Agreement to Fusion and its stockholders. The Board
believed that, taken as a whole, the following factors supported
its decision to approve the Merger:
●
Strategic
Position and Financial and Operational Scale. The expectation that, following the Merger,
Fusion’s market position will be enhanced by BCHI’s
strong customer base, customer scale and revenue and significant
network and infrastructure assets. The combined company is expected
to have 2017 pro-forma revenue of over $575 million, last twelve
months (referred to as LTM) adjusted earnings before interest, taxes
depreciation and amortization (referred to as EBITDA) of over $150 million and over 150,000 business
customers.
●
Anticipated
Cost Synergies and Reduced Debt Leverage Ratio. The combined company is
expected to generate significant cost synergies of approximately
$22.0 million from supply chain optimization, facilities
consolidation, network consolidation and employee headcount
reductions and approximately $2.0 million of capital expenditure
synergies. In addition, the combined company is expected to reduce
Fusion’s net debt to adjusted LTM EBITDA leverage from 6.3x
to a pro forma ratio of 3.7x as of June 30,
2017.
●
Financial
Terms of the Merger. The Board
considered the number of shares of Fusion Common Stock to be issued
to BCHI Holdings, the fact that upon completion of the Merger, BCHI
Holdings will own approximately 75% of the total number of shares
of Fusion Common Stock and stockholders of Fusion will own
approximately 25% of the total number of shares of Fusion Common
Stock, and the other financial terms of the Merger. The Board also
considered the fact that because the Merger consideration payable
to BCHI Holdings in the Merger is a fixed number of shares of
Fusion Common Stock, Fusion stockholders would not be affected by a
decrease in the trading price of Fusion Common Stock during the
pendency of the Merger, and the fact that the Merger Agreement does
not provide BCHI with a price-based termination right, a merger
consideration adjustment or other similar protection in such
circumstances. The Board did not quantify or assign any relative or
specific weight to the various financial terms listed. Instead, the
Board considered these terms in the aggregate. In addition,
individual members of the Board may have given differing weights to
different financial items.
●
Terms of
the Merger Agreement and Related Agreements. The Board reviewed and considered the terms and
conditions of the Merger Agreement and the related agreements,
including the structure of the transaction, the representations,
warranties and covenants of each party, the conditions to
completion the Merger, the indemnity to be provided by BCHI
Holdings with respect to certain pending regulatory and litigation
matters, the rights of each party to terminate the Merger Agreement
and the absence of break-up fees payable in the event of a
termination. In addition, the Board considered Fusion’s right
to consider and negotiate alternative acquisition proposals and to
consider and change its recommendations in certain
circumstances.
●
Strategic
Alternatives. The Board
considered the costs and benefits of continuing to build its
business on a standalone basis rather than through additional
acquisitions.
●
Fairness
Opinion. The Board considered
the fairness opinion orally delivered by FTICA to the Board at the
August 25, 2017 meeting and subsequently confirmed in writing,
which concluded that, as of the date of such opinion and subject to
the assumptions and limitations set forth in its written opinion,
the aggregate Merger consideration to be paid in the Merger was
fair, from a financial point of view, to Fusion and the holders of
the Fusion Common Stock (other than Fusion and its
affiliates).
●
Due
Diligence. The Board considered
the scope and results of the due diligence investigation of BCHI
undertaken by Fusion’s management and its external advisors,
including the report provided by Citrin regarding the quality of
BCHI’s earnings.
●
Regulatory
Approvals; Likelihood of Consummation. The Board considered the regulatory approvals
required to consummate the Merger and Fusion’s
management’s belief that the Merger would be approved by the
requisite authorities on a timely basis, without the imposition of
conditions that would materially adversely affect the businesses of
Fusion or BCHI after the Merger, and that the transaction would
otherwise be consummated in accordance with the terms of the Merger
Agreement.
●
Negotiations
with BCHI. The benefits to
existing Fusion stockholders that Fusion and its advisors were able
to obtain during their extensive negotiations with BCHI, including
an increase in the percentage of shares of Fusion Common Stock to
be held by current Fusion stockholders post-Merger from 17%
of the combined company to 25% of the combined company and the
Board's belief that the consideration reflected in the Merger
Agreement was the best transaction that could be obtained by Fusion
stockholders at this time, and that there was no assurance that a
more favorable opportunity would arise later or through any
alternative transaction or as a result of continuing as a
standalone company.
●
Governance
of Fusion post-Merger. The Board considered the fact that the current
management of Fusion is expected to have significant influence on
the ongoing operations of the post-Merger Fusion and that the
Fusion Committee will have the right to nominate four of the nine
directors of the post-Merger Board and the right to consent to the
nomination of one additional director, which consent may not be
unreasonably withheld.
●
Stockholders’
Ability to Reject the Merger. The Board considered the fact that the Merger and
the other transactions contemplated by the Merger Agreement are
subject to approval by the Fusion Stockholders, who would be free
to reject the transactions contemplated by the Merger
Agreement.
In
the course of its deliberations, the Board also considered a
variety of risks inherent with the proposed Merger,
including:
●
the
fact that because the Merger consideration payable
to BCHI Holdings in the Merger is a fixed number of shares
of Fusion Common Stock, Fusion stockholders would not be able to
benefit from an increase in the trading price of Fusion Common
Stock during the pendency of the Merger, and the fact that the
Merger Agreement does not provide Fusion with a price-based
termination right, a merger consideration adjustment or other
similar protection.
●
the
risk that the Merger and the other transactions contemplated by the
Merger Agreement might not be consummated in a timely manner or at
all, including as a result of the failure to obtain regulatory
approvals, the necessary Fusion Stockholder approvals or the
financing required to complete the Merger and the potential adverse
effect of the public announcement of the Merger or on the delay or
failure to complete the transactions contemplated by the Merger
Agreement on the reputation of Fusion, the trading price of the
Fusion Common Stock and Fusion’s business and operating
results, particularly in light of the costs expected to be incurred
in connection with the transactions and the potential diversion of
management's attention from day-to-day operations for an extended
period of time;
●
the
risk that required regulatory approvals may be delayed, conditioned
or denied;
●
the
risk that various provisions of the Merger Agreement, including the
non-solicitation provisions, may discourage other parties
potentially interested in a combination with Fusion from pursuing
that opportunity;
●
the
risk that the
funding of the financing needed to complete the transactions
contemplated by the Merger Agreement is a condition to closing,
together with the fact that the financing commitments
necessary to consummate the Merger have not, and may not be,
obtained and the risk that the financing for the Merger may not be
obtained;
●
the
substantial expenses incurred in connection with the negotiation of
the transactions contemplated by the Merger Agreement and expected
to be incurred in connection with the completion of the
transactions contemplated by the Merger Agreement;
●
the
possible volatility, at least in the short term, of the trading
price of the Fusion Common Stock resulting from the announcement of
the Merger;
●
the
fact that Fusion stockholders will have a lower equity
participation in the combined company (and, as a result, reduced
opportunity to participate in any future earnings or growth of the
combined company and future appreciation in the value of Fusion
Common Stock following the Merger) than they have in the pre-Merger
Fusion;
●
the inherent
uncertainty of management’s internal financial projections,
including those relied upon by FTICA for purposes of rendering its
fairness opinion;
●
the
challenges inherent in the operation of the combined business and
the fact that the strategic direction of Fusion following the
Merger will be determined by a Board initially comprised of a
majority of directors selected by BCHI Holdings;
●
the
risk that the combined company will be unable to achieve projected
synergies or will be unable to achieve such synergies within the
projected time frame;
●
the
fact that the Merger will give rise to substantial limitations on
the utilization of Fusion’s net operating
losses;
●
the
substantial amount of indebtedness that the combined company will
have upon completion of the Merger;
●
the
risk that the requirement that Fusion conduct its business in all
material respects in the ordinary course prior to completion of the
Merger and subject to specified restrictions unless BCHI provides
its prior written consent might delay or prevent Fusion from
undertaking certain business opportunities that might arise pending
completion of the Merger;
●
the risk that
following the Merger the market price of the Fusion Common Stock
may be affected by factors different from those currently affecting
the market price of Fusion Common Stock and may decline as a result
of the Merger or for other reasons;
●
the
risk that the audited consolidated financial statements of BCHI and
its subsidiaries for the fiscal years ended December 31, 2014
through December 31, 2016 to be delivered by BCHI prior to closing
may differ (other than in deminimis respects) from the unaudited
consolidated financial statements of BCHI and its subsidiaries for
the same periods; and
●
the interests of certain members of the Board and
officers in the Merger described under the section entitled
“The
Merger – Interests of Fusion's Officers and Directors in the
Merger” beginning on page
60 of this proxy statement.
The
Board concluded that the potential risks associated with the
combination of Fusion and BCHI (i) could be mitigated or managed
following the Merger, (ii) were reasonably acceptable under the
circumstances and were unlikely to have a material impact on the
Merger or on post-Merger Fusion in light of such factors as the
relative intrinsic values and financial performance of Fusion and
BCHI, and (iii) were significantly outweighed by the potential
benefits of the Merger to the Fusion's stockholders. Accordingly,
the Board approved the Merger Agreement and the transactions
contemplated therein, including the Merger and the issuance of the
Merger Shares in connection with the Merger.
In
considering the recommendation of the Board, Fusion Stockholders
should be aware that certain directors and executive officers of
Fusion have interests in the Merger that are different from, or in
addition to, any interests they might have solely as a stockholder.
See the section entitled “The
Merger – Interests of Fusion's Officers and Directors in the
Merger” beginning on page 60 of this proxy
statement.
The
foregoing discussion of the information and factors considered by
the Board, includes all of the material positive and negative
factors considered by the Board, but is not intended to be
exhaustive and may not include all the factors considered by the
Board. The Board did not quantify or assign any relative or
specific weights to the various factors that it considered in
reaching its determination to approve the Merger Agreement and the
transactions contemplated thereby. Rather, the Board made its
determination on the totality of the information and factors
considered by it. In addition, individual members of the Board may
have given differing weights to different factors.
The
foregoing discussion of the information and factors considered by
the Board is forward-looking in nature and, therefore, this
information should be read in light of the factors described in the
section entitled "Forward Looking
Statements" beginning on page 37 of this proxy
statement.
Opinion of FTI Capital Advisors, LLC
Fusion
retained FTICA as financial advisor and to provide an opinion to
the Board as to the fairness of the aggregate merger consideration,
from a financial point of view, to Fusion and its stockholders. At
a meeting of the Board held on August 25, 2017 to evaluate the
merger, FTICA delivered to the Board an oral opinion, which opinion
was confirmed by delivery of a written opinion, dated August 26,
2017, to the effect that, as of the date of such opinion and based
upon and subject to the various assumptions, qualifications and
limitations set forth in the written opinion, that the aggregate
Merger consideration to be paid to the BCHI stockholders in the Merger is fair,
from a financial point of view, to Fusion and the holders of the
Fusion Common Stock (other than Fusion and its
affiliates).
The
full text of FTICA’s written opinion, dated August 26, 2017,
is attached hereto as Annex D. FTICA’s written
opinion sets forth, among other things, the assumptions made,
procedures followed, factors considered and limitations upon the
review undertaken by FTICA in rendering its opinion. The following
summary of FTICA’s opinion is qualified in its entirety by
reference to the full text of that opinion. You are encouraged to
read FTICA’s opinion in its entirety. The opinion only
addresses the fairness from a financial point of view of the
aggregate consideration to be paid by Fusion in the Merger as of
the date of such opinion and did not address any terms or other aspects or implications of the
merger or the other transactions contemplated by the Merger
Agreement (including the Carrier Spin-off and the Consumer
Spin-off). FTICA’s opinion does not address the relative
merits of the Merger as compared to other business strategies or
transactions that might be available to Fusion or Fusion’s
underlying business decision to effect the Merger.
FTICA’s opinion was not intended to and does not constitute
advice or a recommendation as to how Fusion’s stockholders
should vote at any stockholders’ meeting to be held in
connection with the Merger or take any other action with respect to
the Merger.
FTICA
premised its opinion upon its understandings that:
●
as a condition to
the Merger, Fusion will either (I) divest its ownership interest in
Fusion Global that operates the Fusion carrier business and
maintain the economic benefits of Fusion Global through a profit
share engagement with Fusion Global, or (ii) dissolve Fusion
Global;
●
as a condition to
the Merger, BCHI will divest
itself of its consumer and single-line business customers, the
Consumer Spin-off;
●
Fusion will
refinance existing BCHI and
Fusion indebtedness of approximately $458 million; and
●
prior to the
Merger, the holders of Fusion preferred stock will be notified that
they may convert their preferred stock into Fusion Common Stock and
at the Effective Time, all of Fusion preferred stock issued and
outstanding immediately prior to the Effective Time and that its
holder has not converted into shares of Fusion Common Stock will
terminate and such shares of Fusion preferred stock will be
cancelled.
For
purposes of its opinion FTICA assumed that: (I) the Carrier
Spin-off will be consummated on or prior to the Effective Time,
(ii) the Consumer Spin-off will be completed on or prior to the
Effective Time, (iii) all shares of Fusion preferred stock will be
converted into Fusion Common Stock on or prior to the Effective
Time, and (iv) the number of fully diluted shares of Fusion Common
Stock outstanding immediately prior to the Effective Time will be
in the range of 24,000,000 to 25,000,000 shares and the number of
Merger Shares to be issued to BCHI shareholders will be in the
range of 72,000,000 to 75,000,000 shares.
In
arriving at its opinion FTICA reviewed and analyzed, among other
things:
●
the draft Merger
Agreement and the specific terms of the Merger and the other
transactions contemplated by the Merger Agreement (including the
Consumer Spin-off and the Carrier Spin-off);
●
recent historical
financial information of Fusion, BCHI and BCI, including (i)
Fusion’s Annual Reports on Form 10-K for the fiscal years
ended December 31, 2012 through December 31, 2016 (which included
audited financial statements), and Fusion’s Quarterly Report
on Form 10-Q for the quarter ending June 30, 2017 (which included
unaudited financial statements), filed with the SEC, (ii) financial
statements of BCHI for the fiscal years ended December 31, 2014
through December 31, 2016 and the six months ended June 30, 2017
(unaudited); consolidated financial statements of BCI, a
wholly-owned, direct subsidiary of BCHI, and its subsidiaries for
the fiscal years ended December 31, 2014 through December 31, 2016
(audited) and the six months ended June 30, 2017
(unaudited);
●
pro forma
historical financial information of the Surviving Company
(including the Consumer Business), including unaudited pro forma
financial statements of the Surviving Company for the calendar year
ended December 31, 2016 and the last twelve month, or LTM, period
ended June 30, 2017, which Fusion has identified as the most
current financial information available;
●
pro forma
historical financial information of the Surviving Company
(excluding the Consumer Business), including unaudited pro forma
financial statements of the Surviving Company for the calendar year
ended 2016 and the LTM period ended June 30, 2017, which Fusion has
identified as the most current financial information
available;
●
certain internal
financial analysis and forecasts for BCHI (excluding the Consumer
Business) prepared by BCHI management, approved for its use by
Fusion;
●
certain internal
financial analyses and forecasts for Fusion and the Surviving
Company prepared by Fusion management, in each case approved for
our use by Fusion, including the cost savings projected by Fusion
to result from the Merger and the other transactions contemplated
by the Merger Agreement (referred to as the Forecasts);
●
the trading history
of the Fusion Common Stock from August 26, 2014 to August 25, 2017
and a comparison of that trading history with those of other
companies that it deemed relevant;
●
a comparison of the
historical financial results and present financial condition of
Fusion with those of other companies that it deemed relevant;
and
●
published estimates
of independent research analysts with respect to the future
financial performance and price targets for Fusion.
FTICA
also had discussions with Fusion management concerning its and the
Surviving Company’s business, operations, assets,
liabilities, financial condition and prospects and undertook such
other studies, financial analyses and investigations as it deemed
appropriate.
In
conducting its review and arriving at its opinion, FTICA, with the
Board’s consent, assumed and relied, without independent
investigation, upon the accuracy and completeness of all financial
and other information provided to it by Fusion, including the
Forecasts, or which were publicly available or were otherwise
reviewed by FTICA. FTICA did not undertake any responsibility for
the accuracy, completeness or reasonableness of, or independent
verification of, such information. FTICA did not conduct or assume
any obligation to conduct any physical inspection of the properties
or facilities of Fusion or BCHI and did not make or obtain any
valuations or appraisals of the assets or liabilities of Fusion or
BCHI or any of their respective subsidiaries. FTICA further relied
upon the assurances of management of Fusion that they are not aware
of any facts or circumstances that would make such information
inaccurate or misleading. FTICA, with the Board’s consent,
assumed that the Forecasts were reasonably prepared on bases
reflecting the best currently available estimates and good faith
judgments of management of Fusion. FTICA expressed no view as to
the Forecasts or the assumptions on which they were made. FTICA
assumed that there were no material changes in the assets,
liabilities, financial condition, results of operations, business
or prospects of Fusion or BCHI since the date of the last financial
statements made available to it. FTICA did not make or obtain any
independent evaluations, valuations or appraisals of the assets or
liabilities of Fusion or BCHI, nor was FTICA furnished with such
materials. In addition, FTICA did not evaluate the solvency or fair
value of Fusion, Merger Sub or BCHI, under any state or federal
laws relating to bankruptcy, insolvency or similar
matters.
FTICA’s
opinion did not address any legal, tax or accounting matters
related to the Merger Agreement or the merger. FTICA’s
opinion addressed only the fairness of the aggregate merger
consideration to be paid in the merger, from a financial point of
view to Fusion and the holders of the Common Stock (other than
Fusion and its affiliates). FTICA expressed no view as to any other
aspect or implication of the merger or any other agreement,
arrangement or understanding entered into in connection with the
merger or otherwise. FTICA’s opinion was necessarily based
upon economic and market conditions and other circumstances as they
existed and could be evaluated by FTICA on the date of its opinion.
Although subsequent developments may affect FTICA’s opinion,
FTICA does not have any obligation to update, revise or reaffirm
its opinion and FTICA expressly disclaimed any responsibility to do
so.
FTICA
did not consider any potential legislative or regulatory changes
currently being considered or recently enacted by the United State
or any foreign government, or any domestic or foreign regulatory
body, or any changes in accounting methods or generally accepted
accounting principles that may be adopted by the SEC, the Financial
Accounting Standards Board, or any similar foreign regulatory body
or board. For purposes of rendering its opinion FTICA assumed in
all respects material to its analysis, that the representations and
warranties of each party contained in the Merger Agreement are true
and correct, that each party will perform all of the covenants and
agreements required to be performed by it under the Merger
Agreement and that all conditions to the consummation of the Merger
will be satisfied without waiver thereof. FTICA also assumed that
all governmental, regulatory and other consents and approvals
contemplated by the Merger Agreement will be obtained and that in
the course of obtaining any of those consents no restrictions will
be imposed or waivers made that would have an adverse effect on the
contemplated benefits of the Merger. The Board informed FTICA, and
FTICA assumed, that the Merger will be treated as a tax-free
reorganization.
In
connection with rendering its opinion, FTICA performed certain
financial, comparative and other analyses as summarized below. The
preparation of a fairness opinion is a complex process and involves
various determinations as to the most appropriate and relevant
methods of financial and comparative analyses and the application
of those methods to the particular circumstances. Therefore, a
fairness opinion is not accurately summarized and requires full
context of the facts and circumstances.
In
arriving at its opinion, FTICA did not attribute any particular
weight to any single analysis or factor considered by it, but
rather made both quantitative and qualitative judgments as to the
significance and relevance of each analysis and factor relative to
all other analyses and factors performed and considered by it in
the context of the circumstance as a whole. Considering any portion
of such analyses and factors, without considering all analyses and
factors as a whole, could create a misleading or incomplete view of
the process underlying its opinion.
Below
contains a summary of the material financial analyses used by FTICA
in preparing its opinion to the Board. Certain financial analyses
summarized therein that contain only a portion of all relevant
information, and as such, should be read together with the rest of
the analysis altogether. In performing its analyses, FTICA made
numerous assumptions with respect to industry performance, economic
and general business conditions, as well as other matters, many of
which are beyond the control of Fusion or any other party involved
in the merger. FTICA does not assume responsibility if future
results are materially different from those discussed. Any
estimates contained in these analyses are not necessarily
indicative of actual values or predictive of future results or
values, which may be significantly more or less favorable than as
set forth below. In addition, analyses relating to the values of
the businesses do not purport to be appraisals or reflect the
prices at which the businesses, or shares thereof, may actually be
sold.
The
following is a summary of the material financial analyses performed
by FTICA and reviewed by the Board on August 25, 2017 in connection
with FTICA’s opinion. The
financial analyses summarized below include information in tabular
format. In order for FTICA’s analysis to be fully understood,
the tables must be read together with the text of each summary. The
tables alone do not constitute a complete description of the
financial analyses. Considering the date below without considering
the full narrative description of the financial analyses, including
the methodologies and assumptions underlying the analysis, could
create a misleading or incomplete view of FTICA’s financial
analysis.
Discounted Cash Flow Analysis
In
order to estimate the present value of the Common Shares, BCHI
common stock, and the common shares of the combined entity, New
Fusion, FTICA performed a discounted cash flow analysis of each of
the three entities. A discounted cash flow analysis is a
traditional valuation methodology used to derive a valuation of an
asset or security by calculating the net present value of estimated
future cash flows of the asset or security. Net present value
refers to the discounted value of future cash flows available to
investors and is obtained by discounting those future cash flows by
an appropriate risk-adjusted discount rate that takes into account
systematic and unsystematic risk factors, the opportunity cost of
capital, expected returns and the timing of cash
flows.
The
discounted cash flow methodology requires the following steps: (i)
the determination of cash flow forecasts, the Representative Level
Projections, and (ii) the selection of a range of comparative
investment risk-adjusted discount rates to apply against the
Representative Level Projections. Using the Representative Level
Projections, the unlevered free cash flows were calculated by
taking earnings before interest, tax expense, depreciation and
amortization, EBITDA, and subtracting capital expenditures, taxes
and working capital requirements for each year of the projection
period. Following the discrete forecast period, the residual value
of the company, or "terminal value," was estimated by applying the
Gordon Growth Model using a terminal growth rate. The Gordon Growth
Model is used to estimate the present value of cash flows into
perpetuity based on terminal cash flows, long-term expected growth,
and the weighted average cost of capital. In applying this method
to each entity (Fusion, BCHI, and New Fusion) factors specific to
each entity were considered when estimating the discount rate and
long-term growth rate to be applied. The selected discount rates
and long-term growth rates applied were as follows:
Entity
|
Discount Rate
Range
|
Long-Term Growth
Rate Range
|
Fusion
Telecommunications
|
9.50% -
10.50%
|
2.50% -
3.50%
|
BCHI
|
11.00%
- 12.00%
|
1.50% -
2.50%
|
New
Fusion
|
11.00%
- 12.00%
|
2.00% -
3.00%
|
The
cash flows and terminal values were then discounted to present
value using the rates above to derive a range of enterprise values
using the discount cash flow approach.
Guideline Public Company Analysis
In
order to assess how the public market is valuing investments
similar to the entities involved in the merger, FTICA analyzed
certain financial ratios of companies deemed similar to Fusion,
BCHI, and New Fusion, the Guideline Public Company Method. This
approach, known as a market approach, incorporates comparative
measures of risk and growth that are applied against representative
levels of cash flow. The market approach reflects what investors
believe to be fair and reasonable rates of return for particular
investments, given the comparative risk/return profile of each
company relative to another. Using the financial ratios observed
among a portfolio of comparable companies such as
enterprise-value-to-EBITDA, or EV/EBITDA, the valuation
professional can derive an implied enterprise value for the subject
company.
FTICA
reviewed and compared specific financial and operating data as of
the date of value relating to each entity with selected companies
that FTICA, based on its research and experience, and considering
similarity in company operations, size, industry, asset quality and
geographic exposure, deemed comparable to the entity. The selected
guideline public companies were:
Fusion
Guideline Public Companies:
●
GTT Communications,
Inc.
●
Fusion
Telecommunications International, Inc.
BCHI
Guideline Public Companies.
●
Windstream
Holdings, Inc.
●
Alaska
Communications Systems Group, Inc.
●
Frontier
Communications Corporation
●
Consolidated
Communications Holdings, Inc.
New
Fusion Guideline Public Companies:
●
GTT Communications,
Inc.
●
Fusion
Telecommunications International, Inc.
●
Windstream
Holdings, Inc.
●
Alaska
Communications Systems Group, Inc.
●
Frontier
Communications Corporation
●
Consolidated
Communications Holdings, Inc.
In
applying this method to each entity (Fusion, BCHI and New Fusion)
factors specific to each entity were considered when selecting the
range of multiples to be applied. The selected market multiples
applied were as follows:
Entity
|
Financial
Ratio
|
Range of
Multiples
|
Fusion
|
EV/EBITDA
– Last 12 Months
|
11.00x
– 13.00x
|
|
EV/EBITDA
– Next Calendar Year
|
8.00x
– 10.00x
|
BCHI
|
EV/EBITDA
– Last 12 Months
|
5.50x
– 6.00x
|
|
EV/EBITDA
– Next Calendar Year
|
5.50x
– 6.00x
|
New
Fusion
|
EV/EBITDA
– Last 12 Months
|
6.00x
– 7.00x
|
|
EV/EBITDA
– Next Calendar Year
|
6.00x
– 7.00x
|
The
market multiples summarized above were applied to the appropriate
representative level financials to derive a range of enterprise
values for each entity.
Guideline Transaction Analysis
FTICA
reviewed the purchase prices and financial multiples paid in
selected other transactions that FTICA, based on its research and
experience, deemed to be similar to the subject entity based on a
review of target company’s operations, size, industry, asset
quality and geographic exposure. Due the limited availability of
quality data, this method of analysis was applied only to the
valuation of Fusion. The selected guideline transactions
were:
Close
Date
|
Buyer
|
Target
|
April
12, 2017
|
Windstream
Holdings, Inc.
|
Broadway
Networks Holdings, Inc.
|
March
31, 2015
|
CCH I,
LLC
|
Bright
House Networks, LLC
|
September
15, 2015
|
GTT
Communications, Inc.
|
One
Source Networks Inc.
|
April
19, 2014
|
Birch
Communications, Inc.
|
Cbeyond,
Inc.
|
December
12, 2013
|
InterCloud
Systems, Inc.
|
Integrations
Partners – NY Corp.
|
September
27, 2013
|
WideOpenWest
Networks, LLC
|
Bluemile,
Inc.
|
January
18, 2013
|
Intermedia.net,
Inc.
|
Telanetix,
Inc.
|
Based
on its analysis of the transactions above, FTICA applied a range of
11.00x – 13.00x the trailing twelve month EBITDA of Fusion to
derive a range of enterprise values for the entity.
Common Share Estimation
Using
the range of enterprise values specific to each entity, FTICA then
calculated a range of implied prices per share of each entity by
adding the present value of any synergies estimated by Fusion
management, then subtracting the estimated net debt as of August
26, 2017 to determine a range of equity values, and dividing such
amounts by the fully diluted number of common shares, as provided
by management. The following summarizes the result of these
calculations for each of the three entities involved in the
merger.
|
Implied
Price Per Share
|
Fusion
|
$1.32 -
$2.29
|
BCHI
|
$5.05 -
$6.14
|
New
Fusion
|
$3.20 -
$4.38
|
General
FTICA,
its subsidiaries and its affiliates, engage in a wide range of
businesses from investment banking, asset management and other
financial and non-financial advisory services. In the ordinary
course of its business, it and its affiliates may actively advise
its customers with respect to trades or other transactions in
equity, debt and/or other securities (and any derivatives thereof)
and financial instruments (including loans and other obligations)
of the Company and BCHI and certain of its affiliates for the
accounts of its customers.
FTICA is acting as a financial advisor to the Company in
connection with the proposed transaction. The Company paid FTICA a
fee in the amount of $200,000 for its services in connection with
the rendering of its fairness opinion, a portion of which was
payable upon rendering the opinion. In addition, the Company has
agreed to pay FTICA approximately $200,000 for other advisory
services rendered in connection with the proposed transaction, a
substantial portion of which will be conditioned upon the closing
of the Merger. The Company has agreed to reimburse FTICA’s
expenses and indemnify it for certain liabilities that may arise
out of its engagements. FTICA is a wholly-owned subsidiary of FTI
Consulting, Inc. (“FTI”). Neither FTICA nor FTI have
performed any services to the Company or its affiliates during the
past two years. FTI has provided various services to BCHI and its
affiliates in the past, and expects to perform such services to the
Company in the future, and have received, and expect to receive,
customary fees for such services. Specifically, in the past two
years FTI has performed business and operational advisory services
for BCHI. Neither FTI nor FTICA has provided any services to BCHI
in connection with the Merger or the transactions contemplated by
the Merger Agreement.
Management Projections
Fusion
does not, as a matter of course, publicly disclose long-term
projections or internal projections of its future financial
performance, financial condition or other results due to, among
other reasons, the uncertainty of underlying assumptions and
estimates. In connection with Fusion’s evaluation of a
proposed transaction, however, Fusion’s management prepared
certain non-public, unaudited, stand-alone financial projections
(referred to as the Management
Projections). The Management Projections were provide to the
Board in connection with its review of the proposed transaction
with Birch, and also were provided to FTICA, for purposes of
performing its financial analysis summarized under “
-- Opinion of FTI Capital Advisors,
LLC” beginning on page 51 of this proxy statement. The
Management Projections represent forecasted financial information
and a summary of the management projections is included
below. The inclusion of this information should not be
regarded as an indication that Fusion or its financial advisor or
any of their representatives considered, or now considers, the
Management Projections to be necessarily predictive of future
results.
Management used the
following key projections in preparing the Management
Projections:
●
an average
year-over-year revenue growth rate of approximately 4% to
5%;
●
revenue growth
driven primarily by the Business Services
segment;
●
an average monthly
churn rate of 1.0% to 1.2%, consistent with historical
averages;
●
gross profit
growing from approximately 56.0% to 59% by 2021 in the Business
Services segment;
●
selling, general
and administrative expense as a percentage of revenue decreasing
from 37% to 33% by 2021;
●
capital
expenditure's as a percentage of revenue remaining constant at 4%;
and
●
no additional
acquisitions.
The
following table summarizes the Management Projections as described
above:
|
|
|
|
|
|
Revenues
|
$ 149,789,301
|
$ 157,467,529
|
$ 165,091,739
|
$ 171,899,131
|
$ 178,725,376
|
Cost of
revenues
|
82,023,613
|
84,925,304
|
88,204,328
|
90,942,123
|
93,568,711
|
Gross
profit
|
67,765,688
|
72,542,225
|
76,887,410
|
80,957,008
|
85,156,665
|
|
|
|
|
|
|
Depreciation and
amortization
|
14,966,854
|
14,671,038
|
14,187,614
|
13,732,411
|
13,303,782
|
Selling, general
and administrative expenses
|
55,211,659
|
54,695,881
|
56,789,335
|
57,658,695
|
58,790,969
|
Total
operating expenses
|
70,178,514
|
69,366,919
|
70,976,949
|
71,391,106
|
72,094,751
|
Operating
income (loss)
|
(2,412,826)
|
3,175,306
|
5,910,461
|
9,565,902
|
13,061,914
|
|
|
|
|
|
|
Interest expense
and other
|
(8,569,484)
|
(8,826,251)
|
(8,752,235)
|
(8,678,219)
|
(8,604,203)
|
Income
(loss) before income taxes
|
(10,982,310)
|
(5,650,945)
|
(2,841,774)
|
887,683
|
4,457,711
|
Benefit
(provision) for income taxes
|
(30,911)
|
-
|
-
|
-
|
-
|
Net
income (loss)
|
(11,013,221)
|
(5,650,945)
|
(2,841,774)
|
887,683
|
4,457,711
|
|
|
|
|
|
|
Net
income (loss)
|
(11,013,221)
|
(5,650,945)
|
(2,841,774)
|
887,683
|
4,457,711
|
Interest expense
and other financing costs
|
8,696,936
|
8,826,251
|
8,752,235
|
8,678,219
|
8,604,203
|
Depreciation and
amortization
|
14,966,854
|
14,671,038
|
14,187,614
|
13,732,411
|
13,303,782
|
(Benefit)
provision for income taxes
|
30,911
|
-
|
-
|
-
|
-
|
EBITDA
|
12,681,480
|
17,846,344
|
20,098,075
|
23,298,313
|
26,365,696
|
Acquisition
transaction expenses and other
|
1,513,958
|
-
|
-
|
-
|
-
|
Stock-based
compensation expense
|
1,042,892
|
840,000
|
840,000
|
840,000
|
840,000
|
|
$ 15,238,330
|
$ 18,686,344
|
$ 20,938,075
|
$ 24,138,313
|
$ 27,205,696
|
The
Management Projections were not prepared with a view to public
disclosure and are included in this proxy statement only because
such information was made available as described above. The
Management Projections were not prepared with a view to compliance
with generally accepted accounting principles as applied in the
United States (referred to as GAAP), the published guidelines of the
SEC regarding projections and forward-looking statement or the
guidelines established by the American Institute of Certified
Public Accountants for preparation and presentation of prospective
financial information. Furthermore, EisnerAmper LLP, our
independent auditor, has not examined, reviewed, compiled or
otherwise applied procedures to, the Management Projections and,
accordingly, assumes no responsibility for, and expresses no
opinion on, the Management Projections. The Management Projections
included in this proxy statement have been prepared by, and are the
responsibility of, Fusion’s management. The Management
Projections were prepared solely for internal use of Fusion and its
advisors and are subjective in many respects.
Although a summary
of the Management Projections is presented with numerical
specificity, they reflect numerous variables, assumptions and
estimates as to future events made by Fusion’s management
that the Company’s management believed were reasonable at the
time the Management Projections were prepared, taking into account
the relevant information available to management at the time.
However, this information is not fact and should not be relied upon
as being necessarily indicative of actual future results. Important
factors that may affect actual results and cause the Management
Projections not to be achieved include general economic conditions,
results or financial condition, industry performance, accuracy of
certain accounting assumptions, changes in actual and projected
cash flows, competitive pressures, current expansion efforts
adversely affecting our business and results, ability to
successfully integrate acquisitions, pricing pressures from our
customers adversely affecting Fusion’s profitability,
technological changes and competition adversely affecting our
sales, profitability or financial condition, any disruption in our
internal systems, costs or adverse effects on Fusions business,
changes in government regulation or other policies adversely
affecting our revenue and profitability, work stoppages or other
labor issues at our facilities or those of our customers or vendors
adversely affecting our business, results or financial condition,
and changes in tax laws. In addition, the Management Projections do
not take into account any circumstances or events occurring after
the date that they were prepared and do not give effect to the
Merger. As a result, there can be no assurance that the Management
Projections will be realized, and actual results may be materially
better or worse than those contained in the Management Projections.
Since the Management Projections cover multiple years, that
information by its nature becomes less predictive with each
successive year. The inclusion of this information should not be
regarded as an indication that the Board, the Company, FTICA or any
other recipient of this information considered, or now considers,
the Management Projections, to be material information of Fusion or
that actual future results will necessarily reflect the Management
Projections, and the Management Projections should not
be relied upon as such. The summary of the Management Projections
is not included in this proxy statement in order to induce any
stockholder to vote in favor of the Merger proposal or any of the
other proposals to be voted on at the Annual Meeting.
The
Management Projections should be evaluated, if at all, in
conjunction with the historical financial statements, risk factors
and other information regarding Fusion contained in its public
filings with the SEC. See “Where You Can Find More
Information” beginning on page 117 of
this proxy statement.
The
Management Projections are forward-looking statements. For
information on factors that may cause Fusion’s future results
to materially vary, see “Forward-Looking Statements” beginning on page 37
of this proxy statement.
Except
to the extent required by federal securities laws, Fusion does not
intend, and expressly disclaims responsibility, to update or
otherwise revise the Management Projections to reflect
circumstances existing after the date when management of Fusion
prepared the Management Projections or to reflect the occurrence of
future events or changes in general economic or industry
conditions. By including in this proxy statement a
summary of certain financial projections, neither the Company nor
any of its representatives or advisors (including FTICA) makes any
representation to any person regarding the ultimate performance of
post-Merger Fusion compared to the information
contained in such financial projections and should not be read to
do so.
In
light of the foregoing factors and the uncertainties inherent in
the Management Projections, Fusion Stockholders are cautioned not
to unduly rely on these Management Projections.
Certain
if the measures included in the Management Projections may be
considered non-GAAP financial measures. Non-GAAP financial measures
should not be considered in isolation from, or as a substitute for,
financial information presented in compliance with GAAP, and
non-GAAP financial measures as used by Fusion may not be comparable
to similarly titled amounts used by other companies.
Financing of the Merger
Fusion
is seeking approximately $620 million of new financing, the
proceeds of which will be used (i) to repay approximately $458
million borrowed by BCHI under existing secured credit facilities,
(ii) to repay approximately $97.0 million owed by Fusion under its
existing secured credit facilities, (iii) to pay approximately
$40.0 million of transaction fees and expenses, and (iv) to repay
approximately $5.1 million owed by BCHI under the subordinated
notes of BCHI, dated October 28, 2016, in favor of Holcombe T.
Green, Jr., R. Kirby Godsey and the Holcombe T. Green Jr. 2013
Five-Year Annuity Trust and approximately $1.0 million owed by the
Company under the subordinated note of the Company, dated November
14, 2016, in favor of Marvin S. Rosen. In addition, the Company
expects to use the remaining $25.0 million to fund future working
capital and general corporate requirements. The funding of the
financing in the total amount specified above is a condition to the
obligations of Fusion and BCHI to consummate the Merger. For more
information see, “The
Merger Agreement - Conditions to the Merger” beginning on
page 76 of this proxy
statement.
Fusion
and BCHI have been in active discussions with a number of financial
institutions concerning the financing required to complete the
Fusion Merger and are seeking to obtain
commitments covering the total amount of the required financing
within the next forty five days but cannot provide any assurance
that such commitments will be secured or, if such commitments are
provided, that they will be on terms acceptable to the
Company.
Should
acceptable commitments be obtained, the obligations of the
financing parties to provide the required debt financing will be
subject to a number of conditions, including the execution of
definitive financing documentation, legal due
diligence, the accuracy of specified representations and
warranties, payment of applicable fees, costs and expenses and
delivery of customary closing documents.
Accounting for the Merger
The
acquiring entity for accounting purposes is often the entity with a
controlling financial interest after the combination takes place
(i.e. the entity whose owners as a group retain the largest portion
of the voting rights of the combined entity). If the accounting
acquirer is the legal acquiree the accounting transaction is
referred to as a “reverse acquisition.” In such a case,
the acquiring entity is the entity whose equity shares were
purchased, not the entity whose equity shares were issued. The
Merger will be accounted for as a “reverse acquisition”
whereby Fusion is considered the legal acquirer but BCHI is considered the “accounting
acquirer.” As a result:
●
the
post-Merger financial statements will be issued under the name of
the legal acquirer (Fusion) but will be presented as a continuation
of the financial statements of the accounting acquirer
(BCHI);
●
the
post-Merger comparative historical financial information will be
the historical information of the accounting acquirer (BCHI), even
though the data will be presented so that it appears to be that of
the legal acquirer (Fusion); and
●
the
historical stockholders’ equity of the accounting acquirer
(BCHI) prior to the Merger will be retroactively adjusted to
reflect the legal capital of the legal acquirer
(Fusion).
Effects on Fusion if the Merger is not Consummated
If the proposal to adopt the Merger Agreement is
not approved by the Fusion Stockholders, or if the Merger is not
consummated for any other reason, BCHI will not be assimilated into
the business of Fusion and Fusion will continue to operate as it
did prior to entering into the Merger Agreement. In addition, those
director nominees elected by Fusion Stockholders pursuant to
Proposal No. 6 will continue to serve as directors until the
2018 Annual Meeting of Stockholders and until such time as their
respective successors are elected and qualified or their earlier
resignation, death, or removal from office. Moreover, if the Merger is not consummated, the
Company will not file the Certificate of Amendment contemplated by
Proposal No. 2, and it will not file the Restated Charter
contemplated by Proposal No. 3, but it will file an amendment to
its existing charter solely to effectuate the name change
contemplated by the draft Restated Charter. Fusion will also incur
the costs and expenses of the Merger and this proxy solicitation
whether or not the Merger is consummated.
Interests of Fusion’s Officers and Directors in the
Merger
In
considering the recommendation of the Board with respect to the
proposal to adopt the Merger Agreement and associated matters,
Fusion Stockholders should be aware that, aside from their
interests as Fusion Stockholders, Fusion’s directors and
certain executive officers have interests in the Merger that are
different from, or in addition to, those of Fusion Stockholders
generally. These interests may create potential conflicts of
interests.
The
Board was aware of these potential conflicts of interest and
considered them, among other matters, in reaching its decision to
approve the Merger Agreement and to recommend that Fusion
Stockholders vote in favor of adopting the Merger
Agreement.
Employment Arrangements with Named Executive Officers
The
Company entered into an employment agreement with Matthew D. Rosen,
its Chief Executive Officer in November 2015. The term of Mr.
Rosen's employment agreement with the Company will expire on
October 31, 2018. The Company and Mr. Rosen intend to negotiate and
enter into a new employment agreement to take effect upon
expiration of such existing contract, or sooner. Pursuant to
this agreement, Fusion is obligated to pay specific amounts to Mr.
Rosen upon (1) a termination of his employment by Fusion without
“cause” (as defined in his employment agreement),
or (2) a termination of his employment by Mr. Rosen
for “good reason” (as defined in his employment
agreement), including a termination by Mr. Rosen for
any reason within six months following a change in control
(as defined in his employment agreement) of the
Company. In the case of any such termination, he is entitled to
receive unpaid base salary accrued through the effective date of
his termination plus any pro-rata bonus that would be payable had
he completed the full year of employment and a lump sum payment
(within 30 days of the effective date of such
termination) equal to 200% of his base salary then in effect
and 200% of his highest annual bonus for the three years
preceding his termination. In addition, upon any such
termination of employment, all stock options held by Mr. Rosen
would vest in full. The Merger will constitute a change in control
of Fusion for purposes of Mr. Rosen’s employment agreement.
Mr. Rosen’s employment agreement also provides that Fusion
will cooperate in good faith to afford Mr. Rosen the right to
exercise his stock options in full immediately prior to the change
in control. The Merger will constitute a change in control of
Fusion for purposes of Mr Rosen's employment
agreement.
In addition, Mr. Rosen’s employment
agreement provides that in the event of a sale of Fusion or
substantially all of the assets of the Company and its subsidiaries
for cash or securities or a combination thereof, Mr. Rosen is entitled to a one-time bonus equal to
the following: (i) if Fusion stockholders receive aggregate
consideration of up to $149,999,999, Mr. Rosen is entitled to
receive a special bonus equal to 2.5% of such consideration
paid/distributed to the Fusion stockholders; (ii) 3.5% if such
consideration is between $150 million and $249,999,999; (iii) 4.5%
if such consideration is between $250 million and $349,999,999; and
(iv) 5% if such consideration exceeds
$350 million. The Compensation
Committee, with advice of counsel, has determined that the Merger
does not trigger a payment obligation under this
provision of Mr. Rosen's
employment agreement.
That fact
notwithstanding, and considering the structure of the Birch
transaction which was not contemplated by Mr. Rosen’s
employment agreement, the Compensation Committee has determined
that a special one-time transaction bonus is warranted and it
intends to retain the services of an outside compensation
consultant to determine the appropriate bonus amount. Such
bonus would be subject to the approval of the Board and BCHI and is
contingent upon the closing of the Merger.
Mr. Rosen’s employment agreement also
provides that the Board will, within ninety (90) days following
execution of the employment agreement, develop a plan
that
enables Mr. Rosen
to
obtain a five percent (5%) equity
stake in the Company within three years from the date of his
employment agreement. On November 13, 2017, the Board granted Mr.
Rosen options to purchase 822,298 shares of Fusion Common Stock in
satisfaction of this obligation, two thirds of
these options vest on the date of grant and one-third will vest on
February 3, 2018. The exercise price of these options, which is
$2.51, was set at the closing price of Fusion’s Common Stock
on November 10, 2017 (the last trading day before the grant was
approved by the Board).
Michael
R. Bauer serves as the Company’s Chief Financial Officer. Mr.
Bauer does not currently have a formal employment agreement with
the Company. However, under the terms of his offer letter, in the
event that Mr. Bauer’s employment is terminated (1) within
six months following a change in control, except for
“Cause” (as defined in his offer letter), (ii) by the
Company “Without Cause” (as defined in his offer
letter) or, (iii) due to a resignation by Mr. Bauer for “Good
Reason” (as defined in his offer letter), then the Company is
obligated to pay severance to him in an amount equal to his base
salary and the cost of health benefit continuation for six months
(in a lump sum or installments, at the election of Fusion). In
connection with his appointment as Chief Financial Officer, in 2016
Mr. Bauer received a grant of 55,000 restricted shares of Fusion
Common Stock, which shares vest ratably over a three year period
and which shares (along with any stock options held by Mr. Bauer)
will immediately vest if the Merger is completed. See “-
Golden Parachute
Compensation” elsewhere in this section.
Repayment of Chairman's Note
At the
Effective Time, the Company intends to repay, in full, the
outstanding balance of approximately $930,000, plus accrued and
unpaid interest, under that certain promissory note dated November
14, 2016 issued to Marvin S. Rosen, the Chairman of the Board
and Director of Fusion.
Acceleration of Certain Stock Options
Directors,
executive officers and all other Fusion employees that have been
granted stock options under Fusion 1999 and 2009 stock option plans
are entitled to exercise such stock options for a period of sixty
(60) days following the occurrence of a “trigger event”
(as defined in each such plan). The Merger constitutes a
“trigger event” under these plans.
The following table sets forth, for each of
Fusion’s directors and executive officers holding stock
options as of [●], 2017, the aggregate number of
shares of Fusion Common Stock subject to outstanding and
unexercised (whether vested or unvested) stock options. The value
of the vested and unvested stock options has been calculated on a
pre-tax basis by multiplying (1) the positive difference between
the current per share price of Fusion’s common stock
and the exercise price of each stock
option, if any, and (2) the number of shares of Fusion Common Stock
subject to the stock option:
|
|
Unvested Options
(#)
Value
|
|
Name:
|
|
|
|
Non-Employee
Directors:
|
|
|
|
William
Rubin
|
16,150
|
0
|
[●]
|
Marvin S.
Rosen
|
16,500
|
0
|
[●]
|
Larry
Blum
|
16,150
|
0
|
[●]
|
Michael J. Del
Giudice
|
16,500
|
0
|
[●]
|
Jack
Rosen
|
16,150
|
0
|
[●]
|
Paul C.
O’Brien
|
16,500
|
0
|
[●]
|
Executive
Officers:
|
|
|
|
Matthew D.
Rosen
|
895,776
|
469,358
|
[●]
|
Gordon Hutchins,
Jr.
|
130,142
|
46,200
|
[●]
|
Jonathan
Kaufman
|
65,494
|
13,200
|
[●]
|
Russell P.
Markman
|
82,394
|
36,850
|
[●]
|
Jan
Sarro
|
84,802
|
30,000
|
[●]
|
James P. Prenetta,
Jr.
|
26,000
|
45,000
|
[●]
|
Michael R.
Bauer
|
55,000
|
0
|
[●]
|
Lisa
Taranto
|
24,500
|
25,000
|
[●]
|
Philip D.
Turits
|
78,600
|
42,900
|
[●]
|
__________
(1)
All options granted
under the 1999 and 2009 Stock Option Plans vest for a period of
sixty days following a change in control of the Company. For
purposes of this chart all options issued under those plans are
deemed vested. Options granted under the 2016 Equity
Incentive Plan do not currently vest upon a change in control of
Fusion.
Appointment
as a Director of post-Merger Fusion
The following existing directors of the Board
will be nominated and appointed as Directors of the post-Merger
Board: [●], [●] and
[●].
Conversion of Series A Preferred and Series B-2
Preferred
Prior to the
closing of the Merger, each of Marvin S. Rosen, Philip D. Turits,
Michael J. Del Giudice, Jack Rosen, Matthew D. Rosen and Paul C.
O’Brien, will convert all of their shares of Series A-1
Preferred Stock, Series A-2 Preferred Stock and Series A-4
Preferred Stock, including all accrued and unpaid dividends
thereon, into shares of Fusion Common Stock and each of such
directors and William Rubin and Larry Blum, will convert their
shares of Series B-2 Preferred Stock into shares of Fusion Common
Stock.
Named Executive Officers Golden Parachute Compensation
The table below provides information about certain
compensation for each of our named executive officers that is based
on or otherwise relates to the Merger. For additional details
regarding the terms of the payments and benefits described below,
see the discussion above under the caption "The Merger - Interests of Fusion's Officers and
Directors in the Merger" beginning on page 60 of this proxy
statement. The amounts in the table were calculated using
outstanding option and restricted share holdings as of
[●], 2017 and a per share
price of the Fusion Common Stock of $[●], and assumes that the Merger closed on
[●], 2017. The compensation
summarized in the table and footnotes below is subject to a
non-binding advisory vote of the Fusion Stockholders as described
below in Proposal No. 5 beginning on page 94 of this
proxy statement.
The
amounts in the following table are estimates based on multiple
assumptions that may not actually occur, including assumptions
described elsewhere in this proxy statement, and do not include
amounts that were otherwise vested as of [●], 2017 (the latest
practicable date prior to the filing of this proxy statement). In
addition, certain amounts will vary depending on the actual closing
date of the Merger, which is presently expected to occur in the
first quarter of 2018. For purposes of the following chart, we have
assumed that each named executive officer’s employment is
terminated on [●], 2017 by Fusion without
cause (as that term is defined in the employment agreement between
Fusion and Matthew D. Rosen and in the offer letter Fusion issued
to Mr. Bauer) As a result, the actual amounts, if any, to be
received by a named executive officer may differ in material
respects from the amounts set forth below.
Golden Parachute Compensation
Name
|
|
|
|
|
|
|
Matthew D.
Rosen
|
$1,550,000.00
|
$[●]
|
$0.00
|
$0.00
|
$0.00
|
$[●]
|
Gordon Hutchins,
Jr.
|
$0.00
|
$[●]
|
$0.00
|
$0.00
|
$0.00
|
$[●]
|
Michael R.
Bauer
|
$185,000.00
|
$[●]
|
$0.00
|
$0.00
|
$0.00
|
$[●]
|
___________________
(1)
The
amounts in this column represent "double trigger" cash severance
payments that each named executive officer would be entitled to
receive if the named executive officer were terminated by Fusion
without cause or by the named executive officer for good reason on
[●], 2017. For Mr. Rosen, the amount consists of a lump sum
severance payment equal to $1,550,000
and a pro-rated
bonus payment equal to
$[●].
For Mr. Bauer, the amount consists of severance equal to $125,000
plus an amount of $60,000 representing the cost of health benefits
continuation for six months. These payments are payable in the
event of a termination by Fusion without cause or by the named
executive officer for good reason.
(2)
The
amounts in this column represent the value of stock options/shares
of restricted Fusion Common Stock that vest as a result of the
Merger on a "single trigger" basis, as further described above. For
Messrs. Rosen and Hutchins, the entire amount reported is
attributable to stock options. For Mr. Bauer, $[●] is
attributable to stock options and $[●] is attributable to
restricted shares.
(3)
The
amounts in this column represent continued participation in the
welfare benefits plans during the termination period.
Transaction Completion
Bonus
On November 13, 2017, the Board adopted a special
transaction bonus plan for certain members of Fusion’s senior
management team and non-executive directors. This plan, which was
developed and unanimously recommended by the Compensation
Committee, provides for a special one-time cash bonus payment to
the 27 designated management participants (excluding Matthew
Rosen, Fusion's Chief Executive Officer) and the 6 non-executive director participants
solely in the event the Merger is completed. The amounts payable
under this plan range from $7,500 to $137,500 for management
participants and provides for a payment of $40,000 to each
non-executive director. The total amount payable under
this plan is $1,289,000, $240,000 of
which will be payable to the non-executive directors and $1,049,000
of which will be payable to the designated management
participants.
The bonus amount established for each management
participant was determined on the basis of that participant’s
position at Fusion and his/her involvement with the BCHI
acquisition transaction. The Company’s Chief Executive
Officer is not a participant in this bonus plan. The Board elected
to include the non-executive directors in this plan as a means to
recognize their dedicated services to Fusion in the past, the
strategic guidance provided by these directors in connection with
the BCHI transaction, and in recognition that their services have
been provided without cash compensation. The Compensation
Committee has determined that a special one-time transaction bonus
payment to Matthew Rosen, Fusion's Chief Executive Officer, is also
warranted and intends to retain the services of an outside
compensation consultant to determine the appropriate bonus
amount. Such bonus
would be subject to the approval of the Board and BCHI and is
contingent upon the closing of the Merger. For a review of
the stock options granted to member of the Board in 2016, see
“Certain Relationships, Related
Transactions and Director Independence - 2016 Director
Compensation” beginning
on page 109
of this proxy
statement.”
New Management Arrangements
As
of the date of this proxy statement, other than the
understanding between the parties that Matthew D. Rosen will serve
as the Chief Executive Officer of post-Merger Fusion and that the
Company and Mr. Rosen intend to negotiate and enter into a new
employment agreement to take effect upon expiration of such
existing contract, or sooner, none of Fusion’s nor
BCHI’s executive officers have entered into any agreement,
arrangement or understanding with Fusion or with BCHI or their
respective affiliates specifically regarding the terms of
employment with, or the right to participate in the equity of,
Fusion on a going-forward basis following the completion of the
Merger.
Fusion
has indicated that it or its affiliates may pursue agreements,
arrangements or understandings with certain executive officers,
which may include cash-based and equity-based compensation and
other forms of compensation. Prior to the Effective Time of the
Merger, Fusion may initiate negotiations with Fusion’s and
BCHI’s executive officers regarding continued employment with
Fusion or one of its affiliates, and may enter into with certain of
such executive officers definitive agreements regarding employment
with Fusion on a going-forward basis following the completion of
the Merger.
Indemnification and Insurance
Under the Merger Agreement, Fusion’s
directors and executive officers will be entitled to certain
ongoing indemnification and advancement of expenses after the
Merger under a continuation of the indemnification and advancement
of expense provisions in Fusion’s charter and by-laws
for a period of six years after the Effective Time of
the Merger and, subject to certain limitations, Fusion has also
agreed to maintain directors’ and officers’ liability
insurance policies from the Surviving Company for a period of six
years after the Effective Time. For more information regarding such
indemnification and insurance coverage, see the section entitled
“The
Merger Agreement—Indemnification of Officers and
Directors” beginning on
page 75 of this proxy statement.
Support Agreement
In
connection with the execution of the Merger Agreement, on August
26, 2017, all of the directors (solely in their capacity as
stockholders of the Company) entered into the Support Agreement
with BCHI. Pursuant to the Support Agreement, each such person,
among other matters, agreed to vote in favor of the adoption of the
Merger Agreement and against any alternative acquisition
proposals.
Regulatory Matters
Federal Communications Commission
In order to obtain required FCC approvals, Fusion
and BCHI must file applications with, and seek approval from, the
FCC for the transfer of control of FCC licenses and authorizations
held by Fusion and its subsidiaries. These applications are
required as the transactions contemplated by the Merger Agreement
constitute a change in control of Fusion as Holcombe
T. Green. Jr., as a controlling stockholder of
BCHI Holdings, will acquire, indirectly through his
control of BCHI Holdings, more than fifty percent of the Fusion
Common Stock at the
Effective Time. On October 31, 2017, Fusion and BCHI jointly filed
such applications seeking the requisite FCC approvals. A condition
to the obligation of Fusion and BCHI to complete the Merger is a
requirement that the requisite FCC consents be granted and any
conditions thereto be satisfied. Fusion
will also make any filings required to complete the Carrier
Spin-off and BCHI will make all other filings with the FCC that may
be necessary to complete the Consumer Spin-off.
Public Service Commissions
In
order to receive approvals from the Approval States in connection
with the Merger, which Fusion and BCHI currently expect to include
California, Colorado, Georgia, Hawaii, Indiana, Louisiana,
Maryland, Minnesota, Mississippi, Nebraska, New Jersey, New York,
Ohio, Pennsylvania, Tennessee, Texas, Virginia and West Virginia,
any Fusion subsidiary that holds intrastate telecommunications
authority, each a Fusion Licensee, in one or more Approval States
is required to file applications with the PSCs in such states. In
many instances, Fusion and BCHI will have to join in the
application. Further, it is possible that each BCHI subsidiary that
holds intrastate telecommunications authority, each a Birch
Licensee, in one or more Approval States will have to file as well.
These applications will request approval of the transfer of
ultimate indirect control of the Fusion Licensee(s) to BCHI
Holdings and its majority stockholder, Holcombe T. Green, Jr. In
certain states, these applications also may include a request for
the PSC’s consent to the reorganization of the Birch
Licensee(s) in connection with the Merger and/or the transfer to
the Fusion stockholders of a minority interest in certain Birch
Licensee(s).
In
order to comply with any Merger-related regulatory requirements in
the remaining states where a Fusion Licensee and/or a Birch
Licensee holds authority, the Notification States, the Fusion
Licensee(s), together with Fusion and BCHI (and possibly with any
Birch Licensee authorized in any of these states), must file notice
of the Merger with the respective PSCs. These filings serve to
notify the PSCs regarding the transfer of ultimate indirect control
of the Fusion Licensee(s) to BCHI Holdings and its majority
stockholder, Holcombe T. Green, Jr. In certain Notification States,
these notices also may address the reorganization of the Birch
Licensee(s) in connection with the Merger and/or the transfer to
the Fusion stockholders of a minority interest in certain Birch
Licensee(s).
In
order to comply with the financing approval or notice requirements
of the PSCs in states that require such approval or notice with
respect to the debt financing proposed in connection with the
Merger, the Financing Filing States, which Fusion and BCHI
currently expect to include Arizona, Colorado, Delaware, Georgia,
Hawaii, Indiana, Maryland, Nebraska, New Jersey, New Mexico, New
York, Pennsylvania, Rhode Island and Tennessee, each Fusion
Licensee and each Birch Licensee that will participate in the
financing and is authorized in the Financing Filing States,
together with Fusion and possibly BCHI, must submit a notice or
application for approval, as applicable, to the relevant PSC.
Consistent with state law and insofar as practicable, these notices
and applications may be combined with the Merger-related filings
discussed in the preceding paragraphs.
A
condition to the obligation of Fusion and BCHI to complete the
Merger is that any PSC consents required in connection with the
Merger be granted and any conditions thereof be satisfied and that
such PSC consents be in effect. In addition, with the participation
of Fusion and/or the Fusion Licensee(s) where necessary or
appropriate, and subject to Fusion’s agreement as to
strategy, the parties will make all approval or notification
filings with the PSCs that are necessary to complete the Consumer
Spin-off unless and insofar as jointly waived by the
parties.
Prior
to the date of this proxy statement, Fusion, the Fusion Licensees,
BCHI, and the Birch Licensees (insofar as their participation is
required) filed all required notices or applications for approval
with the PSCs in connection with the Merger transaction, including
the related financing.
Antitrust Authorities
As a condition to the Merger, the HSR Act requires
Fusion and BCHI
to comply with the HSR Act’s
notification and waiting period. The HSR Act provides for an
initial 30-calendar-day waiting period following the necessary
filings by the parties to the Merger, which was completed on
October 31, 2017 by filing of a notification and report form with
the Antitrust Division of the United States Department of
Justice and the United States Federal Trade Commission. The FTC granted early termination of the waiting
period on November 15, 2017.
State Takeover Laws
Section 203 of the DGCL generally restricts an
“interested stockholder” (including a person who owns
or has the right to acquire 15% or more of the corporation’s
voting stock) from engaging in a “business combination”
(defined to include mergers and certain other actions) with certain
Delaware corporations for a period of three years following the
time such person became an interested stockholder without the vote
of 66-2/3% of the stock not held by the interested stockholder.
These restrictions will not apply to the Merger because
neither BCHI nor any BCHI
shareholder owned 15% or more of Fusion’s outstanding Voting
Shares prior to entering into the Merger
Agreement.
A
number of other states have adopted takeover laws and regulations
that purport, to varying degrees, to be applicable to attempts to
acquire securities of a corporation that are incorporated in those
states or that have substantial assets, stockholders, principal
executive offices or principal places of businesses in that state.
To the extent that certain provisions of certain of these state
takeover statues purport to apply to the Merger, Fusion believes
that there are reasonable bases for contesting such
laws.
Commitment to Obtain Approvals
Fusion and BCHI have agreed to use reasonable best efforts to
file all notices and obtain all consents and approvals of any
governmental entity or third party required in connection with the
Merger. Any regulators could object to the Merger and/or impose
conditions or restrictions on their approvals that are materially
adverse to Fusion and BCHI. In
no event will Fusion, BCHI or any of their affiliates be required
to (i) to divest or hold separate any assets or agree to
limit its future activities, method or place of doing business,
including any assets acquired by the Company, BCHI or any of their
respective affiliates in connection with the Merger and the other transactions
contemplated by the Merger Agreement, (ii) to commence any
litigation against any person in order to facilitate the
consummation of the Merger and
the other transactions contemplated by the Merger Agreement, or
(iii) to defend against any litigation filed with or brought by any
governmental entity seeking to prevent the consummation of, or
impose limitations on, any of the transactions contemplated by the
Merger Agreement.
Receipt of Regulatory Approvals
Fusion
currently anticipates that all regulatory approvals will be
received by mid- to late-January 2018, although the receipt of
approvals and their timing cannot be assured or predicted at this
time.
Material U.S. Federal Income Tax Consequences
The
Merger will not result in any taxable gain or loss for U.S. federal
income tax purposes to Fusion, BCHI or any Fusion Stockholder in his or
her capacity as a Fusion Stockholder. Any Fusion Stockholder who is
also a stockholder of BCHI
should consult its own tax advisor as to the tax consequences of
participating in the Merger.
As a
result of the Merger, Fusion may be subject to limitations on the
utilization of certain tax attributes. In particular, as a result
of the Merger, there will be an “ownership change”
within the meaning of Section 382 of the Code, which generally will
limit Fusion’s use of its current net operating losses for
each year following the Merger to an amount equal to the product of
(i) the value of Fusion immediately prior to the Merger and (ii)
the long-term tax exempt rate (1.93% for ownership changes
occurring in February 2018).
Nasdaq Listing
The
Fusion Common Stock is currently listed on The Nasdaq Capital
Market® under the symbol "FSNN." In the Merger Agreement,
Fusion has agreed to use reasonable best efforts to obtain approval
for listing of the Merger Shares on The Nasdaq Capital
Market®. On September 22, 2017, Fusion was advised that the
Merger would constitute a “change in control” of Fusion
for purposes of Nasdaq listing rule 5110(a). As a result, prior to
completion of the Merger, Fusion will file an initial listing
application with Nasdaq seeking approval for the listing of its
Fusion Common Stock. If such application is accepted, Fusion
anticipates that the Fusion Common Stock will continue to trade on
The Nasdaq Capital Market® under the symbol
“FSNN.”
THE MERGER AGREEMENT
The following is a summary of
the material terms of the Merger Agreement. The following summary
does not purport to be complete and may not contain all of the
information about the Merger that is important to you. The
following summary is qualified in its entirety by reference to the
Merger Agreement. You should read carefully the full text of the
Merger Agreement before making any decisions regarding the Merger
as the Merger Agreement is the principal legal document governing
the Merger. A copy of the Merger Agreement is attached hereto
as
Annex A and is incorporated by
reference herein. The Merger Agreement and this summary of its
material terms have been included to provide you with information
regarding its terms. It is not intended to provide any other
factual information about Fusion, BCHI or Merger Sub. Fusion is
responsible for considering whether additional disclosure of
material information is required to make the statements in this
proxy statement not misleading. Factual disclosures about Fusion
contained in this proxy or in Fusion’s public reports filed
with the SEC may supplement, update or modify the factual
disclosures about Fusion contained in the Merger Agreement and
described in the following summary.
The representations, warranties and
covenants made in the Merger Agreement are qualified and subject to
important limitations agreed to by the parties to the Merger
Agreement in connection with negotiating the terms of the Merger
Agreement. In particular, in your review of the representations and
warranties contained in the Merger Agreement and described in the
following summary, it is important to bear in mind that the
representations and warranties were made for the benefit of the
other parties to the Merger Agreement, and were negotiated with the
principal purpose of allocating risk between the parties to the
Merger Agreement, rather than establishing matters as facts. The
representations and warranties also may be subject to a contractual
standard of materiality that may be different from that generally
relevant to stockholders or applicable to reports and documents
filed with the SEC, and in some cases are qualified by confidential
disclosures that were made by each party to the other, which
disclosures are not reflected in the Merger Agreement or otherwise
publicly disclosed. The representations and warranties in the
Merger Agreement will not survive the completion of the Merger.
Moreover, information concerning the subject matter of the
representations and warranties may have changed since the date of
the Merger Agreement. For the foregoing reasons, the
representations, warranties and covenants or any descriptions of
those provisions should not be read alone, but instead should be
read together with the information provided elsewhere in this proxy
statement and in the documents incorporated by reference into this
proxy statement. See “Where You Can Find More
Information” beginning on
page 117 of this proxy statement.
Structure of the Merger
On the terms and subject to the conditions of the
Merger Agreement, and in accordance with Delaware and Georgia law,
at the Effective Time BCHI will merge with and into Merger Sub, a
wholly-owned subsidiary of Fusion formed by Fusion to facilitate
the Merger, with Merger Sub surviving as a wholly-owned subsidiary
of Fusion (referred to as the Surviving
Company).
Effective Time; Marketing Period
The
closing of the Merger (referred to as the closing) will take place
on the later of (i) the second business day following satisfaction
or waiver of the closing conditions set forth in the Merger
Agreement (other than the conditions that by their nature are to be
satisfied at the closing, but subject to the satisfaction or waiver
of those conditions) or (ii) the earlier of (a) a date, specified
by Fusion and BCHI, during the Marketing Period (as described
below) and (b) ten business days after the final day of the
Marketing Period; except that if the closing would otherwise occur
within the ten business day period prior to the date on which
Fusion’s Quarterly Reports on Form 10-Q or its Annual Report
on Form 10-K (or any amendment to any previously filed Company
report) would be required to be filed with the SEC, the closing
will occur on the third business day after the filing by the
Company of such report. In lieu of the foregoing, the closing may
occur on such other date as may be agreed in writing by Fusion and
BCHI.
On the closing date, Fusion and BCHI will complete
the Merger by filing certificates of Merger with the Secretaries of
State of the State of Georgia and the State of Delaware, and the
Merger will become effective upon such filings or at a time agreed
to by the parties and specified in the certificates of merger (such
time is referred to as the Effective
Time). At the Effective Time,
all of the property, rights, privileges, powers and franchises of
BCHI will vest in the surviving company, and all of the liabilities
and obligations of BCHI (other than those associated with the
Consumer Spin-off) will become liabilities and obligations of the
surviving company.
The
Marketing Period is the first period of 20 consecutive days (or
such other period as agreed by Fusion, Merger Sub and BCHI)
throughout and on the last day of which (a) the financing sources
for the Merger will have received all customary financial and other
information regarding Fusion, BCHI and their respective
subsidiaries as is reasonably requested by a party to the Merger
Agreement or a financing source in connection with the financing,
including certain financial statements prepared in accordance with
GAAP, financial information necessary for the preparation of pro
forma financial statements customary for debt offerings under Rule
144A under the Securities Act, projections, audit reports, and a
draft of a customary comfort letter (including “negative
assurance comfort”) with respect to such financial
information by Fusion’s auditors, and (b) all the conditions
to closing set forth in the Merger Agreement (other than those that
by their nature will not be satisfied until the Effective Time)
have been satisfied and nothing has occurred and no condition
exists that would cause any of such conditions to not be satisfied
assuming the Effective Time was to be scheduled for any time during
such consecutive 20-day period (or such other period agreed upon by
Fusion, Merger Sub and BCHI). Notwithstanding the foregoing, the
Marketing Period will not commence and will be deemed not to have
commenced if, on or prior to the completion of such consecutive
20-day period (or such other period as may be mutually agreed upon
by Fusion, Merger Sub and BCHI), (i) Fusion will have announced any
intention to restate any financial statements or financial
information included in the required information or that any such
restatement is under consideration or may be a possibility, in
which case the Marketing Period will be deemed not to commence
unless and until such restatement has been completed and the
applicable required information has been amended or Fusion has
announced that it has concluded that no restatement will be
required, or (ii) Fusion will have failed to file any report with
the SEC when due, in which case the Marketing Period will be deemed
not to commence unless and until all such reports have been
filed.
Consideration to be Received in the Merger
At the
Effective Time, all of the shares of
common stock, par value $0.01 per share, of BCHI issued and
outstanding immediately prior to the Effective Time (other than any
shares to be cancelled pursuant to the Merger Agreement) will be
converted automatically into the right to receive, in the
aggregate, a number of fully paid and non-assessable shares of
Fusion’s Common Stock, equal to three (3) times the number of
shares of (i) Fusion Common Stock issued and outstanding
immediately prior to the Effective Time, plus (ii) the number of shares of Fusion Common Stock
issued or issuable upon the conversion of all classes or series of
Fusion preferred stock outstanding immediately prior to the
Effective Time, plus (iii) the number of shares of Fusion Common Stock
issuable upon the exercise of in-the-money warrants of Fusion (as
adjusted for stock splits and calculated using the treasury stock
method). For purposes of the Merger Agreement, in-the-money
warrants are any Fusion warrants that are (i) outstanding and
unexercised immediately prior to the Effective Time that have a per
share exercise price less than the volume weighted average daily
closing price of the Fusion Common Stock for the ten consecutive
trading days prior to the business day preceding the closing date
(as adjusted for stock splits) or (ii) issued after the date of the
Merger Agreement. The Fusion Common Stock issued as Merger
consideration will be issued in the name of BCHI
Holdings.
Also at the Effective Time, each share of BCHI
common stock issued and outstanding immediately prior to the
Effective Time that is (i) owned or held in treasury by BCHI or
(ii) owned by any direct or indirect subsidiary of BCHI (referred
to in this proxy statement as cancelled
shares), will no longer be
outstanding, will automatically be cancelled and will cease to
exist. No consideration will be delivered in exchange for any
cancelled shares.
All
shares of BCHI common stock converted into the right to receive the
Merger consideration will cease to exist as of the Effective Time
of the Merger. Each certificate that represented any shares of BCHI
common stock (other than cancelled shares) will, after the
Effective Time, represent only the right to receive the Merger
consideration into which the shares have been
converted.
At
the Effective Time, each limited liability company interest of
Merger Sub issued and outstanding immediately prior to the
Effective Time will be converted into and become limited liability
interests of the Surviving Company.
At
the Effective Time, all of the rights under each share of Fusion
preferred stock issued and outstanding immediately prior to the
Merger shall terminate and all such shares of Fusion preferred
stock shall be deemed cancelled.
Exchange and Payment Procedures
Immediately
after the Effective Time, each holder of record of BCHI common
stock entitled to receive the Merger consideration will surrender
their BCHI common stock certificates to Fusion in exchange for
shares of Fusion Common Stock. All Merger consideration issued or
paid upon surrender of such certificates will be deemed to have
been issued or paid in full satisfaction of all rights pertaining
to the shares of BCHI common stock formally represented by such
certificates. None of Fusion, BCHI, Merger Sub or the Surviving
Company will be liable to any former holder of BCHI common stock
for any amount properly delivered to a public official pursuant to
any applicable abandoned property, escheat or similar law. Each of
Fusion, BCHI, Merger Sub and the Surviving Company will be entitled
to deduct and withhold any amounts due under applicable tax laws
from the amounts that otherwise would become payable under the
terms of the Merger Agreement, and any such deducted and withheld
amounts will be paid to the appropriate taxing authorities and will
be treated as having been paid to the person from whom such amounts
were originally deducted or withheld.
Directors/Members and Officers of the Surviving Company and Other
Subsidiaries
After
the Effective Time, each subsidiary of Fusion, including the
Surviving Company, will have two directors (or, in the case of a
limited liability company, two managers) who are mutually
acceptable to BCHI and the Company and who will serve until the
earlier of their resignation or removal or until their respective
successors are duly elected and qualified. In addition, after the
Effective Time, the officers of each subsidiary of Fusion,
including the Surviving Company, will determined by mutual
agreement of BCHI and Fusion.
Board of Directors of Post-Merger Fusion
Effective at or prior to the
Effective Time, the size of the Board will be fixed at nine
directors. Four directors, at least one of whom must be an
independent director within the meaning of the Nasdaq listing
standards, will be nominated by BCHI Holdings; four directors, at
least one of whom must be an independent director within the
meaning of the Nasdaq listing standards, will be nominated by the
Fusion Committee; and one director, who must be an independent
director within the meaning of the Nasdaq listing standards, will
be nominated by BCHI Holdings with the approval of the Fusion
Committee, which may not be unreasonably withheld. Matthew D. Rosen, Fusion’s
current Chief Executive Officer, will serve as the post-Merger
Chairman of the Board, and Holcombe T. Green, Jr., a principal
stockholder of BCHI, will serve as the initial post-Merger Vice
Chairman of the Board.
Executive Officers of Fusion Following the Merger
Matthew
D. Rosen will be the Chief Executive Officer of the post-Merger
Fusion, Gordon Hutchins, Jr. will be the President and
Russell Markman will be the Chief Operating Officer.
The other executive officers of post-merger Fusion
will be determined prior to the closing of the Merger by
mutual agreement of Fusion and BCHI Holdings. As of the date
of this proxy statement, no other executive officers have been
chosen.
Representations and Warranties
The
Merger Agreement contains customary and substantially reciprocal
representations and warranties of Fusion and BCHI that are subject,
in some cases, to specified exceptions and qualifications contained
in confidential disclosure schedules and, in the case of the
representations and warranties of Fusion, are also qualified, in
some cases, by certain documents filed by Fusion before August 23,
2017, excluding risk factor disclosure or disclosures that are
predictive or forward looking in nature.
The reciprocal representations and warranties relate to, among
other things:
●
due organization,
existence, good standing and authority to carry on
businesses;
●
ownership of
subsidiaries;
●
corporate power and
authority to enter into, and consummate transactions under, the
Merger Agreement, and enforceability of the Merger
Agreement;
●
absence of
violations of, or conflicts with, governing documents, applicable
law, material permits and certain agreements;
●
required
governmental consents, approvals, registrations, notices and
filings;
●
financial
statements and absence of undisclosed liabilities;
●
absence of material
adverse effect (as described below) from January 1, 2017 to the
date of the Merger Agreement;
●
absence of legal
proceedings, investigations and governmental orders;
●
employee benefit
plans and employment and labor matters;
●
compliance with
applicable laws and governmental orders;
●
intellectual
property and data privacy;
●
title to property
and assets and absence of liens;
●
regulatory matters
and required licenses and permits;
●
interconnection
agreements;
●
accuracy of
information supplied or to be supplied for use in this proxy
statement;
●
absence of
undisclosed affiliate transactions;
●
brokers’ fees
payable in connection with the transactions contemplated by the
Merger Agreement;
●
identity of
officers, directors, partners and managers of company and its
subsidiaries; and
●
no other
representations or warranties.
Fusion made additional representations and warranties to BCHI
relating to:
●
its SEC filings
(including all amendments thereto) since June 30, 2014 and its
internal controls over financial reporting and its disclosure
controls and procedures;
●
recommendation
of the Board;
●
opinion
of its financial advisor; and
BCHI made an additional representation and warranty to Fusion
relating to its share ownership of and rights to acquire capital
stock of the Company.
None of the representations and warranties in the Merger Agreement
survive completion of the Merger.
Many
of the representations and warranties in the Merger Agreement are
subject to exceptions and qualifications, including knowledge,
materiality and material adverse effect.
For
purposes of the Merger Agreement, a “material adverse
effect” with respect to the Company or BCHI means any change,
event, effect, occurrence, state of facts or development that,
individually or in the aggregate, (a) has had or would reasonably
be expected to have a material adverse effect on the business,
results of operations, assets, liabilities or condition (financial
or otherwise) of a party or its subsidiaries, taken as a whole, (b)
has a material adverse effect on the ability of a party to
consummate the transactions contemplated by the Merger Agreement,
or (c) would prevent the consummation by a party of the
transactions contemplated by the Merger Agreement by April 2, 2018
(or as extended in accordance with the terms of the Merger
Agreement) (referred to as the Outside Date); provided, however, that
in no event will any of the following (including the effect of any
of the following) be taken into account in determining whether,
with regard to clause (a) there has been or will be, a
“material adverse effect:” (i) changes, events,
effects, occurrences, states of facts or developments generally
affecting the United States or global economy or the financial,
credit, debt, securities or other capital markets in the United
States or any other jurisdiction, including changes in interest
rates, (ii) changes in GAAP or the interpretation thereof or
changes in laws, the interpretation thereof or political,
legislative or regulatory conditions (A) applicable to the party or
its subsidiaries or any of its or their respective properties or
assets or (B) generally affecting the industries in which the party
or its subsidiaries operate, (iii) acts of war or terrorism (or the
escalation of the foregoing) or natural or weather-related
disasters or other force majeure events (including hurricanes,
floods or earthquakes), and (iv) any failure to meet internal
or published projections, forecasts or revenue or earnings
predictions for any period, except that the underlying causes of
such change or failure will not be excluded by this clause (iv),
except, in the case of clauses (i), (ii) and (iii) to the extent
disproportionately affecting a party and its subsidiaries when
compared to others operating in the same industries.
Covenants Relating to the Conduct of the Business of the
Parties
Pursuant to the
terms of the Merger Agreement, each of Fusion and BCHI agreed that, subject to certain exceptions or unless the other
party consents in writing, that until the earlier of the Effective
Time or a termination of the Merger Agreement in accordance with
its terms, it will and will cause each of its subsidiaries to, use
commercially reasonable efforts to:
●
conduct, in all material respects, its
business in the ordinary course, including the timely
payment of all applicable taxes,
●
preserve intact its business organization and significant business
relationships, and preserve satisfactory relationships with its
employees, keep available the services of its current officers and
key employees and maintain its current rights and
franchises,
●
maintain insurance on all material assets in amounts and kinds
comparable to that in effect on August 26, 2017, and
●
maintain all licenses, franchises, permits, variances, orders,
approvals, certificates, authorizations, registrations or rights of
or with all governmental entities and timely pay all material fees,
charges and other amounts to all governmental
entities.
In
addition, Fusion and BCHI agreed, subject to certain exceptions,
that it will not, and will not permit its respective subsidiaries
to, do any of the following or take certain other actions without
the prior approval of the other party, which approval may not be
unreasonably withheld, conditioned or delayed:
●
incur
any indebtedness for borrowed money, assume, guarantee, endorse or
otherwise as an accommodation become responsible for the
obligations of any other person, or make any loan or advance,
subject, in each case, to certain exceptions;
●
issue,
grant, sell or pledge, or agree to issue, grant, sell or pledge,
any shares of its capital stock or any securities or obligations
convertible (whether currently convertible or convertible only
after the passage of time or the occurrence of certain events) into
or exchangeable for any shares of its capital stock or adjust,
split, combine, consolidated or reclassify any of its capital stock
or other ownership interests or make, declare or pay any dividends
or make any other distributions on or, directly or indirectly,
redeem, purchase or otherwise acquire any shares of its capital
stock or any securities or obligations convertible (whether
currently convertible or convertible only after the passage of time
or the occurrence of certain events) into or exchangeable for any
shares of its capital stock, subject, in each case to certain
exceptions;
●
except
as required by law or any contract, including any benefit plan in
effect on August 26, 2017, (i) materially increase any wages,
salaries, compensation, pension, or other fringe benefits or
perquisites payable to any director, executive officer or employee
with a base salary equal to or greater than $150,000; (ii) enter
into or amend any employment or severance agreements with any
director or executive officer; (iii) establish any material bonus
or incentive plan; (iv) pay any pension or retirement allowance not
allowed by any existing plan or agreement or by applicable law; (v)
pay any bonus to any director or executive officer; (vi) become a
party to, amend or commit itself to, any pension, retirement,
profit-sharing or welfare benefit plan or agreement with or for the
benefit of any employee of the party or any subsidiary of such
party except, in each case, in the ordinary course and as would not
result in a material increase in cost or liability to the party; or
(vii) amend any equity compensation plan or agreement
thereunder;
●
sell,
lease, transfer or otherwise dispose of any of its properties or
assets to any person other than its subsidiaries, except in the
ordinary course of business or disposals of obsolete
assets;
●
make
any acquisition (including by merger) of the capital stock (or
other equity interests) or a material portion of the assets of any
other person;
●
except
as required by applicable law, enter into any new line of business
that is material to such party and its subsidiaries, taken as a
whole, or materially change any of its technology or operating
policies that are material, individually or in the aggregate, to
such party and its subsidiaries, taken as a whole;
●
amend
its charter of by-laws or any organizational document of its
subsidiaries or, in the case of the Company, take any action to
exempt any person other than BCHI or a BCHI subsidiary from DGCL
Section 203 or any similarly restrictive provisions of its
organizational documents;
●
except
as required by GAAP or the SEC, make any material change in its
methods or principles of accounting;
●
except
as required by applicable law, make, change or rescind any tax
election, change any tax accounting period, adopt or change any tax
accounting method, amend any material tax return, enter into any
closing agreement, settle any tax claim or assessment relating to
such party or its subsidiaries, obtain any tax ruling, surrender
any right to claim a refund of material taxes, or consent to any
extension or waiver of the limitation period applicable to any tax
claim or assessment relating to such party or its
subsidiaries;
●
enter
into, renew, amend in any material respect or waive any material
rights under any material contract, except in the ordinary course
of business and which would not materially and adversely affect the
business of that party or its subsidiaries;
●
adopt
or recommend a plan of complete or partial dissolution,
liquidation, recapitalization, restructuring or other
reorganization;
●
make
any discretionary contributions to pension or retirement plans in
excess of the minimum required contributions as required by the
Pension Protection Act of 2006 or similar legal requirements for
plans outside the United States;
●
conduct
its businesses or that of its subsidiaries in a manner that would
cause that party or its subsidiaries to become an “investment
company” subject to registration under the Investment Company
Act;
●
terminate
or permit any material permit to lapse, other than in accordance
with the terms and regular expiration of any such permit, or fail
to apply on a timely basis for any renewal of any renewable
material permit;
●
materially
change recurring or non-recurring rates, promotions, sales
incentives, commission plans, credit policies or collections
procedures;
●
fail
to pay or satisfy, or delay the payment or satisfaction of, any
accounts payable or other obligations, in any manner outside of the
ordinary course of business or inconsistent with past
practices;
●
take
any action outside the ordinary course of business consistent with
past practices that would materially diminish the working capital
of that party or its subsidiaries; or
●
agree
to take, make any commitment to take, or adopt any resolutions of
its board of directors in support of, any of the foregoing
actions.
The
foregoing restrictions notwithstanding, the parties agreed that
Fusion may, prior to the closing, (i) issue equity or debt
securities in connection with capital raising activities, in an
aggregate amount of net proceeds not to exceed $10.0 million, and
(ii) complete the reverse stock split contemplated by Proposal No.
2.
Efforts to Complete the Merger; Filings; Other
Actions
Upon
the terms and subject to the conditions of the Merger Agreement,
each of the parties will use its reasonable best efforts to (i)
take or cause to be taken all appropriate action and do or cause to
be done all things necessary, proper or advisable to consummate and
make effective, as promptly as practicable, the transactions
contemplated by the Merger Agreement, (ii) obtain from any
governmental entity any consents, licenses, permits, waivers,
approvals, authorizations or orders required to be obtained, and to
avoid any action by any governmental entity (including antitrust
actions), in connection with the transactions contemplated by the
Merger Agreement and (iii) make all necessary filings with respect
to the Merger Agreement under the HSR Act, as are required to
obtain FCC approval and as are required to obtain approval from the
State PSCs and make all necessary filings and thereafter make any
other required submissions with respect to the Merger Agreement as
required under applicable law. Each of the parties has also agree
to furnish to the other parties all information required for any
application or other filing to be made pursuant to applicable law
in connection with the Merger Agreement.
The
parties also have agreed to:
●
give, or cause
their respective subsidiaries to give, any notices to third parties
and to use reasonable best efforts to obtain any third party
consents (i) necessary, proper or advisable to consummate the
transactions contemplated by the Merger Agreement, or (ii) required
to prevent a material adverse effect from occurring prior to the
Effective Time;
●
give the other
parties prompt notice of the making or commencement of any legal,
administrative, arbitral or other proceedings, claims, actions,
suits or governmental or regulatory investigations with respect to
the transactions contemplated by the Merger Agreement and keep the
other parties informed as to the status;
●
promptly inform the
other parties of any communication to or from any governmental
entity regarding any of the transactions contemplated by the Merger
Agreement;
●
respond as promptly
as practicable to any additional requests for information received
by it from any antitrust authority, the FCC, any State PSC or any
other governmental entity with respect to the transactions
contemplated by the Merger Agreement or the filings required to
obtain the State Approvals and the FCC Approval;
●
use reasonable best
efforts to obtain termination or expiration of the waiting period
under the HSR Act and such other approvals, consents and clearances
as may be necessary, proper or advisable under any applicable laws
and obtain such approvals, consents and clearances as may be
necessary, proper or advisable under any applicable
laws;
●
use reasonable
efforts to prevent the entry in any legal, administrative, arbitral
or other proceedings, claims, actions, suits or governmental or
regulatory investigations of any order that would prohibit, make
unlawful or delay the consummation of the transactions contemplated
by the Merger Agreement; and
●
consult and
cooperate with the other parties and consider in good faith the
views of the other parties in connection with any filings made in
connection with the transactions contemplated by the Merger
Agreement.
The
parties, however, are not required to do any of the
following:
●
divest or hold
separate any assets or agree to limit its future activities, method
or place of doing business;
●
commence any
litigation against any person to facilitate consummation of the
transactions contemplated by the Merger Agreement; or
●
defend against any
litigation filed with or brought by any governmental entity seeking
to prevent the consummation of, or impose limitations on, any of
the transactions contemplated by the Merger Agreement.
Preparation of the Proxy Statement
As
promptly as practicable following the date of the Merger Agreement
(but in no event later than thirty (30) days after binding
commitments in respect of the required financing for the Merger
have been entered into), Fusion is required to prepare and file
this proxy statement with the SEC. BCHI agreed to furnish to Fusion
all information concerning itself and its subsidiaries, and provide
such other assistance (including using reasonable best efforts to
assist Fusion in preparing pro forma financial information required
to be included in this proxy statement), as may be reasonably
requested in connection with the preparation, filing and
distribution of this proxy statement by Fusion. Fusion also agreed
to use reasonable best efforts to cause this proxy statement to be
mailed to the Fusion Stockholders as promptly as practicable, and
in no event later than seven business days, following clearance of
this proxy statement by the SEC.
Stockholders’ Meeting
Fusion
has agreed to take all lawful action to call, give notice of,
convene and hold a meeting of its stockholders on a date as
promptly as practicable following clearance of this proxy statement
by the SEC for the purpose of obtaining approval of Proposal Nos.
1, 2 and 3 from the Fusion Stockholders.
No Solicitation of
Transactions
Except
as described below, Fusion has agreed that, from the date of the
Merger Agreement until the earlier of the Effective Time or the
termination of the Merger Agreement in accordance with its terms,
it will, and will cause its subsidiaries and their respective
officers, managers and directors and their respective affiliates
not to, directly or indirectly:
●
initiate,
solicit or knowingly encourage or facilitate any inquiries with
respect to, or the making of, an Alternative Proposal (as described
below);
●
approve
or recommend or enter into any contract or agreement in principle
concerning an Alternative Proposal;
●
terminate,
amend, release, modify or fail to enforce any provision of, or
grant any waiver under, any standstill, confidentiality or similar
contract entered into by Fusion or a Fusion subsidiary in respect
or in contemplation of an Alternative Proposal;
●
engage
in, continue or participate in any negotiations to facilitate any
proposal that constitutes an Alternative Proposal;
●
furnish
any non-public information or relating to, or permit access to the
books and records of Fusion to any third party that, to
Fusion’s knowledge, is seeking to make or has made an
Alternative Proposal; or
●
resolve
or publicly propose to do any of the foregoing.
Fusion
also agreed to immediately cease any existing solicitations,
encouragements, discussions or negotiations with any third party
with respect to any Alternative Proposal or proposal that could
reasonably be expected to lead to, or result in, an Alternative
Proposal, and (ii) request any such third party to promptly
return or destroy all confidential information concerning Fusion
and its subsidiaries. Fusion has agreed to notify BCHI orally and
in writing within 24 hours if any inquiries, proposals or offers
with respect to an Alternative Proposal or requests for
non-ordinary course non-public information relating to Fusion or
any of its subsidiaries are received by or any discussions or
negotiations with respect to an Alternative Proposal are sought to
be initiated or continued with Fusion or any of its
subsidiaries.
Nothing
in the Merger Agreement prevents Fusion or the Board from, at any
time prior to, but not after, the time of the receipt of its
requisite stockholder approval, in response to the receipt of a
Bona Fide Alternative Proposal (as described below), (i) providing
information or affording access to the books and records or
representatives of Fusion or any of its subsidiaries and (ii)
engaging in or participating in any discussions or negotiations
with the third party making such Bona Fide Acquisition Proposal if,
prior to taking any of the actions described in clauses (i) and
(ii) in this paragraph:
●
Fusion
has received from such third party an executed confidentiality
agreement with provisions no less restrictive to such third party
than the terms of the confidentiality agreement dated May 18, 2017
by and among Fusion, BEPL and Birch Communications, Inc., except
that the confidentiality agreement with such third party is not
required to contain standstill provisions and cannot
contain any provisions that would prevent Fusion from complying
with its disclosure obligations under the Merger
Agreement;
●
Fusion
has disclosed to BCHI
any non-public information to be provided to such third party and
any books and records to which such third party will be afforded
access to the extent not previously provided to
BCHI;
●
Fusion
has delivered to BCHI written notice prior to taking any such
action (i) stating that the Board intends to take such action, (ii)
stating that the Board has determined in good faith, after
consultation with its outside financial and legal advisors, that
(A) such Bona Fide Alternative Proposal constitutes or is
reasonably likely to result in a Superior Proposal (as described
below), and (B) that failure to take such action would reasonably
be expected to be inconsistent with the directors’ fiduciary
duties; and
●
the
Board has determined in good faith, after consultation with its
outside financial and legal advisors, that (i) such Bona Fide
Alternative Proposal constitutes or is reasonably likely to result
in a Superior Proposal, and (ii) that failure to take such action
would reasonably be expected to be inconsistent with the
directors’ fiduciary duties.
Except
as described below, Fusion has also agreed that the Board will not,
directly or indirectly:
●
withdraw, qualify or modify in a manner adverse to
BCHI, its recommendation that the Company stockholders vote to
adopt and approve the Merger Agreement and the Merger, including
the Restated Charter and the issuance of shares of Fusion Common
Stock pursuant to the Merger and (to the extent necessary to comply
with Nasdaq listing requirements) completion of the reverse stock
split contemplated by Proposal No. 2 (such recommendation referred
to as the Fusion Board
Recommendation);
●
fail
to announce publicly, within 10 business days after a tender or
exchange offer relating to any Fusion securities has been
commenced, that the Board recommends rejection of such tender or
exchange offer;
●
fail
to include the Fusion Board Recommendation in the notice of the
Annual Meeting distributed to Fusion Stockholders;
●
approve
or adopt or recommend any Alternative Proposal; or
●
resolve
or publicly propose to do any of the foregoing.
Any of the actions in the immediately preceding
paragraph are referred to as a Change in
Recommendation.
Nothing contained in the Merger Agreement,
however, will prevent Fusion or the Board from, at any time prior
to, but not after, the time of the receipt of its requisite
stockholder approval, in response to a Superior Proposal, effecting
a Change in Recommendation, if, prior to effecting such Change in
Recommendation the Board (i) determines that a Bona Fide
Alternative Proposal constitutes a Superior Proposal and (ii)
determines in good faith, after consultation with its outside
financial and legal advisors that the failure to take such action
would be inconsistent with the directors’ fiduciary duties.
Prior to effecting any Change in Recommendation, (i) Fusion must
deliver to BCHI a written notice (A) stating that the Board intends
to effect a Change in Recommendation, (B) stating that the Board
has made the determinations set forth in clauses (i) and (ii) of
the immediately prior sentence, and (C) including an unredacted
copy of such Superior Proposal and an unredacted form of any
alternative acquisition agreement related to such Superior Proposal
and (ii) the Negotiation Period (as described below) must have
expired. During the five business day period commencing on the date
of BCHI’s receipt of such Change in Recommendation notice
(such period referred to as the Negotiation
Period), Fusion will engage in
good faith negotiations with BCHI regarding an amendment to the
Merger Agreement so that the Alternative Proposal that is the
subject of the Change of Recommendation notice ceases to be a
Superior Proposal. If any material terms or conditions of such Bona
Fide Alternative Proposal are modified, Fusion will deliver a new
Change in Recommendation notice and the Negotiation Period will be
extended by two business days.
Nothing
contained in the Merger Agreement prevents Fusion from complying
with its disclosure obligations under applicable law, including
under Rule 14d-9 promulgated under the Exchange Act or making any
disclosure to the Fusion stockholders if the Board determines in
good faith, after consultation with its outside legal counsel, that
the failure to make such disclosure would be inconsistent with its
fiduciary duties or applicable law; provided, that neither Fusion
nor the Board (or any committee thereof) may make any Change in
Recommendation except as otherwise permitted under the Merger
Agreement.
For purposes of the Merger Agreement,
“Alternative
Proposal” refers to any
proposal made by a person (other than BCHI, a BCHI subsidiary or an
affiliate of BCHI or a BCHI subsidiary) relating to (a) any direct
or indirect acquisition or purchase, in a single transaction or a
series of related transactions, of (i) 15% or more of the
consolidated total assets of Fusion and its subsidiaries, taken as
a whole, or (ii) 5% or more of the voting securities of Fusion, (b)
any tender offer or exchange offer that if consummated would result
in any person beneficially owning, directly or indirectly, 5% or
more of any class of outstanding equity securities of Fusion or any
Fusion subsidiary, (c) any merger, consolidation, exclusive
license, business combination, joint venture, partnership, share
exchange or other transaction involving Fusion or any Fusion
subsidiary pursuant to which any person or its holders of equity
interest of Fusion would beneficially own, directly or indirectly,
5% or more of any class of outstanding equity interests of Fusion
or any Fusion subsidiary or the surviving entity resulting,
directly or indirectly, from any such transaction, or (d)
concerning any recapitalization, liquidation, dissolution or any
other similar transaction involving Fusion or any Fusion
subsidiary, which represents, individually or in the aggregate, 15%
or more of Fusion’s consolidated assets, in each case, other
than the Merger and the other transactions contemplated by the
Merger Agreement. A “Bona Fide Alternative
Proposal” refers to an
unsolicited written Alternative Proposal that was not received or
obtained in violation of the non-solicitation provisions of the
Merger Agreement.
For purposes of the Merger Agreement, a
“Superior
Proposal” refers
to a Bona Fide Alternative Proposal that the Board has determined
in good faith, after consultation with its outside financial and
legal advisors (taking into account the various legal, financial,
regulatory and other aspects of such Bona Fide Alternative
Proposal, including the financing terms thereof, the nature of the
consideration offered, the expected timing and risk and likelihood
of consummation), (a) is reasonably likely to be consummated in
accordance with its terms, and (b) if consummated, would result in
a transaction more favorable to each of the stockholders of Fusion
from a financial point of view than the Merger and the other
transactions contemplated by the Merger Agreement (after taking
into account any revisions to the terms of the Merger Agreement
proposed by BCHI); provided, however, that for purposes of the
definition of “Superior Proposal,” the references to
“15% or more” in the definition of Alternative Proposal
are deemed to be references to “more than
95%.”
Access to Information
The
Merger Agreement provides that, subject to certain exceptions and
upon reasonable advanced notice, during the period prior to the
Effective Time, each of Fusion and BCHI will afford the other and
its representatives reasonable access during normal business hours
to its owned or leased properties, books, contracts, commitments,
personnel, records, tax returns, work papers and other information
concerning its business, operations and status of compliance with
environmental law, as the other party may reasonably request
subject to the requirements of applicable law, attorney-client
privilege, fiduciary duty, contractual obligations in existence as
of August 26, 2017 and the protection of third-party trade
secrets.
Employee Matters
To the
extent commercially reasonable, and without duplication of
benefits, Fusion has agreed to give and to cause its affiliates to
give to each employee of BCHI or its subsidiaries who is employed
by Fusion or a subsidiary of Fusion after the closing of the
Merger: (i) the same service credit under any Fusion benefit plan
that covers such employee as would have been granted to such
employee by BCHI or any BCHI subsidiary prior to the closing under
any comparable BCHI benefit plan, (ii) service credit under any
Fusion benefit plan that covers such employee after the closing of
the Merger for service prior to the closing based on the provisions
of such Fusion benefit plan, (iii) the right to participate in each
Fusion benefit plan providing welfare benefits in the plan year in
which the closing of the Merger occurs without regard to
preexisting-condition limitations, waiting periods, evidence of
insurability or other exclusions or limitations, and (iv) credit
for any expense incurred within the year in which the closing of
the Merger occurs, but prior to the closing date of the Merger,
that were credited by BCHI pursuant to the comparable BCHI benefit
plans for purposes of determining deductibles, co-pays and other
applicable limits under the Fusion benefit plans in which they
participate and similar replacement plans.
For the
period beginning on the closing date of the Merger and ending on
December 31 of such year, Fusion has also agreed to continue, and
cause its affiliates to continue, to credit each BCHI employee all
vacation and personal holiday time that such BCHI employee has
accrued but not used through the date of the closing of the Merger
and is entitled to use as of the closing date of the Merger,
subject to Fusion’s vacation day carryover
policy.
Nothing
in the Merger Agreement prohibits Fusion or its affiliates from
terminating any BCHI employee’s employment as Fusion or an
affiliate determines appropriate in its sole discretion, subject to
the terms of any employment agreement or applicable
law.
Indemnification of Officers and Directors
The
Merger Agreement provides that, from the Effective Time, Fusion
will and will cause its subsidiaries to, indemnify, defend and hold
harmless (including by advancing expenses) each current and former
director, officer and employee of (i) BCHI and its subsidiaries,
and (ii) Fusion and each of its subsidiaries against all claims,
liabilities, losses, damages, judgments, fines, penalties, costs
and expenses (including fees and expenses of legal counsel) in
connection with any actual or threatened claim, suit, action,
proceeding or investigation (whether civil, criminal,
administrative or investigative), whenever asserted, arising out
of, relatingto or in connection with any action or omission
relating to their position with BCHI or its subsidiaries, or Fusion
and its subsidiaries, as the case may be, occurring or alleged to
have occurred before or at the Effective Time (including any claim
relating in whole or in part to the Merger Agreement or the
transactions contemplated thereby), to the fullest extent permitted
under applicable law. In addition, Fusion has agreed that for a
period of six years following the Merger, it will obtain and fully
pay for, and if it is unable to do so will cause the Surviving
Company to obtain and fully pay for, a “tail” policy
for BCHI’s and Fusion’s current and former directors,
officers and employees who are covered prior to the Effective Time
by the directors’ and officers’ liability insurance
currently maintained by BCHI or Fusion, as the case may be, with
coverage for six years following the Effective Time and with at
least the same coverage as under BCHI’s existing
directors’ and officers’ liability insurance policy and
fiduciary insurance policies; provided, that the maximum aggregate
premium for such “tail” policy for any year will not be
in excess of 150% of the last annual premium paid by
BCHI for coverage for its
last full fiscal year.
Nasdaq Listing; Reverse Split
The
Fusion Common Stock is currently
listed on The Nasdaq Capital Market® under the symbol "FSNN."
Fusion has agreed to use reasonable best efforts to cause the
Merger Shares to be approved for listing on The Nasdaq Capital Market® as promptly
as practicable after August 26, 2017 and, in any event, prior to
the closing date of the Merger. To the
extent necessary to comply with Nasdaq listing requirements, Fusion
agreed to submit to the Fusion Stockholders a proposal to adopt the
Certificate of Amendment. On September 22, 2017, Nasdaq advised
Fusion that the Merger will constitute a “change in
control” of Fusion for purposes of Nasdaq listing rule
5110(a). As a result, prior to completion of the Merger, Fusion
will file an initial listing application with Nasdaq seeking
approval for the listing of the Fusion Common Stock. If such
application is accepted, Fusion anticipates that the Fusion Common
Stock will continue to trade under the symbol
“FSNN.”
Financing
Each
of Fusion and BCHI has agreed to use their reasonable best efforts
to take, or cause to be taken, all actions and to do, or cause to
be done, all things necessary, proper or advisable to arrange and
obtain the financing in an aggregate amount necessary (i) to effect
the repayment in full and termination of (x) the principal debt
facilities of Fusion and BCHI, (y) the subordinated notes of BCHI,
dated October 28, 2016, in favor of Holcombe T. Green, Jr., R.
Kirby Godsey and the Holcombe T. Green, Jr. 2013 Five-Year Annuity
Trust, and (z) the subordinated note of Fusion, dated November 14,
2016, in favor of Marvin S. Rosen, (ii) to effect the release and
termination of any and all security interests and liens in
connection of any of the foregoing, and (iii) to complete the
transactions contemplated by the Merger Agreement. Each of Fusion
and BCHI also agreed to use reasonable best efforts to (i)
negotiate and enter into commitments for, and then definitive
agreements with respect to, the financing, as promptly as
practicable, (ii) satisfy on a timely basis (taking into account
the Marketing Period) all conditions in such commitments and
definitive agreements, (iii) consummate the financing at or prior
to the closing of the Merger and (iv) enforce the
counterparties’ obligations and rights under such commitments
and definitive agreements. If any portion of the financing becomes
reasonably likely to be unavailable on the material terms and
conditions contemplated by the applicable commitments and
definitive agreements, each of Fusion and BCHI will use its
commercially reasonable efforts to arrange and obtain alternative
financing from alternative sources in an amount sufficient to
consummate the transactions contemplated by the Merger Agreement
with terms and conditions not materially less favorable, taken as a
whole, to the parties than the terms and conditions set forth in
the applicable commitments and definitive agreement as promptly as
practicable following the occurrence of such event but no later
than the final day of the Marketing Period. Each party has agreed
to provide and to cause its subsidiaries to provide all cooperation
customary and necessary in connection with arranging, obtaining and
syndicating the financing and causing the conditions in the
commitments and definitive agreements to be satisfied.
Certain Additional Covenants
The Merger Agreement also contains additional
covenants, including, among others, covenants relating to
coordination with respect to litigation relating to the Merger and
public announcements with respect to the transactions contemplated
by the Merger Agreement, the applicability of state takeover
statutes, the delivery of timely notice to the holders of Fusion
preferred stock in order that such holders may exercise conversion
rights prior to the consummation of the Merger, cooperation in the
separation of the Consumer/SMS Business and the use of
reasonable best efforts to complete the divestiture or dissolution
of Fusion Global (see the section entitled “Consumer Spin-Off and Carrier
Spin-Off” beginning on page 82 of this proxy
statement) and the delivery by BCHI to Fusion of audited
consolidated financial statements of BCHI for the fiscal years
ended December 31, 2014 through December 31, 2016.
Conditions to the Merger
Each
party’s obligation to effect the Merger is subject to the
satisfaction or waiver (to the extent permitted under the Merger
Agreement and applicable law) at or prior to the Effective Time of
the following conditions:
●
receipt by Fusion
of the affirmative vote by the holders of a majority of the
outstanding shares of Fusion Common Stock entitled to be voted at
the Annual Meeting and any approval of the holders of the Company
preferred stock that is required pursuant to the Company's Charter
and by-laws for each of the following proposals to adopt: (i) the
Merger Agreement and approve the Merger, the issuance of the Merger
Shares, and the other transactions contemplated by the Merger
Agreement, (ii) the Certificate of Amendment, and (iii) the
Restated Charter.
●
the filing of
notices with or the receipt of approvals from the FCC and the State PSCs to whom
notice is required or from whom consent is required in respect of
the Merger and the other transactions contemplated by the Merger
Agreement and the expiration of any waiting period prescribed by
law with respect to such approvals before the transactions
contemplated by the Merger Agreement may be
consummated;
●
the expiration or
early termination of the waiting period (and any extension thereof)
applicable under the HSR Act to the consummation of the
transactions contemplated by Merger Agreement;
●
the absence of any
law or judgment, order, decision, writ, injunction, decree,
stipulation, award, ruling, or other finding or agency requirement
of a governmental entity or arbitration award in effect or enacted,
entered, promulgated or enforced by any governmental entity that
prohibits or makes illegal the consummation of the transactions
contemplated by the Merger Agreement;
●
the financing or
alternative financing necessary to complete the transactions
contemplated by the Merger Agreement, on terms and conditions
satisfactory to Fusion and BCHI, has been funded;
●
the Merger Shares
have been approved for listing on Nasdaq subject to official notice
of issuance;
●
all shares of
Fusion preferred stock issued and outstanding immediately prior to
the Effective Time have been cancelled or converted into shares of
Fusion Common Stock in accordance with the applicable provisions of
the respective certificates of designation for such preferred
stock;
●
each of the
Stockholders’ Agreement and the Registration Rights Agreement
have been executed and delivered by the parties
thereto;
●
Fusion has
consummated the Carrier Business Spin-off or shall have dissolved
Fusion Global Services;
●
the parties have
entered into the separation agreements in respect of the Consumer
Spin-off and the transactions contemplated by such separation
agreements have been consummated; and
●
all nine of the
members of the post-Merger Board have been determined in accordance
with the provisions of the Stockholders’
Agreement.
BCHI’s
obligations to effect the Merger are subject to the satisfaction or
waiver of the following additional conditions:
●
the
accuracy, in all material respects, of Fusion’s
representations and warranties relating to corporate organization,
capitalization, authority, no violation and brokers’ fees as
of the date of the Merger Agreement and as of the Effective
Time;
●
the
accuracy of all other Fusion representations and warranties as of
the date of the Merger Agreement and as of the Effective Time
(except that representations and warranties that by their terms
speak specifically as of the date of the Merger Agreement or
another date will be true and correct as of such date); provided,
that this condition will be deemed satisfied with respect to such
representations and warranties unless all inaccuracies in such
representations and warranties in the aggregate constitute a
material adverse effect (ignoring solely for the purposes of this
proviso any references to material adverse effect or other
materiality qualifiers contained in such other representations or
warranties) and receipt by BCHI of an officer certificate signed by
a Fusion officer certifying the accuracy of such representations
and warranties;
●
performance
in all material respects by Fusion and Merger Sub of all covenants
and agreements required to be performed by it at or prior to the
closing date of the Merger, and receipt by BCHI of an officer
certificate signed by a Fusion officer certifying such performance;
and
●
absence of any change, event, effect, cause,
occurrence, state of facts or developments (other than any excluded
change, event, effect, cause, occurrence, state of fact or
development) occurring after August 26, 2017, that, individually or
in the aggregate, has had or would reasonably be expected to have a
material adverse effect on Fusion and its subsidiaries taken as a
whole, on Fusion’s ability to consummate the transactions
contemplated by the Merger Agreement or that would prevent the
consummation of the transactions contemplated by the Merger
Agreement by the Outside Date.
Fusion’s
obligations to effect the Merger are subject to the satisfaction or
waiver of the following additional conditions:
●
the
accuracy, in all material respects, of BCHI’s representations
and warranties relating to corporate organization, capitalization,
authority, no violation and brokers’ fees and the accuracy in
all respects of the BCHI representation and warranty relating to
the unaudited consolidated financial statements of BCHI and its
subsidiaries, in each case as of the date of the Merger Agreement
and as of the Effective Time;
●
the
accuracy of all other BCHI representations and warranties as of the
date of the Merger Agreement and as of the Effective Time (except
that representations and warranties that by their terms speak
specifically as of the date of the Merger Agreement or another date
will be true and correct as of such date); provided, that this
condition will be deemed satisfied with respect to such
representations and warranties unless all inaccuracies in such
representations and warranties in the aggregate constitute a
material adverse effect (ignoring solely for the purposes of this
proviso any references to material adverse effect or other
materiality qualifiers contained in such other representations or
warranties) and receipt by Fusion of an officer certificate signed
by a BCHI officer certifying the accuracy of such representations
and warranties;
●
performance
in all material respects by BCHI of all covenants and agreements
required to be performed by it at or prior to the closing date of
the Merger, and receipt by Fusion of an officer certificate signed
by a BCHI officer certifying such performance;
●
absence of any change, event, effect, cause,
occurrence, state of facts or developments (other than any excluded
change, event, effect, cause, occurrence, state of fact or
development) occurring after August 26, 2017, that, individually or
in the aggregate, has had or would reasonably be expected to have a
material adverse effect on Fusion and its subsidiaries taken as a
whole, on Fusion’s ability to consummate the transactions
contemplated by the Merger Agreement or that would prevent the
consummation of the transactions contemplated by the Merger
Agreement by the Outside Date;
and
●
delivery
by BCHI of a FIRPTA certificate.
Termination and No Termination Fees
The
Merger Agreement may be terminated and the Merger may be abandoned
at any time prior to the Effective Time under the following
circumstances:
●
by
the mutual written consent of Fusion and BCHI;
●
by
either Fusion or BCHI:
o
if
the Merger has not been consummated by April 2, 2018, except that
if on such date the only conditions to the Closing to the Merger
that have not been satisfied or waived (other than those conditions
that by their nature cannot be satisfied at the closing) are those
related to certain regulatory and governmental approvals, including
antitrust approvals, then either party may, by written notice to
the other, elect to extend the Outside Date until April 30,
2018;
o
if
any law, order, judgment, decree, injunction or ruling of a court
of competent jurisdiction prohibiting or making illegal the
consummation of the Merger that is in effect and that has become
final and non-appealable;
o
if
Fusion Stockholders’ adoption and approval of the Merger is
not obtained at the Annual Meeting or at any adjournment or
postponement of such meeting; or
o
if
binding commitments with respect to the required financing are not
received by December 24, 2017 (i.e., within 120 days after the
signing date of the Merger Agreement).
o
BCHI
has breached any of its representations and warranties or failed to
perform any of its covenants or agreements such that the conditions
to Fusion’s obligation to consummate the Merger would not be
satisfied, and such breach has not been cured within the specified
cure period or is incapable of being cured; or
o
if
the Board has made a Change in Recommendation and Fusion is not in
breach of its non-solicitation obligations under the Merger
Agreement.
o
Fusion
has breached any of its representations and warranties or failed to
perform any of its covenants or agreements such that the conditions
to BCHI’s obligation to consummate the Merger would not be
satisfied, and such breach has not been cured within the specified
cure period or is incapable of being cured; or
o
If
the Board has made a Change in Recommendation or Fusion is in
breach of its obligations under the non-solicitation provisions of
the Merger Agreement.
Neither
Fusion nor BCHI is obligated to
pay the other a termination fee in the event that the Merger
Agreement is terminated in accordance with its terms.
Fees and Expenses
Except
as otherwise expressly provided in the Merger Agreement, if the
transactions contemplated by the Merger Agreement are not
consummated, the fees and expenses incurred by each party in
connection with the negotiation, preparation, execution and
delivery of the Merger Agreement and the documents and instruments
contemplated thereby and in connection with the transactions
contemplated therein, including all fees and disbursements of
advisors retained by such party are the sole responsibility of such
incurring and retaining party.
Amendment and Supplement
Subject
to compliance with applicable law, at any time prior to the
Effective Time, the Merger Agreement may be amended or supplemented
in any and all respects, whether before or after receipt of the
required stockholder vote by written agreement signed by the
parties; except that, after receipt of the required stockholder
vote, there may not be, without further approval of such
stockholders, any amendment of the Merger Agreement that changes
the amount or the form of the consideration to be delivered
thereunder. The Merger Agreement may not be amended except by an
instrument in writing signed on behalf of each of the
parties.
Governing Law; Jurisdiction
The
Merger Agreement is governed by the laws of the State of Delaware,
without regard to any applicable conflict of laws principles. The
parties have agreed that any action or proceeding arising out of or
relating to the Merger Agreement or the transactions contemplated
by the Merger Agreement will be brought and determined exclusively
in the Delaware Court of Chancery and, in the absence of such
federal jurisdiction, exclusively in any Delaware state court
sitting in New Castle County.
Specific Performance
The
parties to the Merger Agreement have agree that irreparable damage
would occur in the event that any of the provisions of the Merger
Agreement are not performed and that monetary damages, even if
available, would not be an adequate remedy. Accordingly, the
parties agree that each of the parties will be entitled to seek an
injunction or injunctions to prevent breaches of the Merger
Agreement and to enforce specifically the terms and provisions of
the Merger Agreement without proof of damages. The parties agree
not to oppose the granting of an injunction, specific performance
or other equitable relief on the basis that the other parties have
an adequate remedy at law or an award of specific performance is
not an appropriate remedy for any reason at law or in
equity.
Amendments to the Merger Agreement
On
September 15, 2017, the parties to the Merger Agreement entered
into an amendment to the Merger Agreement to provide that the
filings required to be made under the HSR Act and to obtain
approval of the FCC must be made within seven business days after
receipt of satisfactory binding commitment letters from a financing
source.
In
addition, on September 29, 2017, the parties to the Merger
Agreement entered into an amendment to the Merger Agreement to
provide that the filings required to be made State PSCs must be
made within seven business days after receipt of satisfactory
binding commitment letters from a financing source.
Further,
on October 27, 2017, the parties to the Merger Agreement entered
into an amended and restated amendment to the Merger Agreement to
(i) further adjust the dates by which the parties will file the
required filings under the HSR Act, with the FCC and the State
PSC’s, (ii) extend to December 24, 2017, the date on which
the parties may terminate the Merger Agreement if committed
financing has not been secured, (iii) amend the language regarding
Fusion’s proposed reverse stock split to provide for a range
of ratios rather than a fixed ratio, and (iv) fix a reference error
in the definition of "Superior Proposal" which should have read
"15%" not "20%".
A copy of each of the amendments to the Merger
Agreement are attached hereto as Annex A
and are incorporated by reference
herein. You
should read carefully the full text of each of these amendments
before making any decisions regarding the Merger as the Merger
Agreement, as so amended, is the principal legal document governing
the Merger.
AGREEMENTS RELATED TO THE MERGER AGREEMENT
The following is a summary of the
material terms of the Stockholders’ Agreement, the
Registration Rights Agreement and the Support Agreement. A copy of
each of these agreements is attached hereto as an
exhibit to the Merger Agreement attached hereto as
Annex A
and is incorporated by reference
herein. These agreements have been attached to this proxy statement
to provide you with information regarding their terms. In addition,
the following section includes a summary of the Letter Agreements.
The following description of each such agreement does not purport
to be complete and is qualified in its entirety by reference to
such agreements. You should review the full text of the each of
these agreements for a more complete understanding of the detailed
terms and conditions contained therein.
Stockholders’ Agreement
At the Closing, BCHI Holdings and each of the
Principal Stockholders will enter into the Stockholders’
Agreement. Among other things, the Stockholders’
Agreement will provide that, from and after the Effective Time, the
Board will consist of nine directors, which will be selected as
follows:
●
four directors, at
least one of whom must be an independent director within the
meaning of the Nasdaq listing standards, will be nominated by BCHI
Holdings;
●
four directors, at
least one of whom must be an independent director within the
meaning of the Nasdaq listing standards, will be nominated by the
Fusion Committee; and
●
one director, who
must be an independent director within the meaning of the Nasdaq
listing standards, will be nominated by BCHI Holdings with the
approval of the Fusion Committee, which may not be unreasonably
withheld.
The
Stockholders’ Agreement will require each party to vote its
respective shares of Fusion Common Stock in favor of electing to
the Board individuals nominated in accordance with the foregoing
provisions. The rights of the Fusion
Committee and BCHI Holdings to nominate directors to the Board will
continue (i) as to the Fusion Committee, until such time as Marvin
S. Rosen and Matthew D. Rosen, collectively beneficially own less
than one and one-half percent (1.5%) of the then issued and
outstanding shares of Fusion Common Stock, and (ii) as to BCHI
Holdings, until such time as it and its affiliates collectively
beneficially own less than twenty percent (20%) of the number of
shares of Fusion Common Stock owned by them immediately following
the closing of the Merger.
Registration Rights Agreement
At the closing of the
Merger, Fusion and BCHI Holdings will also enter into the
Registration Rights Agreement pursuant to which Fusion will grant
certain registration rights to BCHI Holdings. Under the terms of
the Registration Rights Agreement, Fusion will be obligated, among
other things and subject to the conditions and exceptions contained
therein, to file a shelf registration statement covering no greater
than 25% of the total number of Merger Shares, and to use
reasonable best efforts to cause such shelf registration statement
to be declared effective by the SEC within 120 days following the
closing of the merger. In
addition, Fusion has agreed to maintain the effectiveness of that
resale registration statement until the earlier of the sale of all
of the covered Merger Shares or the fifth anniversary of the
effective date of that registration statement. BCHI Holdings may,
subject to certain limitations, require that distribution of the
Merger Shares covered by the resale registration statement be made
in an underwritten offering; provided that gross proceeds of such
offering are expected to be at least $10 million, and subject to
customary cutbacks and lock-ups.
Under the Registration
Rights Agreement, BCHI Holdings will also have certain customary
demand and piggyback registration rights with respect to their
Merger Shares. BCHI Holdings
may, subject to certain limitations, require that distribution of
its Merger Shares pursuant to a demand registration right be made
in an underwritten offering; provided that gross proceeds of such
offering are expected to be at least $20 million, and subject to
customary cutbacks and lock-ups.
Under
the Registration Rights Agreement, the Merger Shares cease to be
covered by the agreement at such time as (i) such shares are sold
pursuant to a Securities Act registration statement, (ii) such
shares are sold pursuant to Rule 144 of the Securities Act, or
(iii) at such time as all of such shares may be sold without regard
to volume limitations under Rule 144 promulgated under the
Securities Act.
Support Agreement
In connection with the execution of the Merger
Agreement, Marvin S. Rosen, Matthew D. Rosen, Philip D. Turits,
Michael J. Del Giudice, Jack Rosen, Larry Blum, Paul O’Brien
and William Rubin (referred to as the Principal
Stockholders) entered into the
Support Agreement with BCHI, pursuant to which the Principal
Stockholders agreed, among other things, at any meeting of the
stockholders of Fusion, to be present (in person or by proxy) and
to vote all of their Voting Shares:
●
in
favor of the Merger Agreement and any transactions contemplated
thereby (including the Merger); and,
in certain specified circumstances, in favor of any amendment to
the Merger Agreement; and
●
against
(i) any alternative acquisition proposal that meets certain
thresholds specified in the Support Agreement, (ii) any action that
would reasonably be expected to result in a breach of, or failure
to perform, any representation, warranty, covenant or agreement of
Fusion under the Merger Agreement, or if any of the conditions to
closing set forth in the Merger Agreement are not satisfied, or
(iii) any action that would prevent or materially delay or would
reasonably be expected to prevent or materially delay, consummation
of the Merger.
The
Support Agreement terminates upon the
earliest to occur of (i) the termination of the Merger Agreement in
accordance with its terms, (ii) the Effective Time, (iii) with
regard to any Principal Stockholder, the entry by Fusion, without
the prior written consent of such Principal Stockholder, into any
amendment or modification of the Merger Agreement which results in
(A) a change which is materially adverse to such Principal
Stockholder, or (B) the extension of the Outside Date (except where
the Outside Date is extended in accordance with the terms of the
Merger Agreement), or (iv) the mutual written agreement of the
parties to terminate the Support Agreement.
At the time of execution of the Support
Agreement, the Principal Stockholders held, in the
aggregate, Voting Shares representing 10.5% of the issued and
outstanding shares of Fusion Common Stock and 9.8% of the votes
entitled to be cast at the Annual Meeting.
Indemnity Agreement
As
a further inducement to Fusion executing the Merger Agreement, BCHI
Holdings entered into a letter agreement with Fusion under the
terms of which it agreed, for a period of eighteen months following
the closing of the Merger, to indemnify and hold harmless Fusion
for and against any and all losses in excess of $500,000 that are
related to, or arise from, certain specified litigation and
regulatory matters, subject to a maximum aggregate liability of
$25.0 million. BCHI Holdings shall have the right to assume the
defense of these matters and shall have the right to settle such
matters so long as such settlement does not involve any monetary
payment by Fusion and/or its subsidiaries and does not otherwise
have a material adverse effect on the business of Fusion and its
subsidiaries. Amounts owed by BCHI Holdings under this indemnity
will be payable in cash or through the transfer to Fusion of a
number of Merger Shares equal to (rounded up or down to the nearest
whole share) (1) the amount of such obligation, divided by (2) the
greater of (A) $2.00, or (B) the weighted average daily closing bid
price of the Fusion Common Stock, as reported by Nasdaq (or any
successor to such exchange), for five consecutive trading days
ending immediately prior to the third business day preceding the
date of such transfer. Any cash payment and/or return of Merger
Shares must be completed within five business days of the date that
Fusion (or its subsidiary’s) liability is determined. During
the eighteen month indemnity period, BCHI Holdings is required, at
all times, to maintain in its name liquid assets and Merger Shares
with an aggregate value of no less than $25.0 million; provided,
that for the purposes of determining the value of the Merger Shares
held, such shares will not be deemed to have a value of less than
$2.00 per share, regardless of the then-current market price for
the Fusion Common Stock.
CONSUMER SPIN-OFF AND CARRIER SPIN-OFF
Consumer Spin-off
Pursuant to the
Merger Agreement, the parties have agreed to cooperate in good
faith to consummate the proposed separation of BCHI’s
existing consumer and single-line business services business
(referred to as the Consumer/SMB
Business) to the existing BCHI shareholders (referred to as
the Consumer Spin-off). The
transactions relating to the Consumer Spin-off are described in
Exhibit D to the
Merger Agreement and must be consummated prior to the closing of
the Merger pursuant to agreements to be negotiated in good faith by
the parties prior to such closing (referred to as the Separation Agreements) and upon the
terms and conditions to be mutually agreed upon by Fusion and
BCHI.
Consumer/SMB Business Assets and Liabilities;
Distribution
Exhibit D to the Merger
Agreement contemplates that, prior to the closing of the Merger,
BCHI and its subsidiaries will transfer to a newly created
subsidiary of BCHI or to an existing subsidiary of BCHI approved by
Fusion (collectively referred to as Spinco) the following assets associated
with the Consumer/SMB Business: (i) all customer contracts and
accounts; (ii) any assets that are used solely to support that
business; (iii) any other assets that are reasonably agreed by the
parties as necessary to support the services provided to the
customers of that business; and (iv) certain patents listed on
Annex 1 to Exhibit
D to the Merger Agreement and any associated marks in the
United States and Canada, which patents will be licensed by Spinco
to the Surviving Company for use following the closing under a
perpetual, royalty free, worldwide license. Following the
completion of the asset transfers contemplated above and
immediately prior to the Effective Time, BCHI will distribute the
equity interests of Spinco to it’s shareholders (referred to
as Distribution).
The
parties have agreed that, as of the time of the Distribution
(referred to as the Distribution
Time), Spinco will have accounts receivable and accounts
payable that have a net aggregate value of $0, and that the parties
will cooperate in good faith to determine which accounts receivable
and accounts payable related to the Consumer/SMB Business will be
transferred to Spinco to achieve such net $0 aggregate value. No
liabilities, other than those associated with the accounts payable,
will be assumed by Spinco. The parties have also agreed to
cooperate in good faith to determine the employees of BCHI and its
subsidiaries to be offered employment by Spinco in connection with
the Consumer Spin-off.
Valuation Adjustment
The
parties have agreed that if value of the Consumer/SMB Business as
of the Distribution Time (referred to as the Distribution Value) is less than $25.0
million, then, immediately prior to the Distribution Time, BCHI
will deliver to Spinco a promissory note payable to Spinco, in an
amount equal to the excess of $25.0 million over the Distribution
Value. Such promissory note will be payable on the one-year
anniversary of the closing of the Merger and may be settled by the
Surviving Company, at its election, either in cash or in shares of
Fusion Common Stock, such shares to be calculated in accordance
with the formula described below.
If the
Distribution Value is greater than $25.0 million (referred to as
the Excess Value), then the
BCHI shareholders will either (i) make a cash payment, at the
Distribution Time, to BCHI in an amount equal to the Excess Value,
or (ii) cause Spinco to issue a promissory note payable to BCHI, in
an amount equal to the Excess Value, payable on the one-year
anniversary of the closing of the Merger, which note will be
payable, at the election of Spinco, either in cash or shares of
Fusion Common Stock equal to (rounded up or down to the nearest
whole share) (1) the Excess Value, divided by (2) the greater of (A) $2.00
or (B) the weighted average daily closing price of the Fusion
Common Stock, as reported by Nasdaq, for the ten consecutive
trading days ending immediately prior to the third business day
preceding the date of such transfer.
For
purposes of the foregoing adjustment, the Distribution Value will
be calculated as follows: (i) EBITDA of the Consumer/SMB Business
for the last full calendar month prior to the Distribution Time,
multiplied by (ii) 12;
multiplied by (iii) $3.48.
For purposes of the foregoing, EBITDA of the Consumer/SMB Business
will be calculated in accordance with the methodology used in
creating the projected numbers included on Annex 2 to Exhibit D to the Merger
Agreement. BCHI will calculate the Distribution Value in good faith
and will provide the calculation to Fusion for its reasonable
verification. If the parties are unable to reach agreement
concerning the value of the Consumer/SMB Business, they will submit
the matter to an independent accounting firm for its
determination.
Separation Agreements
In
connection with the Consumer Spin-off, the parties have agreed
that, prior to the closing of the Merger, Fusion and BCHI will
mutually develop the terms of a wholesale agreement, pursuant to
which Spinco will purchase specific services from the Surviving
Company post-Merger, which services will include services currently
purchased by BCHI and its subsidiaries from various third-party
carriers and also services available directly from Fusion and its
subsidiaries. Fusion and BCHI have agreed that the wholesale
agreement will be structured in a manner that will enable the
parties to maximize the benefit of any existing volume discounts
available from third party carriers.
The
parties have also agreed that, prior to the closing of the Merger,
Fusion and BCHI will negotiate the terms of a transition services
agreement, pursuant to which, following the completion of the
Merger, the Surviving Company and its subsidiaries will provide
Spinco and its subsidiaries with various agreed upon support
services that are reasonably required by Spinco to support the
customers of the Consumer/SMB Business, for a period of up to three
(3) years following the completion of the Consumer Spin-off. The
cost of such transition services will be mutually agreed upon by
Fusion and BCHI. In addition, the parties have agreed that if
Spinco is unable to obtain all required regulatory approvals,
licenses and permits necessary for it to legally operate the
Consumer/SMB Business following completion of the Consumer
Spin-off, Spinco and the Surviving Company will enter into a
management agreement, the terms of which will be agreed in advance
by BCHI and Fusion.
In
addition, the parties have agreed that if the transactions relating
to the Consumer Spin-off cannot be consummated on the terms set
forth in Exhibit D
to the Merger Agreement due to the failure to obtain any required
regulatory approvals or consents with respect to any material
contracts or arrangements, BCHI and Fusion will work in good faith
to restructure the Consumer Spin-off in a manner that provides the
parties with substantially the same economic and commercial
position as if such transactions had occurred as described
above.
As
discussed above under “The
Merger — Regulatory Matters” beginning on page
63 of this proxy statement, BCHI will make all filings with the FCC
that may be necessary to complete the Consumer Spin-off and, with
the participation of Fusion and its subsidiaries, where necessary
or appropriate, and subject to Fusion’s agreement as to
strategy, will make all approval or notification filings with the
State PSCs that are necessary to complete the Consumer Spin-off,
unless and insofar as such filings are jointly waived by the
parties.
Carrier Spin-off
Pursuant to the
Merger Agreement, Fusion has agreed to use reasonable best efforts
to effectuate, on or prior to the closing of the Merger, the Fusion
Global Arrangement or dissolution of Fusion Global. Fusion Global
is a sixty percent owned subsidiary of Fusion through which Fusion
operates its carrier services business segment. Fusion wishes to
divest the carrier services business as it has lower margins than
the cloud business services business of Fusion and is not area in
which Fusion wishes to focus on a going-forward basis. The
consummation by Fusion of the Fusion Global Arrangement or the
completion of the dissolution of Fusion Global is a condition
precedent to the completion of the Merger.
PROPOSAL NO. 1 – ADOPTION OF THE MERGER
AGREEMENT
We are requesting that you approve a proposal to
adopt the Merger Agreement and thereby approve the transactions
contemplated by the Merger Agreement, including the Merger and the
issuance of the Merger Shares. For a detailed discussion of the
terms and conditions of the Merger Agreement, as it has been
amended, see the section entitled “The Merger
Agreement” beginning on
page of this proxy statement. Copies of the Merger Agreement and
amendments thereto are attached to this proxy statement as
Annex
A.
Effect on Other Proposals
Approval of
Proposal No. 1 by Fusion Stockholders is a separate vote from
approval of the Certificate of Amendment contemplated by Proposal
No. 2 and from the approval of the Restated Charter contemplated by
Proposal No. 3. Thus, Fusion Stockholders may approve the
Certificate of Amendment pursuant to Proposal No. 2 and the
Restated Charter pursuant to Proposal No. 3, but not approve the
adoption of the Merger Agreement and the transactions contemplated
thereby. However, if Fusion Stockholders do not approve Proposal
No. 1, Fusion will not have satisfied the condition precedent under
the Merger Agreement, even if Proposal No. 2 and Proposal No. 3 are
approved by Fusion Stockholders.
If this
Proposal No. 1 is not approved by the Fusion Stockholders at the
Annual Meeting, the Merger will not be consummated, in which case
the Company will not file the Certificate of Amendment contemplated
by Proposal No. 2 and will not file the Restated Charter
contemplated by Proposal No. 3 even if Proposals Nos. 2 and 3 are
approved by the Fusion Stockholders at the Annual Meeting. However,
the Company will file an amendment to its existing charter solely
to effectuate the name change contemplated by the draft Restated
Charter. In addition, if the Merger is not consummated, those
director nominees elected by Fusion Stockholders pursuant to
Proposal No. 6 will continue to serve as directors of Fusion until
the 2018 annual meeting of stockholders and until such time as
their respective successors are elected and qualified or their
earlier resignation, death or removal from
office.
Required Vote and Board Recommendation
Approval of this Proposal No. 1 requires the
affirmative vote of the holders of at least a majority of the
voting power of the Voting Shares issued and outstanding as of the
Record Date and entitled to vote thereon, voting as a single
class. Abstentions and broker
non-votes will have the effect of a vote “AGAINST” Proposal No. 1.
As discussed in the section entitled
“The
Merger — Reasons for the Merger and Recommendation of the
Board” beginning on page
48 of this proxy statement, after considering various factors
described in such section, the Board has (i) determined that the
Merger Agreement and the transactions contemplated thereby,
including the Merger and the issuance of the Merger Shares, are
fair to, advisable and in the best interests of Fusion and its
stockholders, (ii) approved the execution, delivery and performance
by Fusion of the Merger Agreement and the consummation of the
transactions contemplated thereby, including the Merger and the
issuance of the Merger Shares, and (iii) directed that the
Merger Agreement be submitted to the Fusion Stockholders for
adoption.
THE
BOARD RECOMMENDS THAT THE FUSION STOCKHOLDERS VOTE
“FOR” PROPOSAL NO. 1.
PROPOSAL NO. 2 –
APPROVAL OF AN AMENDMENT TO THE CERTIFICATE OF INCORPORATION
OF
FUSION TO EFFECT A REVERSE STOCK SPLIT
Background
and Reasons for the Proposal
At the
Annual Meeting, Fusion Stockholders will be asked to approve the
Certificate of Amendment, which amendment authorizes a reverse
stock split of all issued and outstanding shares of Fusion Common
Stock, at a ratio of up to 5:1, to the extent determined necessary
by the Board to comply with the Nasdaq listing requirements for the
listing of the Fusion Common Stock on The Nasdaq Capital
Market® following completion of the Merger. The Certificate of
Amendment is attached hereto as Annex
B.
Once
the reverse stock split ratio has been determined by the
Board, upon effectiveness
of the Certificate of Amendment (referred to as the Reverse Split Effective Time), all
shares of Fusion Common Stock outstanding immediately prior to the
Reverse Split Effective Time will be combined and reclassified into
a smaller number of shares, such that a holder of Fusion Common
Stock will own one share of Fusion Common Stock for such number of
shares, as determined by the Board, at a ratio of up to 5:1 of
Fusion Common Stock held by such stockholder immediately prior to
the Reverse Split Effective Time. The actions taken in connection
with the reverse stock split will reduce the number of outstanding
shares of Fusion Common Stock, but the total number of authorized
shares of Fusion Common Stock under Fusion’s certificate of
incorporation will not be affected by this reverse split. We
estimate that there will be approximately [●]
shares of Fusion Common Stock outstanding following the reverse
stock split (not taking into account any shares of Fusion Common
Stock issued upon conversion of Fusion’s preferred stock) and
prior to consummation of the Merger.
Under
the Merger Agreement, approval of the Merger Shares for listing on
Nasdaq is a condition precedent to consummation of the Merger. See
“The Merger Agreement –
Conditions to the Merger” beginning on page 76 of this
proxy statement. The Fusion Common Stock is currently quoted on The
Nasdaq Capital Market®, and Fusion is subject to the rules and
regulations of Nasdaq. Nasdaq Rule 5110(a) provides:
“[A] Company must apply for initial listing in
connection with a transaction whereby the Company combines with a
non-Nasdaq entity, resulting in a change of control of the Company
and potentially allowing the non-Nasdaq entity to obtain a Nasdaq
listing. In determining whether a change of control has occurred,
Nasdaq shall consider all relevant factors including, but not
limited to, changes in the management, board of directors, voting
power, ownership, and financial structure of the Company. Nasdaq
shall also consider the nature of the businesses and the relative
size of the Nasdaq company and non-Nasdaq
entity.”
By
letter dated September 22, 2017, Nasdaq advised Fusion that the
consummation of the Merger would constitute a change of control
within the meaning of Nasdaq Rule 5110(a) and, therefore, Fusion
would be required to file an application for initial listing on
Nasdaq and to meet Nasdaq’s new listing criteria.
Consequently, in anticipation of consummation of the Merger, on
[●],
2017, Fusion submitted an application for listing of the Fusion
Common Stock on Nasdaq post-Merger.
The
Nasdaq new listing criteria require that a company applying for
initial inclusion of its common stock demonstrate its ability to
sustain a minimum bid price of at least $3.00. The following table
sets forth the weekly high and low closing bid prices for the
Fusion Common Stock for the 60 days preceding the date of this
proxy statement.
|
|
|
|
|
December
4, 2017
|
[●]
|
[●]
|
November
27, 2017
|
[●]
|
[●]
|
November
20, 2017
|
[●]
|
[●]
|
November
13, 2017
|
[●]
|
[●]
|
November
6, 2017
|
$2.54
|
$2.40
|
October
30, 2017
|
$2.75
|
$2.49
|
October
23, 2017
|
$2.82
|
$2.58
|
October
16, 2017
|
$2.82
|
$2.80
|
October
9, 2017
|
$2.91
|
$2.80
|
Depending upon the
market price of the Fusion Common Stock between the date of this
proxy statement and the closing of the Merger, the Fusion Common
Stock may not meet the Nasdaq minimum bid price requirements for
new listings. Approval of Proposal No. 2 by the Fusion Stockholders
will provide the Board with discretion, subject to certain
parameters, to effect a reverse split of the outstanding shares of
Fusion Common Stock to the extent such a reverse split is necessary
to satisfy the Nasdaq minimum bid price requirements.
The
Board established the proposed reverse stock split ratio range
following consideration of the Nasdaq listing qualification
standards and taking into account the range within which the Fusion
Common Stock has traded in recent months.
The
Board’s Discretion to Effect the Reverse Stock
Split
If the
reverse stock split proposal is approved by the Fusion
Stockholders, the Certificate of Amendment, the form of which is
attached hereto as Annex
B, will be effected, if at all, only after a
determination by the Board that the reverse stock split is
necessary to comply with Nasdaq’s initial listing
qualification standards. It is currently anticipated that the Board
will implement the reverse stock split prior to the consummation of
the Merger in order to comply with the applicable listing
requirements of The Nasdaq Capital Market®. However,
notwithstanding approval of Fusion’s Stockholders of the
reverse stock split proposal, the Board may, in its sole discretion
and without any further action by the Fusion Stockholders (but
subject to the applicable provisions of the Merger Agreement),
determine not to effect the reverse stock split and abandon the
proposed amendment, as permitted under Section 242(c) of the
DGCL.
Effects of the Reverse Stock Split on Fusion Common
Stock
We
cannot be certain that the reverse stock split will have a
long-term positive effect on the market price of the Fusion Common
Stock or will increase Fusion’s ability to consummate
acquisitions or financing arrangements in the future.
The
market price of the Fusion Common Stock is based on factors that
may be unrelated to the number of shares
outstanding. These factors include its performance,
general economic and market conditions and other factors, many of
which are beyond Fusion’s control. The market price for
its post-split shares may not rise or remain constant in proportion
to the reduction in the number of pre-split
shares. Accordingly, although the reverse stock split
will not, by itself, impact the Company’s assets or
prospects, the total market value of the Fusion Common Stock after
the reverse stock split may be lower than the total market value
before the reverse stock split was effectuated. In the future, the
market price of the Fusion Common Stock following the reverse
stock split may not equal or exceed the market price prior to
the reverse stock split.
The
liquidity of the Fusion Common Stock may be adversely affected by
the reduced number of shares outstanding after the reverse
stock split. In addition, the reverse stock split will
likely increase the number of Fusion stockholders that own
“odd-lots” of less than 100 shares of Fusion Common
Stock. Holders of odd-lots may experience an increase in the cost
of selling their shares and may have greater difficulty in making
sales.
The reverse
stock split will affect all of the holders of the Fusion Common
Stock uniformly. On the Reverse Split Effective Date, each
holder of Fusion Common Stock will own a reduced number of shares
of Fusion Common Stock, but will hold the same percentage of the
outstanding shares of Fusion Common Stock as such stockholder held
prior to the Reverse Split Effective Date.
The reverse
stock split will not affect the par value of the Fusion Common
Stock. As a result, on the Reverse Split Effective Date,
the stated capital on Fusion’s balance sheet attributable to
the Fusion Common Stock will be reduced in proportion with
the reverse stock split, and our additional paid-in capital
account will be credited with the amount by which the stated
capital is reduced. The per share profit/loss and net
book value per share of the Fusion Common Stock will be increased
because there will be fewer shares of Fusion Common Stock
outstanding following the reverse stock split. These accounting
entries will have no impact on total stockholders’
equity. All share and per share information will be
retroactively adjusted following the Reverse Split Effective Date
to reflect the reverse stock split for all periods presented
in future filings.
All
outstanding options, warrants and convertible securities entitling
the holders thereof to purchase shares of Fusion Common Stock will
be adjusted to enable such holders to purchase, upon conversion or
exercise thereof, a reduced number of shares of Fusion Common Stock
based upon the reverse stock split rate, at the same aggregate
price required to be paid therefore upon exercise or conversion
thereof immediately preceding the reverse stock split.
The new
shares of Fusion Common Stock issued in connection with the reverse
stock split will be fully paid and non-assessable. The
reverse stock split proposal will not change any other terms of the
Fusion Common Stock. The new shares will have the same
voting rights and rights to dividends and distributions and will be
identical in all other respects to the pre-split shares of Fusion
Common Stock.
Manner of Effecting the Reverse Split Proposal
If the
Board determines that the reverse stock split is necessary in order
for Fusion to meet The Nasdaq Capital Market® minimum bid
price requirement, the reverse stock split will take place on the
Reverse Split Effective Date without any further action on the part
of Fusion Stockholders. If the reverse stock split is effected, the
Reverse Split Effective Date will be set forth in the Certificate
of Amendment and publicly disclosed.
Certificated
Shares: Following the Reverse Split Effective
Date, each stock certificate representing pre-split shares of
Fusion Common Stock will continue to evidence the number of shares
of Fusion Common Stock issuable as a result of the reverse stock
split. Certificates evidencing post-split shares of Fusion Common
Stock will be issued in due course as stock certificates evidencing
pre-split shares of Fusion Common Stock are tendered for exchange
or transfer to Fusion’s transfer agent. Fusion
will bear the costs of the issuance of the additional stock
certificates. Since we are not
implementing the reverse stock split at this time, we request that
you do not send in any of their stock certificates until requested
to do so by the Company.
Stock
certificates to be issued evidencing post-split shares of Fusion
Common Stock issued in exchange for “free-trading”
stock certificates evidencing pre-split shares of Fusion Common
Stock will be issued as “free-trading” new shares,
without legend. Similarly, stock certificates evidencing post-split
shares that are issued in exchange for “restricted”
pre-split shares of Fusion Common Stock will be issued as
“restricted” shares, bearing the same legend as
appeared on certificates evidencing the corresponding pre-split
shares. Also, for purposes of determining the term of the
restrictive period applicable to the shares after the reverse stock
split, the time period during which a holder of Fusion Common Stock
held their existing pre-split shares will be included in the total
holding period.
Uncertificated
Shares: Certain of Fusion’s registered holders
of Fusion Common Stock may hold some or all of their shares
electronically in book-entry form with Fusion’s transfer
agent. These stockholders do not have stock certificates evidencing
their ownership of the Fusion Common Stock. They are, however,
provided with a statement reflecting the number of shares
registered in their accounts.
If a
Fusion stockholder holds registered shares in book-entry form with
Fusion’s transfer agent, no action needs to be taken to
receive post-reverse split shares. If a Fusion stockholder is
entitled to post-reverse split shares, a transaction statement will
automatically be sent to the stockholder’s address of record
indicating the number of shares of Fusion Common Stock held
following the reverse stock split.
Shares Held in Street
Name: No action need be taken by Fusion stockholders whose
shares are held in “street name” through an
Organization. On the Reverse Split Effective Date, we intend to
treat shares held by Fusion stockholders in “street
name” in the same manner as registered stockholders whose
shares are registered in their names. Organizations will be
instructed to effectuate the reverse stock split for their
beneficial holders holding shares of pre-split Fusion Common Stock
in “street name.” However, Organizations may have
different procedures than registered Fusion stockholders for
processing the reverse stock split. Stockholders holding shares of
Fusion Common Stock with an Organization and having any questions
in this regard are encouraged to contact their Organization for
further information.
Fractional
Shares
No
fractional shares will be issued in connection with the reverse
stock split and any fractional share to which a stockholder may be
entitled as a result of the Reverse Stock Split shall be rounded up
to the nearest whole share.
Potential Anti-Takeover Effect
Although the
increased proportion of authorized but unissued shares of Fusion
Common Stock to issued shares could, under certain circumstances,
have an anti-takeover effect (for example, by permitting issuances
that would dilute the stock ownership of a person seeking to effect
a change in the composition of the Board or contemplating a tender
offer or other transaction for the combination of Fusion with
another company), the reverse stock split is not being proposed in
response to any effort of which Fusion is aware to accumulate
shares of Fusion Common Stock or obtain control of Fusion, nor is
it part of a plan by management to recommend a series of similar
amendments to the Board. Rather, the reverse stock split is being
proposed solely in connection with the Merger in order to satisfy
Nasdaq’s minimum bid price requirements. Other than the
reverse stock split proposal and the other proposals set forth in
this proxy statement pertaining to the Merger and the other
transactions contemplated by the Merger Agreement, the Board does
not currently contemplate recommending the adoption of any other
actions that could be construed to affect the ability of third
parties to take over or effect a change of control of
Fusion.
No
Appraisal Rights
Under
the DGCL, Fusion Stockholders are not entitled to appraisal rights
with respect to the reverse stock split, and Fusion will not
independently provide stockholders with any such
right.
Certain Federal Income Tax Consequences
The
reverse stock split should not result in any recognition of gain or
loss by Fusion stockholders. The holding period of the
post-split shares will include the stockholder’s holding
period for the corresponding pre-split shares of Fusion Common
Stock owned prior to the reverse stock split. The
adjusted basis of the post-split shares (including the original
shares) will be equal to the adjusted basis of a Fusion
stockholder’s original shares of Fusion Common
Stock.
Fusion’s
beliefs regarding the tax consequence of the reverse stock split
are not binding upon the Internal Revenue Service or the courts,
and there can be no assurance that the Internal Revenue Service or
the courts will accept the positions expressed
above. This summary does not purport to be complete and
does not address the tax consequences to holders that are subject
to special tax rules, such as banks, insurance companies, regulated
investment companies, personal holding companies, foreign entities,
nonresident foreign individuals, broker-dealers and tax exempt
entities. The state and local tax consequences of the
reverse stock split may vary significantly as to each stockholder,
depending upon the state in which he or she resides.
The
foregoing summary is included for general information
only. Accordingly, Fusion stockholders are urged to
consult their own tax advisors with respect to the federal, state
and local tax consequences of the reverse stock split.
Effect on Other Proposals
If
Proposal Nos. 1, 2 and 3 are approved by Fusion Stockholders at the
Annual Meeting, and it is determined that the reverse stock split
is necessary for Fusion to comply with the Nasdaq new listing
criteria, the proposed amendment to Fusion’s certificate of
incorporation to effect the reverse stock split will be filed with
the Secretary of State of the State of Delaware. However, even if
Proposal Nos. 1 and 3 are approved by Fusion Stockholders, if
Fusion Stockholders do not approve this Proposal No. 2, Fusion may
be unable to comply with the closing conditions in the Merger
Agreement that require that the Merger Shares be approved for
listing on Nasdaq.
Required Vote and Board Recommendation
Approval of this
Proposal No. 2 requires the affirmative vote of the holders of at
least a majority of the Voting Shares issued and outstanding as of
the Record Date and entitled to vote thereon, voting as a single
class. Abstentions and broker non-votes will have the effect of a
vote “AGAINST”
this Proposal No. 2.
THE
BOARD UNANIMOUSLY RECOMMENDS THAT THE FUSION STOCKHOLDERS VOTE
“FOR” PROPOSAL NO. 2.
PROPOSAL NO. 3 – AMENDED AND RESTATED CERTIFICATE OF
INCORPORATION
Background of and Reasons for the Proposal
At the
Annual Meeting, Fusion Stockholders will be asked to adopt the
Restated Charter. The adoption of the Restated Charter is required
by the terms of the Merger Agreement and is a condition precedent
to closing of the transactions contemplated thereby. A copy of the
Restated Charter is attached hereto as Annex
C.
As
discussed in more detail below, the Restated Charter will be filed
at the Effective Time in order to, among other things:
●
satisfy
Fusion’s obligation under the Merger Agreement;
●
change
Fusion’s corporate name to “Fusion Connect, Inc.”
to better reflect its image, brand and post-Merger cloud services
business focus;
●
provide Fusion with
a sufficient number of authorized shares of Fusion Common Stock to
enable Fusion to issue the Merger Shares in accordance with the
Merger Agreement; and
●
provide the Company
with greater flexibility in considering and planning for potential
future corporate needs.
If the
Merger and the Restated Charter are approved by Fusion
Stockholders, the Restated Charter will be filed with the Secretary
of State of the State of Delaware at the Effective
Time.
Name Change
Fusion
has included in the Restated Charter an amendment changing its
corporate name to “Fusion Connect, Inc.” Fusion
believes that it is in the Company’s best interests to modify
the corporate name to better reflect the Company’s image,
brand and post-Merger North American business focus.
Increase in Authorized Shares of Fusion Common Stock
Fusion’s
current certificate of incorporation authorizes the issuance of up
to 90,000,000 shares of Fusion Common Stock and 10,000,000 shares
of preferred stock. In connection with its
approval of the Merger Agreement and the transactions contemplated
thereby, the Board has approved, subject to the approval of Fusion
Stockholders, the Restated Charter, which provides for, among other
things, an increase of the total number of authorized shares of
Fusion Common Stock from 90,000,000 to
150,000,000.
As of
the Record Date, [●]
shares of Fusion Common Stock were issued and
outstanding. In addition, approximately [●]
shares of Fusion Common Stock are reserved for future issuance
under Fusion’s employee equity incentive plans, outstanding
warrants and conversion of all outstanding shares of Fusion’s
preferred stock. As a result, the number of shares of Fusion Common
Stock currently available for issuance is [●].
The
Merger Agreement provides, among other things, that upon
consummation of the Merger, Fusion will issue to BCHI Holdings a
number of shares of Fusion Common Stock equal to three (3) times
(i) the number of shares of Fusion Common Stock issued and
outstanding immediately prior to the Effective Time, plus (ii) the number of shares of
Fusion Common Stock issued or issuable upon the conversion of all
shares of all classes or series of Fusion’s preferred stock
outstanding immediately prior to the Effective Time, plus (ii) the number of shares of
Fusion Common Stock issuable upon the exercise of all in-the-money
warrants (as adjusted for stock splits and calculated using the
treasury stock method).
If the
Effective Time had taken place on the Record Date, the number of
Merger Shares to be issued by Fusion to BCHI Holdings pursuant to
the Merger Agreement would have been [●]
shares of Fusion Common Stock. Thus, if the Effective Time had
taken place on the Record Date, Fusion would have required at least
[●]
additional shares of Fusion Common Stock to issue the Merger Shares
to BCHI Holdings at the
Effective Time. Based on the foregoing, it is necessary to increase
the total number of authorized shares of Fusion Common Stock in
order to satisfy Fusion’s obligations under the Merger
Agreement.
The
Board also believes that the additional authorized shares of Fusion
Common Stock will provide Fusion with the necessary flexibility to
utilize shares for various corporate purposes that may be
identified in the future. These corporate purposes may include, but
are not limited to, potential strategic transactions (such as
mergers, acquisitions and other business combinations), future
stock splits and stock dividends, capital-raising or financing
transactions, grants and awards under the equity incentive plans,
and other types of general corporate purpose transactions. The
Board believes that it is important for the Company to have the
flexibility to issue shares beyond the number of shares of Fusion
Common Stock that remain available for issuance without the delay
or expense associated with convening a special stockholders’
meeting to secure stockholder approval at that
time. Except as described above, Fusion does not
currently have any plans, commitments, arrangements, understandings
or agreements to issue any of the additional shares of Fusion
Common Stock that would be authorized pursuant to the Restated
Charter.
The
additional authorized shares of Fusion Common Stock, if and when
issued, would be part of the existing class of Fusion Common Stock
and would have the same rights and privileges as the shares of
Fusion Common Stock currently outstanding. Except for the Merger
Shares, the authorization of the additional shares of Fusion Common
Stock sought by this proposal would not have any immediate
dilutive effect on the proportionate voting power or other rights
of existing stockholders but, to the extent that the additional
authorized shares of Fusion Common Stock are issued in the future
or are used in connection with securities convertible into shares
of Fusion Common Stock, they may decrease existing
stockholders’ percentage of equity ownership and thus could
be dilutive to existing stockholders. Depending on the price at
which such shares are issued, they also may have a negative effect
on the market price of the Fusion Common Stock. Any such future
issuances also could have a dilutive effect on the Company’s
earnings per share and book value per share.
In
addition, although the Board has not proposed the increase in the
total number of authorized shares of Fusion Common Stock with the
intent of using the additional shares to prevent or discourage any
actual or threatened takeover of Fusion, under certain
circumstances, such shares could have an anti-takeover effect. For
example, the additional shares could be issued to dilute the stock
ownership or voting rights of persons seeking to obtain control of
Fusion or could be issued to persons allied with the Board or
management, thereby having the effect of making it more difficult
to remove directors and management by diluting the stock ownership
or voting rights of persons seeking to effect such a removal or to
otherwise effect a takeover of Fusion. As such, if the Restated
Charter is approved, the additional shares of authorized Fusion
Common Stock may render more difficult or discourage a
non-consensual merger, a tender offer or proxy contest, the
assumption of control by a holder of a large block of the Fusion
Common Stock, or the replacement or removal of the
Board.
Applicable law
requires that Fusion disclose in connection with this proposal the
provisions in its certificate of incorporation and by-laws that
could have an anti-takeover effect. The following provisions of
Fusion’s charter or by-laws may have the effect of
preventing, discouraging or delaying a change in the control of
Fusion:
●
Our by-laws provide
that special meetings may be called by the Board or the Chief
Executive Officer, or upon written request delivered to the Chief
Executive Officer by stockholders holding at least a majority of
all the shares entitled to vote at the meeting, and that no
business other than that stated in the notice may be transacted at
any special meeting; provided, however, that matters given by or at
the direction of the Board may be presented. In
addition, the Company’s Chairman, in his or her sole
discretion, may present, or accept for presentation, procedural
matters. These provisions may have the effect of delaying
consideration of a stockholder proposal until the next annual
meeting unless a special meeting is called by the Board or the
Company’s stockholders, as noted above.
●
Our charter
provides for 10,000,000 authorized shares of preferred stock, which
may enable the Company to render more difficult or to discourage an
attempt to obtain control of it by means of a non-consensual
merger, a tender offer, proxy contest, or otherwise. Our
charter also grants the Board broad powers to establish the rights
and preferences of authorized and unissued shares of preferred
stock, which could be used to adversely affect the rights and
powers, including voting rights, of stockholders and could also
have the effect of delaying, deterring or preventing a change in
control of the Company.
It is
not the intended purpose of, and the Board has no current intention
or plan to employ the proposed increase in authorized shares to
discourage or prevent any persons from attempting to take
over the Company. Rather, the Restated Charter is being
proposed in connection with the transactions contemplated by the
Merger Agreement. In addition, it is the intended purpose of the
proposed increase in authorized shares to provide greater
flexibility to the Board in considering and planning for potential
future corporate needs, as described above.
Other Amendments Contemplated by the Restated Charter
It is a
condition precedent to consummation of the Merger that all
outstanding shares of all series of Fusion’s preferred stock
be converted into shares of Fusion Common Stock prior to the
Effective Time or, if not so converted, cancelled immediately prior
to the Effective Time in accordance with their terms. As a result,
at the Effective Time, Fusion will have no shares of preferred
Stock issued or outstanding.
The
Restated Charter eliminates all previously designated series of
Fusion’s preferred stock. Following the completion of the
Merger, the Board will be authorized to issue 10,000,000 shares of
undesignated preferred stock.
No Dissenter’s Rights
Under
the DGCL, Fusion Stockholders are not entitled to dissenter’s
rights or appraisal rights with respect to the Restated Charter
proposal.
Effect on Other Proposals
Approval of
Proposal No. 3 by Fusion Stockholders is a separate vote from
approval of the Merger pursuant to Proposal No. 1 and from approval
of the amendment to the certificate of incorporation to effectuate
the reverse stock split pursuant to Proposal No. 2. Thus, Fusion
Stockholders may approve the Merger pursuant to Proposal No. 1 and
the reverse stock split pursuant to Proposal No. 2, but not approve
the Restated Charter pursuant to this Proposal No. 3. However, if
Fusion Stockholders do not approve the Restated Charter, Fusion
will not have satisfied the condition precedent under the Merger
Agreement, even if Proposal No. 1 and Proposal No. 2 are approved
by Fusion Stockholders. Moreover, if the Restated Charter is not
approved by Fusion Stockholders, the number of authorized shares of
Fusion Common Stock will not be increased as contemplated by the
Restated Charter and, as a result, Fusion may not have a sufficient
number of authorized shares of Fusion Common Stock to consummate
the issuance of the Merger Shares in accordance with the Merger
Agreement.
Required Vote and Board Recommendation
Approval of this
Proposal No. 3 requires the affirmative vote of the holders of at
least a majority of the Voting Shares issued and outstanding as of
the Record Date and entitled to vote thereon, voting as a single
class. Abstentions and broker non-votes will have the effect of a
vote “AGAINST”
this Proposal No. 3.
THE
BOARD UNANIMOUSLY RECOMMENDS THAT THE FUSION STOCKHOLDERS VOTE
“FOR” PROPOSAL 3.
PROPOSAL 4 – ADJOURNMENT OF THE ANNUAL MEETING
We are asking you to approve a proposal to approve
one or more adjournments of the Annual Meeting to a later date or
dates, if necessary, to solicit additional proxies if, at the time
of the Annual Meeting, there are insufficient votes to approve the
proposals to adopt the Merger Agreement (Proposal No.
1), to adopt the Certificate of
Amendment (Proposal
No.2) and to adopt the Restated
Charter (Proposal No.
3).
If
the Fusion Stockholders approve the adjournment proposal, we could
adjourn the Annual Meeting and any adjourned session of the Annual
Meeting and use the additional time to solicit additional proxies,
including the solicitation of proxies from Fusion Stockholders that
have previously returned properly executed proxies voting against
the adoption of the Merger Agreement or other related proposals.
Among other things, approval of the adjournment proposal could mean
that, even if we had received proxies representing a sufficient
number of votes against the proposal to adopt the Merger Agreement,
such that the proposal would be defeated, we could adjourn the
Annual Meeting without a vote and seek to convince the holders of
Voting Shares to change their votes to votes in favor of the
adoption of the Merger Agreement.
If
the Annual Meeting is adjourned, stockholders who have already
submitted their proxies will be able to revoke them at any time
before such proxies are voted at the Annual Meeting, as adjourned.
If the adjournment is for more than 30 days, a notice of the
adjourned meeting shall be given to each stockholder of record
entitled to vote at the meeting.
Required Vote and Board Recommendation
Approval
of the adjournment proposal requires the affirmative vote of a
majority of the Voting Shares cast at the Annual Meeting in person
or represented by proxy and entitled to vote thereon (whether or
not a quorum is present), voting as a single class. Abstentions and
broker non-votes will not affect the outcome of this Proposal No.
4.
THE
BOARD UNANIMOUSLY RECOMMENDS THAT THE FUSION STOCKHOLDERS VOTE
“FOR” PROPOSAL 4.
PROPOSAL NO. 5 --
ADVISORY VOTE ON MERGER-RELATED COMPENSATION OF
FUSION’S NAMED EXECUTIVE OFFICERS
Background and Reasons for the Proposal
Pursuant to the Dodd-Frank Wall Street Reform and
Consumer Protection Act of 2010, Section 14A of the Exchange
Act and Rule 14a-21(c) under the Exchange Act, Fusion is providing
the Fusion Stockholders with an opportunity to cast a non-binding,
advisory vote on the compensation of the Company’s named
executive officers that is based on or otherwise relates to the
Merger, as disclosed under "The
Merger - Interests of Fusion's Officers and Directors in the Merger
- Named Executive Officers Golden Parachute
Compensation" beginning on page 61 of this proxy statement. The
proposal gives Fusion Stockholders the opportunity to express their
views on the Merger-related compensation of the Company’s
named executive officers, including the agreements and
understandings pursuant to which such compensation will or may
become payable. The Board encourages you to carefully review the
information regarding the Merger-related compensation of the
Company’s named executive officers disclosed in this proxy
statement.
As
required by Section 14A of the Exchange Act, Fusion is requesting
stockholders to adopt the following resolution, on a non-binding,
advisory basis:
“RESOLVED, that the stockholders hereby
approve, on a non-binding basis, the compensation that will or may
become payable to Fusion’s named executive officers in
connection with the Merger, including the agreements and
understandings pursuant to which such compensation will or may
become payable, in each case as disclosed pursuant to Item 402(t)
of Regulation S-K under "The Merger -
Interests of Fusion's Officers and Directors in the Merger - Named
Executive Officers Golden Parachute Compensation."
Effects on Other Proposals
The
vote on this Proposal No. 5 is separate and apart from the vote on
Proposal No. 1 and is not a condition to completion of the Merger.
Accordingly, you may vote not to approve this Proposal No. 5 and
vote to adopt the Merger Agreement, and vice versa. Approval of
this Proposal No. 5 is not a condition to completion of the Merger,
and failure to approve this Proposal No. 5 will have no effect on
the vote to adopt the Merger Agreement. Because the vote on this
Proposal No. 5 is advisory in nature, it will not be binding on
Fusion or the Board, regardless of whether the Merger Agreement is
adopted. Further, the underlying plans and arrangements with the
named executive officers pursuant to which their Merger-related
compensation is payable in connection with the Merger are
contractual in nature and not, by their terms, subject to
stockholder approval. Accordingly, regardless of the outcome of the
advisory vote on this Proposal No. 5, if the Merger is consummated,
the named executive officers will be eligible to receive the
compensation that is based on or otherwise relates to the Merger in
accordance with the terms and conditions applicable to those
payments.
Required Vote and Board Recommendation
Approval, on a
non-binding advisory basis, of the Merger-related compensation of
Fusion’s pre-Merger- named executive officers requires the
affirmative vote of a majority of the Voting Shares cast at the
Annual Meeting in person or represented by proxy and entitled to
vote thereon, voting as a single class. Abstentions and broker
non-votes will not affect the outcome of this Proposal No.
5.
THE
BOARD UNANIMOUSLY RECOMMENDS THAT THE FUSION STOCKHOLDERS VOTE
“FOR” THE APPROVAL, ON A NON-BINDING ADVISORY BASIS, OF
PROPOSAL NO. 5.
EXECUTIVE OFFICERS OF FUSION
Identification and Background of Executive Officers
Set
forth below is a brief description of the present and past business
experience of each of our executive officers.
Matthew D. Rosen, Age 45, Chief Executive Officer and
Director
Mr.
Rosen has served as a director since May 2005 and has been our
Chief Executive Officer since March 2006. He served as our
President from March 2006 until March 2008, as our Chief Operating
Officer from August 2003 to March 2006, as our Executive Vice
President and Chief Operating Officer from February 2002 to August
2003, as our Executive Vice President and President of Global
Operations from November 2000 to January 2002 and as our President
of US Operations from March 2000 to November 2000. Mr. Rosen
is the son of our Chairman of the Board, Marvin Rosen.
Philip D. Turits, Age 84, Secretary, Treasurer, and
Director
Mr.
Turits co-founded the Company in 1997 and has served as a director
since September 1997, our Secretary since October 1997, our
Treasurer since March 1998 and Vice Chairman of the Board from
March 1998 to December 1998. From September 1991 to February 1996,
Mr. Turits served as Treasurer and Chief Operating Officer for
Larry Stuart, Ltd., a consumer products company, and prior to 1991
he served as President and Chief Executive Officer of Continental
Chemical Company.
Gordon Hutchins, Jr., Age 68, President, Chief Operating
Officer
Mr.
Hutchins has served as our President and Chief Operating Officer
since March 2008. Mr. Hutchins served as our Executive Vice
President from December 2005 to March 2008 and as Acting Chief
Financial Officer from January 2010 until April
2016. Prior to joining the Company, Mr. Hutchins served
as President and Chief Executive Officer of SwissFone, Inc., a
telecommunications carrier. Prior to joining SwissFone,
Mr. Hutchins served as President and Chief Executive Officer of
STAR Telecommunications, Inc., an international telecommunications
carrier. Mr. Hutchins has also served as President and
Chief Executive Officer of GH Associates, Inc., a
management-consulting firm that he
founded. During his early career, Mr.
Hutchins served as President and Chief Executive Officer of LDX
NET, Inc., a fiber optic network company, and held positions with
MCI, McDonnell Douglas Corporation and AT&T.
Michael R. Bauer, Age 45, Chief Financial Officer
Mr.
Bauer has served as our Chief Financial Officer since April 13,
2016. Prior to joining the Company, Mr. Bauer served as Chief
Financial Officer at GTT Communications Inc. from June 2012 to June
2015. Prior to serving as GTT’s Chief Financial Officer, Mr.
Bauer served as its acting Chief Financial Officer, Principal
Accounting Officer and Treasurer from December 2011 to June 2012
and as its Vice President, Finance and Controller from June 2009 to
December 2011. Mr. Bauer has over 20 years of broad finance and
accounting experience. Prior to joining GTT, Mr. Bauer led the
financial planning and analysis and investor relations efforts at
MeriStar Hospitality Corporation. Mr. Bauer began his career with
Arthur Andersen in audit and business advisory
services.
Jonathan Kaufman, Age 58, Chief Strategy Officer
Mr.
Kaufman has served as our Chief Strategy Officer since January
2015. Prior to assuming that position, Mr. Kaufman
served as President, Business Services, from October 2012 (the date
we acquired his company, NBS, a company he founded in 1998) until
January 2015. From its founding until its sale in 2012,
Mr. Kaufman served as Chief Executive Officer of
NBS. Prior to founding NBS, Mr. Kaufman served as Chief
Executive Officer of Target Telecom Inc., a telecommunications
service company that he founded in 1984 and sold to WorldCom in
1996.
Russell P. Markman, Age 66, President Business
Services
Mr.
Markman has served as our President Business Services since January
2015. Prior to assuming that role, Mr. Markman served as Executive
Vice President, Business Services from October 2012 to January
2015. Prior to our acquisition of NBS in October
2012, Mr. Markman served as President of that company from January
2009 to October 2012. Prior to becoming
President of NBS, Mr. Markman served as Vice President, Operations
from October 2003 to October 2012. Prior to joining NBS,
Mr. Markman established the alternate channel distribution program
for commercial sales at RCN Corporation, where he served as
Director of Commercial Sales.
Jan Sarro, Age 63, Executive Vice President – Marketing and
Business Development
Ms.
Sarro has served as our Executive Vice President of Marketing and
Business Development since November 2012. Prior to
assuming that role, Ms. Sarro served as our Executive Vice
President – Corporate Services from March 2008 to October
2012, as our Executive Vice President, Carrier Services from April
2005 to March 2008, and as our Vice President of Sales and
Marketing from March 2002 to April 2005. Prior to joining the
Company, Ms. Sarro served as President of the Americas for Viatel,
Inc., a global, facilities-based communications carrier. Ms. Sarro
has over 20 years of experience in the telecommunications
industry. Ms. Sarro has also held senior executive
marketing and sales management positions at Argo Communications,
FTC Communications, TRT Communications and WorldCom.
James P. Prenetta, Jr., Age 55, Executive Vice President and
General Counsel
Mr.
Prenetta has served as our Executive Vice President and General
Counsel since June 2017 and previously served in that role from May
2014 through January 2015. From January 2015 to June 2017, Mr.
Prenetta acted as Corporate Counsel to Fusion. From September 2009
to January 2017, Mr. Prenetta served as General Counsel and
Corporate Secretary for Hibernia NGS Limited and its various
subsidiaries. Prior to joining Hibernia Networks, Mr. Prenetta
served as Senior Vice President, General Counsel and Corporate
Secretary for One Communications Corporation and its successor CTC
Communications Corp. from January 2004 to September 2009. From 2003
to 2009, Mr. Prenetta has also served as special counsel to
Columbia Ventures Corporation, an investment firm and a major
shareholder of Hibernia Networks and One Communications, a
competitive local exchange carrier.
Lisa Taranto, Age 50, Vice President, Finance and Principal
Accounting Officer
Ms.
Taranto has served as our Principal Accounting Officer since August
2015 and as our Vice President, Finance since January
2014. From January 2014 until August 2015, she also held
the position of Vice President, Accounting. Prior to
joining us, Ms. Taranto served as Vice President, Finance and
Accounting for Broadvox, LLC and from January 2006 to January 2011
served as Vice President, Accounting and Financial Operations for
Cypress Communications. From May 2003 to April 2005, Ms.
Taranto held senior financial management roles at AirGate PCS (a
Sprint Company), where she built the company’s settlements
operations organization and held a position on that company’s
external controls and disclosures committee. Ms. Taranto has over
25 years of financial management experience in the communications
industry. Earlier in her career, Ms. Taranto held executive
management roles at MCI/Verizon Business, where she led the Global
Financial Operations and IT Revenue Systems
organizations.
EXECUTIVE COMPENSATION
Fiscal 2016 Summary Compensation Table
The
following table summarizes all compensation recorded by us in each
of the last two completed fiscal years for our named executive
officers.
|
|
|
|
|
|
|
|
|
Name and
Principal Position
|
|
|
|
|
|
|
|
|
Matthew D.
Rosen,
|
|
2016
|
$425,000
|
$350,000
|
$-
|
$259,230
|
$2,102
|
$1,036,332
|
Chief Executive
Officer
|
|
2015
|
$425,000
|
$350,000
|
$-
|
$192,218
|
$3,311
|
$970,529
|
|
|
|
|
|
|
|
|
Gordon Hutchins,
Jr.,
|
|
2016
|
$275,000
|
$60,000
|
$-
|
$72,584
|
$456
|
$408,040
|
President &
Chief Operating Officer
|
|
2015
|
$275,000
|
$60,000
|
$-
|
$67,237
|
$448
|
$402,685
|
|
|
|
|
|
|
|
|
Michael R. Bauer,
Chief Financial Officer
|
|
2016
|
$179,006
|
$41,000
|
$99,550
|
$57,031
|
$468
|
$377,055
|
___________________
(1)
|
Included
in these columns are amounts earned, though not necessarily paid to
the named executive officer, during the corresponding fiscal year.
Named executive officers consists of: (i) Fusion’s Principal
Executive Officer regardless of compensation level, and (ii) the
Company’s two most highly compensated executive officers
(other than its Principal Executive Officer), who were serving as
such on December 31, 2016 and whose total 2016 compensation
exceeded $100,000, and (iii) up to two additional individuals for
whom disclosure would have been provided but for the fact that the
individual was not serving as an executive officer of Fusion on
December 31, 2016.
|
(2)
|
The
amount reported in this column for Mr. Rosen for 2015 includes
$25,000 of compensation taken by Mr. Rosen in the form of 11,468
shares of Fusion Common Stock. The price of $2.18 per share of
Fusion Common Stock, the closing bid price of the Fusion Common
Stock on the date of issuance of these shares (December 4, 2015),
was used to determine the number of shares issued.
|
(3)
|
Reflects
55,000 restricted shares of
Fusion Common Stock that vest ratably over a period of three years
that Mr. Bauer received in connection with his appointment as Chief
Financial Officer.
|
(4)
|
Reflects
the dollar amount recognized for financial statement reporting
purposes for the fiscal years ended December 31, 2016 and 2015, for
restricted stock and option awards. The value attributable to
restricted share and option awards is computed based on aggregate
grant date fair value in accordance with Financial Accounting
Standards Board (referred to as FASB) ASC Topic 718, and the
assumptions made in the valuations of the restricted shares and
option awards are included in Note 2 (Summary of Significant
Accounting Policies – Stock Based Compensation) of the notes
to Fusion’s consolidated financial statements for the year
ended December 31, 2016 included in Fusion’s Annual Report on
Form 10-K for the year ended December 31, 2016. Pursuant to SEC
rules, the amounts shown exclude the impact of estimated
forfeitures related to service-based vesting
conditions.
|
(5)
|
Represents
life insurance premiums paid by the Company.
|
Employment Agreements, Termination of Employment and
Change-In-Control Arrangements
On
November 5, 2015, the Company executed an employment agreement with
Matthew D. Rosen, its Chief Executive Officer. The term of Mr.
Rosen's employment agreement with the Company will expire on
October 31, 2018. The Company and Mr. Rosen intend to negotiate and
enter into a new employment agreement to take effect upon
expiration of such existing contract, or sooner. Mr.
Rosen’s employment agreement provides (a) for an annual base
salary of not less than $425,000 (subject to annual review for cost
of living increases, performance and market conditions), (b) for an
annual bonus equal to at least 50% of base salary if the Company
achieves positive adjusted EBITDA, and (c) that in the event his
employment is terminated (1) by the Company without
“cause” (as defined in his employment agreement),
or (2) by Mr. Rosen for “good reason” (as
defined in his employment agreement), including as a
result of a resignation by Mr. Rosen for any reason within six
months following a change in control of the Company (as defined in
his agreement), he will receive unpaid base salary accrued through
the effective date of the termination plus any pro-rata bonus that
would be payable had he completed a full year of employment and a
lump sum payment (within 30 days of the effective date of
said transaction) equal to 200% of his base salary then in
effect and 200% of his highest annual bonus for the three
years preceding his termination. In addition, upon any
such termination of employment, all stock options held by Mr. Rosen
would vest in full. Mr. Rosen’s employment agreement also
provides that the Company will cooperate in good faith to afford
Mr. Rosen the right to exercise his stock options in full
immediately prior to a change in control.
Mr.
Rosen’s employment agreement also includes a one year
non-disclosure, employee non-solicitation and non-compete
provisions.
In the event of a sale of the Company or
substantialy all of the assets of the Company and its subsidiaries
for cash or securities or a combination thereof, Mr. Rosen is
entitled to a one-time bonus equal to the following: (i) if the
Fusion stockholders receive aggregate consideration
of up to $149,999,999, Mr. Rosen is
entitled to receive a special bonus equal to 2.5% of such
consideration paid/distributed to the Fusion stockholders; (ii)
3.5% of such consideration if such consideration is between $150
million and $249,999,999; (iii) 4.5% if such consideration is
between $250 million and $349,999,999; and (iv) 5% if such
consideration exceeds
$350 million. The Compensation
Committee, with advice of counsel, has determined that the Merger does not
trigger the payment of the one-time bonus contemplated by this
provision of Mr. Rosen's employment agreement.
That fact notwithstanding, and considering that
the structure of the BCHI transaction was not contemplated by the
terms of Mr. Rosen’s employment agreement,
the
Compensation Committee has determined that a special one-time
transaction bonus is warranted and it intends to retain the
services of an outisde compensation consultant to determine the
appropriate bonus amount. Such bonus would be subject to the
approval of the Board and BCHI and is contingent upon the closing
of the Merger.
Mr. Rosen’s employment agreement also provides that the Board
will, within ninety (90) days following execution of the employment
agreement, develop a plan that enables Mr. Rosen
to obtain a five percent (5%) equity stake in the
Company within three years from the date of his employment
agreement. On November 13, 2017, the Board granted and
Mr. Rosen agreed to accept options to purchase 822,298
shares of Fusion Common Stock in satisfaction of this obligation,
two thirds of these options vest on the date of grant and
one-third will vest on February 3, 2018. The exercise price of
these options, which is $2.51, was set at the closing price of
Fusion’s Common Stock on November 10, 2017 (the last trading
day before the grant was approved by the
Board).
In
2016, the Company declared a special bonus to Mr. Rosen in the
amount of $535,500 for bonus amounts due but not paid by the Company for periods
prior to 2014.
Gordon
Hutchins Jr. serves as Fusion’s President and Chief Operating
Officer. Mr. Hutchins does not have a written employment
agreement with the Company. Effective January 1, 2015,
Mr. Hutchins’ annual salary was increased to
$275,000. Mr. Hutchins is entitled to receive a bonus
of up to 25% of his annual salary if the Company achieves
designated corporate performance metrics.
Michael
R. Bauer serves as the Company’s Chief Financial Officer. Mr.
Bauer does not currently have a formal employment agreement with
the Company. However, his offer letter provides that his annual
salary is $250,000 and he is entitled to receive a bonus of up to
25% of his annual salary if Fusion achieves designated corporate
performance metrics. In connection with his appointment as Chief
Financial Officer, in 2016 Mr. Bauer received a grant of 55,000
generally restricted shares of Fusion Common Stock, which shares
vest ratably over a three year period and which shares (along with
stock options granted to Mr. Bauer) vest in the event of a change
in control of the Company (as defined in his offer letter). In the
event Mr. Bauer’s employment is terminated (i) within six
months following a change in control, except for
“Cause” (as defined in his offer letter), or (ii) by
the Company “Without Cause” (as defined in his offer
letter), or (iii) due to a resignation by Mr. Bauer for “Good
Reason” (as defined in his offer letter) then the Company is
obligated to pay him severance in an amount equal to salary and the
cost of health benefit continuation for a period of six months (in
a lump sum or installments, at the election of the
Company).
Determination of Executive Compensation
The
compensation of Fusion’s Chief Executive Officer is
determined by the Compensation Committee. The
compensation of Fusion’s other executive officers is
determined by the compensation committee of the Board (referred to
as the Compensation
Committee), in consultation with the Chief Executive
Officer. In determining the levels and forms of compensation to be
paid to Fusion’s executive officers, the Compensation
Committee considers overall Company performance, departmental or
business segment performance, individual executive performance and
experience, internal equity with regard to other executive
positions, general economic conditions, and typical levels and
forms of compensation at similarly-sized companies with business
models similar to ours.
In
considering levels and forms of compensation at other companies,
the Compensation Committee relies not only on its own knowledge,
but also on published salary reviews and compensation studies for
companies with business models similar to Fusion’s, for
specific executive positions and for the industry in
general.
The
Company’s goal is to provide each of Fusion’s executive
officers with a total compensation package (base salary, the
potential for a performance-based annual cash bonus, and time-based
equity incentives) that is competitive. The Company
endeavors to appropriately balance the levels of fixed compensation
and “at risk” compensation, as well as the levels of
cash compensation and equity incentives.
In
addition to cash-based and equity-based compensation,
Fusion’s executive officers are eligible to participate in
the benefit programs that are offered to all of its employees,
including medical insurance, dental insurance, life insurance, a
401(k) plan, and a variety of other elective benefit
plans. The Company does not currently offer perquisites
or other significant benefits to our executive officers that are
not otherwise available to all of Fusion’s
employees.
2016 Equity Incentive Plan
On
October 28, 2016, the Fusion Stockholders approved the Fusion
Telecommunications International, Inc. 2016 Equity Incentive Plan
(referred to as the 2016 Plan), which was previously adopted by the
Board on August 22, 2016. The 2016 Plan provides for the grant of
incentive stock options, non-qualified stock options, stock
appreciation rights (referred to as SARs), restricted stock, restricted
stock units, stock grants, stock units, performance shares,
performance share units and performance cash (referred to
collectively as Awards).
The 2016 Plan also permits the grant of Awards that are intended to
qualify for the “performance-based compensation”
exception to the $1.0 million limitation on the deduction of
compensation imposed by Section 162(m) of Code. The 2016
Plan supersedes and replaces the 2009 Plan, which plan remains in
effect solely with respect to outstanding awards that have not been
exercised, forfeited, canceled, expired or otherwise terminated.
The 2016 Plan provides a long-term, equity-based incentive designed
to assist our retention of key personnel, align the interests of
our directors, executive officers and employees with those of our
stockholders and focus participants on the achievement of long-term
business objectives that will increase share value.
The
total number of shares of Common Stock reserved under the 2016 Plan
is an amount equal to ten percent (10%) of the Company’s
shares outstanding from time-to-time on a fully-diluted basis,
plus shares from any award granted under the 2009 Stock Option Plan
(referred to as the 2009
Plan) that terminates, expires or lapses following the
effective date of the 2016 Plan. In addition, the 101,749 shares
not granted under the 2009 Plan are also available for grant
under the 2016 Plan. Subject to the express provisions of the
2016 Plan, if any award granted under the 2016 Plan terminates,
expires, or lapses for any reason, or is paid in cash, any stock
subject to or surrendered will again be stock available for the
grant of an award under the 2016 Plan. The maximum number of shares
of Fusion Common Stock that may be issued as incentive stock
options is limited to 2.2 million shares. The exercise of a
stock-settled SAR, or broker-assisted “cashless”
exercise of an option (or a portion thereof) will reduce the number
of shares of Fusion Common Stock available for issuance pursuant to
the 2016 Plan by the entire number of shares of Fusion Common Stock
subject to that SAR or option (or applicable portion thereof), even
though a smaller number of shares of Fusion Common Stock will be
issued upon such an exercise. Also, shares of Fusion Common Stock
tendered to pay the exercise price of an option or tendered or
withheld to satisfy a tax withholding obligation arising in
connection with an award will not become available for use under
the 2016 Plan.
The
2016 Plan contains the following provisions, which the Company
believes reflect best practices for equity-compensation plans: (i)
prohibits the grant of stock options and SARs with discounted
exercise prices (subject to limited exceptions described in the
2016 Plan), (ii) prohibits the repricing of stock options and SARs
without stockholder approval, (iii) prohibits the recycling of
awards tendered in payment of an option or withheld to satisfy tax
obligations; (iv) contains a definition of change in control
whereby potential acceleration of awards will only occur in the
event of an actual change in control transaction; (v) includes, as
a general rule, double-trigger vesting following a change in
control; and (vi) imposes a $500,000 limit on the grant date market
value of awards that may be granted to any one participant who is a
non-employee director during any 12-month period.
The
2016 Plan is administered by the Compensation
Committee. The Compensation Committee determines, from
time to-time, those of Fusion’s executive officers, directors
and employees to whom Awards will be granted, the amount of the
Awards granted to each individual, the vesting schedule of the
Awards and all other terms and conditions of the
Award.
As of
[●], 2017, the Company has granted options to purchase shares
of Common Stock under the 2016 Plan. No other forms of Awards have
been granted under the 2016 Plan to date.
2009 and 1998 Stock Option Plans
On
December 17, 2009, the Fusion Stockholders approved the 2009 Stock
Option Plan, which was previously adopted by the Board in March
2009. This plan replaced our 1998 Stock Option Plan, the
term of which expired as to new option
grants.
The
number of shares reserved for issuance under the 2009 Plan was
1,260,000 (after giving effect to two amendments to increase the
number of available shares and taking into account the reverse
split that occurred in May 2014). The 2009 Plan is administered by
the Compensation Committee. As of [●], 2017, there were
outstanding options to purchase [●] shares of Fusion Common
Stock under the 2009 Plan. Options to purchase [●] shares of
Common Stock also remain outstanding under Fusion’s now
expired 1998 Stock Option Plan, with such options expiring at
various dates through 2020.
Outstanding Equity Awards at 2016 Year-End
The
following table provides information concerning unexercised options
and stock awards that have not vested for each of Fusion’s
named executive officers as of December 31, 2016.
|
|
OPTION AWARDS
|
STOCK AWARDS
|
Name
|
Number of
securities underlying unexercised options (#)
exercisable
|
Number of
securities underlying unexercised options (#)
unexercisable
|
Equity incentive plan awards; Number of
securities underlying unexercised unearned options
(#)
|
Option exercise prices
($)
|
Grant Date
|
Option expiration
date
|
Number of shares or units of stock that have
not vested (#)
|
Market value of shares or units of stock that
have not vested ($)
|
Equity incentive plan awards; Number of
unearned shares, units or other rights that have not vested
(#)
|
Equity incentive plan awards; Market or Payout
Value of unearned shares, units or other rights that have not
vested (#)
|
Matthew D. Rosen
|
|
|
|
|
|
|
|
|
|
|
|
7,000
|
-
|
-
|
$ 34.50
|
3/29/2007
|
3/29/2017
|
-
|
-
|
-
|
-
|
|
7,000
|
-
|
-
|
$ 15.50
|
3/26/2008
|
3/26/2018
|
-
|
-
|
-
|
-
|
|
7,000
|
-
|
-
|
$ 5.50
|
3/26/2009
|
3/26/2019
|
-
|
-
|
-
|
-
|
|
8,750
|
-
|
-
|
$ 6.00
|
4/14/2010
|
4/14/2020
|
-
|
-
|
-
|
-
|
|
8,750
|
-
|
-
|
$ 4.50
|
10/19/2011
|
10/19/2021
|
-
|
-
|
-
|
-
|
|
10,000
|
|
-
|
$ 5.50
|
10/17/2012
|
10/17/2022
|
-
|
-
|
-
|
-
|
|
71,236
|
-
|
-
|
$ 4.25
|
7/29/2013
|
7/29/2023
|
-
|
-
|
-
|
-
|
|
53,333
|
26,667
|
-
|
$ 3.52
|
10/17/2014
|
10/17/2024
|
-
|
-
|
-
|
-
|
|
33,333
|
66,667
|
-
|
$ 2.13
|
10/7/2015
|
10/6/2025
|
-
|
-
|
-
|
-
|
|
-
|
250,000
|
-
|
$ 1.26
|
11/5/2016
|
11/11/2026
|
-
|
-
|
-
|
-
|
Total
|
206,402
|
343,334
|
-
|
|
|
|
-
|
-
|
-
|
-
|
Gordon Hutchins, Jr.
|
|
|
|
|
|
|
|
|
|
|
|
3,500
|
-
|
-
|
$ 34.50
|
3/29/2007
|
3/29/2017
|
-
|
-
|
-
|
-
|
|
4,000
|
-
|
-
|
$ 15.50
|
3/26/2008
|
3/26/2018
|
-
|
-
|
-
|
-
|
|
4,000
|
-
|
-
|
$ 5.50
|
3/26/2009
|
3/26/2019
|
-
|
-
|
-
|
-
|
|
5,000
|
-
|
-
|
$ 6.00
|
4/14/2010
|
4/14/2020
|
-
|
-
|
-
|
-
|
|
6,500
|
-
|
-
|
$ 4.50
|
10/20/2011
|
10/19/2021
|
-
|
-
|
-
|
-
|
|
6,500
|
|
-
|
$ 5.50
|
10/17/2012
|
10/17/2022
|
-
|
-
|
-
|
-
|
|
20,342
|
-
|
-
|
$ 4.25
|
7/29/2013
|
7/29/2023
|
-
|
-
|
-
|
-
|
|
16,750
|
8,250
|
-
|
$ 3.52
|
10/17/2014
|
10/17/2024
|
-
|
-
|
-
|
-
|
|
11,900
|
23,100
|
-
|
$ 2.13
|
10/7/2015
|
10/6/2025
|
-
|
-
|
-
|
-
|
|
-
|
70,000
|
-
|
$ 1.26
|
11/5/2016
|
11/11/2026
|
|
|
|
|
Total
|
78,492
|
101,350
|
-
|
|
|
|
-
|
-
|
-
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Michael R. Bauer
|
-
|
55,000
|
-
|
$1.26
|
11/11/2016
|
11/11/2026
|
55,000
|
$99
,550(1)
|
-
|
-
|
Total
|
0
|
55,000
|
-
|
|
|
|
55,000
|
$99,550(1)
|
-
|
-
|
____________
(1)
|
The
value attributed to the restricted shares issued to Mr. Bauer is
computed in accordance with FASB ASC Topic 718. Pursuant to SEC
rules, the amounts shown exclude the impact of estimated
forfeitures related to service-based vesting conditions. All
options vest ratably over three years from their grant date subject
to acceleration in certain circumstances.
|
Equity Compensation Plan Information
The
following table sets forth securities authorized for issuance under
the Company’s equity compensation plans as of December 31,
2016.
|
Number of Securities To Be Issued Upon Exercise
of Outstanding Options, Warrants and
Rights
|
Weighted Average Exercise Price of Outstanding
Options, Warrants and Rights
|
Number of
Securities Remaining Available For Future Issuance Under Equity
Compensation Plans (excluding securities reflected in second
column)(1)
|
Equity Compensation
Plans Approved by Stockholders
|
2,151,073
|
$ 2.33
|
1,350,764
|
|
|
|
|
Equity Compensation
Plans Not Approved by Stockholders
|
--
|
$--
|
--
|
Total
|
2,151,073
|
|
1,350,764
|
__________________________________
(1)
Includes [●]
shares of Fusion Common Stock available for issuance under the 2016
Plan other than upon the issuance of an option, warrant or right.
Under the 2016 Plan, the aggregate number of shares of Common Stock
reserved and available for grant will be an amount equal to 10% of
the Fusion Common Stock outstanding from time to time on a fully
diluted basis, plus (1) shares from awards granted under the 2009
Plan that terminate, expire, lapse for any reason in the future,
and (2) 101,749 shares not granted under the 2009
Plan.
PROPOSAL NO. 6 – ELECTION OF DIRECTORS
Nominees for Election of Directors
At the
Annual Meeting, Fusion Stockholders will be asked to elect eight
nominees to the Board. These nominees were recommended by the
Compensation Committee and nominated by the Board. All of the
director nominees are incumbent directors. Each nominee has agreed
to serve as a director if reelected.
The
Company’s by-laws provide that a director's term extends from
the date of his or her election or appointment to the Board until
Fusion holds its next annual meeting of stockholders or their
successors are duly elected and qualified or until his or her
death, resignation or removal. However, if the Merger Agreement is
approved by the Fusion Stockholders and the Merger is completed,
the Board will be reconstituted in accordance with the terms of the
Merger Agreement and the Stockholders Agreement. See the section
entitled “Agreements Related
to the Merger – Stockholders’ Agreement”
beginning on page of this proxy statement.
Fusion’s
by-laws provide that directors are elected by a plurality of votes
cast by stockholders present at the meeting, in person or
represented by proxy. Therefore, the eight nominees who receive the
greatest number of votes cast at the Annual Meeting will be
elected. Instructions to withhold authority, abstentions and
“broker non-votes” will not be taken into account in
determining the outcome of this matter.
Director Background and Qualifications
Fusion
believes that individuals who are nominated to serve as directors
should possess the necessary intelligence, business skills, and
life experience to make a significant contribution to the Company;
should have adequate time to devote to their activities as Board
members; should demonstrate the highest level of ethical behavior;
should have no conflicts of interest that might influence the
performance of their duties as Board members; should have the
ability to work effectively and harmoniously with other directors
and with management; and be fully committed to building long-term
value for Fusion’s stockholders.
The
Company seeks a board that is comprised of professionals with
diverse backgrounds and who possess business skills directly
relevant to the day-to-day activities of the Company. In the
information provided below, Fusion identifies for each nominee the
unique background, business experience, and skills that it believes
will allow him to provide effective guidance to management and have
a positive impact on the performance of the Company. In particular,
Fusion identifies the industry, operational, financial, and legal
and leadership experience that led it to conclude that each of
these nominees should be reelected to serve on the
Board.
In
addition to specific qualifications, the information set forth
below includes each nominee’s age, principal occupation, and
business experience during at least the last five years, and other
directorships currently held in public companies.There is no
arrangement or understanding between any of the nominees set forth
below and the Company or any other person pursuant to which the
nominee was selected as a director or nominee.
Marvin S. Rosen, Age 77, Chairman of the Board
Marvin
Rosen co-founded the Company in 1997. He has served as the Chairman
of the Board since November 2004, Vice Chairman of the Board from
December 1998 to November 2004 and has been a member of the Board
since March 1998. He served as the Company’s Chief Executive
Officer from April 2000 to March 2006. In January 2014, he rejoined
the international law firm of Greenberg Traurig LLP as a
shareholder specializing in corporate securities matters. He
previously was a shareholder of that firm and also acted as Of
Counsel for a number of years. Mr. Rosen was Finance
Chairman for the Democratic National Committee from September 1995
to January 1997. Currently, he serves on the Board of Directors of
the Robert F. Kennedy Center for Justice and Human Rights and the
Howard Gilman Foundation. Mr. Rosen served on the
Board of Directors of Terremark Worldwide, Inc. from 2000 until its
sale to Verizon in 2011. Mr. Rosen’s son, Matthew Rosen, is
our Chief Executive Officer, and serves as a director.
Director Qualification: The Board believes that Mr. Rosen’s
background as the co-founder and former Chief Executive Officer of
the Company, a securities attorney and a former director of another
public company provides him with the industry, financial, legal,
and leadership experience to advise the Board on strategic and
tactical matters.
Philip D. Turits, Age 84, Secretary, Treasurer and
Director
Mr.
Turits co-founded the Company in 1997 and has served as a director
since September 1997, as Secretary since October 1997, as Treasurer
since March 1998 and as Vice Chairman of the Board from March 1998
to December 1998. From September 1991 to February 1996, Mr. Turits
served as Treasurer and Chief Operating Officer for Larry Stuart,
Ltd., a consumer products company, and prior to 1991 he served as
President and Chief Executive Officer of Continental Chemical
Company.
Director Qualification: The Board believes that Mr.
Turits’ background as the co-founder and Secretary/Treasurer
of the Company and an experienced corporate executive provides him
with the operational, financial and leadership experience necessary
to provide valuable guidance to management, particularly in the
financial aspects of Fusion’s business.
Matthew D. Rosen, Age 45, Chief Executive Officer and
Director
Mr.
Rosen has served as a director of Fusion since May 2005 and has
been its Chief Executive Officer since March 2006. He served as
President of Fusion from March 2006 until March 2008, as its Chief
Operating Officer from August 2003 to March 2006, as its Executive
Vice President and Chief Operating Officer from February 2002 to
August 2003, as its Executive Vice President and President of
Global Operations from November 2000 to January 2002 and as its
President of US Operations from March 2000 to November 2000. Mr.
Rosen is the son of Fusion’s Chairman of the Board, Marvin
Rosen. In the event the Merger is completed, Mr. Rosen will serve
as the Chairman of the Board and as a director.
Director Qualification: The Board believes
that Mr. Rosen’s background as its current Chief Executive
Officer and as its former Chief Operating Officer, a senior
executive in the telecommunications industry, an experienced
operations executive and a former investment banker provides him
with the industry, operational, financial and leadership experience
to advise the Board on all aspects of the Company’s
business.
Jack Rosen, Age 71, Director
Mr.
Rosen has served as a director since July 2012. Mr. Rosen is the
founder and Chief Executive of Rosen Partners LLC, a residential
and commercial real estate development firm. He is also the current
Chairman of the American Council for World Jewry, Inc. and the
current President of the American Jewish Congress. In addition, Mr.
Rosen oversees a wide array of healthcare, cosmetic and
telecommunications business ventures throughout the U.S., Europe
and Asia. Mr. Rosen currently serves on the Advisory Board of
Altimo, an investment company in Russia, Turkey and the
Commonwealth of Independent States, operating in the field of
mobile and fixed-line communications. Mr. Rosen is currently a
member of the Council on Foreign Relations, an independent,
nonpartisan membership organization, think tank, and
publisher.
Director Qualification: The Board believes that Mr.
Rosen’s background as a leader in many international
organizations and as a corporate director in the telecommunications
industry provides him with the leadership experience necessary to
provide valuable direction and guidance to management and the
Board.
Paul C. O’Brien, Age 78, Director
Mr.
O’Brien has served as a director since August 1998. Since
January 1995, he has served as the President of the O’Brien
Group, Inc., a consulting and investment firm. From February 1988
to December 1994, he was the President and Chairman of New England
Telephone (a subsidiary of NYNEX), now Verizon, a
telecommunications company. Mr. O’Brien also serves on the
Board of Directors of Astrobotics and The Computer Merchant and is
the Chairman of the Board of Jumpstart Micro Inc.
Director Qualification:
The Board believes that Mr.
O’Brien’s background as President of a consulting and
investment firm, Chairman of a major telecommunications company and
a corporate director provides him with the industry, operational,
financial, and leadership experience necessary to effectively guide
the Board on all aspects of the Company’s
business.
Michael J. Del Giudice, Age 74, Director
Mr. Del
Giudice has served as a director since November 2004. He is a
Senior Managing Director of Millennium Capital Markets LLC and
Senior Managing Director of MCM Securities LLC, both companies that
he founded in 1996. Mr. Del Giudice also serves as Chairman of
Carnegie Hudson Resources, LLC, founded in 2012. Mr. Del Giudice
has been a Member of the Board of Directors of Consolidated Edison
Company of New York, Inc. since 1999, and is currently a member of
its Audit Committee and Chairman of its Corporate Governance and
Nominating Committee. Mr. Del Giudice served as a director of Reis,
Inc. from 2007 to 2013 and was a director of Barnes and Noble, Inc.
from 1999 to September 2010. He is also Vice Chairman of the New
York Racing Association. Mr. Del Giudice was a General Partner and
Managing Director at Lazard Freres & Co. LLC from 1985 to 1995.
From 1983 to 1985, Mr. Del Giudice was Chief of Staff to New York
Governor Mario M. Cuomo. He served from 1979 to 1981 as Deputy
Chief of Staff to Governor Hugh L. Carey and from 1975 to 1979 as
Chief of Staff to the then Speaker of the New York
Assembly.
Director Qualification: The Board believes that Mr. Del
Giudice’s background as a Senior Managing Director of
securities and investment firms, an investment banker, Chief of
Staff to a Governor and an active corporate director provides him
with the financial and leadership experience to be a valuable
advisor to management and the Board.
Larry Blum, Age 74, Director
Mr.
Blum has served as a director since February 2012. He has been a
Senior Advisor for Marcum LLP (formerly known as Marcum
Rachlin)(referred to as Marcum), independent registered public
accountants, since 2011. For more than 18 years, Mr.
Blum served as the Managing Partner of Rachlin LLP, directing the
firm’s growth to its position as Florida’s
largest independent accounting and business advisory firm up
until its merger with Marcum LLP in 2009. Mr. Blum has
also served as a litigation advisor and is a member of the Florida
Bar.
Director Qualification: The Board believes that Mr.
Blum’s background as a managing partner of a public
accounting firm and his expertise in the areas of strategic
planning, mergers and acquisitions and domestic and international
taxation provides him with the financial and leadership experience
to be a valuable advisor to Fusion’s management and the
Board.
William Rubin, Age 64, Director
Mr.
Rubin has served as a director since February 2012. Since 1992, he
has been President of the Rubin Group, a consulting firm
representing clients before governmental entities. Previously, he
was Assistant Insurance Commissioner and Treasurer of the State of
Florida, where he was directly responsible for all activities
related to the Florida State Board of Administration, the agency
that manages the investments for Florida’s pension funds. Mr.
Rubin also serves as an advisor to many large companies, primarily
health care companies doing business in
Florida.
Director Qualifications: The Board believes that Mr. Rubin’s
background as a senior governmental official and a lobbyist
provides him with the financial and leadership experience to be a
valuable advisor to executive management and the
Board.
Required Vote and Board Recommendation
Directors are
elected by a plurality of the votes cast at the Annual Meeting by
the holders of Voting Shares present in person or represented by
proxy at the Annual Meeting and entitled to vote thereon, voting as
a single class. Only votes cast “FOR” will be counted for purposes
of this Proposal. Instructions to withhold authority, abstentions
and “broker non-votes” will not be taken into account
in determining the outcome of this Proposal No. 6.
THE
BOARD UNANIMOUSLY RECOMMENDS THAT THE FUSION STOCKHOLDERS VOTE
“FOR” EACH DIRECTOR NOMINEE.
CORPORATE GOVERNANCE
Board of Directors
The
Board oversees the Company’s business affairs and monitors
the performance of senior management. In accordance with
Fusion’s corporate governance principles, the Board does not
involve itself in the day-to-day operations of the
Company. The directors keep themselves informed through
discussions with the Chief Executive Officer and other executive
officers of Fusion, by reading the reports and other materials that
Fusion sends them and by participating in board and committee
meetings. If any director resigns, dies or is otherwise
unable to serve out his or her term, or if the Board increases the
number of directors, the Board may fill any vacancy by a vote of a
majority of the directors then in office. A director
elected to fill a vacancy serves for the unexpired term of his or
her predecessor. Except as otherwise provided by Delaware
law, any director or the entire board may be removed, with or
without cause, by a majority of the shares then entitled to vote at
an election of directors.
Fusion’s
by-laws provide that the Board shall consist of not less than one
director and that a director’s term extends from the
date of his or her election until its next annual meeting of
stockholders. Through board action, the number of
directors of the Company has been set at no less than seven and no
more than seventeen. The Board currently consists of eight
members.
Board Meetings and Attendance
During
2016, seven meetings of the Board were held all of which were
telephonic. All incumbent directors, other than Marvin S. Rosen and
Paul C. O’Brien attended at least 75% of the total meetings
of the Board; and all directors, other than Mr. O’Brien
attended at least 75% of the total meetings of the committees on
which they served.
Annual Meeting Attendance
The
Company does not require that directors attend the annual meeting
of stockholders. Two incumbent directors attended Fusion’s
2016 annual meeting.
Stockholder Communications with Directors
The
Board recommends that communications with the Board be initiated in
writing and addressed as follows:
Fusion Telecommunications International, Inc.
Attention: Corporate Secretary- Stockholder
Communications
420 Lexington Avenue, Suite 1718
New York, New York 10170
This
centralized process will assist the Board in reviewing and
responding to stockholder communications in an appropriate manner.
The name of any specific director recipient should be noted in the
communication. The Board has instructed the Company’s
Corporate Secretary to forward such correspondence only to the
intended recipient; however, the Board has also instructed its
Corporate Secretary, prior to forwarding any correspondence, to
review such correspondence and, in his or her discretion, not to
forward certain items if they are deemed of a commercial or
frivolous nature or otherwise inappropriate for consideration by
the Board. In such cases, some of that correspondence may be
forwarded elsewhere within the Company for review and possible
response.
Code of Ethics
Since
2004, Fusion has had a Corporate Code of Ethics, the current
version of which applies to all members of the Board, the Chief
Executive Officer, any other principal executive officer, the Chief
Financial Officer and the Company’s Corporate
Controller. To receive a copy of the Company’s
Code of Ethics, you may write to Fusion Telecommunications
International, Inc., Attention: Corporate Secretary, 420 Lexington
Avenue, Suite 1718, New York, New York 10170 or you may contact
Fusion’s Corporate Secretary at (212) 201-2407. A
copy of the Code of Ethics is also posted on Fusion’s website
www.fusionconnect.com.
Disclosure of amendments to, or waivers of, provisions of the Code
of Ethics will be publicly disclosed in accordance with applicable
rules and regulations, and will be made available upon request in
the manner indicated above.
BOARD COMMITTEES
The
Board has established the Compensation Committee, a Strategic and
Investment Banking Committee (referred to as the Strategic Committee), and an Audit
Committee (referred to as the Audit Committee), to devote attention
to specific subjects and to assist the Board in the discharge of
its responsibilities. The functions of the committees and their
current members are set forth below:
Compensation Committee
The
primary functions of the Compensation Committee are
to:
●
|
evaluate and
assess, on an annual basis, the performance of the Chief Executive
Officer;
|
●
|
make
recommendations to the Board regarding base salaries,
annual incentive awards (equity and/or cash) and long-term
incentive awards for the Chief Executive Officer and, in
consultation with the Chief Executive Officer, for other executive
officers;
|
●
|
establish
performance objectives for executive officers under our incentive
compensation plans with particular consideration to appropriate
levels of risk-taking incentives;
|
●
|
make
recommendations to the Board regarding employment
agreements, severance agreements, change in control agreements and
similar arrangements;
|
●
|
retain
compensation consultants to be used to assist in the evaluation of
the compensation of the Chief Executive Officer and other executive
officers and obtain advice and assistance from internal and outside
legal, accounting or other advisors;
|
●
|
review
and recommend to the Board the nominees for election as directors
and assist the Board in identifying and attracting qualified
candidates;
|
●
|
periodically review
and assess the adequacy and levels of director compensation;
and
|
●
|
periodically review
succession plans for key executive officer positions.
|
During
2016, the members of the Compensation Committee were Michael J. Del
Giudice – Chairman, Paul C. O’Brien and Larry Blum,
each of whom is a non-employee member of the
Board. During 2016, the Compensation Committee held
three meetings. The Board has determined that each of these
directors is independent within the meaning of Nasdaq Rule
5605(a)(2). The charter of the Compensation Committee is posted on
Fusion’s website www.fusionconnect.com,
and a copy of that charter can be obtained by contacting its
Corporate Secretary at:
Fusion Telecommunications International, Inc.
Attention: Corporate Secretary
420 Lexington Avenue, Suite 1718
New York, New York 10170
The information on Fusion’s website is
neither incorporated by reference into this proxy statement nor
otherwise made a part hereof. The Compensation Committee
held three meetings during 2016.
Stockholder Nomination of Directors
The
Compensation Committee currently does not have a formal procedure
with regard to the consideration of candidates recommended by
Fusion’s stockholders. The Board believes that such a
procedure may make sense and continues to investigate various
procedural options.
Director Qualifications
The
Compensation Committee used the following procedures and guidelines
contained in its charter to evaluate and recommend the nominees for
director included in this proxy statement:
●
recommend to the
Board and aid in identifying and attracting qualified candidates to
stand for election as directors;
●
periodically
evaluate the desirability of and recommend to the Board any changes
in the size and composition thereof; and
●
select
and evaluate directors in accordance with the general and specific
criteria set forth below: General Criteria: Director selection
should include a sufficient number of independent directors to
satisfy existing SEC and exchange requirements, and such
independent directors should have the appropriate skills,
experience and other characteristics to fill all committee
positions required to be filled by independent
directors; Specific Criteria: In addition to the
general criteria, the Compensation Committee shall develop and
periodically evaluate and modify, as appropriate, a set of specific
criteria outlining the skills, experience, particular areas of
expertise, specific backgrounds and other characteristics that
should be represented on the Board to enhance the effectiveness of
the Board and its committees, taking into account any particular
needs of the Company based on its business, size, strategic
objectives, customers and other characteristics;
●
evaluate each new
director candidate and each incumbent director before recommending
that the Board nominate or re-nominate such individual for election
or reelection as a director based on the extent to which such
individual meets the general and specific criteria
above;
●
diligently seek to
identify potential candidates who will strengthen the Board, by
establishing procedures for soliciting and reviewing potential
nominees from directors and stockholders; and
●
submit
to the Board the candidates for director to be recommended by the
Board for election at each annual meeting of stockholders and to be
added to the Board at any other time due to board expansion,
director resignations, retirements or otherwise.
Strategic and Investment Banking Committee
The
members of the Company’s Strategic Committee are Marvin S.
Rosen – Chairman, Michael Del Giudice and Philip D.
Turits. The Strategic Committee evaluates and recommends
investment strategies with investment banks and brokerage houses
and assists in the evaluation of potential mergers and acquisitions
candidates. The Strategic Committee does not currently have a
written charter. The Strategic Committee acts at the direction of
the Board. The Strategic Committee held no meetings in
2016.
Board Role in Risk Oversight
The
Board has overall responsibility for risk oversight, with a
particular focus on those areas of risk that might have the most
significant impact on the Company. These risk oversight
responsibilities are primarily discharged through the Audit
Committee and the Compensation Committee. The roles of these
committees in risk evaluation are as follows:
Audit Committee. The Audit
Committee oversees the risk management policies and practices
related to the financial reporting process and to Fusion’s
published financial statements. In addition, the Audit Committee
from time to time reviews those risk management policies and
practices with executive management and the Company’s
auditors, to insure full compliance and the minimization of
finance-related risks.
Compensation Committee. The
Compensation Committee oversees the risk management policies and
practices related to compensation and compensation-related risks,
as well as possible risks related to succession planning. This
oversight responsibility specifically includes working with
executive management in relation to employee compensation policies,
practices and programs.
Fusion’s
executive officers direct the day-to-day implementation and
monitoring of the management policies and practices established by
the Board and its committees. As part of its periodic
meetings with executive management, the Board reviews the
Company’s risk management policies and
practices.
CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
Officer and Director Loans to Company
In
December 2015, Marvin S. Rosen, Fusion’s Chairman of the
Board, converted $300,000 of the outstanding principal amount of
the promissory note issued to him by the Company into 137,615
shares of Fusion Common Stock, at a price of $2.18 per share. In
November 2016, Mr. Rosen converted an additional $250,000 of the
outstanding principal amount of the promissory note into 217,391
shares of Fusion Common Stock, at a price of $1.15 per share. Of
these shares, 21,739 shares were issued at Mr. Rosen’s
direction in the name of his son, Matthew D. Rosen, the
Company’s Chief Executive Officer.
In
December 2015, Matthew D. Rosen, converted $25,000 owed to him by
the Company (for a partial bonus payable to him under the terms of
his employment agreement) into 11,468 shares of Fusion Common
Stock, at a price of $2.18 per share. See the section entitled
“Executive
Compensation,” beginning on page 97 of this proxy
statement.
Director Independence
We
apply the standards of Rule 5605(a)(2) of Nasdaq for determining
the independence of the members of the Board and its committees.
Based upon the Company’s application of those standards, the
Board has determined that the following members are
independent:
Larry
Blum
Jack
Rosen
William
Rubin
Paul C.
O’Brien
Michael
J. Del Giudice
2016 Director Compensation
Fusion’s
directors do not receive cash compensation for their services on
the Board or any of the committees. However, they are reimbursed
for out-of-pocket expenses incurred in attending
meetings. In addition, Fusion annually grants directors
stock options for their services, the amount of which is determined
by the Compensation Committee.
The
following table provides information relating to compensation paid
to the directors for the 2016 fiscal year.
Name
|
Fees
Earned Or Paid In Cash (S)
|
|
|
Non-Equity Incentive Plan
Compensation
|
Change in Pension Value and Nonqualified
Deferred Compensation Earnings
|
All
Other Compensation (1) ($)
|
|
Marvin S.
Rosen(3)
|
$-
|
$-
|
$9,991
|
$-
|
$-
|
$-
|
$9,991
|
Michael J. Del
Giudice(3)
|
$-
|
$-
|
$9,991
|
$-
|
$-
|
$-
|
$9,991
|
Jack
Rosen(3)
|
$-
|
$-
|
$9,991
|
$-
|
$-
|
$-
|
$9,991
|
Paul C.
O’Brien(3)
|
$-
|
$-
|
$9,991
|
$-
|
$-
|
$-
|
$9,991
|
Philip D.
Turits(3)
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
William
Rubin(3)
|
$-
|
$-
|
$9,991
|
$-
|
$-
|
$-
|
$9,991
|
Larry
Blum(3)
|
$-
|
$-
|
$9,991
|
$-
|
$-
|
$-
|
$9,991
|
__________
(1)
|
This
column reflects the dollar amount recognized for financial
statement reporting purposes for the fiscal year ending December
31, 2016, for option awards pursuant to the 2009
Plan. The value attributable to option awards is
computed in accordance with FASB ASC Topic 718, and the assumptions
made in the valuations of the option awards are included in Note 2
(Summary of Significant Accounting Policies – Stock Based
Compensation) of the notes to Fusion’s financial statements
for the year ended December 31, 2016, incorporated by reference
into this proxy statement.
|
(2)
|
The
table does not include amounts reimbursed for expenses incurred in
attending board and committee meetings.
|
(3)
|
At
December 31, 2016, the directors had the following number of
options outstanding: Marvin S. Rosen 16,500; Michael Del Giudice
16,500; Jack Rosen 16,150; Paul C. O’Brien 16,500; Philip
Turits 121,500; William Rubin 16,150; and Larry Blum
16,150.
|
Engagement for Tax Services
Since
March 6, 2014, the Company has engaged Marcum to prepare the
Company’s tax returns and to provide related tax advisory
services. The Company paid this firm approximately
$135,000 and $155,000 for the years ended December 31, 2016 and
2015, respectively. Larry Blum, a director of the Company, is
a Senior Advisor and a former partner of Marcum.
PROPOSAL NO. 7 --
TO RATIFY THE SELECTION OF EISNERAMPER LLP AS OUR INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM FOR THE FISCAL YEAR ENDING
DECEMBER 31, 2017
Reasons for the Proposal
Subject to ratification by
Fusion’s stockholders, the Audit Committee, in accordance
with its charter, intends to engage EisnerAmper, LLP
(referred to as Eisner)
as the Company’s independent registered public accountants to
audit our consolidated financial statements for the fiscal year
ending December 31, 2017. Eisner audited Fusion’s
financial statements for the fiscal year ended December 31,
2016. In deciding to appoint Eisner, the Audit Committee
reviewed auditor independence issues and existing commercial
relationships with Eisner and concluded that
Eisner has no
commercial relationship with Fusion that would impair its
independence for the fiscal year ending December 31,
2017.
Representatives of
Eisner are expected to attend the Annual Meeting, will have an
opportunity to make a statement if they so desire and are expected
to be available to respond to appropriate questions.
The
aggregate fees billed to Fusion by Eisner, for each of the years
ended December 31, 2016 and 2015 are as follows:
Audit
and Audit-Related Fees
The
fees billed for professional services rendered by Eisner for the
years ended December 31, 2016 and 2015 were approximately $150,000
and $147,000, respectively. The fees billed for
professional services included fees associated with the audit of
Fusion’s annual financial statements, reviews of the
Company’s quarterly financial statements and consent for
Fusion’s registration statement.
Tax Related Fees
There
were no fees billed for tax-related services by Eisner during the
year ended December 31, 2016 and 2015.
All Other Fees
Fees
for other services that were not included in the categories above
billed by Eisner during the years ended December 31, 2016 and 2015
were approximately $90,000 and $120,000, respectively. These fees
were primarily for audit and due diligence services related to
business acquisition transactions undertaken by the
Company.
Audit Committee Pre-Approval of Audit and Permissible Non-Audit
Services of Independent Accountants
Consistent with SEC
policies regarding auditor independence, the Audit Committee has
the responsibility for appointing, setting compensation, and
overseeing the work of the independent accountants. In
recognition of this responsibility, the Audit Committee has
established a policy to pre-approve all audit and permissible
non-audit services provided by the independent
accountant.
Prior
to engagement of the independent accounting firm for the audit of
the Company’s 2017 consolidated financial statements,
management will submit to the Audit Committee for approval an
aggregate of services expected to be rendered during that year for
each of the three categories of services.
Audit
and audit-related services include audit work performed in the
preparation of annual financial statements, reviews of the
Company’s interim financial statements and work that
generally only the independent accountants can reasonably be
expected to provide, including comfort letters, statutory audits,
employee benefit plan audits and attest services and consultation
regarding financial accounting and/or reporting
standards.
Other
Fees are those fees associated with services not captured in the
other categories, including due diligence and other audit services
related to mergers and acquisitions.
Prior
to engagement, the Audit Committee pre-approves these services by
category of service. During the year, circumstances may arise when
it may become necessary to engage the independent accounting firm
for additional services not contemplated in the original
pre-approval. In those instances, the Audit Committee requires
specific pre-approval before engaging the independent
accountant.
The
Audit Committee may delegate pre-approval authority to one or more
of its members. The member to whom such authority is delegated must
report, for informational purposes only, any pre-approval decisions
to the Audit Committee at its next scheduled meeting.
In
2016, all audit and permissible non-audit services provided by the
independent accountants were preapproved by the Audit
Committee.
Required Vote and Board Recommendation
Approval of this
Proposal No. 7 requires the affirmative vote of a majority of the
votes cast at the Annual Meeting by holders of the Voting Shares
present in person or represented by proxy at the Annual Meeting and
entitled to vote thereon, voting as a single class. Abstentions and
broker non-votes will not affect the outcome of this Proposal No.
7.
THE
BOARD UNANIMOUSLY RECOMMENDS THAT THE FUSION STOCKHOLDERS VOTE
“FOR” PROPOSAL NO. 7.
AUDIT MATTERS
Audit Committee
The
Audit Committee’s primary function is to assist the Board in
fulfilling its oversight responsibilities by reviewing the
integrity of the Company’s financial statements, its internal
control systems, its auditing, accounting and financial reporting
processes (including those associated with the Sarbanes-Oxley Act
of 2002) and the qualification and independence of its independent
accountants. The Audit Committee’s primary duties
are to:
●
serve
as an independent and objective party to monitor Fusion’s
quarterly and annual financial reporting process and the
adequacy of its internal control systems;
●
review
and appraise the audit efforts of the independent accountants;
and
●
provide an open
avenue of communication among the independent accountants,
financial and senior management and the Board.
To
fulfill its responsibilities and duties, the Audit
Committee:
●
reviews and
discusses with management and the independent accountants the
Company’s annual audited financial statements and any reports
or other financial information submitted to any governmental body
or to the public;
●
reviews with
management and the independent accountants the Company’s
quarterly financial statements prior to the filing of the
Company’s Quarterly Reports on Form 10-Q or prior to release
of earnings for the quarter;
●
reviews and
approves any related-party transactions;
●
appoints and
replaces the independent accountants and approves the professional
fees to be paid to the independent accountants, including the range
of audit and non-audit fees;
●
reviews with the
independent auditors all critical accounting policies and practices
being used by the Company;
●
ensures the
independence of the independent accountants by preapproving all
auditing and non-audit services to be performed for the Company,
ensure the rotation of audit partners as required by law, and
discusses with the independent accountant’s the matters
required to be discussed by applicable auditing
standards;
●
reviews any
significant disagreements among management and the independent
accountants in connection with the preparation of the
Company’s financial statements;
●
establishes
procedures relating to the receipt, retention and treatment of
complaints received by the Company regarding accounting, internal
accounting controls or auditing matters, and the confidential,
anonymous submission by employees of concerns regarding
questionable accounting and auditing matters; and
●
establishes,
reviews and updates periodically the Company’s Code of Ethics
to ensure that management has established a system to monitor and
enforce the Code of Ethics.
During
2016, the members of our Audit Committee were Paul C. O’Brien
– Chairman, Michael Del Giudice and Larry Blum, each of whom
was a non-employee member of the Board. The Board has
determined that Michael Del Giudice is the Audit Committee
Financial Expert within the meaning of SEC rules. The
Board has also determined that each of the directors serving on the
Audit Committee is independent within the meaning of Nasdaq Rule
5605(a)(2). The Audit Committee charter is posted on
Fusion’s website at www.fusionconnect.com, and a
copy of the charter can also be obtained by contacting
Fusion’s Corporate Secretary. The information on
Fusion’s website is neither incorporated by reference nor
otherwise made a part of this proxy statement. The Audit Committee
held five meetings in 2016.
Audit Committee Report
With
respect to the year ended December 31, 2016, in addition to its
other work, the Audit Committee:
●
reviewed and
discussed with management and Eisner the Company’s audited
consolidated financial statements as of December 31, 2016 and the
year then ended; and
●
discussed with
Eisner the matters required to be discussed by Statement on
Auditing Standards No. 61, “Communication with Audit
Committees,” as amended, with respect to its review of the
findings of Eisner during its examination of the Company’s
financial statements; and
●
received from
Eisner written affirmation of its independence as required by the
Independence Standards Board Standard No. 1, “Independence
Discussions with Audit Committees.” In addition, the Audit
Committee discussed with Eisner its independence and determined
that the provision of non-audit services was compatible with
maintaining auditor independence.
Based
on the review and discussion summarized above, the Audit Committee
recommended that the Board include the audited consolidated
financial statements in the 2016 Annual Report on Form 10-K for
filing with the SEC.
|
Submitted
by:
/s/
Paul C. O’Brien, Chairman
/s/
Michael Del Giudice
/s/
Larry Blum
|
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
Principal Stockholders
The
following table presents information regarding the beneficial
ownership of each class of Fusion’s voting securities as of
October 31, 2017:
●
each
person who beneficially owns more than 5% of its voting
securities;
●
each
of Fusion’s directors and named executive officers (as
defined in Item 402(a)(3) of Regulation S-K) individually;
and
●
all
executive officers and directors as a group.
The
Company’s voting securities consist of the Fusion Common
Stock and the Series B-2 Preferred Stock, which generally vote as a
single class on all matters. Each share of Fusion Common
Stock is entitled to one vote per share. Each share of
Series B-2 Preferred Stock is entitled to 200 votes (which
represents the number of shares of Fusion Common Stock into which
each share of Series B-2 Preferred Stock is convertible). As of
[●], 2017, the total voting power of the issued and
outstanding Voting Shares was [●] votes, consisting of (a)
[●] votes represented by shares of Fusion Common Stock and
(b) [●] votes represented by shares of Series B-2 Preferred
Stock.
Unless
otherwise indicated, the address of each beneficial owner in the
following table is c/o Fusion Telecommunications International,
Inc., 420 Lexington Avenue, Suite 1718, New York, NY 10170. We
believe that all persons, unless otherwise noted, named in the
following table have sole voting and investment power with respect
to all Voting Shares shown as being owned by them. Under U.S.
securities laws, a person is considered to be the beneficial owner
of securities owned by him/her (or certain persons whose ownership
is attributed to him/her) and that can be acquired by him/her
within 60 days from that date, including upon the exercise of
options, warrants or convertible securities.
Fusion
determines a beneficial owner’s percentage ownership by
assuming that options, warrants or convertible securities that are
held by such owner, but not those held by any other person, and
which are exercisable within 60 days of October 31, 2017, have been
exercised or converted.
|
|
Number of Voting Shares
Beneficially
Owned
|
Percentage of Voting Shares
|
|
|
|
|
William
Rubin
|
(1)
|
204,334
|
*
|
Matthew D.
Rosen
|
(2)
|
1,044,543
|
4.5%
|
Marvin S.
Rosen
|
(3)
|
2,013,072
|
8.9%
|
Larry
Blum
|
(4)
|
64,925
|
*
|
Michael J. Del
Giudice
|
(5)
|
74,079
|
*
|
Jack
Rosen
|
(6)
|
126,038
|
*
|
Gordon Hutchins,
Jr.
|
(7)
|
127,754
|
*
|
Paul C.
O’Brien
|
(8)
|
118,432
|
*
|
Philip D.
Turits
|
(9)
|
146,401
|
*
|
Michael R.
Bauer
|
(10)
|
18,333
|
*
|
All Directors and
Executive Officers as a Group (15 persons)
|
|
4,556,970
|
20.0%
|
__________________________
* Less
than 1% of outstanding shares.
(1)
|
Includes
(i) 11,150 shares of Fusion Common Stock issuable upon the exercise
of options, (ii) 200 shares of Series B-2 Preferred Stock
convertible into 40,000 shares of Fusion Common Stock; and (iii)
20,132 shares of Fusion Common Stock issuable upon the exercise of
Fusion Common Stock purchase warrants.
|
(2)
|
Includes 895,776 shares of Fusion Common Stock
issuable upon the exercise of options, (ii) 14,695 shares of Fusion
Common Stock issuable upon the exercise of Fusion Common Stock
purchase warrants; (iii) 76 shares of Series B-2 Preferred Stock
convertible into 15,200 shares of Fusion Common Stock; and (iv) 50
shares of Series A-1 Preferred Stock and 5 shares of Series A-2
Preferred Stock convertible into a total of 823 shares of Fusion
Common Stock.
|
(3)
|
Includes
(i) 230,158 shares of Fusion Common Stock issuable upon the
exercise of Fusion Common Stock purchase warrants, (ii) 11,500
shares of Fusion Common Stock issuable upon the exercise of
options, (iii) 722 shares of Series B-2 Preferred Stock convertible
into 144,400 shares of Fusion Common Stock; (iv) 1,610 shares of
Fusion Common Stock held by a Delaware Trust Custodian IRA of Mr.
Rosen; and (v) 50 shares of Series A-1 Preferred Stock and 25
shares of Series A-2 Preferred Stock convertible into a total of
1,375 shares of Fusion Common Stock.
|
(4)
|
Includes
(i) 42,185 shares of Fusion Common Stock held by trusts for which
his wife serves as trustee, (ii) 4,456 shares of Fusion Common
Stock issuable upon the exercise of Fusion Common Stock purchase
warrants held by trusts for which his wife serves as trustee, (iii)
11,150 shares of Fusion Common Stock issuable upon the exercise of
options; and (iv) 33 shares of Series B-2 Preferred Stock
convertible into 6,600 shares of Fusion Common Stock held by trusts
for which his wife serves as trustee.
|
(5)
|
Includes
(i) 11,500 shares of Fusion Common Stock issuable upon the exercise
of options, (ii) 320 shares of Fusion Common Stock issuable upon
the exercise of Fusion Common Stock purchase warrants, (iii) 11,381
shares of Fusion Common Stock held in the name of Catskill Investor
Group, LLC, (iv) 5 shares of Series B-2 Preferred Stock convertible
into 1,000 shares of Fusion Common Stock, and (v) 200 shares of
Series A-1 Preferred Stock and 75 shares of Series A-2 Preferred
Stock owned by Catskill Investor Group, LLC, that are convertible
into a total of 4,811 shares of Fusion Common Stock.
|
(6)
|
Includes
(i) 9,600 shares of Fusion Common Stock issuable upon the exercise
of Fusion Common Stock purchase warrants held in the name of
Rosen-Kaiyuan, LLC, of which Jack Rosen is the managing
member, (ii) 53,868
shares of Fusion Common Stock held by Rosen Partners, LLC and
12,095 shares of Fusion Common Stock held by Rosen-Kaiyuan, LLC,
(iii) 11,150 shares of Fusion Common Stock issuable upon the
exercise of options, (iv) 150 shares of Series B-2
Preferred Stock convertible into 30,000 shares of Fusion Common
Stock held in the name of Rosen-Kaiyuan, LLC, and (v) 200 shares of
Series A-1 Preferred Stock and 50 shares of Series A-2 Preferred
Stock convertible into a total of 4,121 shares of Fusion Common
Stock.
|
(7)
|
Includes
(i) 121,508 shares of Fusion Common Stock issuable upon the
exercise of options, and (ii) 25 shares of Series A-2 Preferred
Stock convertible into a total of 690 shares of Fusion Common
Stock.
|
(8)
|
Includes
(i) 11,500 shares of Fusion Common Stock issuable upon the exercise
of options, (ii) 3,200 shares of Fusion Common Stock issuable
upon the exercise of Fusion Common Stock purchase warrants, (iii)
50 shares of Series B-2 Preferred Stock convertible into 10,000
shares of Fusion Common Stock, and (iv) 100 shares of Series A-1
Preferred Stock convertible into 1,371 shares of Fusion Common
Stock.
|
(9)
|
Includes
(i) 29 shares of Fusion Common Stock held by his wife, (ii) 320
shares of Fusion Common Stock issuable upon the exercise of Fusion
Common Stock purchase warrants, (iii) 54,834 shares of Fusion
Common Stock issuable upon the exercise of options, (iv) 5 shares
of Series B-2 Preferred Stock convertible into 1,000 shares of
Fusion Common Stock, (v) 25 shares of Series A-1 Preferred
Stock and 30 shares of Series A-2 Preferred Stock convertible into
a total of 1,171 shares of Fusion Common Stock.
|
(10)
|
Reflects
the vested portion of restricted stock.
|
OTHER MATTERS
The
Board knows of no other matters to be brought before the Annual
Meeting. However, if any other matters are properly brought before
the Annual Meeting, the persons appointed in the accompanying proxy
intend to vote the Voting Shares represented thereby in accordance
with their best judgment.
SECTION 16(A) BENEFICIAL OWNERSHIP
REPORTING COMPLIANCE
Section
16 (a) of the Exchange Act requires that every person who is
directly or indirectly the beneficial owner of more than 10% of any
class of any equity security (other than an exempted security)
which is registered pursuant to Section 12 of the Exchange Act, or
who is a director or an officer of the issuer of such security,
file the ownership reports required by Section 16 of the Exchange
Act.
Based
solely upon the Company’s review of Forms 3 and 4 and
amendments thereto furnished to it during or with respect to its
most recent fiscal year, and Forms 5 and amendments thereto
furnished to it with respect to its most recent fiscal year and any
written representation from a reporting person (as defined in Item
405 of Regulation S-K) that no Form 5 is required, during the
Company’s most recent fiscal year the following Section 16
officers and directors failed to file one report each with respect
to option grants: Gordon Hutchins, Jonathan Kaufman, Jan
Sarro, Russell Markman and Lisa Taranto; and the following Section
16 officers and directors failed to file Form 4’s with
respect to shares of Fusion Common Stock received as quarterly
dividends on shares of Series B-2 Preferred Stock owned by
them: Marvin S. Rosen, Matthew D. Rosen, Philip Turits, Paul C.
O’Brien, William Rubin and Jack Rosen.
STOCKHOLDER PROPOSALS FOR THE 2018 ANNUAL MEETING
To be
considered for inclusion in the Company’s proxy statement
relating to Fusion’s 2018 annual meeting of stockholders, the
Company must receive stockholder proposals no earlier than the
close of business on the ninetieth day prior to such annual meeting
and not later than the close of business on the later of the
sixtieth day prior to such annual meeting or the tenth day
following the day on which we make a public announcement of the
date of such meeting.
Proposals that are
not received in a timely manner will not be voted on at the 2018
annual meeting. If a proposal is received on time, the proxies that
management solicits for the meeting may still exercise
discretionary voting authority on the proposal under circumstances
consistent with the proxy rules of the SEC. All stockholder
proposals should be marked for the attention of Fusion’s
Corporate Secretary, 420 Lexington Avenue, New York, New York,
10170.
WHERE YOU CAN FIND MORE INFORMATION
Fusion files annual, quarterly and
special reports, proxy statements and other information with the
SEC. You may read and copy any
reports, statements or other information that we file with the SEC
at the SEC’s public reference room at the following location:
100 F Street, N.E., Room 1580, Washington, D.C. 20549.
You may also obtain copies of those documents at prescribed rates
by writing to the Public Reference Section of the SEC at that
address. Please call the SEC at (800) SEC-0330 for
further information on the public reference room. These SEC filings
are also available to the public from commercial document retrieval
services and at www.sec.gov.
In addition, stockholders may obtain free copies of the documents
filed with the SEC by Fusion through our
website: www.fusionconnect.com.
Fusion
has supplied all information contained in this proxy statement
relating to Fusion, and BCHI has supplied all information contained
in this proxy statement relating to BCHI.
In
addition, the SEC allows Fusion to disclose important information
to you by referring you to other documents filed separately with
the SEC. This information is considered to be a part of this proxy
statement, except for any information that is superseded by
information included directly in this proxy statement or
incorporated by reference subsequent to the date of this proxy
statement as described below.
This
proxy statement incorporates by reference the documents listed
below that Fusion has previously filed with the SEC (other than, in
each case, documents or information deemed to have been furnished
and not filed in accordance with SEC rules). They contain important
information about Fusion and its financial condition.
The
following Fusion filings with the SEC are incorporated by
reference:
●
its Annual Report on Form 10-K for the fiscal year ended December
31, 2016, filed with the SEC on March 21, 2017, and as amended on
April 11, 2017 and April 28, 2017;
●
its
Quarterly Report on Form 10-Q for the quarterly period ended March
31, 2017, filed with the SEC on May 12, 2017;
●
its
Quarterly Report on Form 10-Q for the quarterly period ended June
30, 2017, filed with the SEC on August 14, 2017;
●
its Quarterly
Report on Form 10-Q for the quarterly period ended September 30,
2017, filed with the SEC on November 13, 2017;
●
its
Current Report on Form 8-K/A filed with the SEC on April 17, 2017;
and
●
its
Current Report on Form 8-K filed with the SEC on August 30,
2017.
Fusion
also incorporates by reference into this proxy statement additional
documents that it may file with the SEC under Section 13(a),
13(c), 14, or 15(d) of the Exchange Act between the date of this
proxy statement and the earlier of the date of the Annual Meeting
or the termination of the Merger Agreement. These documents include
periodic reports, such as Annual Reports
on Form 10-K and Quarterly Reports
on Form 10-Q, as well as Current Reports
on Form 8-K and proxy soliciting materials. The
information provided on Fusion’s website is not part of this
proxy statement, and therefore is not incorporated by reference
herein.
BIRCH COMMUNICATIONS HOLDINGS, INC DESCRIPTION
OF BUSINESS
Overview
Birch
Communications Holdings, Inc. (“BCHI”) is a leading
technology service provider of IP based managed voice products,
broadband, cloud and IT services to small, midsized, and enterprise
businesses under the Birch and Primus brands. Birch delivers cost
effective solutions with a superior customer experience for small
and midsized businesses – partnering to increase customer
productivity. Our industry leading product portfolio is available
across North America and includes cloud communications, cloud
connectivity, and cloud computing.
Our Business
BCHI’s
vision is to become the leading provider of cloud and managed
services to SMB and enterprise customers in the U.S. and Canada,
working as a trusted advisor to its customers for service
deployment, delivery and management of cloud communications, cloud
computing, network connectivity and other managed solutions. BCHI
aims to create value by rapidly and cost effectively provisioning
and managing its customers’ essential business services by
leveraging the company’s key strategic
advantages:
●
Attractive sector
dynamics
●
End-to-end solution
set
●
Efficient,
proprietary billing and back-office systems
●
Trusted partner
relationships
●
Diversified, high
quality business customer base
●
Diversified organic
sales channels
Birch’s
strategic evolution over the past decade has developed in three
distinct phases:
●
2006-2015: Build a compelling
customer, technology and network platform with scale. As a
privately-held company Birch initially managed its business to
maximize free cash flow by growing scale through acquisitions of
companies and assets at low valuations, and improving the
operational and financial performance of these assets through the
implementation of best practices, shedding noncore assets and
unprofitable customers, and expense rationalization. As a
consequence of building scale, BCHI is now one of the largest cloud
and business services providers in North America,
with:
-
Business segment
revenue of approximately $450 million for the 12 months ended
September 30, 2017, and total revenue of more than
$560 million during the same period;
-
A comprehensive
portfolio of advanced cloud and business services solutions
available throughout the U.S. and Canada, designed to serve
business communications, computing and connectivity
needs;
-
A
broad
and diverse customer base, including over 140,000
small, medium, large and enterprise business
customers; and
-
A robust 100% IP
core network covering 65 major North American markets, with
approximately 31,000 route miles of fiber, metro fiber in 11 large
markets, and an extensive network-to-network interface
(“NNI”) platform enabling BCHI to sell nationwide and
address large business opportunities
●
2016-2017: Stabilize the
business. After BCHI had rationalized its acquisitions to
eliminate revenue with an unattractive margin profile, management
implemented several initiatives in 2016 to stabilize the business
by further developing its Business Segment customer base. This
customer base is characterized by higher average revenue per
customer (“ARPU”), higher margins, longer-term
contracts and lower churn relative to its Consumer Segment customer
base. Management also implemented a range of sales and pricing
strategies to optimize revenue opportunities across all four of the
company’s sales channels, along with expense optimization
through investments in process and automation. These efforts have
resulted in:
-
Flat sequential
revenue performance during Q2 2017 for the first time in 10
quarters, with solid trends continuing through Q3 2017
-
An improvement in
overall gross margin in Q3 2017 to 44.6% versus 43.4% in Q1
2017
-
Achieving in Q3
2017 the lowest level of selling, general and administrative
expense as a percentage of total revenue since 2013, at
21.9%
●
2017 onward: implement moderate organic growth
strategy. In the first half of 2017, management focused on
growing its business segment customer
base by upselling to existing customers and increasing focus on and
investments in sales and marketing. Management believes that these
efforts have positioned the company for future growth, as reflected
in:
-
Growth in business
segment sales bookings, reflecting signed orders that have not yet
been installed, of 28% in Q3 2017 versus Q1 2017, representing nine
consecutive months of sequential growth through August 2017, and
achieved record bookings in October 2017
-
Growth in MRR
backlog to a record $1.1 million at the end of September 2017,
up more than 50% compared to the end of March 2017, due to the
success of winning larger customer orders that typically exhibit a
longer conversion cycle from booking to revenue as orders are
released by the customer in tranches over time
-
Birch’s
business segment sales funnel nearly
tripling to $4.1 million at the end of September 2017 versus
$1.5 million at the end of March 2017
-
Growth in total
Adjusted EBITDA to $31.7 million in Q3 2017, up approximately
28% over Q1 2017
Product Offerings
●
Cloud Communications and
Business Services. BCHI’s cloud-based communications
solutions increase productivity while reducing costs, helping
small, medium and large businesses connect, communicate and
collaborate.
●
TotalCloud.
BCHI’s premier cloud communications offering provides a
full-featured cloud voice and UCaaS solution for businesses of
every size. The solution’s basic features, which include
unlimited calling, routing, auto attendant, mobile applications and
find-me/follow-me, can be complemented with a full range of
advanced unified communications features such as web-based video
conferencing with screen and file sharing, instant messaging, group
chat and presence. All features and functionality can be delivered
throughout the enterprise on any device, from desktop to laptop,
tablet or smartphone.
●
Voice
Essentials. BCHI’s simple, easy-to use cloud-based
voice solution can be delivered over–the-top or bundled with
its Cloud Connectivity for increased control over quality and cost.
Voice Essentials provides unlimited local and domestic long
distance, call routing, and additional enhanced features, offering
a straightforward cloud communications solution to meet the needs
of small businesses.
●
BirchNet
Essentials. BirchNet Essentials offers everything a business
needs for local and long distance service: unlimited local calling,
unlimited “local long distance” LATA calling,
nationwide long distance, and multiple features, including
Anonymous Call Rejection, Distinctive Ring, Call Tracing, Call
Forwarding, Call Blocking, Call Forwarding No Answer, Three-way
Calling, Remote Access to Call Forwarding, Call Return and Repeat
Dialing.
●
BirchNet
Value. BirchNet Value provides basic voice service with
features and long distance available as paid service
options.
●
SIPconnect.
BCHI’s SIP trunking solution offers single and multi-location
businesses a flexible, IP-based telephony solution that can be
provided either bundled or standalone, delivered either
over-the-top, or in combination with BirchLink on-net connectivity
for guaranteed quality of service (QoS).
●
Cloud Connectivity.
BCHI’s 100% IP-based network has 31K fiber route-miles, 8
data centers and metro fiber assets in 11 major markets. Its
extensive NNI Platform greatly expands network reach to serve
multi-location customers.
●
Metro-Ethernet
- In addition to BCHI’s own extensive fiber network and
company-owned assets, including more than 400,000 lit buildings and
over 31,000 fiber route miles, BCHI manages and maintains carrier
agreements that extend its reach and ability to deliver diverse
Ethernet over Copper and fiber connections in a highly secure and
efficient infrastructure.
●
BirchLink MPLS
(Multi-Protocol Label Switching). BCHI’s MPLS solution
delivers a secure network connection linking all locations of
multi-site businesses, enabling the seamless integration of
communications across the enterprise. Offering connection speeds
from 1.5Mbps to 1Gbps, the solution creates a private, high-speed
WAN to transmit all voice and data between locations.
●
BirchLink Complete. BCHI
provides enterprise-class, multiline voice and high-speed Internet
service for small businesses, including dynamic routing and
prioritization features that provide full data bandwidth when calls
are not in progress.
Cloud Computing.
Birch’s Cloud Computing solutions help businesses manage
critical data and applications in a secure cloud environment,
reducing IT and infrastructure resources and costs.
●
TotalCloud Data
Center. BCHI’s private or hybrid cloud computing
solution enables on-demand resources in a scalable, secure
environment. The solution, which reduces the technical resource and
support requirements necessary to manage and maintain complex,
on-site data infrastructures, can be offered managed or un-managed,
and features a flexible pricing model with no hidden fees. The
TotalCloud Data Center solution includes a customer-focused
onboarding and support model with training, design engineering and
24/7 dedicated live and on-line support.
●
File
Storage. Similar to other “box” style file
storage, BCHI’s TotalCloud File Storage secures confidential
business files with unparalleled security, enabling easy
collaboration to optimize productivity. The solution also allows
users to access, delete, revise and share files on all
devices.
●
Hosted
Email. Hosted Microsoft® Exchange provides an
enterprise-grade email solution, hosted in BCHI's
professionally-managed data center, eliminating the costs
associated with the administration, maintenance, and support of an
on-premise email system.
Competition
BCHI
competes with companies that provide voice and data services,
Internet connectivity, cloud voice, UCaaS, and application hosting
to businesses. Competition is mitigated by BCHI’s ability to
provide multiple product offerings, differentiating the company
from single product providers.
BCHI’s
voice communications, connectivity and network service offerings
primarily compete with carriers such as CenturyLink, AT&T, and
Verizon, cloud services providers such as 8x8, Vonage and
RingCentral, as well as various cable providers such as Comcast and
Charter Communications.
BCHI’s
cloud computing solutions, which are provided on a private or
hybrid basis, as well as its hosting solutions, compete with
companies such as Rackspace, Google, IBM, Hewlett-Packard,
Internap, Microsoft, Godaddy.com, and Amazon Web
Services.
Sales and Marketing
Birch’s
service distribution includes the following key
channels:
●
Indirect Sales
Channel – Includes third party partners who leverage
preexisting business relationships and act as sales agents on
behalf of BCHI. These agents include value-added resellers, local
area network consultants, and other IT and communications
consultants. This collaborative effort improves overall sales
productivity while simultaneously reducing the expense associated
with maintaining a direct sales force. To maximize the success of
the indirect channel BCHI provides channel sales managers and other
support resources. These resources assist with the sales and
customer onboarding process.
●
Outbound Telesales
– BCHI has developed a third party partner approach to
outbound sales, combining the use of third party telemarketers with
a specialized team of managers, quality control and order process
specialists. This channel sells small businesses seeking basic
phone and data services. All calls are scripted and follow strict
review prior to conversion as part of a rigorous internal process
to meet BCHI’s high quality and service
standards.
●
Inside Telesales
–BCHI operates a small team of inside sales representatives
to handle inbound opportunities, up-sell to existing customers and
renew existing agreements.
●
Direct Sales
– BCHI engages prospects with a knowledgeable and experienced
sales and technical support channel focused on medium to enterprise
opportunities.
Regulatory Environment
BCHI’s
services are subject to varying degrees of federal, state, and
local regulation. Telecommunications services are subject to
extensive regulation at both the federal and state levels while
Internet access services are subject to a lesser degree of
regulation. Federal, state, and local regulations governing
BCHI’s services are the subject of ongoing judicial
proceedings, rulemakings, and legislative initiatives that could
change the manner in which BCHI’s industry operates and
affect its business. BCHI cannot predict the outcome of any ongoing
matters or their potential impact upon the communications industry
generally or upon BCHI specifically. BCHI operations also are
subject to various consumer, environmental, building, safety,
health, and other governmental laws and regulations. The following
discussion summarizes some specific areas of federal, state, and
local regulation that directly or indirectly affect our business,
but is not intended to be exhaustive.
Federal
Regulation
The
Federal Communication Commission ("FCC") exercises jurisdiction
over providers of interstate and international telecommunications
services. BCHI has the operating authority required by the FCC to
conduct its interstate and international telecommunications
business as it is currently conducted. BCHI’s operating
subsidiaries that provide telecommunications services are
classified as non-dominant telecommunications carriers by the FCC
and, as a result, the prices, terms, and conditions of its
interstate and international telecommunications services are
subject to limited FCC regulation. Like all common carriers,
however, BCHI is subject to the general requirement that its
charges, practices, and classifications for telecommunications
services must be “just and reasonable,” and that it
refrain from engaging in “unjust or unreasonable
discrimination” with respect to its charges, practices, or
classifications.
Local Competition. The Communications
Act of 1934, as amended (the “Communications Act”),
imposes a variety of duties on all telecommunications carriers
providing local telephone services, including competitive carriers
such as us, to promote competition in the provisioning of these
services. These duties include requirements to: (1) interconnect
with other telecommunications carriers. (2) establish reciprocal
compensation arrangements for the completion of calls. (3) permit
the resale of services. (4) permit users to retain their telephone
numbers when changing carriers. and (5)provide competing carriers
access to poles, ducts, conduits, and rightsofway.
Incumbent local exchange carriers (“ILECs”) are subject
to additional duties to: (1) offer interconnection at any
technically feasible point within their networks on non
discriminatory, costbased terms. (2) offer collocation of
competitors’ equipment at their premises on a
nondiscriminatory basis. (3) make available some of their
network facilities, features, and capabilities, referred to as
Unbundled Network Elements, or UNEs, on nondiscriminatory,
costbased terms. and (4) offer wholesale versions of their
retail services for resale at discounted rates.
Local
telephone service competition depends on costbased and
nondiscriminatory interconnection with, and use of, ILEC
networks and facilities. Failure to achieve and maintain such
arrangements could have a material adverse effect on our ability to
provide competitive local telephone services. FCC rules define the
scope of the facilities that ILECs must make available as UNEs to
competitive carriers.
The
Communications Act and FCC rules also dictate that ILECs are
required to negotiate in good faith with competitive carriers
regarding terms for interconnection, collocation, reciprocal
compensation, and access to UNEs. If the negotiating carriers
cannot reach agreement within a prescribed time, either carrier may
request binding arbitration of the disputed issues by a state
regulatory commission. The resulting“interconnection
agreement” typically has a term of three years, although the
parties may mutually agree to extend or amend such agreements. The
initial terms of many of our interconnection agreements have
expired, however, our interconnection agreements
generally contain an “evergreen” provision that allows
the agreement to continue in effect until terminated. ILECs also
are making available some facilities and services to competitors
under unregulated “commercial agreements” that are not
subject to the same requirements as interconnection agreements. The
largest ILECs are also attempting to eliminate mandatory
interconnection through FCC rulemaking, and replace regulated
interconnection arrangements with commercial
negotiations.
Our
operating companies hold interconnection agreements and/or
commercial agreements with AT&T, CenturyLink, Fairpoint
Communications, Frontier Communications, Verizon, and Windstream in
each state and service territory in which we require such
agreements. New agreements could result in less favorable rates,
terms and conditions than our current agreements. If we are unable
to renegotiate or enter into new agreements on acceptable terms,
our cost of doing business could increase and our ability to
compete could be impeded.
Voice over Internet Protocol Services.
Some of our operating subsidiaries provide voice services deemed to
be Voice over Internet Protocol (“VoIP”) services. The
FCC has not decided whether VoIP is an “information
service” or “telecommunications service.” The
FCC, however, has issued a series of rulings addressing aspects of
the regulatory treatment of “interconnected” VoIP
service, so that VoIP services that interconnect with the public
switched telephone network (“PSTN”) are subject to a
number of regulatory requirements, including rules relating to
Universal Service Fund (“USF”) contributions,
protection of Customer Proprietary Network Information
(“CPNI”), compliance with the Communications Assistance
for Law Enforcement Act (“CALEA”), local number
portability, E911, outage reporting, access for individuals
with disabilities, and others. The FCC also ruled that state
utility regulatory commissions may not impose pricing and entry
regulations on VoIP services, concluding that VoIP services are
interstate services. Reviewing courts have affirmed these FCC
decisions. Some states have adopted legislation prohibiting the
regulation of VoIP services, but some state regulatory commissions
continue to attempt to regulate VoIP service. We cannot predict how
these matters will be resolved or the impact of these matters on
companies with which we compete or interconnect.
Broadband Internet Access Services. In
an order released in March 2015, the FCC classified retail
broadband Internet access services as telecommunications services
subject to regulation under Title II of the Communications Act. In
June 2016, the U.S. Court of Appeals for the District of Columbia
affirmed the FCC ruling, and several parties have asked for review
by the United States Supreme Court. The FCC has initiated a
rulemaking proceeding that would revise the previously adopted
rules, and restore the classification of broadband Internet access
services as “information services” subject to a
lighttouch regulatory framework. Congress also has proposed
legislation in this area. We cannot predict whether or when future
changes to the regulatory framework will occur at the FCC, in
Congress, or in the courts. We also cannot predict whether or to
what extent the rules as revised by the FCC, Congress, or the
courts may affect our operations or impose costs on our
business.
Intercarrier Compensation. The FCC regulates the switched
access service rates imposed by local carriers on interexchange
carriers for the origination and termination of long distance
traffic. Competitive carriers’ interstate switched access
service rates may not be greater than those of the ILEC serving the
same geographic area. In November 2011, the FCC adopted
intercarrier compensation rules under which switched access service
rates for all traffic, including VoIP traffic that interconnects
with the PSTN, were reduced, and a uniform billandkeep
framework for both intrastate and interstate terminating access
traffic will be the ultimate end state. The reforms required by the
FCC’s new rules are being phased in over a multiyear
transition. Since July 2013, all local carriers’ intrastate
tariffed terminating switched access charges must be no higher than
their interstate access charges. These rules significantly altered
the manner in which all carriers, including us, are compensated and
pay for the origination and termination of telecommunications
traffic. There also are other rulemaking proceedings pending that
could further revise intercarrier compensation requirements, and
address issues such as IPtoIP interconnection. We
cannot predict the extent to which the FCC will address these
issues in the future and whether it will adopt requirements that
are favorable or unfavorable to us.
Special Access or Business Data
Services. Business data services (“BDS”), also
known as special access, are services offered by ILECs that allow
for use of dedicated transmission facilities or private lines by
wireline and wireless telecommunications carriers,
Internetbased service providers, and large enterprise
endusers. We rely on the purchase of BDS for “last
mile” access to many of our customer locations. As a result,
the price of BDS has a major effect on our ability to price our
retail offerings to meet our gross margin expectations while
remaining competitively priced in the retail market. In April 2017,
the FCC adopted a new, deregulatory framework for BDS, which
eliminated pricing regulation for certain types of BDS and
established a competitive market test for determining whether other
types of BDS should remain subject to pricing regulation. Several
parties have challenged the FCC’s decision in federal court.
At this time, we cannot predict how the FCC’s decision, or
any modifications by the court, will affect our business. A
significant increase in the price for BDS could materially increase
our cost of services, and pricing flexibility for BDS offered by
ILECs could place us at a competitive disadvantage, both as a
purchaser of access and as a vendor of access to other carriers or
enduser customers.
Universal Service. The federal
Universal Service Fund (“USF”) subsidizes
communications services in rural and highcost areas, services
for low income consumers, and services for schools,
libraries, and rural health care providers. Currently, the FCC
assesses all providers of telecommunications services,
interconnected VoIP services, and certain providers of
telecommunications a percentage of interstate and international
revenues received from U.S. retail customers. We are subject to
this contribution requirement. Providers are permitted to pass
through their USF contribution assessment to their customers in a
manner consistent with FCC billing regulations. The FCC is
considering a number of proposed changes to the method of assessing
these USF contributions, including whether providers of broadband
Internet access services should be subject to contribution
requirements. We cannot predict when the FCC may reach a decision,
what types of changes may be adopted, or how such changes may
affect our business.
Customer Proprietary Network
Information. Telecommunications carriers and interconnected
VoIP service providers are required to implement measures to
prevent the unauthorized disclosure of Customer Proprietary Network
Information (“CPNI”). We must file a verified
certification of compliance by March 1 of each year that affirms
the existence of training and other sales and marketing processes
designed to prevent improper use and unauthorized release of CPNI.
In 2016, the FCC extended these protections to providers of
broadband Internet access service, but those rules were repealed
pursuant to the Congressional Review Act in April 2017, and
Congress restricted the FCC from adopting “substantially
similar” rules in the future. Other privacy legislation has
been proposed at the state and federal level, some of which would
require broadband service providers to apply heightened privacy and
security protections to customer data. We cannot predict whether or
to what extent revisions to the current rules may affect our
operations or impose costs on our business.
State Regulation
State
regulatory commissions, commonly referred to as public utility
commissions (“PUCs”), generally have jurisdiction over
telecommunications carriers to the extent that they provide
intrastate telecommunications services. Most state PUCs require
providers such as us to obtain certificates of authority before
offering telecommunications services between points within the
state. Through our operating subsidiaries, we have authority to
offer local telephone service and intrastate long distance service
in all 50 U.S. states and the District of Columbia (with the
exception of Alaska, in which we hold authority to provide
intrastate long distance service only).
We may
be required to file tariffs or price lists setting forth the terms,
conditions and prices for specified services that are classified as
intrastate and to update or amend our tariffs when we adjust our
rates or add new products. We also are subject to various reporting
and recordkeeping requirements at the state level, as well as
requirements to contribute to state USF, E911, and other funds, and
collect and/or pay other taxes, fees, and surcharges where
applicable. Certificates of authority can be conditioned, modified,
canceled, terminated, or revoked by state regulatory authorities
for a carrier’s failure to comply with state laws or the
rules, regulations, and policies of state regulatory authorities.
Fines or other penalties may be imposed for
violations.
We may
be affected by how states regulate the retail prices of the ILECs
with which we compete. As the degree of intrastate competition is
perceived to increase, states are offering ILECs increased pricing
flexibility and deregulation of services deemed to be competitive.
We cannot predict the extent to which these developments may affect
our business. In addition, state legislatures are considering, and
in some cases enacting, new laws that limit the authority of state
PUCs to regulate and oversee the business dealings of carriers.
While we may benefit from such actions, deregulation of our ILEC
competitors may affect our operations or impose costs on our
business.
Many
states require prior approval for transfers of control of certified
carriers, corporate reorganizations, acquisitions of
telecommunications operations, assignment of carrier assets,
carrier stock offerings, and incurrence by carriers of significant
debt obligations. These requirements can delay and increase the
cost we incur to complete financing transactions, including future
stock or debt offerings, the sale of part or all of our regulated
business, or the acquisition of assets and other entities to be
used in our regulated business.
Local Government Authorizations and Related
Rights-of-Way
Local
governments may require us to obtain licenses, permits, or
franchises to use the public rightsofway necessary to
install and operate our network. We may be subject to numerous
local regulations such as building codes, municipal franchise
requirements, and licensing. Such regulations vary on a
city-by-city and county-by-county basis and
can affect our provision of both network services and carrier
services. We also may be required to pay license or franchise fees
based on a percentage of gross revenues or a per linear foot basis
in various localities. In many markets, ILECs are not required to
pay these franchise fees or are permitted to pay fees that are
substantially lower than those required to be paid by us. To the
extent that our competitors do not pay the same level of fees that
we do, we could be at a competitive disadvantage.
BIRCH COMMUNICATIONS HOLDINGS, INC.
ATLANTA, GEORGIA
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2017
BIRCH COMMUNICATIONS HOLDINGS, INC.
CONTENTS
Consolidated Balance Sheets as of September 30, 2017 and December
31, 2016
|
F-3
|
|
|
Consolidated Statements of Operations and Comprehensive Income for
the Three Months Ended September 30, 2017 and 2016 and for the Nine
Months Ended September 30, 2017 and 2016
|
F-4
|
|
|
Consolidated Statements of Changes in Stockholders’ Deficit
for the Nine Months Ended September 30, 2017 and 2016
|
F-5
|
|
|
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 2017 and 2016
|
F-6
|
|
|
Notes to Consolidated Financial Statements
|
F-7
|
BIRCH COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
See
accompanying notes which are an integral part of these financial
statements.
BIRCH COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE
INCOME
(Amounts in thousands)
(Unaudited)
See
accompanying notes which are an integral part of these financial
statements.
BIRCH COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’
DEFICIT
(Amounts in thousands)
(Unaudited)
See
accompanying notes which are an integral part of these financial
statements.
BIRCH COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
See
accompanying notes which are an integral part of these financial
statements.
BIRCH COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Business
Birch Communications Holdings, Inc., (Birch) (the Company) is the
sole owner of Birch Communications, Inc. (formerly known as Access
Integrated Networks, Inc., incorporated in 1996) which is comprised
of the following wholly-owned consolidated subsidiaries: Birch
Communications of Virginia, Inc., Birch Communications of Kentucky,
LLC, Birch Telecom of Texas Ltd., LLP, Birch Telecom of Kansas,
Inc., Birch Telecom of Missouri, Inc., Birch Telecom of Oklahoma,
Inc., Birch Telecom of the South, Inc., Birch Telecom of the Great
Lakes, Inc., Birch Telecom of the West, Inc., Birch Communications
of the Northeast, Inc., Ionex Communications North, Inc., Ionex
Communications South, Inc., Ionex Communications, Inc., Tempo
Telecom, LLC, Primus Management, ULC, Primus of Puerto Rico, LLC,
Cbeyond, Inc., Cbeyond Communications, LLC (Cbeyond), Birch
Internet Services, Inc., Birch Equipment, Inc., Birch Management
Corporation, Primus Holdings, Inc., Birch Texas Holdings, Inc.,
Birch Telecom, Inc., and Birch Telecom 1996, Inc. The Company is a
competitive local exchange carrier (CLEC) providing services to
primarily small- and medium-sized business customers and to a
lesser extent, residential consumers in 50 states, and
Washington, D.C., focusing mainly in the southeastern
and southwestern United States.The Company provides local, long
distance, high speed internet, broadband data, Session Initiation
Protocol (SIP) trunking, Private Branch Exchange (PBX) hosting,
email, web hosting and other ancillary telephony, broadband
information technology (IT) services and internet services. It does
so by provisioning services over its own digital network called the
Birch Digital Network (BDN) or by reselling the services of the
incumbent local exchange carrier (ILEC), such as AT&T, Inc.,
Verizon and CenturyLink. Birch is subject to certain regulations
and requirements of the Federal Communications Commission (FCC) and
various state public service commissions and, where required, files
tariffs, price lists and other terms and conditions relating to the
use of their services.
In connection with offering local exchange services, the Company
has entered into two types of agreements with most ILECs. The first
is an Interconnection Agreement (ICA), which vary in length of term
by state and region. The ICA allows the Company to purchase resale
services as well as unbundled network elements (UNE) such as loops
and transport, and the ability to collocate equipment at the
ILEC’s central office (all necessary to build and operate the
BDN). The second type of agreement is the Commercial Agreement
(CA). The CA governs the terms, conditions and prices for the
purchase of unbundled network element replacement services where
UNEs are not available. These agreements allow the Company to enter
new markets with minimal capital expenditures and to offer local
exchange services by purchasing all unbundled network element
platform (UNE-P) required for local service on a wholesale basis.
The terms of the ICA, including pricing terms which are negotiated
and agreed to by the Company and each ILEC, have been approved by
state regulatory authorities in all states in which the ILEC
operates, although they remain subject to review and modification
by such authorities. The Company believes the ICAs and CAs provide
a foundation for it to provide local service on a reasonable basis,
but there can be no assurance on a prospective basis in this regard
as important regulatory, legal and technology issues are ever
changing.
Typically, the Company enters multi-year ICAs with the ILECs. Under
these agreements, prices are either fixed for the life of the
agreement or specific mechanisms for periodic adjustments in prices
are outlined.
Note 2. Basis of Presentation and Summary of Significant Accounting
Policies
Basis of Presentation and Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated. All
dollars in notes to the consolidated financial statements are
rounded to the nearest thousands, except per share
amounts.
The accompanying unaudited consolidated financial statements have
been prepared in accordance with GAAP, for interim financial
information. Accordingly, the financial statements do not include
all of the information and footnotes required by GAAP for complete
financial statement presentation. In management’s opinion,
all normal and recurring adjustments considered necessary for a
fair presentation of the financial position, results of operations
and cash flows for the interim periods presented have been
included. The results of operations for the period ended September
30, 2017 are not necessarily indicative of the results to be
expected for the full year.
Use of Estimates
Management uses estimates and assumptions in preparing the
consolidated financial statements in accordance with generally
accepted accounting principles in the United States
(“GAAP”). These estimates and assumptions affect the
reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities, and the reported revenues and
expenses. Actual results could vary from the estimates that were
assumed in preparing the consolidated financial
statements.
Reclassifications
Certain reclassifications of prior year amounts have been made to
conform to the current year presentation.
Cash and Cash Equivalents
The Company considers all highly liquid instruments with an
original maturity of three months or less to be cash
equivalents.
Revenue Recognition
Revenue is recognized when earned based upon the following specific
criteria: (1) persuasive evidence of arrangement exists, (2)
services have been rendered, (3) seller’s price to the buyer
is fixed or determinable, and (4) collectability is reasonably
assured. The Company’s revenue is comprised of two primary
components: (1) fees paid by end customers for local, long-distance
and data and (2) carrier charges, primarily access fees. End
customer revenue includes local, long-distance and data and is
comprised of monthly recurring charges, usage charges and initial
nonrecurring charges. Monthly recurring charges include the fees
paid by customers for services and additional features on those
facilities. Usage charges consist of per-use sensitive fees paid
for calls made. Initial nonrecurring charges consist primarily of
installation charges. Access charges are comprised of charges paid
primarily by interexchange carriers for the origination and
termination of interexchange toll and toll-free calls.
The Company follows provisions of Accounting Standards Codification
(ASC) Topic 605, Revenue Recognition in
Financial Statements. This
guidance addresses the recording of revenues and associated costs
relating to installation and service activation
fees.
Deferred Customer Revenue
Deferred customer revenue represents the liability for advance
billings to customers for local phone service. Customers are billed
in advance for fixed monthly charges.
Concentrations of Credit Risk
Cash and Cash Equivalents
Financial
instruments that potentially subject the Company to credit risk
include cash on deposit with financial institutions in excess of
federally insured limits. At September 30, 2017, the Company had
bank deposits of $5,471 in excess of the FDIC coverage of $250. In
Canada, the Company had bank deposits of C$778 in excess of the
CDIC coverage of C$100.
Accounts Receivable
The
Company’s accounts receivable subject the Company to credit
risk, since collateral is generally not required. The
Company’s risk of loss is limited due to the ability to
terminate access on delinquent accounts. The large number of
customers comprising the customer base mitigates the concentration
of risk. In the nine months ended September 30, 2017, no customer
represented more than 10 percent of the Company’s
revenues.
Accounts
receivable are stated at the amount management expects to collect
from outstanding balances. Management provides for uncollectible
amounts through a charge to earnings and a credit to a valuation
allowance based on its assessment of the current status of
individual accounts. Balances that are still outstanding after
management has used reasonable collection efforts are written off
through a charge to the valuation allowance and a credit to
accounts receivable.
Other
The
Company faces certain factors, including the following: growth and
expansion, which may strain the Company’s
resources; dependence on key personnel; dependence on third-party
suppliers of equipment and communications services; dependence on
relationships with incumbent local exchange carriers; competition
from other competitive local exchange carriers and providers of
communications services; and potential disruption of services due
to system failures.
Property and Equipment
Property and equipment are stated at cost, and depreciation is
computed using the straight-line method over the estimated useful
lives of the assets (generally three to five years). Maintenance
and repairs are charged to expense as incurred. Gains or losses on
the disposal of property and equipment are recognized in operations
in the year of disposition. Amortization of capital lease items is
included in depreciation expense. Depreciation expense
was
$7,304 and $23,393 for the three and nine months
ended September 30, 2017 and $7,225 and $21,281 for the three and
nine months ended September 30, 2016, respectively.
Amortization
Subscriber Acquisition Costs
The
Company amortizes subscriber acquisition costs over the estimated
life of a customer (84 - 120 months as of September 30, 2017).
Amortization expense of subscriber acquisition costs was $5,521 and
$16,457 for the three and nine months ended September 30, 2017 and
$6,113 and $17,304 for the three and nine months ended September
30, 2016, respectively.
IP-Network Transition Costs
The
Company amortizes the one-time charges associated with
transitioning a resale customer to its own IP-Network over a period
of 36 months. Amortization expense of IP-network transition costs
was $3,036 and $8,617 for the three and nine months ended September
30, 2017 and $2,343 and $6,109 for the three and nine months ended
September 30, 2016, respectively.
Installation Costs
The
Company amortizes costs relative to the install of new customers
over a period of 36 months. Amortization expense of
installation costs was $1,615 and $3,925 for the three and nine
months ended September 30, 2017 and $886 and $2,047 for the three
and nine months ended September 30, 2016,
respectively.
Commissions
The
Company amortizes up-front sales commissions paid to third parties
over the contractual service period (7 - 36 months as of September
30, 2017). Amortization of these commissions was $3,082 and $7,829
for the three and nine months ended September 30, 2017 and $1,752
and $4,047 for the three and nine months ended September 30, 2016,
respectively.
Tradenames
The
Company amortizes tradenames and costs over the estimated life of
84 months. Amortization expense of tradenames costs was $425 and
$1,275 for the three and nine months ended September 30, 2017 and
$104 and $311 for the three and nine months ended September 30,
2016, respectively.
Noncompete Agreements
The
Company amortizes noncompete agreement costs over the life of the
agreement (12-24 months as of September 30, 2017). Noncompete
agreements were fully amortized as of September 30, 2017 and
December 31, 2016; therefore no amortization expense was
recognized.
Impairment of Long-Lived Assets
The Company accounts for long-lived assets in accordance with
provisions of ASC Topic 360, Accounting for the Impairment
or Disposal of Long-Lived Assets. This guidance addresses financial accounting and
reporting for the impairment and disposition of long-lived assets,
including property and equipment and purchased intangible assets.
The Company evaluates the recoverability of long-lived assets for
impairment when events or changes in circumstances indicate the
carrying amount of an asset may not be recoverable. Conditions that
would necessitate an impairment assessment include a significant
decline in the observable market value of an asset, a significant
change in the extent or manner in which an asset is used, or a
significant adverse change that would indicate the carrying amount
of an asset or group of assets is not recoverable. For long-lived
assets to be held and used, the Company recognizes an impairment
loss only if it’s carrying amount is not recoverable through
its undiscounted cash flows and measures the impairment loss, if
any, based on the difference between the carrying amount and fair
value. Long-lived assets held for sale are reported at the lower of
cost or fair value less costs to sell. If impairment is indicated,
the carrying amount of the asset is written down to fair
value.
Goodwill and Purchased Intangible Assets
Goodwill is the excess of the purchase price over the fair value of
identifiable net assets acquired in business combinations accounted
for under the acquisition method of accounting pursuant to ASC
Topic 805, Business
Combinations. Purchased
intangible assets consist primarily of subscriber bases and
customer relationships, acquired software and technology and other
assets acquired in conjunction with the purchases of businesses and
subscriber bases from other companies. Subscriber bases acquired
directly are valued at cost plus assumed service liabilities, which
approximates fair value at the time of purchase. When management
determines material intangible assets are acquired in conjunction
with the purchase of a company, the Company engages an independent
third party to determine the allocation of the purchase price to
the intangible assets acquired. Certain intangible assets
determined to have definite lives are amortized on a straight-line
basis over their estimated useful lives.
The Company accounts for goodwill and intangible assets in
accordance with ASC Topic 350, Goodwill and Other Intangible
Assets, which prohibit the
amortization of certain intangible assets, deemed to have
indefinite lives. Goodwill is not amortized and is tested for
impairment on an annual basis, or more frequently if deemed
necessary. As of September 30, 2017, we had $93,356 of goodwill.
The Company’s 2016 annual goodwill impairment analysis did
not result in an impairment charge.
Income Taxes
The Company, with the consent of its stockholders, has elected
under the Internal Revenue Code to be an S corporation effective
January 1, 2006. In lieu of corporate income taxes, the
stockholders of an S corporation are taxed on their proportionate
share of the Company’s taxable income. Therefore, no
provision or liability for federal income taxes has been included
in the consolidated financial statements. However, the Company
operates in a few states that do not recognize S corporation
status. The Company recognizes state tax provisions as amounts are
paid to the tax jurisdictions.
Cbeyond files separate corporate tax returns which include sales to
affiliated companies. No immediate tax expense is recognized
in the consolidated statements other than the tax benefit from the
release of the valuation allowance on its net operating
loss.
Income tax expense was
$654 and $2,008 for
the three and nine months ended September 30, 2017 and $201 and
$1,299 for the three and nine months ended September 30, 2016,
respectively. The 2016 return has not been filed. The 2015, 2014
and 2013 returns have been filed and are still subject to
examination by the Internal Revenue Service for three years from
filing.
The Company has U.S. deferred tax assets, which have been fully
reserved due to the uncertainty of their use. The balance sheet
includes deferred assets attributable to the Company’s
investment in Primus, a Canadian subsidiary. The acquisition
was taxable for income tax purposes and all assets and liabilities
have been recorded at fair market value for both book and income
tax purposes. The deferred assets are solely attributable to
different cost recovery methods for fixed assets and customer
lists.
For financial reporting purposes, income before income (loss) taxes
includes the following components:
|
Three Months Ended
September 30,
|
Nine Months Ended
September 30,
|
|
|
|
|
|
United
States
|
$(7,393)
|
$(2,073)
|
$(29,270)
|
$2,812
|
Foreign
|
1,343
|
4,848
|
4,691
|
7,960
|
Total
|
$(6,050)
|
$2,775
|
$(24,579)
|
$10,772
|
Foreign withholding taxes have not been recognized on the 2016
earnings of the non-U.S. subsidiaries. Generally, such
amounts become subject to U.S taxation upon remittance of the
dividends and certain other circumstances. It is not
practicable to estimate the amount of deferred tax liability
related to investments in the foreign subsidiary.
The Company’s tax positions are evaluated for recognition
using a more-likely-than-not threshold, and those tax positions
requiring recognition are measured at the largest amount of tax
benefit that is greater than 50 percent likely of being realized
upon ultimate settlement with a taxing authority that has knowledge
of all relevant information. Liabilities for income tax matters
include amounts for income taxes, penalties and interest thereon
and are the result of the potential alternative interpretations of
tax laws and the judgmental nature of the timing of recognition of
taxable income. Management does not believe the Corporation has
taken any tax positions which would require accrual.
Share-Based Compensation and Consulting
The Company has an equity compensation plan providing for the grant
of equity awards. All transactions with nonemployees in which goods
or services are the consideration received for the issuance of
equity instruments are accounted for based on the fair value of the
consideration received or the fair value of the equity instrument
issued, whichever is more reliably measurable. The measurement date
of the fair value of the equity instrument issued is the earlier of
the date on which the counter party’s performance is complete
or the date on which it is probable that performance will
occur.
Advertising Costs
The Company expenses all advertising costs as incurred. Advertising
expense was $1,114 and $3,653 for the three and nine months ended
September 30, 2017 and $835 and $2,076 for the three and nine
months ended September 30, 2016, respectively.
Foreign Currency
The Company’s foreign subsidiary, Primus Management ULC
(Primus Canada) uses the local currency of its country as its
functional currency. Assets and liabilities are translated into
U.S. dollars at exchange rates at the balance sheet dates.
Revenues, costs and expenses are translated using the average
exchange rates for the period. Gains and losses resulting from the
translation of our consolidated balance sheets and statements of
operations are recorded as a component of accumulated other
comprehensive income. Gains and losses from foreign currency
transactions are recognized as foreign exchange gain (loss) in the
statement of operations.
Comprehensive Income (Loss)
Comprehensive income includes all changes in the Company’s
equity during the period that results from transactions and other
economic events other than transactions with its stockholders. For
the Company, comprehensive income includes the gains or losses
resulting from foreign currency translations.
Distributions to Owners
It is management’s policy to distribute amounts to the
Company’s owners to cover their tax liability related to the
earnings of the Company. “Permitted Tax Distributions,”
as defined in the PNC Bank, National Association Credit Agreement
(2014 Credit Facility), shall be based on good faith estimates by
the Company of net taxable income for the relevant period (or
portion thereof) and subsequent tax distributions shall be
appropriately adjusted to the extent of any excess or deficit in
payments in respect of prior relevant periods or portions
thereof.
Sales, Use and Other Value Added Taxes
The Company’s revenue is recorded net of applicable sales,
use and other value added taxes.
Recently adopted accounting standards
In August, 2014, the Financial Accounting Standards Board (the
FASB) issued Accounting Standards Update (ASU) 2014-15,
Disclosure of
Uncertainties about an Entity’s Ability to Continue as a
Going Concern. The update
requires management to assess a company’s ability to continue
as a going concern and to provide related footnote disclosures in
certain circumstances. Under the new standard, disclosures are
required when conditions give rise to substantial doubt about a
company’s ability to continue as a going concern within one
year from the financial statement issuance date. The new standard
applies to all companies and is effective for the annual period
ending after December 15, 2016. Adoption of this standard did not
have a material impact on the Company’s consolidated
financial statements.
The Company has early implemented certain provisions of Accounting
Standards Update 2016-01, Financial Instruments –
Overall (Subtopic 825-10): Recognition and Measurement of Financial
Assets and Financial Liabilities. To simplify reporting, fair value disclosures for
financial instruments reported at amortized cost are no longer
provided in the notes to these financial
statements.
Recently issued accounting standards
In November, 2016, the FASB issued ASU 2016-18, Statement of Cash Flows
Restricted Cash. The update
requires that the statement of cash flows explain the change during
the period in the total of cash, cash equivalents, and restricted
cash. Entities will also be required to reconcile such totals to
amounts on the balance sheet and disclose the nature of the
restrictions. The update is effective for non-public business
entities for fiscal years beginning after December 15, 2018. Early
adoption at the original effective date is permitted. The Company
is evaluating the impact of the implementation of this standard on
its financial statements.
In February, 2016, the FASB issued ASU 2016-02, Leases. The update requires lessees to recognize lease
assets and liabilities for all leases, with certain exceptions, on
the balance sheets. The standard is now required to be adopted by
non-public business entities in annual periods beginning on or
after December 15, 2019 and must be applied on a full retrospective
basis. Early adoption at the original effective date is permitted.
The Company is evaluating the impact of the implementation of this
standard on its financial statements.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with
Customers. The new guidance
outlines a single comprehensive model for entities to use in
accounting for revenue arising from contracts with customers and
supersedes most current revenue recognition guidance, including
industry-specific guidance. The core principle of the revenue model
is that an entity recognizes revenue to depict the transfer of
promised goods or services to customers in an amount that reflects
the consideration to which the entity expects to be entitled in
exchange for those goods or services. The new standard requires
significantly expanded disclosures about revenue contract assets
and liabilities. In April 2015, the FASB issued guidance that
deferred the effective date by one year. The standard is required
to be adopted by non-public business entities in annual periods
beginning on or after December 15, 2018, and interim periods within
annual periods beginning after December 15, 2019, and may be
applied on a full retrospective or modified retrospective approach.
Early adoption at the original effective date is permitted. The
Company is evaluating the impact of the implementation of this
standard on its financial statements.
Note 3. Earnings per Share
Basic and diluted net income (loss) per share
Basic net income (loss) per share is calculated by dividing net
income (loss) by the weighted average number of shares of common
stock outstanding for the period. Diluted net income (loss) per
share gives effect to all dilutive potential common shares
outstanding during the period including stock options and warrants
using the treasury stock method.
The following table summarizes the basic and diluted net income
(loss) per share calculations:
|
For the Three Months Ended
September 30,
|
For the Six Months Ended
September 30,
|
|
|
|
|
|
Net
income (loss)
|
$(6,704)
|
$2,574
|
$(26,587)
|
$9,473
|
Basic
weighted average common shares outstanding
|
2,564
|
2,564
|
2,564
|
2,564
|
Effect
of dilutive securities
|
-
|
38
|
-
|
38
|
Diluted
weighted average common shares outstanding
|
2,564
|
2,602
|
2,564
|
2,602
|
Basic
income (loss) per common share
|
$(2.61)
|
$1.00
|
$(10.37)
|
$3.69
|
Diluted
income (loss) per common share
|
$(2.61)
|
$0.99
|
$(10.22)
|
$3.64
|
Note 4. Property and Equipment
Property and equipment consists of the following:
|
Estimated Life
Range (years)
|
|
|
Owned
Assets:
|
|
|
|
Telecommunications
Equipment
|
|
$85,412
|
$82,359
|
Leasehold
Improvements
|
|
11,630
|
14,242
|
Office
Equipment
|
|
1,909
|
1,707
|
Buildings
and Building Improvements
|
|
1,540
|
1,540
|
Furniture
and Fixtures
|
|
6,055
|
6,311
|
Computer
Software
|
|
53,126
|
49,604
|
Land
|
|
470
|
470
|
Automobiles
|
|
131
|
131
|
Construction-In-Process
|
|
5,431
|
2,993
|
|
|
|
|
Total
Owned Assets
|
|
165,704
|
159,357
|
Accumulated
Depreciation
|
|
(94,273)
|
(74,786)
|
Total
Owned Assets, Net
|
|
71,431
|
84,571
|
|
|
|
|
Total
Assets Under Capital Lease
|
|
37,574
|
36,643
|
Accumulated
Depreciation
|
|
(11,589)
|
(10,257)
|
Total
Assets Under Capital Lease, Net
|
|
25,985
|
26,386
|
|
|
|
|
Property
and Equipment, Net
|
|
$97,416
|
$110,957
|
Note 5. Leases
The Company has entered into various operating and capital leases
for facilities and equipment used in its operations. Aggregate
future minimum rental commitments under operating leases and
maturities of capital lease obligations as of September 30, 2017
are as follows:
|
|
|
|
|
|
2017
|
$4,390
|
$1,102
|
2018
|
9.026
|
2,991
|
2019
|
6,587
|
1,522
|
2020
|
3,096
|
671
|
2021
|
1,171
|
247
|
Thereafter
|
1,064
|
1,813
|
|
|
|
|
$25,334
|
$8,346
|
|
|
|
Amounts
Representing Interest
|
|
(883)
|
|
|
|
Present
Value of Minimum Lease Payments
|
|
7,463
|
|
|
|
Current
Portion
|
|
(3,476)
|
|
|
|
Obligations
Under Capital Lease-Net of Current Portion
|
|
$3,987
|
Property and equipment acquired through capital leases are recorded
at the present value of the future payments due under the lease
agreements, discounted at rates varying from 2.00 to 5.00
percent.
Assets and accumulated amortization under capitalized leases
consists of the following:
|
|
|
|
Assets
Under Capital Lease
|
|
|
|
Telecommunications
and Office Equipment
|
Life
of Lease
|
$10,301
|
$9,371
|
IRU
(1)
|
20
Years
|
25,326
|
25,325
|
Computer
Software
|
4
Years
|
1,947
|
1,947
|
|
|
|
Total
Assets Under Capital Lease
|
|
37,574
|
36,643
|
|
|
|
Accumulated
Depreciation
|
|
(12,481)
|
(10,257)
|
Total
Assets Under Capital Lease, Net
|
|
$25,985
|
$26,386
|
(1)
Purchase of network capacity under long-term contracts for the
indefeasible right to use (IRU) fiber network infrastructure owned
by others.
Rental expense charged to operations was $921 and $3,820 for the
three and nine months ended September 30, 2017 and $1,604 and
$4,500 for the three and nine months ended September 30, 2016,
respectively.
Note 6. Intangible Assets
Intangible assets and accumulated amortization as
follows:
|
|
|
|
|
|
Subscriber
Acquisition Costs
|
$ 203,454
|
$ 201,346
|
Network
Transition Costs
|
53,126
|
37,557
|
Tradenames
and Trademarks
|
13,146
|
13,146
|
Noncompete
Agreement
|
3,000
|
3,000
|
Installation
Costs
|
17,776
|
17,066
|
Commissions
|
41,475
|
30,934
|
|
|
|
Total
Intangible Assets
|
331,977
|
303,049
|
Accumulated
Amortization
|
(163,958)
|
(125,379)
|
|
|
|
Intangible
Assets, Net
|
$ 168,019
|
$ 177,670
|
Amortization expense was $13,679 and $38,103 for the three and nine
months ended September 30, 2017, and $11,198 and $29,818 for the
three and nine months ended September 30, 2016,
respectively.
Estimated future amortization expense for intangible assets owned
as of September 30, 2017 is as follows:
Year
|
|
|
|
2017
|
$ 13,028
|
2018
|
43,040
|
2019
|
34,196
|
2020
|
25,124
|
2021
|
16,561
|
Thereafter
|
19,884
|
|
|
|
$ 151,833
|
Note 7. Long-Term Debt
The Company’s long-term debt consists of the
following:
|
|
|
Term
Loan Payable
|
$ 406,158
|
$ 414,483
|
Revolver
Loan Payable
|
45,000
|
40,000
|
Promissory
Notes (1)
|
6,568
|
6,000
|
Notes
Payable (1)
|
500
|
500
|
Stock
Repurchase Agreement (2)
|
13,700
|
13,700
|
Deferred
Financing, Net
|
(13,137)
|
(12,687)
|
Debt
Origination Discount
|
(4,249)
|
(5,585)
|
|
|
|
|
454,540
|
456,411
|
Current
Maturities
|
(28,823)
|
(26,500)
|
|
|
|
Total
Long-Term Debt
|
$ 425,717
|
$ 429,911
|
1.
See Note 12. Related Party
Transactions for discussion of the subordinated promissory notes
and note payable.
2.
As it is the intent for the
repurchased shares to be retired, the Company has elected to
account for the shares repurchased under the constructive
retirement method. For shares repurchased in excess of par, the
Company allocated the excess value to accumulated
deficit.
On July 18, 2014, the Company refinanced its existing debt under a
Term Loan Payable (2014 Credit Facility) arrangement totaling
$450,000 with PNC Bank, N.A., as Administrative Agent. The
arrangement also includes $50,000 made available under the Revolver
Loan Payable. The Company capitalized the costs associated with
issuing the debt of $13,770. The debt was issued at a discount of
$9,450. The deferred financing and discount are recognized as
interest expense throughout the term of the loan.
On October 28, 2016, the Company amended the 2014 Credit Facility.
The Company capitalized the costs associated with the amendment of
$4,289. The amended 2014 Credit Facility is due in quarterly
installments of $2,800 through December 31 2016, then $5,625 per
quarter until June 30, 2020. The amended 2014 Credit Facility
matures with the remainder due on July 18th
2020. The interest on the amended 2014
Credit Facility is Libor plus 7.25% for the term loan and Libor
plus 6.25% for the revolver loan payable.
On May 1, 2016, the Company entered into an installment purchase
agreement to repurchase 148 shares of common stock from a former
employee, valued at $13,700. The installments due are as follows:
$1,000 on December 31, 2016, $1,500 on May 1, 2017, $1,000 on
December 31, 2017, $3,000 on May 1, 2018, and $7,200 on May 1,
2019. Per the agreement, should the payment of any installment
conflict with a covenant in any material credit agreement of the
Company, the installment will be delayed. The sum delayed will
accrete at a rate of 4% per year. As of November 7, 2017, no
payments have been made due to a material impact to the amended
2014 Credit Facility, resulting in $46,667 of additional
debt.
On April 12, 2017, the Company entered into a second amendment to
the 2014 Credit Facility. The Company was able to secure an
additional $10,000 to the term loan from its primary lender
Halcion. Additionally, there was a $5,000 commitment from Company
ownership if the Company dropped below $10,000 in liquidity. The
second amended 2014 Credit Facility is due in quarterly
installments of $125 per quarter until June 30, 2020. The
additional term loan matures with the remainder due on July 18,
2020. The Company capitalized the costs associated with the
amendment of $4,881.
The aggregate scheduled maturities of long-term debt as of
September 30, 2017 is as follows:
Year
|
|
|
|
2017
|
$ 9,625
|
2018
|
25,500
|
2019
|
29,700
|
2020
|
407,101
|
2021
|
-
|
Thereafter
|
-
|
|
$ 471,926
|
Note 8. Commitments and Contingencies
Sales Agents’ Agreements
The Company’s marketing strategies focus on providing local
services through a combination of its agent channel and its direct
and internal sales channel.
The remaining agents may or may not bring an existing base of
accounts and perform a traditional agent role. They will not be the
end users’ points of contact; all contact for
additions/changes and service/maintenance will be handled directly
by the Company.
The total commissions paid through the Company’s agents and
internal sales channels was
$3,784 and $11,478 for
the three and nine months ended September 30, 2017 and $4,277 and
$12,847 for the three and nine months ended September 30, 2016,
respectively. These commissions are classified as selling, general
and administrative expenses in the accompanying consolidated
statements of operations and comprehensive income. Upfront sales
commissions paid to third parties are capitalized and amortized
over the contract service period.
Legal Proceedings
We are involved in legal proceedings arising in the ordinary course
of business.
On November 20, 2008, Telecom Decision Makers, Inc. (TDM) filed a
lawsuit against Access Integrated Networks, Inc. and Birch
Communications, Inc. (Birch) in the United States District Court,
Western District of Kentucky at Louisville. TDM was seeking a
Declaratory Judgment from the Court, claiming that the
“Confidential Independent Sales Representative Agreement for
Voice Products and Services” in effect with Navigator
Telecommunications (Navigator), was automatically assigned to Birch
Communications, Inc. in their purchase of a portion of
Navigator’s assets on November 18, 2008. TDM claimed that
Navigator’s agreement to pay certain commissions continued
since they did not exercise a buy-out option, and that this
obligation is now binding on Birch.
The parties engaged in extensive discovery, including written
discovery, including corporate deposition of Navigator, retaining
expert witnesses and deposing those witnesses. There was extensive
motion practice on discovery matters and for summary judgment,
which the Court denied. A trial date of January 6, 2014 was
established. At a pretrial conference on January 3, 2014, the Court
granted the Company’s motion to limit the trial to the single
issue raised in the Complaint, specifically whether the transaction
between Navigator and Birch caused a “change of
control”, within the language of the TDM/Navigator agreement.
The jury’s verdict indicated that the transaction did cause a
change of control.
On or
about May 19, 2014 the Company submitted a renewed motion for
judgment asking the declaratory judgment be set aside, and that
motion was denied. No party filed a notice of appeal.
Instead, on or about August 28, 2014 the Company was named as the
defendant in a second TDM lawsuit. This matter was removed to
federal court by the Company on or about September 4, 2014. In the
Second TDM Proceeding, TDM is seeking damages for breach of
contract, unjust enrichment and other claims. These claims arise
from the same contract that prompted the first TDM Proceeding. On
or about September 12, 2014 the Company submitted a motion to
dismiss, urging that the new lawsuit impermissibly seeks to re-open
the First TDM Proceeding, that TDM’s claims are barred by
finality doctrines and applicable statutes of limitations. That
motion has been briefed but not decided.
Plaintiff appealed to the Sixth Circuit of Appeals in November
2015. The Company is proceeding to defend its position to force
arbitration to determine damages, if any, on appeal. An estimate of
$3,600 was accrued as of December 31, 2016. The final arbitration
awarded to TDM in May 2017 was $3,647 plus attorney’s fees
awarded of $382. The additional $429 was accrued in
2017.
On October 7, 2015, Abante Rooter and Plumbing, Inc. (Abante) filed
a lawsuit against Birch Communications, Inc. in the United States
Georgia Northern District of Atlanta. Abante claimed violations of
the Telephone Consumer Protection Act (TCPA) by Birch
Communications, Inc. and/or certain of its affiliates as a result
of alleged unauthorized contact by third party telemarketing
services engaged by Birch to individuals’ cellular
telephones. On or about July 6, 2016, Plaintiff made a first
settlement demand in the Action for $26 million. Mediation was
conducted September 29, 2016 and was unsuccessful. Plaintiff has
filed for certification as a class action. Birch has filed a Motion
attacking the plaintiff’s expert witness, classification of
TCPA violation and class description and Birch has filed a Motion
for Summary Judgment. In May 2017, the Company reached a tentative
agreement with plaintiffs, subject to approval by the Court, to
settle the case for $12,000 payable in equal quarterly payments
over three years. The $12,000 settlement was accrued as of December
31, 2016.
Accruals for litigation loss contingencies are recorded when it is
probable that a liability has been incurred and the amount of loss
can be reasonably estimated.
Note 9. Benefit Plans
The Company’s 401(k) plan covers all employees who have
attained 18 years of age and completed 90 days of service.
Participants may contribute up to the maximum determined by the
federal government each year. The Company’s match is
discretionary. The Company has elected not to partially match
employee contributions in 2016 and 2017.
Due to the acquisition of Primus (See Note 11. Prior Year
Acquisitions) employees in Canada are covered under a Registered
Retirement Savings Plan. Eligible employees may make contributions
up to their personal eligible contribution limit under the Canadian
Income Tax Act. There is no employer contribution
component.
Note 10. Stock Incentive Plan
The Company sponsors a stock incentive plan (the Plan) that
provides for the granting of stock options to senior and general
management, to encourage continued employment and to provide
recognition for services that have contributed or will contribute
to the success of the Company. Under the Plan, the Company may
grant options to select employees and counsel to acquire shares of
the Company’s common stock at the fair value at the date of
grant. Options are generally granted at a price (established by the
board of directors based on third-party valuation analyses) equal
to the most recent valuation analysis price as of the option grant
date. The number of shares and the exercise schedules are
determined at the sole discretion of the Company. The Company, at
September 30, 2017, had no shares outstanding or exercisable under
the stock option plan.
A summary status of the options is presented as
follows:
|
|
|
|
|
Weighted Average Exercise Price
|
|
Weighted Average Exercise Price
|
|
|
|
|
|
Outstanding,
Beginning
|
37
|
$ 22.58
|
65
|
$ 32.19
|
Granted
|
-
|
-
|
-
|
-
|
Exercised
|
-
|
-
|
-
|
-
|
Forfeited
|
(37)
|
22.58
|
(28)
|
44.68
|
Cancelled
|
-
|
|
-
|
|
Outstanding,
Ending
|
-
|
$ -
|
37
|
$ 22.58
|
|
|
|
|
|
Options
Exercisable
|
-
|
$ -
|
37
|
$ 22.58
|
The Company recorded share-based compensation expense of $25 and
$171 for the three and nine months ended September 30, 2016. No
expense was recognized in the three and nine months ended September
30, 2017.
Note 11. Prior Year Acquisitions
Primus Management ULC and its affiliates
On April 1, 2016, the Company completed the purchase of select
assets and the customers of Primus and its affiliates, (Primus). A
cash payment of $29,815 was made to affect this
transaction.
The major classes of assets acquired and liabilities assumed at the
acquisition date are as follows:
Real
property
|
$ 1,354
|
Personal
property
|
277
|
Customer
relationships
|
30,500
|
Inventories
and other assets
|
9,058
|
Debt-free
current liabilities
|
(11,374)
|
Fair
value of identifiable net assets
|
$ 29,815
|
The goodwill arising on the acquisition is as follows:
Fair
value of consideration transferred
|
$ 29,815
|
Fair
value of identifiable net assets
|
(29,815)
|
Goodwill
|
$ -
|
The fair value of trade receivables on April 1, 2016, was $7,958
which equaled the gross amount receivable. The customer
relationship intangible is amortized over 96 months.
The Company recognized $1,196 of transaction costs in 2016 related
to the acquisition and the charges were reported in selling,
general and administrative expenses in the consolidated statement
of operations and comprehensive income.
Note 12. Related Party Transactions
BirCan Holdings, LLC Transaction
On October 28, 2016, the owners of BCHI transferred their
membership interests of BirCan Holdings, LLC, in exchange for
subordinated notes to the shareholders of $6,000. The interest on
the subordinated notes is 12% of the unpaid balance. As of
September 30, 2017, the Company has accrued $568 of interest as
additional debt per the terms of the agreement. The Company also
incurred a $500 note payable in the exchange. Real property valued
at $3,901 and personal property valued at $2,630 were transferred
to the Company.
Note 13. Restructuring Event
The
Company had a strategic alignment starting in April 2017 that
included a reduction in headcount, facility costs and other
operating costs. As of September 30, 2017, restructuring costs
totaled $5,609.
The
following table summarizes changes to the accrued liability
associated with the restructuring as of September 30,
2017:
|
|
|
|
Expenses
|
$ 1,110
|
$ 4,499
|
$ 5,609
|
Payments
|
(618)
|
(1,012)
|
(1,630)
|
Accrued
Liability
|
$ 492
|
$ 3,487
|
$ 3,979
|
|
|
|
|
(1)
The remaining
employee-related liability will be paid within 12 months and
approximates fair value due to the short discount
period.
(2)
These charges were
measured using fair value measurements with unobservable inputs and
represent the present value of expected lease payments and direct
costs to obtain a sublease, reduced by estimated sublease rental
income. The timing and amount of estimated cash flows will continue
to be evaluated each reporting period.
Note 14. Transaction Announcement
Fusion
Telecommunications International, Inc. (Fusion) filed an
announcement on August 28, 2017 to acquire Birch's Cloud and
Business Services business, including its customers, operations and
infrastructure. It is currently estimated that approximately 73
million common shares of Fusion will be issued in connection with
this transaction, valued at $3.85 per share. Fusion will assume
Birch's existing debt of approximately $458 million, which is
expected to be refinanced along with Fusion's existing
debt.
BCHI FINANCIAL STATEMENTS
BIRCH COMMUNICATIONS HOLDINGS, INC.
ATLANTA, GEORGIA
CONSOLIDATED FINANCIAL
STATEMENTS AS OF
DECEMBER 31, 2016 AND 2015 AND
REPORT OF INDEPENDENT ACCOUNTANTS
BIRCH COMMUNICATIONS HOLDINGS, INC.
CONTENTS
Report of Independent Accountants
|
F-24
|
|
|
Consolidated Balance Sheets
|
F-25
|
|
|
Consolidated Statements of Operations and Comprehensive
Income
|
F-26
|
|
|
Consolidated Statements of Changes in Stockholders’
Equity
|
F-27
|
|
|
Consolidated Statements of Cash Flows
|
F-28
|
|
|
Notes to Consolidated Financial Statements
|
F-29
|
McNair, McLemore, Middlebrooks & Co., LLC
CERTIFIED
PUBLIC ACCOUNTANTS
389
Mulberry Street ● Post Office Box One ● Macon, GA
31202
Telephone
(478) 746-6277 ● Facsimile (478) 741-1129
www.mmmcpa.com
August
28, 2017
REPORT
OF INDEPENDENT ACCOUNTANTS
Board
of Directors and Stockholders
Birch
Communications Holdings, Inc.
We have
audited the accompanying consolidated financial statements of
Birch Communications Holdings,
Inc., (the
Company), which comprise the consolidated balance sheets as of
December 31, 2016 and 2015 and the related consolidated statements
of operations and comprehensive income, changes in
stockholders’ equity and cash flows for the years then ended,
and the related notes to the financial statements.
Management’s Responsibility for the Financial
Statements
Management is responsible for the preparation and fair presentation
of these consolidated financial statements in accordance with
accounting principles generally accepted in the United States of
America; this includes the design, implementation and maintenance
of internal control relevant to the preparation and fair
presentation of consolidated financial statements that are free
from material misstatement, whether due to fraud or
error.
Auditor’s Responsibilities
Our
responsibility is to express an opinion on these consolidated
financial statements based on our audits. We conducted our audits
in accordance with auditing standards generally accepted in the
United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free from material
misstatement.
An
audit involves performing procedures to obtain audit evidence about
the amounts and disclosures in the consolidated financial
statements. The procedures selected depend on the auditor’s
judgment, including the assessment of the risks of material
misstatement of the consolidated financial statements, whether due
to fraud or error. In making those risk assessments, the auditor
considers internal control relevant to the Company’s
preparation and fair presentation of the consolidated financial
statements in order to design audit procedures that are appropriate
in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal
control. Accordingly, we express no such opinion. An audit also
includes evaluating the appropriateness of accounting policies used
and the reasonableness of significant accounting estimates made by
management, as well as evaluating the overall presentation of the
consolidated financial statements.
We
believe that the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our audit opinion.
Opinion
In our
opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Birch Communications Holdings, Inc. as of December 31, 2016 and 2015,
and the results of its operations and cash flows for the years then
ended in accordance with accounting principles generally accepted
in the United States of America.
McNAIR,
McLEMORE, MIDDLEBROOKS & CO., LLC
BIRCH COMMUNICATIONS HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
See
accompanying notes which are an integral part of these financial
statements.
BIRCH COMMUNICATIONS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE
INCOME
(Amounts in thousands)
See accompanying notes which are an integral part of these
financial statements.
BIRCH COMMUNICATIONS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’
EQUITY
(Amounts in thousands)
See accompanying notes which are an integral part of these
financial statements.
BIRCH COMMUNICATIONS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
See accompanying notes which are an integral part of these
financial statements.
BIRCH COMMUNICATIONS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands)
(1) Nature of Business and Summary of Significant Accounting
Policies
Nature of Business
Birch Communications Holdings, Inc., (Birch) (the Company) is the
sole owner of Birch Communications, Inc. (formerly known as Access
Integrated Networks, Inc., incorporated in 1996) which is comprised
of the following wholly-owned consolidated subsidiaries: Birch
Communications of Virginia, Inc., Birch Communications of Kentucky,
LLC, Birch Telecom of Texas Ltd., LLP, Birch Telecom of Kansas,
Inc., Birch Telecom of Missouri, Inc., Birch Telecom of Oklahoma,
Inc., Birch Telecom of the South, Inc., Birch Telecom of the Great
Lakes, Inc., Birch Telecom of the West, Inc., Birch Communications
of the Northeast, Inc., Ionex Communications North, Inc., Ionex
Communications South, Inc., Ionex Communications, Inc., Tempo
Telecom, LLC, Primus Management, ULC, Primus of Puerto Rico, LLC,
Cbeyond, Inc., Cbeyond Communications, LLC (Cbeyond), Birch
Internet Services, Inc., Birch Equipment, Inc., Birch Management
Corporation, Primus Holdings, Inc., Birch Texas Holdings, Inc.,
Birch Telecom, Inc., and Birch Telecom 1996, Inc. The Company is a
competitive local exchange carrier (CLEC) providing services to
primarily small- and medium-sized business customers and to a
lesser extent, residential consumers in 50 states, and Washington
D.C., focusing mainly in the southeastern and southwestern United
States. The Company provides local, long distance, high speed
internet, broadband data, Session Initiation Protocol (SIP)
trunking, Private Branch Exchange (PBX) hosting, email, web hosting
and other ancillary telephony, broadband information technology
(IT) services and internet services. It does so by provisioning
services over its own digital network called the Birch Digital
Network (BDN) or by reselling the services of the incumbent local
exchange carrier (ILEC), such as AT&T, Inc., Verizon and
CenturyLink. Birch is subject to certain regulations and
requirements of the Federal Communications Commission (FCC) and
various state public service commissions and, where required, files
tariffs, price lists and other terms and conditions relating to the
use of their services.
In connection with offering local exchange services, the Company
has entered into two types of agreements with most ILECs. The first
is an Interconnection Agreement (ICA), which vary in length of term
by state and region. The ICA allows the Company to purchase resale
services as well as unbundled network elements (UNE) such as loops
and transport, and the ability to collocate equipment at the
ILEC’s central office (all necessary to build and operate the
BDN). The second type of agreement is the Commercial Agreement
(CA). The CA governs the terms, conditions and prices for the
purchase of unbundled network element replacement services where
UNEs are not available. These agreements allow the Company to enter
new markets with minimal capital expenditures and to offer local
exchange services by purchasing all unbundled network element
platform (UNE-P) required for local service on a wholesale basis.
The terms of the ICA, including pricing terms which are negotiated
and agreed to by the Company and each ILEC, have been approved by
state regulatory authorities in all states in which the ILEC
operates, although they remain subject to review and modification
by such authorities. The Company believes the ICAs and CAs provide
a foundation for it to provide local service on a reasonable basis,
but there can be no assurance on a prospective basis in this regard
as important regulatory, legal and technology issues are ever
changing.
Typically, the Company enters multi-year ICAs with the ILECs. Under
these agreements, prices are either fixed for the life of the
agreement or specific mechanisms for periodic adjustments in prices
are outlined.
(1) Nature of Business and Summary of Significant Accounting
Policies (Continued)
Summary of Significant Accounting Policies
Use of Estimates
Management uses estimates and assumptions in preparing the
consolidated financial statements in accordance with generally
accepted accounting principles. These estimates and assumptions
affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities, and the reported
revenues and expenses. Actual results could vary from the estimates
that were assumed in preparing the consolidated financial
statements.
Cash and Cash Equivalents
The Company considers all highly liquid instruments with an
original maturity of three months or less to be cash
equivalents.
Revenue Recognition
Revenue is recognized when earned based upon the following specific
criteria: (1) persuasive evidence of arrangement exists, (2)
services have been rendered, (3) seller’s price to the buyer
is fixed or determinable, and (4) collectability is reasonably
assured. The Company’s revenue is comprised of two primary
components: (1) fees paid by end customers for local, long-distance
and data and (2) carrier charges, primarily access fees. End
customer revenue includes local, long-distance and data and is
comprised of monthly recurring charges, usage charges and initial
nonrecurring charges. Monthly recurring charges include the fees
paid by customers for services and additional features on those
facilities. Usage charges consist of per-use sensitive fees paid
for calls made. Initial nonrecurring charges consist primarily of
installation charges. Access charges are comprised of charges paid
primarily by interexchange carriers for the origination and
termination of interexchange toll and toll-free calls.
The Company follows provisions of Accounting Standards Codification
(ASC) Topic 605, Revenue Recognition in
Financial Statements. This
guidance addresses the recording of revenues and associated costs
relating to installation and service activation
fees.
Deferred Customer Revenue
Deferred customer revenue represents the liability for advance
billings to customers for local phone service. Customers are billed
in advance for fixed monthly charges.
Concentrations of Credit Risk
Cash and Cash Equivalents
Financial instruments that potentially subject the Company to
credit risk include cash on deposit with financial institutions in
excess of federally insured limits. At December 31, 2016, the
Company had bank deposits of $5,421 in excess of the FDIC coverage
of $250. In Canada, the Company had bank deposits of C$2,055 in
excess of the CDIC coverage of C$100.
Accounts Receivable
The Company’s accounts receivable subject the Company to
credit risk, since collateral is generally not required. The
Company’s risk of loss is limited due to the ability to
terminate access on delinquent accounts. The large number of
customers comprising the customer base mitigates the concentration
of risk. In 2016, no customer represented more than 10 percent of
the Company’s revenues.
(1) Nature of Business and Summary of Significant Accounting
Policies (Continued)
Summary of Significant Accounting Policies (Continued)
Accounts Receivable (Continued)
Accounts receivable are stated at the amount management expects to
collect from outstanding balances. Management provides for
uncollectible amounts through a charge to earnings and a credit to
a valuation allowance based on its assessment of the current status
of individual accounts. Balances that are still outstanding after
management has used reasonable collection efforts are written off
through a charge to the valuation allowance and a credit to
accounts receivable.
Other
The Company faces certain factors, including the following: growth
and expansion which may strain the Company’s resources;
dependence on key personnel; dependence on third-party suppliers of
equipment and communications services; dependence on relationships
with incumbent local exchange carriers; competition from other
competitive local exchange carriers and providers of communications
services; and potential disruption of services due to system
failures.
Property and Equipment
Property and equipment are stated at cost, and depreciation is
computed using the straight-line method over the estimated useful
lives of the assets (generally three to five years). Maintenance
and repairs are charged to expense as incurred. Gains or losses on
the disposal of property and equipment are recognized in operations
in the year of disposition. Amortization of capital lease items is
included in depreciation expense. Depreciation expense for the
years ended December 31, 2016 and 2015 was $29,210 and $28,902,
respectively.
Amortization
Subscriber Acquisition Costs
The
Company amortizes subscriber acquisition costs over the estimated
life of a customer (84 - 120 months as of December 31, 2016).
Amortization expense of subscriber acquisition costs was $21,708
and $19,343 for the years ended December 31, 2016 and 2015,
respectively.
IP-Network Transition Costs
The
Company amortizes the one-time charges associated with
transitioning a resale customer to its own IP-Network over a period
of 36 months. Amortization expense of IP-Network transition costs
was $7,011 and $6,632 for the years ended December 31, 2016 and
2015, respectively.
Installation Costs
The
Company amortizes costs relative to the install of new customers
over a period of 36 months. Amortization expense of
Installation Costs was $4,553 and $815 for the years ended December
31, 2016 and 2015, respectively.
Commissions
The
Company amortizes up-front sales commissions paid to third parties
over the contractual service period (7 - 36 months as of December
31, 2016). Amortization of these commissions was $5,784 and $3,743
for the years ended December 31, 2016 and 2015,
respectively.
(1) Nature of Business and Summary of Significant Accounting
Policies (Continued)
Summary of Significant Accounting Policies (Continued)
Amortization (Continued)
Tradenames
The
Company amortizes tradenames and costs over the estimated life of
84 months. Amortization expense of tradename costs was
$1,771 and $1,700 for the year ended December 31, 2016 and 2015,
respectively.
Noncompete Agreements
The
Company amortizes noncompete agreement costs over the life of the
agreement (12-24 months as of December 31, 2016). Amortization
expense of noncompete agreement cost was $567 for the year ended
December 31, 2015.
Impairment of Long-Lived Assets
The Company accounts for long-lived assets in accordance with
provisions of ASC Topic 360, Accounting for the Impairment
or Disposal of Long-Lived Assets. This guidance addresses financial accounting and
reporting for the impairment and disposition of long-lived assets,
including property and equipment and purchased intangible assets.
The Company evaluates the recoverability of long-lived assets for
impairment when events or changes in circumstances indicate the
carrying amount of an asset may not be recoverable. Conditions that
would necessitate an impairment assessment include a significant
decline in the observable market value of an asset, a significant
change in the extent or manner in which an asset is used, or a
significant adverse change that would indicate the carrying amount
of an asset or group of assets is not recoverable. For long-lived
assets to be held and used, the Company recognizes an impairment
loss only if it’s carrying amount is not recoverable through
its undiscounted cash flows and measures the impairment loss, if
any, based on the difference between the carrying amount and fair
value. Long-lived assets held for sale are reported at the lower of
cost or fair value less costs to sell. If impairment is indicated,
the carrying amount of the asset is written down to fair
value.
Goodwill and Purchased Intangible Assets
Goodwill is the excess of the purchase price over the fair value of
identifiable net assets acquired in business combinations accounted
for under the acquisition method of accounting pursuant to ASC
Topic 805, Business
Combinations. Purchased
intangible assets consist primarily of subscriber bases and
customer relationships, acquired software and technology and other
assets acquired in conjunction with the purchases of businesses and
subscriber bases from other companies. Subscriber bases acquired
directly are valued at cost plus assumed service liabilities, which
approximates fair value at the time of purchase. When management
determines material intangible assets are acquired in conjunction
with the purchase of a company, the Company engages an independent
third party to determine the allocation of the purchase price to
the intangible assets acquired. Certain intangible assets
determined to have definite lives are amortized on a straight-line
basis over their estimated useful lives.
The Company accounts for goodwill and intangible assets in
accordance with ASC Topic 350, Goodwill and Other Intangible
Assets, which prohibit the
amortization of certain intangible assets, deemed to have
indefinite lives. The Financial Accounting Standards Board (FASB)
issued ASU 2014-02, Intangibles – Goodwill
and Other; this standard allows
for amortization of goodwill. The Company has not elected to
amortize goodwill. As of December 31, 2016, the Company had $93,356
of goodwill. The Company’s 2016 goodwill impairment analysis
did not result in an impairment charge.
(1) Nature of Business and Summary of Significant Accounting
Policies (Continued)
Summary of Significant Accounting Policies (Continued)
Income Taxes
The Company, with the consent of its stockholders, has elected
under the Internal Revenue Code to be an S corporation effective
January 1, 2006. In lieu of corporate income taxes, the
stockholders of an S corporation are taxed on their proportionate
share of the Company’s taxable income. Therefore, no
provision or liability for federal income taxes has been included
in the consolidated financial statements. However, the Company
operates in a few states that do not recognize S corporation
status. The Company recognizes state tax provisions as amounts are
paid to the tax jurisdictions.
Cbeyond files separate corporate tax returns which include sales to
affiliated companies. No immediate tax expense is recognized
in the consolidated statements other than the tax benefit from the
release of the valuation allowance on its net operating
loss.
The provision for income taxes for the years ended December 31,
2016 and 2015 was $1,847 and $2,182, respectively. The 2016 return
has not been filed. The 2015, 2014 and 2013 returns have been filed
and are still subject to examination by the Internal Revenue
Service for three years from filing.
The Company has U.S. deferred tax assets, which have been fully
reserved due to the uncertainty of their use. The balance sheet
includes deferred assets attributable to its investment in Primus,
its Canadian subsidiary. The acquisition was taxable for
income tax purposes and all assets and liabilities have been
recorded at fair market value for both book and income tax
purposes. The deferred assets is solely attributable to
different cost recovery methods for fixed assets and customer
lists.
For financial reporting purposes, income before income taxes
includes the following components:
|
|
|
|
|
United
States
|
$(38,724)
|
$27,695
|
Foreign
|
13,428
|
-
|
Total
|
$(25,296)
|
$27,695
|
Foreign withholding taxes have not been recognized on the 2016
earnings of its non-U.S. subsidiaries. Generally, such
amounts become subject to U.S taxation upon remittance of the
dividends and certain other circumstances. It is not
practicable to estimate the amount of deferred tax liability
related to investments in the foreign subsidiary.
On January 1, 2009, the Company adopted the recognition and
disclosure provisions of ASC Topic 740, Income
Taxes. Under this guidance, tax
positions are evaluated for recognition using a
more-likely-than-not threshold, and those tax positions requiring
recognition are measured at the largest amount of tax benefit that
is greater than 50 percent likely of being realized upon ultimate
settlement with a taxing authority that has knowledge of all
relevant information. Liabilities for income tax matters include
amounts for income taxes, penalties and interest thereon and are
the result of the potential alternative interpretations of tax laws
and the judgmental nature of the timing of recognition of taxable
income. Management does not believe the Corporation has taken any
tax positions which would require accrual due to this
guidance.
(1) Nature of Business and Summary of Significant Accounting
Policies (Continued)
Summary of Significant Accounting Policies (Continued)
Share-Based Compensation and Consulting
The Company adopted provisions of ASC Topic 718,
Share-Based
Payments, as of January 1, 2005
to account for equity instruments issued to employees and
nonemployees.
All transactions with nonemployees in which goods or services are
the consideration received for the issuance of equity instruments
are accounted for based on the fair value of the consideration
received or the fair value of the equity instrument issued,
whichever is more reliably measurable. The measurement date of the
fair value of the equity instrument issued is the earlier of the
date on which the counter party’s performance is complete or
the date on which it is probable that performance will
occur.
Advertising Costs
The Company expenses all advertising costs as incurred. Advertising
expense for the years ended December 31, 2016 and 2015 was $2,866
and $1,288, respectively.
Foreign Currency
The Company’s foreign subsidiary, Primus Management ULC
(“Primus Canada”) uses the local currency of its
country as its functional currency. Assets and liabilities are
translated into U.S. dollars at exchange rates at the balance sheet
dates. Revenues, costs and expenses are translated using the
average exchange rates for the period. Gains and losses resulting
from the translation of our Consolidated Balance Sheets and
Statements of Operations are recorded as a component of accumulated
other comprehensive income. Gains and losses from foreign currency
transactions are recognized as Foreign exchange gain (loss) in the
Statement of Operations.
Comprehensive Income (Loss)
Comprehensive income includes all changes in a company’s
equity during the period that results from transactions and other
economic events other than transactions with its stockholders. For
the Company, comprehensive income includes the gains or losses
resulting from foreign currency translations.
Subsequent Events
In preparing these consolidated financial statements, the Company
has evaluated events and transactions for potential recognition or
disclosure through August [ ], 2017, the date the financial
statements were available to be issued.
Distributions to Owners
It is management’s policy to distribute amounts to its owners
to cover their tax liability related to the earnings of the
Company. “Permitted Tax Distributions,” as defined in
the PNC Bank, National Association Credit Agreement (2014 Credit
Facility), shall be based on good faith estimates by the Company of
net taxable income for the relevant period (or portion thereof) and
subsequent tax distributions shall be appropriately adjusted to the
extent of any excess or deficit in payments in respect of prior
relevant periods or portions thereof.
Sales, Use and Other Value Added Taxes
The Company’s revenue is recorded net of applicable sales,
use and other value added taxes.
(1) Nature of Business and Summary of Significant Accounting
Policies (Continued)
Summary of Significant Accounting Policies (Continued)
Recently adopted accounting standards
In August, 2014, the Financial Accounting Standards Board (the
“FASB”) issued Accounting Standards Update
(“ASU”) 2014-15, Disclosure of Uncertainties
about an Entity’s Ability to Continue as a Going
Concern. The update requires
management to assess a company’s ability to continue as a
going concern and to provide related footnote disclosures in
certain circumstances. Under the new standard, disclosures are
required when conditions give rise to substantial doubt about a
company’s ability to continue as a going concern within one
year from the financial statement issuance date. The new standard
applies to all companies and is effective for the annual period
ending after December 15, 2016.
The Company has early implemented certain provisions of Accounting
Standards Update 2016-01, Financial Instruments –
Overall (Subtopic 825-10): Recognition and Measurement of Financial
Assets and Financial Liabilities. To simplify reporting, fair value disclosures for
financial instruments reported at amortized cost are no longer
provided in the notes to these financial
statements.
Recently issued accounting standards
In November, 2016, the FASB issued ASU 2016-18, Statement of Cash Flows
Restricted Cash. The update
requires that the statement of cash flows explain the change during
the period in the total of cash, cash equivalents, and restricted
cash. Entities will also be required to reconcile such totals to
amounts on the balance sheet and disclose the nature of the
restrictions. The update is effective for non-public business
entities for fiscal years beginning after December 15, 2018. Early
adoption at the original effective date is permitted. The Company
is evaluating the impact of the implementation of this standard on
its financial statements.
In February, 2016, the FASB issued ASU 2016-02, Leases. The update requires lessees to recognize lease
assets and liabilities for all leases, with certain exceptions, on
the balance sheets. The standard is now required to be adopted by
non-public business entities in annual periods beginning on or
after December 15, 2019 and must be applied on a full retrospective
basis. Early adoption at the original effective date is permitted.
The Company is evaluating the impact of the implementation of this
standard on its financial statements.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with
Customers. The new guidance
outlines a single comprehensive model for entities to use in
accounting for revenue arising from contracts with customers and
supersedes most current revenue recognition guidance, including
industry-specific guidance. The core principle of the revenue model
is that an entity recognizes revenue to depict the transfer of
promised goods or services to customers in an amount that reflects
the consideration to which the entity expects to be entitled in
exchange for those goods or services. The new standard requires
significantly expanded disclosures about revenue contract assets
and liabilities. In April 2015, the FASB issued guidance that
deferred the effective date by one year. The standard is now
required to be adopted by non-public business entities in annual
periods beginning on or after December 15, 2018, and interim
periods within annual periods beginning after December 15, 2019,
and may be applied on a full retrospective or modified
retrospective approach. Early adoption at the original effective
date is permitted. The Company is evaluating the impact of the
implementation of this standard on its financial
statements.
(1) Nature of Business and Summary of Significant Accounting
Policies (Continued)
Summary of Significant Accounting Policies (Continued)
Immaterial Correction to Equity
The Company revised previously reported amounts due to an error
related to the share activity reported. In accordance with FASB ASC
Topic 250, Accounting Changes and Error
Corrections, the Company
evaluated the materiality of the error from quantitative and
qualitative perspectives, and concluded that the error was
immaterial to the Company’s prior period interim and annual
consolidated financial statements. The correction of the immaterial
error resulted in a correction of common shares outstanding in the
Company’s Consolidated Statements of Changes in
Stockholders’ Equity as of December 31, 2014. This immaterial
correction of an error had no impact on the Company’s Total
Consolidated Stockholders’ Equity, Consolidated Statements of
Operations and Comprehensive Income or Cash Flows in any
period.
(2) Property and Equipment
Property and equipment consists of the following as of December
31:
|
Estimated Life
Range (years)
|
|
|
Owned
Assets:
|
|
|
|
Telecommunications
Equipment
|
5 -7
|
$82,359
|
$75,165
|
Leasehold
Improvements
|
|
14,242
|
12,558
|
Office
Equipment
|
3 - 5
|
1,707
|
533
|
Buildings
and Building Improvements
|
30 - 40
|
1,540
|
15,298
|
Furniture
and Fixtures
|
3 – 7
|
6,311
|
5,729
|
Computer
Software
|
3 – 5
|
49,604
|
38,350
|
Land
|
N/A
|
470
|
1,180
|
Automobiles
|
2 - 5
|
131
|
104
|
Construction-In-Process
|
N/A
|
2,993
|
3,268
|
|
|
|
|
Total
Owned Assets
|
|
159,357
|
152,185
|
Accumulated
Depreciation
|
|
(74,786)
|
(48,250)
|
Total
Owned Assets, Net
|
|
84,571
|
103,935
|
|
|
|
|
Total
Assets Under Capital Lease
|
|
36,643
|
37,951
|
Accumulated
Depreciation
|
|
(10,257)
|
(8,535)
|
Total
Assets Under Capital Lease, Net
|
|
26,386
|
29,416
|
|
|
|
|
Property
and Equipment, Net
|
|
$110,957
|
$133,351
|
(3) Leases
The Company has entered into various operating and capital leases
for facilities and equipment used in its operations. Aggregate
future minimum rental commitments under operating leases and
maturities of capital lease obligations as of December 31, 2016 are
as follows:
|
|
|
|
|
|
2017
|
$11,583
|
$4,425
|
2018
|
9,547
|
2,737
|
2019
|
7,126
|
1,267
|
2020
|
3,450
|
417
|
2021
|
1,171
|
163
|
Thereafter
|
1,064
|
1,810
|
|
|
|
|
$33,941
|
$10,819
|
|
|
|
Amounts
Representing Interest
|
|
(977)
|
|
|
|
Present
Value of Minimum Lease Payments
|
|
9,842
|
|
|
|
Current
Portion
|
|
(4,376)
|
|
|
|
Obligations
Under Capital Lease-Net of Current Portion
|
|
$5,466
|
Property and equipment acquired through capital leases are recorded
at the present value of the future payments due under the lease
agreements, discounted at rates varying from 2.00 to 10.66
percent.
Assets and accumulated amortization under capitalized leases
consists of the following as of December 31:
|
|
|
|
Assets
Under Capital Lease
|
|
|
|
Telecommunications
and Office Equipment
|
Life
of Lease
|
9,371
|
10,143
|
IRU
(1)
|
20
Years
|
25,325
|
23,914
|
Computer
Software
|
4
Years
|
1,947
|
3,894
|
|
|
|
Total
Assets Under Capital Lease
|
|
36,643
|
37,951
|
|
|
|
Accumulated
Depreciation
|
|
(10,257)
|
(8,535)
|
Total
Assets Under Capital Lease, Net
|
|
$26,386
|
$29,416
|
(1)
Purchase of network capacity under long-term contracts for the
indefeasible right to use (IRU) fiber network infrastructure owned
by others.
Rental expense charged to operations was $6,142 and $6,238 for the
years ended December 31, 2016 and 2015, respectively.
(4) Intangible Assets
Intangible assets and accumulated amortization as of December 31
are as follows:
|
|
|
|
|
|
Subscriber
Acquisition Costs
|
$201,346
|
$171,324
|
Network
Transition Costs
|
37,557
|
26,704
|
Tradenames
and Trademarks
|
13,146
|
13,146
|
Noncompete
Agreement
|
3,000
|
3,000
|
Installation
Costs
|
17,066
|
8,088
|
Commissions
|
30,934
|
20,847
|
|
|
|
Total
Intangible Assets
|
303,049
|
243,109
|
Accumulated
Amortization
|
(125,379)
|
(84,552)
|
|
|
|
Intangible
Assets, Net
|
$177,670
|
$158,557
|
Amortization expense for the years ended December 31, 2016 and 2015
was $40,888 and $32,800, respectively. Estimated future
amortization expense for intangible assets owned as of December 31,
2016 is as follows:
Year
|
|
|
|
2017
|
$41,884
|
2018
|
34,824
|
2019
|
26,776
|
2020
|
22,695
|
2021
|
16,297
|
Thereafter
|
19,007
|
|
|
|
$161,483
|
(5) Long-Term Debt
The Company’s long-term debt consists of the following as of
December 31:
|
|
|
Term
Loan Payable
|
$414,483
|
$435,938
|
Revolver
Loan Payable
|
40,000
|
16,000
|
Promissory
Notes (1)
|
6,000
|
-
|
Notes
Payable (1)
|
500
|
-
|
Stock
Repurchase Agreement (2)
|
13,700
|
-
|
Deferred
Financing, Net
|
(12,687)
|
(11,242)
|
Debt
Origination Discount
|
(5,585)
|
(7,301)
|
|
|
|
|
456,411
|
433,395
|
Current
Maturities
|
(26,500)
|
(23,643)
|
|
|
|
Total
Long-Term Debt
|
$429,911
|
$409,752
|
|
|
|
(1)
See
(11) Related Party Transactions for discussion of the subordinated
promissory notes and note payable.
(2)
As
it is the intent for the repurchased shares to be retired, the
Company has elected to account for the shares repurchased under the
constructive retirement method. For shares repurchased in excess of
par, the Company allocated the excess value to accumulated
deficit.
On July 18, 2014, the Company refinanced its existing debt under a
Term Loan Payable (2014 Credit Facility) arrangement totaling
$450,000 with PNC Bank, N.A., as Administrative Agent. The
arrangement also includes $50,000 made available under the Revolver
Loan Payable. The Company capitalized the costs associated with
issuing the debt of $13,770. The debt was issued at a discount of
$9,450. The deferred financing and discount are recognized as
interest expense throughout the term of the loan.
On October 28, 2016, the Company amended the 2014 Credit Facility.
The Company capitalized the costs associated with the amendment of
$4,289. The amended 2014 Credit Facility is due in quarterly
installments of $2,800 through December 31 2016, then $5,625 per
quarter until June 30, 2020. The amended 2014 Credit Facility
matures with the remainder due on July 18th
2020. The interest on the amended 2014
Credit Facility is Libor plus 7.25% for the term loan and Libor
plus 6.25% for the revolver loan payable.
On May 1, 2016, the Company entered into an installment purchase
agreement to repurchase 148 shares of common stock from a former
employee, valued at $13,700. The installments due are as follows:
$1,000 on December 31, 2016, $1,500 on May 1, 2017, $1,000 on
December 31, 2017, $3,000 on May 1, 2018, and $7,200 on May 1,
2019. Per the agreement, should the payment of any installment
conflict with a covenant in any material credit agreement of the
Company, the installment will be delayed. The sum delayed will
accrete at a rate of 4% per year. As of August [ ], 2017, no
payments have been made due to a material impact to the amended
2014 Credit Facility, resulting in $46,667 of additional
debt.
The aggregate scheduled maturities of long-term debt are as
follows:
Year
|
|
|
|
2017
|
$26,500
|
2018
|
25,500
|
2019
|
29,700
|
2020
|
392,983
|
2021
|
-
|
Thereafter
|
-
|
|
|
|
$474,683
|
(6) Commitments and Contingencies
Sales Agents’ Agreements
The Company’s marketing strategies focus on providing local
services through a combination of its agent channel and its direct
and internal sales channel.
The remaining agents may or may not bring an existing base of
accounts and perform a traditional agent role. They will not be the
end users’ points of contact; all contact for
additions/changes and service/maintenance will be handled directly
by the Company.
The total commissions paid through the Company’s agents and
internal sales channels for the years ended December 31, 2016 and
2015 were $17,258 and $17,103, respectively, and are classified as
selling and marketing expenses in the accompanying consolidated
statements of operations. Upfront sales commissions paid to third
parties are capitalized and amortized over the contract service
period.
Legal Proceedings
We are involved in legal proceedings arising in the ordinary course
of business.
On November 20, 2008, Telecom Decision Makers, Inc. (TDM) filed a
lawsuit against Access Integrated Networks, Inc. and Birch
Communications, Inc. (Birch) in the United States District Court,
Western District of Kentucky at Louisville. TDM was seeking a
Declaratory Judgment from the Court, claiming that the
“Confidential Independent Sales Representative Agreement for
Voice Products and Services” in effect with Navigator
Telecommunications (Navigator), was automatically assigned to Birch
Communications, Inc. in their purchase of a portion of
Navigator’s assets on November 18, 2008. TDM claimed that
Navigator’s agreement to pay certain commissions continued
since they did not exercise a buy-out option, and that this
obligation is now binding on Birch.
The parties engaged in extensive discovery, including written
discovery, including corporate deposition of Navigator, retaining
expert witnesses and deposing those witnesses. There was extensive
motion practice on discovery matters and for summary judgment,
which the Court denied. A trial date of January 6, 2014 was
established. At a pretrial conference on January 3, 2014, the Court
granted the Company’s motion to limit the trial to the single
issue raised in the Complaint, specifically whether the transaction
between Navigator and Birch caused a “change of
control”, within the language of the TDM/Navigator agreement.
The jury’s verdict indicated that the transaction did cause a
change of control. On or about May 19, 2014 the Company submitted a
renewed motion for judgment asking the declaratory judgment be set
aside, and that motion was denied. No party filed a notice of
appeal.
Instead, on or about August 28, 2014 the Company was named as the
defendant in a second TDM lawsuit. This matter was removed to
federal court by the Company on or about September 4, 2014. In the
Second TDM Proceeding, TDM is seeking damages for breach of
contract, unjust enrichment and other claims. These claims arise
from the same contract that prompted the first TDM Proceeding. On
or about September 12, 2014 the Company submitted a motion to
dismiss, urging that the new lawsuit impermissibly seeks to re-open
the First TDM Proceeding, that TDM’s claims are barred by
finality doctrines and applicable statutes of limitations. That
motion has been briefed but not decided.
(6) Commitments and Contingencies (Continued)
Legal Proceedings (Continued)
Plaintiff appealed to the Sixth Circuit of Appeals in November
2015. The Company is proceeding to defend its position to force
arbitration to determine damages, if any, on appeal. An estimate of
$3,600 was accrued as of December 31, 2016. The final arbitration
awarded to TDM in May 2017 was $3,647 plus attorney’s fees
awarded of $382. The additional $429 was accrued in
2017.
On October 7, 2015, Abante Rooter and Plumbing, Inc.
(“Abante”) filed a lawsuit against Birch
Communications, Inc. in the United States Georgia Northern District
at Atlanta. Abante claimed violations of the Telephone Consumer
Protection Act (“TCPA”) by Birch Communications, Inc.
and/or certain of its affiliates as a result of alleged
unauthorized contact by third party telemarketing services engaged
by Birch to individuals’ cellular telephones. On or about
July 6, 2016, Plaintiff made a first settlement demand in the
Action for $26 million. Mediation was conducted September 29, 2016
and was unsuccessful. Plaintiff has filed for certification as a
class action. Birch has filed a Motion attacking the
plaintiff’s expert witness, classification of TCPA violation
and class description and Birch has filed a Motion for Summary
Judgment. In May 2017, the Company reached a tentative agreement
with plaintiffs, subject to approval by the Court, to settle the
case for $12,000 payable in equal quarterly payments over three
years. The $12,000 settlement was accrued as of December 31,
2016.
Accruals for litigation loss contingencies are recorded when it is
probable that a liability has been incurred and the amount of loss
can be reasonably estimated.
(7) Benefit Plans
The Company’s 401(k) plan covers all employees who have
attained 18 years of age and completed 90 days of service.
Participants may contribute up to the maximum determined by the
federal government each year. The Company’s match is
discretionary and opted to partially match employee contributions
by $250 for the year ended December 31, 2015. As of December 31,
2016, the Company has elected not to partially match employee
contributions.
Due to the acquisition of Primus (See Note 9. Current Year
Acquisitions) employees in Canada are covered under a Registered
Retirement Savings Plan. Eligible employees may make contribution
up to their personal eligible contribution limit under the Canadian
Income Tax Act. There is no employer contribution
component.
(8) Stock Incentive Plan
The Company sponsors a stock incentive plan (the Plan) that
provides for the granting of stock options to senior and general
management, to encourage continued employment and to provide
recognition for services that have contributed or will contribute
to the success of the Company. Under the Plan, the Company may
grant options to select employees and counsel to acquire shares of
the Company’s common stock at the fair value at the date of
grant. Options are generally granted at a price (established by the
board of directors based on third-party valuation analyses) equal
to the most recent valuation analysis price as of the option grant
date. The number of shares and the exercise schedules are
determined at the sole discretion of the Company. The Company, at
December 31, 2016, had 37 shares outstanding and 37 in Company
shares exercisable under the stock option plan.
A summary status of the options as of December 31 is presented as
follows:
|
|
|
|
|
Weighted Average Exercise Price
|
|
Weighted Average Exercise Price
|
|
|
|
|
|
Outstanding,
Beginning
|
65
|
$32.19
|
84
|
$16.21
|
Granted
|
-
|
-
|
15
|
72.51
|
Exercised
|
-
|
-
|
-
|
-
|
Forfeited
|
(28)
|
44.68
|
(10)
|
15.80
|
Cancelled
|
-
|
|
(24)
|
8.38
|
Outstanding,
Ending
|
37
|
$22.58
|
65
|
$32.19
|
|
|
|
|
|
Options
Exercisable, Year-end
|
37
|
$22.58
|
50
|
$20.04
|
|
|
|
Expiration Date
|
|
|
|
|
|
7
|
$9.76
|
January
2017
|
7
|
7
|
$15.80
|
January
2019
|
7
|
3
|
$19.66
|
January
2020
|
3
|
20
|
$29.94
|
January
2022
|
20
|
37
|
|
|
37
|
The options outstanding as of December 31, 2016 have a weighted
average remaining contractual life of 19 months. The Company
recorded share-based compensation expense of $196 and $72 in 2016
and 2015, respectively.
(9) Current Year Acquisitions
Primus Management ULC and its affiliates
On April 1, 2016, the Company completed the purchase of select
assets and the customers of Primus and its affiliates,
(“Primus”). A cash payment of $29,815 was made to
affect this transaction.
The major classes of assets acquired and liabilities assumed at the
acquisition date are as follows:
Real
property
|
$1,354
|
Personal
property
|
277
|
Customer
relationships
|
30,500
|
Inventories
and other assets
|
9,058
|
Debt-free
current liabilities
|
(11,374)
|
Fair
value of identifiable net assets
|
$29,815
|
The goodwill arising on the acquisition is as follows:
Fair
value of consideration transferred
|
$29,815
|
Fair
value of identifiable net assets
|
(29,815)
|
Goodwill
|
$-
|
The fair value of trade receivables on April 1, 2016, was $7,958
which equaled the gross amount receivable. The customer
relationship intangible is amortized over 96 months resulting in
amortization expense of $252 in 2016.
The Company recognized $1,196 of transaction costs in 2016 related
to the acquisition and the charges were reported in selling,
general and administrative expense in the Consolidated Statement of
Operations.
(10) Prior Year Acquisitions
OrbitCom
On June 4, 2015 the Company acquired substantially all of the
customer assets of OrbitCom Inc. (OrbitCom). OrbitCom is a regional
provider of voice, data and IT (colocation and hosting) solutions
to small and medium businesses. The acquisition was a cash
transaction valued at approximately $6,203.
Sage Telecom
On September 15, 2015, the Company completed the asset purchase of
Sage Telecom (Sage). The asset acquisition was comprised of a less
than substantial amount of Sage’s total assets and it will
continue to operate as a local exchange carrier in other geographic
areas. The acquisition was a cash transaction valued at
approximately $6,345.
Globalinx
On February 20, 2015, the Company added a new dealer into our
indirect sales channel. This new dealer moved their entire SMB
customer base to the Company network. A substantial portion of the
customer base consisted of SIP-based and hosted PBX customers. A
cash payment of $6,435 was made to affect this
transaction.
(11)
Related Party Transactions
BirCan Holdings, LLC Transaction
On
October 28, 2016, the owners of BCHI transferred their membership
interests of BirCan Holdings, LLC, in exchange for subordinated
notes to the shareholders of $6,000. The interest on the
subordinated notes is 12% on the unpaid balance and paid quarterly.
The Company also incurred a $500 note payable
in the exchange. Real property valued at $3,901 and personal
property valued at $2,630 were transferred to the
Company.
(12)
Subsequent Events
Longterm Debt
On
April 12, 2017, the Company entered into a second amendment to the
2014 Credit Facility. The Company was able to secure an
additional
$10,000
to the term loan from its primary lender Halcion. Additionally,
there was a $5,000 commitment from Company ownership if the Company
dropped below $10,000 in liquidity. The second amended 2014 Credit
Facility is due in quarterly installments of $125 per quarter until
June 30, 2020. The additional term loan matures with the remainder
due on July 18th 2020. The
Company capitalized the costs associated with the amendment of
$4,323.
Restructuring
The
Company had a strategic alignment in 2017 that included a reduction
in headcount, facility costs and other operating costs. As of July
31, 2017, restructuring costs totaled $3,924. The following table
summarizes changes to the accrued liability associated with the
restructuring.
|
|
Facility
Exit
|
|
|
|
|
|
Expenses
|
$904
|
$3,020
|
$3,924
|
Payments
|
-459
|
-423
|
-882
|
Accrued
Liability as of July 31, 2017
|
$445
|
$2,596
|
$3,041
|
(1)
The remaining
employeerelated liability will be paid within 12 months and
approximates fair value due to the short discount
period.
(2)
These charges were
measured using fair value measurements with unobservable inputs and
represent the present value of expected lease payments and direct
costs to obtain a sublease, reduced by estimated sublease rental
income. The timing and amount of estimated cash flows will continue
to be evaluated each reporting period.
BIRCH COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Our Business
Birch Communications Holdings, Inc. (“BCHI”, the
“Company”, or “we”) provide cloud and
business communications services primarily to small, medium and
large-sized business customers and to a lesser extent, residential
consumers, throughout the United States and Canada. Our services
and are designed to increase productivity while reducing costs and
helping our customers connect, communicate and collaborate. Our
services for business customers include a full-featured cloud voice
and UCaaS (Unified Communications-as-a-Service) solution for
businesses of every size, as well as a simple, easy-to use
cloud-based voice solution; high speed Internet, metro Ethernet and
MPLS (Multi-Protocol Label Switching) services that link our
customers’ networks wide-area networks together and connect
them to the Internet; and private or hybrid cloud computing
services and file storage services, enabling on-demand resources in
a scalable, secure environment. Our services for residential
customers include basic voice service with features and long
distance available as paid options, wireless voice and data
services, and high speed residential Internet
connectivity.
Birch’s vision is to become the leading provider of cloud and
managed services to SMB and Enterprise customers, working as a
trusted advisor to its customers for service deployment, delivery
and management of cloud communications, cloud computing, network
connectivity and other managed solutions. Birch aims to create
value by rapidly and cost effectively provisioning and managing its
customers’ essential business services by leveraging the
company’s key strategic advantages, including:
●
Attractive sector
dynamics
●
End-to-end solution
set
●
Efficient,
proprietary billing and back-office systems
●
Trusted partner
relationships
●
Diversified, high
quality business customer base
●
Diversified organic
sales channels
Recent Acquisitions
Primus Management ULC and its affiliates
On April 1, 2016, the Company completed the purchase of select
assets and the customers of Primus Management ULC and its
affiliates (Primus). Primus provided business and consumer
communications services including cloud-based voice, Internet and
IP connectivity, and related solutions to business and residential
customers throughout Canada. A cash payment of $29,815 was made to
effect this transaction.
Related Party Transactions
BirCan Holdings, LLC Transaction
On October 28, 2016, the owners of BCHI transferred their
membership interests of BirCan Holdings, LLC, in exchange for
subordinated notes to the shareholders of $6,000. The interest on
the subordinated notes is 12% of the unpaid balance. As of
September 30, 2017, BCHI has accrued $568 of interest as additional
debt per the terms of the agreement. BCHI also incurred a $500 note
payable in the exchange. Real property valued at $3,901 and
personal property valued at $2,630 were transferred to the
Company.
Our Performance
Revenue for the nine months ended September 30, 2017 was $420.6
million, compared to $457.4 million for the nine months ended
September 30, 2016. The decline was primarily due to a reduction in
the number of customers resulting from planned actions involving
price and term incentives to enhance the long-term profitability
and value of BCHI’s customer base, partially offset by the
inclusion of additional revenue attributable to the timing of the
Primus Acquisition as well as new organic customer installations.
Operating income for the nine months ended September 30, 2017 was
$12.8 million, compared to $41.0 million for the nine months ended
September 30, 2016. Net comprehensive loss for the nine months
ended September 30, 2017 was $(25.1) million, compared to net
comprehensive income of $9.3 million for the nine months ended
September 30, 2016.
Our Outlook
BCHI’s ability to generate positive cash flows from
operations and net profitability is substantially dependent upon
BCHI’s ability to increase revenue and/or on BCHI’s
ability to achieve further cost savings and operational
efficiencies in its operations.
CRITICAL ACCOUNTING
POLICIES AND ESTIMATES
The
discussion and analysis of financial condition and results of
operations are based upon BCHI’s consolidated financial
statements, which have been prepared in accordance with U.S. GAAP.
The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and the related disclosure of
contingent liabilities. We base these estimates on our historical
experience and on various other assumptions that we believe to be
reasonable under the circumstances, and these estimates form the
basis for our judgments concerning the carrying values of assets
and liabilities that are not readily apparent from other sources.
We periodically evaluate these estimates and judgments based on
available information and experience. Actual results could differ
from our estimates under different assumptions and conditions. If
actual results significantly differ from our estimates, our
financial condition and results of operations could be materially
impacted.
We
have identified the policies and significant estimation
processes discussed below as critical to our operations and to an
understanding of our results of operations. For a detailed
discussion on the application of these and other accounting
policies, see Note 1 to the Consolidated Financial
Statements.
Use of Estimates
We use estimates and assumptions in preparing the
consolidated financial statements in accordance with generally
accepted accounting principles in the United States
(“GAAP”). These estimates and assumptions affect the
reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities, and the reported revenues and
expenses. Actual results could vary from the estimates that were
assumed in preparing the consolidated financial
statements.
Revenue Recognition
We recognize revenue when it is earned based upon the
following specific criteria: (1) persuasive evidence of arrangement
exists, (2) services have been rendered, (3) seller’s price
to the buyer is fixed or determinable, and (4) collectability is
reasonably assured. The Company’s revenue is comprised of two
primary components: (1) fees paid by end customers for local,
long-distance and data and (2) carrier charges, primarily access
fees. End customer revenue includes local, long-distance and data
and is comprised of monthly recurring charges, usage charges and
initial nonrecurring charges. Monthly recurring charges include the
fees paid by customers for services and additional features on
those facilities. Usage charges consist of per-use sensitive fees
paid for calls made. Initial nonrecurring charges consist primarily
of installation charges. Access charges are comprised of charges
paid primarily by interexchange carriers for the origination and
termination of interexchange toll and toll-free calls. The Company
follows provisions of Accounting Standards Codification (ASC) Topic
605, Revenue Recognition in
Financial Statements. This
guidance addresses the recording of revenues and associated costs
relating to installation and service activation
fees.
Accounts Receivable
Accounts receivable are stated at the amount management expects to
collect from outstanding balances. Management provides for
uncollectible amounts through a charge to earnings and a credit to
a valuation allowance based on its assessment of the current status
of individual accounts. Balances that are still outstanding after
management has used reasonable collection efforts are written off
through a charge to the valuation allowance and a credit to
accounts receivable. The Company’s accounts receivable
subject the Company to credit risk, since collateral is generally
not required. The Company’s risk of loss is limited due to
the ability to terminate access on delinquent accounts. The large
number of customers comprising the customer base mitigates the
concentration of risk. In the nine months ended September 30, 2017,
no customer represented more than 10 percent of the Company’s
revenues.
Impairment of Long-Lived Assets
We account for long-lived assets in accordance with
provisions of ASC Topic 360, Accounting for the Impairment
or Disposal of Long-Lived Assets. This guidance addresses financial accounting and
reporting for the impairment and disposition of long-lived assets,
including property and equipment and purchased intangible assets.
The Company evaluates the recoverability of long-lived assets for
impairment when events or changes in circumstances indicate the
carrying amount of an asset may not be recoverable. Conditions that
would necessitate an impairment assessment include a significant
decline in the observable market value of an asset, a significant
change in the extent or manner in which an asset is used, or a
significant adverse change that would indicate the carrying amount
of an asset or group of assets is not recoverable. For long-lived
assets to be held and used, the Company recognizes an impairment
loss only if it’s carrying amount is not recoverable through
its undiscounted cash flows and measures the impairment loss, if
any, based on the difference between the carrying amount and fair
value. Long-lived assets held for sale are reported at the lower of
cost or fair value less costs to sell. If impairment is indicated,
the carrying amount of the asset is written down to fair
value.
Amortization
Subscriber Acquisition Costs: BCHI
amortizes subscriber acquisition costs over the estimated life of a
customer (84 - 120 months as of September 30, 2017). Amortization
expense of subscriber acquisition costs was $5,521 and $16,457 for
the three and nine months ended September 30, 2017 and $6,113 and
$17,304 for the three and nine months ended September 30, 2016,
respectively.
IP-Network Transition Costs: BCHI amortizes the one-time charges associated
with transitioning a resale customer to its own IP-Network over a
period of 36 months. Amortization expense of IP-network transition
costs was $3,036 and $8,617 for the three and nine months ended
September 30, 2017 and $2,343 and $6,109 for the three and nine
months ended September 30, 2016, respectively.
Installation Costs: BCHI
amortizes costs relative to the install of new customers over a
period of 36 months. Amortization expense of installation
costs was $1,615 and $3,925 for the three and nine months ended
September 30, 2017 and $886 and $2,047 for the three and nine
months ended September 30, 2016, respectively.
Commissions: BCHI
amortizes up-front sales commissions paid to third parties over the
contractual service period (7 - 36 months as of September 30,
2017). Amortization of these commissions was $3,082 and $7,829 for
the three and nine months ended September 30, 2017 and $1,752 and
$4,047 for the three and nine months ended September 30, 2016,
respectively.
Tradenames: BCHI
amortizes tradenames and costs over the estimated life of 84
months. Amortization expense of tradenames costs was $425 and
$1,275 for the three and nine months ended September 30, 2017 and
$104 and $311 for the three and nine months ended September 30,
2016, respectively.
Noncompete Agreements: BCHI
amortizes noncompete agreement costs over the life of the agreement
(12-24 months as of September 30, 2017). Noncompete agreements were
fully amortized as of September 30, 2017 and December 31, 2016;
therefore no amortization expense was
recognized.
Share-Based Compensation and Consulting
We have an equity compensation plan providing for the grant of
equity awards. All transactions with nonemployees in which goods or
services are the consideration received for the issuance of equity
instruments are accounted for based on the fair value of the
consideration received or the fair value of the equity instrument
issued, whichever is more reliably measurable. The measurement date
of the fair value of the equity instrument issued is the earlier of
the date on which the counter party’s performance is complete
or the date on which it is probable that performance will
occur.
Foreign Currency
Our foreign subsidiary, Primus Management ULC (Primus Canada) uses
the local currency of its country as its functional currency.
Assets and liabilities are translated into U.S. dollars at exchange
rates at the balance sheet dates. Revenues, costs and expenses are
translated using the average exchange rates for the period. Gains
and losses resulting from the translation of our consolidated
balance sheets and statements of operations are recorded as a
component of accumulated other comprehensive income. Gains and
losses from foreign currency transactions are recognized as Foreign
exchange gain (loss) in the statement of operations.
Comprehensive Income (Loss)
Comprehensive income includes all changes in the Company’s
equity during the period that results from transactions and other
economic events other than transactions with its stockholders. For
the Company, comprehensive income includes the gains or losses
resulting from foreign currency translations.
Income Taxes
We, with the consent of our stockholders, have elected under the
Internal Revenue Code to be an S corporation effective January 1,
2006. In lieu of corporate income taxes, the stockholders of an S
corporation are taxed on their proportionate share of the
Company’s taxable income. Therefore, no provision or
liability for federal income taxes has been included in the
consolidated financial statements. However, the Company operates in
a few states that do not recognize S corporation status. The
Company recognizes state tax provisions as amounts are paid to the
tax jurisdictions.
The Company’s tax positions are evaluated for recognition
using a more-likely-than-not threshold, and those tax positions
requiring recognition are measured at the largest amount of tax
benefit that is greater than 50 percent likely of being realized
upon ultimate settlement with a taxing authority that has knowledge
of all relevant information. Liabilities for income tax matters
include amounts for income taxes, penalties and interest thereon
and are the result of the potential alternative interpretations of
tax laws and the judgmental nature of the timing of recognition of
taxable income. Management does not believe the Corporation has
taken any tax positions which would require accrual.
Recently adopted accounting standards
In August 2014, the Financial Accounting Standards Board (the FASB)
issued Accounting Standards Update (ASU) 2014-15,
Disclosure of
Uncertainties about an Entity’s Ability to Continue as a
Going Concern. The update
requires management to assess a company’s ability to continue
as a going concern and to provide related footnote disclosures in
certain circumstances. Under the new standard, disclosures are
required when conditions give rise to substantial doubt about a
company’s ability to continue as a going concern within one
year from the financial statement issuance date. The new standard
applies to all companies and is effective for the annual period
ending after December 15, 2016. Adoption of this standard did not
have a material impact on the Company’s consolidated
financial statements.
The Company has early implemented certain provisions of Accounting
Standards Update 2016-01, Financial Instruments –
Overall (Subtopic 825-10): Recognition and Measurement of Financial
Assets and Financial Liabilities. To simplify reporting, fair value disclosures for
financial instruments reported at amortized cost are no longer
provided in the notes to these financial
statements.
Recently issued accounting standards
In November, 2016, the FASB issued ASU 2016-18, Statement of Cash Flows
Restricted Cash. The update
requires that the statement of cash flows explain the change during
the period in the total of cash, cash equivalents, and restricted
cash. Entities will also be required to reconcile such totals to
amounts on the balance sheet and disclose the nature of the
restrictions. The update is effective for non-public business
entities for fiscal years beginning after December 15, 2018. Early
adoption at the original effective date is permitted. The Company
is evaluating the impact of the implementation of this standard on
its financial statements.
In February, 2016, the FASB issued ASU 2016-02, Leases. The update requires lessees to recognize lease
assets and liabilities for all leases, with certain exceptions, on
the balance sheets. The standard is now required to be adopted by
non-public business entities in annual periods beginning on or
after December 15, 2019 and must be applied on a full retrospective
basis. Early adoption at the original effective date is permitted.
The Company is evaluating the impact of the implementation of this
standard on its financial statements.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with
Customers. The new guidance
outlines a single comprehensive model for entities to use in
accounting for revenue arising from contracts with customers and
supersedes most current revenue recognition guidance, including
industry-specific guidance. The core principle of the revenue model
is that an entity recognizes revenue to depict the transfer of
promised goods or services to customers in an amount that reflects
the consideration to which the entity expects to be entitled in
exchange for those goods or services. The new standard requires
significantly expanded disclosures about revenue contract assets
and liabilities. In April 2015, the FASB issued guidance that
deferred the effective date by one year. The standard is required
to be adopted by non-public business entities in annual periods
beginning on or after December 15, 2018, and interim periods within
annual periods beginning after December 15, 2019, and may be
applied on a full retrospective or modified retrospective approach.
Early adoption at the original effective date is permitted. The
Company is evaluating the impact of the implementation of this
standard on its financial statements.
RESULTS OF OPERATIONS
The following table summarizes our results of operations for the
years ended December 31, 2016, 2015 and 2014, and for the nine
months ended September 30, 2017 and 2016:
Birch Communications Holdings, Inc.
Consolidated Statements Of Operations - Amounts in
Thousands
|
|
|
|
|
|
|
|
Revenue
|
603,579
|
591,222
|
420,572
|
457,443
|
Cost of
revenue
|
328,408
|
295,532
|
236,057
|
243,648
|
Gross
Profit
|
275,171
|
295,690
|
184,515
|
213,795
|
Operating
expenses:
|
|
|
|
|
Selling, general
and administrative (exclusive of depreciation and amortization,
shown separately below)
|
178,614
|
168,313
|
110,690
|
121,725
|
Depreciation and
amortization
|
70,098
|
61,701
|
61,496
|
51,099
|
Foreign currency
(gain) loss
|
(20)
|
|
(461)
|
4
|
Total operating
expenses
|
248,692
|
230,014
|
171,725
|
172,828
|
Operating income
(loss)
|
26,479
|
65,676
|
12,790
|
40,967
|
Other
(expense) income:
|
|
|
|
|
Interest expense,
net
|
(43,258)
|
(40,525)
|
(37,422)
|
(30,217)
|
Other income
(expense)
|
(8,517)
|
2,544
|
51
|
22
|
Total other income
(expense)
|
(51,775)
|
(37,981)
|
(37,371)
|
(30,195)
|
Income (loss)
before income taxes
|
(25,296)
|
27,695
|
(24,581)
|
10,772
|
Income tax
expense
|
(1,847)
|
(2,183)
|
(2,008)
|
(1,299)
|
Net income
(loss)
|
(27,143)
|
25,512
|
(26,589)
|
9,473
|
Other comprehensive
income:
|
|
|
|
|
Cumulative
translation adjustment
|
(198)
|
|
1,470
|
(198)
|
Comprehensive
income (loss)
|
(27,341)
|
25,512
|
(25,119)
|
9,275
|
Nine Months Ended September 30, 2017 Compared with Nine Months
Ended September 30, 2016
Revenue
Revenue for the nine months ended September 30, 2017 was $420.6
million, compared to $457.4 million for the nine months ended
September 30, 2016. The decline was primarily due to a reduction in
the number of customers resulting from planned actions involving
price and term incentives to enhance the long-term profitability
and value of BCHI’s business customer base, partially offset
by the inclusion of additional revenue attributable to the timing
of the Primus Acquisition as well as new organic customer
installations.
Cost of Revenue and Gross Margin
Cost of revenue decreased 3.1%, or $7.6 million, to $236.1 million
in the nine months ended September 30, 2017 compared to 2016. The
decline is related to cost savings initiatives and lower revenue
volume, partly offset by additional expenses included in the year
to date results due to the timing of the Primus
Acquisition.
Gross margin was 43.9% for the nine months ended September 30,
2017, compared to 46.7% the nine months ended September 30, 2016.
The decrease in gross margin was due to the decline in revenue
relative to the decline in cost of revenue in 2017.
Selling, General and Administrative Expenses
SG&A for the nine months ended September 30, 2017 was $110.7
million, a decrease of $11.0 million, or 9.1% compared to the year
ago period. The decline was due to lower salaries, wages and
benefits expense and other SG&A expense resulting from
successful initiatives to optimize the company’s cost
structure, partially offset by additional costs due to the timing
of the Primus Acquisition. As a percentage of revenue, SG&A was
26.3% for the nine months ended September 30, 2017, compared to
26.6% in the nine months ended September 30, 2016.
Depreciation and Amortization
Depreciation and amortization increased $10.4 million, or 20.3%
during the nine months ended September 30, 2017 compared to the
prior year period. The increase was related in part to an increase
in up-front sales commissions paid to third parties which are
amortized over the contractual service period, as well as higher
new customer installation costs, which are amortized over 36
months.
Operating Income
Birch’s operating income for the nine months ended September
30, 2017 was $12.8 million, compared to $41.0 million during the
nine months ended September 30, 2016 due to the decrease in gross
profit and increase in depreciation and amortization, partially
offset by the decline in SG&A. Operating margin for the nine
months ended September 30, 2017 was 3.0%, compared to 9.0% during
the nine months ended September 30, 2016.
Interest Expense, Net
Net interest expense for the nine months ended September 30, 2017
was $37.4 million, compared to $30.2 million in the prior year
period. Interest expense is primarily due to interest obligations
under our credit facilities. Amounts outstanding under our credit
facilities were $454.5 million and $430.0 as of September 30, 2017
and 2016, respectively.
Comprehensive Net Income (Loss)
Comprehensive net loss for the nine months ended September 30, 2017
was $25.1 million, compared to comprehensive net income of $9.3
million in the nine months ended September 30, 2016, primarily due
to the decline in gross profit.
Twelve months ended December 31, 2016 compared to twelve months
ended December 31, 2015
Revenue
Total revenue of $603.6 million increased $12.4 million, or 2.1% in
the twelve months ended December 31, 2016, from $591.2 million in
the twelve months ended December 31, 2015. The increase in revenue
is primarily due to the timing of the Primus Acquisition, which
closed during the second quarter of 2016. The Primus Acquisition
contributed an additional $86.1 million of revenue during the
twelve months ended December 31, 2016, which was partially offset
by a decline in the number of customers reflecting planned actions
involving price and term incentives initiated in the second half of
2016 to enhance the long-term profitability and value of the
company’s customer base.
Cost of Revenue and Gross Margin
Cost of revenue increased $32.9 million, or 11.1% in the twelve
months ended December 31, 2016 compared to the twelve months ended
December 31, 2015. This increase is primarily due to $44.1 million
in additional costs during the twelve months ended December 31,
2016, due to the timing of the Primus Acquisition.
Gross margin was 45.6% for the twelve months ended December 31,
2017, compared to 50.0% the twelve months ended December 31, 2016.
The decrease in gross margin was due to the increase in cost of
revenue in 2017, reflecting the timing of the Primus
Acquisition.
Selling, General and Administrative Expenses
SG&A expense of $178.6 million increased $10.3 million, or 6.1%
for the twelve months ended December 31, 2017, compared to $168.3
million in the same period of 2015. Included in SG&A expense
for the twelve months ended December 31, 2016 is $23.5 million of
additional costs as a result of the timing of the Primus
Acquisition. This additional expense was partially offset by lower
headcount-related expenses such as salaries, wages and benefits. As
a percentage of revenue, SG&A represented 29.6% during the
twelve months ended December 31, 2016 compared to 28.5% during the
twelve months ended December 31, 2015.
Depreciation and Amortization
Depreciation and amortization increased $8.4 million, or 13.6%
during the twelve months ended December 31, 2016 compared to the
twelve months ended December 31, 2015. The increase was
primarily related to new subscriber acquisition, new OTM
commission, and installation and onboarding
increases.
Interest Expense
Interest expense of $43.3 million during the twelve months ended
December 31, 2016 declined $2.7 million, or 6.7%, compared to $40.5
million for the twelve months ended December 31, 2015. Interest
expense is primarily due to interest obligations under the
company’s credit facilities. Amounts outstanding under the
company’s credit facilities were $454.5 million as of
December 31, 2016 and 2015.
Other Income (Expense)
Other expense for the twelve months ended December 31, 2016 was
$(8.5) million, compared to other income of $2.5 million in the
twelve months ended December 31, 2015, primarily due to the
loss on the sale of the Louisville data center
facility.
Comprehensive Net Income (Loss)
Comprehensive net loss for the twelve months ended December 31,
2016 was $(27.3) million, compared to comprehensive net income of
$25.5 million in the twelve months ended December 31, 2015,
primarily due to the decline in gross profit, the increase in
SG&A expense and Depreciation and Amortization, and the
decrease in Other Income.
LIQUIDITY
AND CAPITAL RESOURCES
On July 18, 2014, the Company refinanced its existing debt under a
Term Loan Payable (2014 Credit Facility) arrangement totaling
$450,000 with PNC Bank, N.A., as Administrative Agent. The
arrangement also includes $50,000 made available under the Revolver
Loan Payable. The Company capitalized the costs associated with
issuing the debt of $13,770. The debt was issued at a discount of
$9,450. The deferred financing and discount are recognized as
interest expense throughout the term of the loan.
On October 28, 2016, the Company amended the 2014 Credit Facility.
The Company capitalized the costs associated with the amendment of
$4,289. The amended 2014 Credit Facility is due in quarterly
installments of $2,800 through December 31 2016, then $5,625 per
quarter until September 30, 2020. The amended 2014 Credit Facility
matures with the remainder due on July 18th
2020. The interest on the amended 2014
Credit Facility is Libor plus 7.25% for the term loan and Libor
plus 6.25% for the revolver loan payable.
On May 1, 2016, the Company entered into an installment purchase
agreement to repurchase 148 shares of common stock from a former
employee, valued at $13,700. The installments due are as follows:
$1,000 on December 31, 2016, $1,500 on May 1, 2017, $1,000on
December 31, 2017, $3,000 on May 1, 2018, and $7,200 on May 1,
2019. Per the agreement, should the payment of any installment
conflict with a covenant in any material credit agreement of the
Company, the installment will be delayed. The sum delayed will
accrete at a rate of 4% per year. As of November 7, 2017, no
payments have been made due to a material impact to the amended
2014 Credit Facility, resulting in $46,667 of additional
debt.
On April 12, 2017, the Company entered into a second amendment to
the 2014 Credit Facility. The Company was able to secure an
additional $10,000 to the term loan from its primary lender
Halcion. Additionally, there was a $5,000 commitment from Company
ownership if the Company dropped below $10,000 in liquidity. The
second amended 2014 Credit Facility is due in quarterly
installments of $125 per quarter until September 30, 2020. The
additional term loan matures with the remainder due on July 18,
2020. The Company capitalized the costs associated with the
amendment of $4,881.
The following table sets forth a summary of our cash flows for the
periods indicated:
Amounts in thousands
|
|
|
|
|
Net
Cash Provided By Operating Activities
|
$45,975
|
$77,950
|
Net
Cash Used In Investment Activities
|
(34,232)
|
(54,038)
|
Net
Cash Used In Financing Activities
|
(10,036)
|
(26,672)
|
Net Increase (Decrease) in Cash and Equivalents
|
$1,707
|
$(2,760)
|
Cash
and Equivalents, Beginning of Period
|
8,208
|
8,715
|
Foreign
Currency Translation Effect on Cash
|
155
|
(640)
|
Cash and Equivalents, End of Period
|
$10,070
|
$5,315
|
Cash provided by operating activities was $46.0 million and $78.0
million for each of the years ended December 31, 2016 and 2015,
respectively. The following table illustrates the primary
components of our cash flows from operations:
Amounts in thousands
|
|
|
|
|
Net
Income (Loss)
|
$(26,587)
|
$9,473
|
Non-cash
Expenses, Gains and Losses
|
65,759
|
54,482
|
Changes
in Accounts Receivable
|
2,677
|
(11,931)
|
Changes
in Accounts Payable
|
16,180
|
19,643
|
Other
|
(12,054)
|
6,283
|
Cash
Provided By Operating Expenses
|
$45,975
|
$77,950
|
ANNEX A
AGREEMENT AND PLAN OF MERGER
BY
AND
AMONG
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.,
FUSION BCHI ACQUISITION LLC,
AND
BIRCH COMMUNICATIONS HOLDINGS, INC.
DATED AUGUST 26, 2017
STRICTLY
PRIVATE AND CONFIDENTIAL. DRAFT FOR DISCUSSION PURPOSES ONLY. NO
LEGAL OBLIGATION OF ANY KIND WILL ARISE UNLESS AND UNTIL A
DEFINITIVE WRITTEN AGREEMENT IS EXECUTED AND
DELIVERED.
|
Page
|
ARTICLE I The TRANSACTIONS
|
2
|
Section 1.1
|
The Merger and Related Matters
|
2
|
Section 1.2
|
Company Matters
|
4
|
Section 1.3
|
Closing
|
5
|
Section 1.4
|
Stockholders’ Agreement
|
5
|
Section 1.5
|
Registration Rights Agreement
|
5
|
Section 1.6
|
Separation Agreements
|
5
|
ARTICLE II EFFECTS of THE Merger
|
6
|
Section 2.1
|
Exchange of Shares
|
6
|
Section 2.2
|
Section 16
|
6
|
Section 2.3
|
No Liability
|
6
|
Section 2.4
|
Withholding Rights
|
6
|
ARTICLE III Representations and Warranties of the
Company
|
6
|
Section 3.1
|
Corporate Organization
|
7
|
Section 3.2
|
Capitalization
|
8
|
Section 3.3
|
Authority; No Violation
|
10
|
Section 3.4
|
Consents and Approvals
|
11
|
Section 3.5
|
Reports
|
11
|
Section 3.6
|
Financial Statements; Liabilities
|
13
|
Section 3.7
|
Absence of Company Material Adverse Effect
|
14
|
Section 3.8
|
Legal Proceedings
|
14
|
Section 3.9
|
Taxes and Tax Returns
|
14
|
Section 3.10
|
Employee Benefit Plans; Labor
|
15
|
Section 3.11
|
Compliance with Law
|
19
|
Section 3.12
|
Environmental Matters
|
19
|
Section 3.13
|
Material Contracts
|
20
|
Section 3.14
|
Intellectual Property; Data Privacy
|
22
|
Section 3.15
|
Title to Properties; Assets
|
24
|
Section 3.16
|
Real Property
|
24
|
Section 3.17
|
Regulatory Matters
|
25
|
Section 3.18
|
Interconnection Agreements
|
26
|
Section 3.19
|
Network Facilities
|
27
|
Section 3.20
|
Insurance
|
28
|
Section 3.21
|
Opinion
|
28
|
Section 3.22
|
Application of Takeover Laws
|
28
|
Section 3.23
|
Information Supplied
|
28
|
Section 3.24
|
Affiliate Transactions
|
28
|
TABLE OF CONTENTS
(continued)
Section 3.25
|
Broker’s Fees
|
29
|
Section 3.26
|
Directors and Officers
|
29
|
Section 3.27
|
No Other Representations or Warranties
|
29
|
ARTICLE IV Representations and Warranties of BCHI
|
29
|
Section 4.1
|
Corporate Organization
|
29
|
Section 4.2
|
Capitalization
|
30
|
Section 4.3
|
Authority; No Violation
|
31
|
Section 4.4
|
Consents and Approvals
|
32
|
Section 4.5
|
Financial Statements; Liabilities
|
32
|
Section 4.6
|
Absence of BCHI Material Adverse Effect
|
34
|
Section 4.7
|
Legal Proceedings
|
34
|
Section 4.8
|
Taxes and Tax Returns
|
34
|
Section 4.9
|
Employee Benefit Plans; Labor
|
36
|
Section 4.10
|
Compliance with Law
|
39
|
Section 4.11
|
Environmental Matters
|
40
|
Section 4.12
|
Material Contracts
|
40
|
Section 4.13
|
Intellectual Property; Data Privacy
|
42
|
Section 4.14
|
Title to Properties; Assets
|
44
|
Section 4.15
|
Real Property
|
44
|
Section 4.16
|
Regulatory Matters
|
44
|
Section 4.17
|
Interconnection Agreements
|
46
|
Section 4.18
|
Network Facilities
|
46
|
Section 4.19
|
Insurance
|
47
|
Section 4.20
|
Information Supplied
|
47
|
Section 4.21
|
Affiliate Transactions
|
47
|
Section 4.22
|
Broker’s Fees
|
47
|
Section 4.23
|
Share Ownership
|
47
|
Section 4.24
|
Directors and Officers
|
48
|
Section 4.25
|
No Other Representations or Warranties
|
48
|
ARTICLE V Pre-Closing Covenants
|
48
|
Section 5.1
|
Conduct of Businesses by the Company and BCHI Prior to the
Effective Time
|
48
|
Section 5.2
|
Company Forbearances
|
48
|
Section 5.3
|
BCHI Forbearances
|
51
|
ARTICLE VI Additional Agreements
|
54
|
Section 6.1
|
Filings; Other Actions; Notification
|
54
|
Section 6.2
|
Preparation of Proxy Statement; Stockholders Meeting
|
55
|
TABLE OF CONTENTS
(continued)
Section 6.3
|
No Solicitation or Change of Recommendation
|
57
|
Section 6.4
|
Access to Information
|
61
|
Section 6.5
|
Employee Matters
|
61
|
Section 6.6
|
Indemnification; Directors’ and Officers’
Insurance
|
63
|
Section 6.7
|
NASDAQ Listing; Reverse Split
|
64
|
Section 6.8
|
Advice of Changes
|
64
|
Section 6.9
|
Control of the Other Party’s Business
|
65
|
Section 6.10
|
Subsidiary Compliance
|
65
|
Section 6.11
|
Financing
|
65
|
Section 6.12
|
Transaction Litigation
|
67
|
Section 6.13
|
Publicity
|
67
|
Section 6.14
|
Takeover Laws
|
68
|
Section 6.15
|
Actions Concerning Company Preferred Stock
|
68
|
Section 6.16
|
Separation of Consumer/SMB Business
|
68
|
Section 6.17
|
Divestiture or Dissolution of Fusion Global
|
68
|
Section 6.18
|
BCHI Financial Statements
|
68
|
ARTICLE VII Closing Conditions
|
69
|
Section 7.1
|
Conditions to Each Party’s Obligation to Effect the
Merger
|
69
|
Section 7.2
|
Conditions to Obligations of BCHI
|
70
|
Section 7.3
|
Conditions to Obligations of the Company and Merger
Sub
|
70
|
Section 7.4
|
Frustration of Closing Conditions
|
71
|
ARTICLE VIII Termination and Amendment
|
71
|
Section 8.1
|
Termination
|
71
|
Section 8.2
|
Effect of Termination
|
73
|
Section 8.3
|
Fees and Expenses
|
73
|
ARTICLE IX General Provisions
|
73
|
Section 9.1
|
Notices
|
73
|
Section 9.2
|
Interpretation
|
74
|
Section 9.3
|
Counterparts
|
75
|
Section 9.4
|
Entire Agreement; Third Party Beneficiaries
|
75
|
Section 9.5
|
Amendment
|
75
|
Section 9.6
|
Extension; Waiver
|
76
|
Section 9.7
|
Governing Law
|
76
|
Section 9.8
|
Jurisdiction
|
76
|
Section 9.9
|
Assignment
|
77
|
Section 9.10
|
Specific Performance
|
77
|
Section 9.11
|
Waivers
|
78
|
Section 9.12
|
No Survival of Representations and Warranties
|
78
|
Section 9.13
|
Severability
|
78
|
Section 9.14
|
Non-Recourse
|
78
|
Section 9.15
|
Definitions
|
78
|
Exhibits
Exhibit
A
-
Amended and
Restated Certificate of Incorporation
Exhibit
B
-
Stockholders’
Agreement
Exhibit
C
-
Registration Rights
Agreement
Exhibit
D
-
Consumer Business
Carve-out
AGREEMENT AND
PLAN OF MERGER
This AGREEMENT AND PLAN OF MERGER,
dated as of August 26, 2017 (as may be amended, supplemented or
otherwise modified from time to time in accordance with its terms,
this “Agreement”), is entered
into by and among Fusion Telecommunications International, Inc., a
Delaware corporation (the “Company”), Fusion BCHI Acquisition LLC, a
Delaware limited liability company (“Merger Sub”), and Birch
Communications Holdings, Inc., a Georgia corporation
(“BCHI”). The Company,
Merger Sub and BCHI are hereinafter sometimes referred to as a
“Party” and collectively as the “Parties.”
Capitalized terms used but not otherwise defined herein have the
meanings set forth in Section
9.15.
RECITALS
A.
The Boards of
Directors of each of the Company and BCHI have deemed it advisable
and in the best interests of their respective corporations and
stockholders to enter into a business combination by means of the
Merger (as defined below).
B.
The Boards of
Directors of each of the Company and BCHI have approved, and
declared advisable and in the best interests of their respective
companies and stockholders, this Agreement and the transactions
contemplated hereby, including the merger of BCHI with and into
Merger Sub (the “Merger”), with Merger Sub
being the surviving company in the Merger, as more fully provided
in, and upon the terms and subject to the conditions set forth in,
this Agreement.
C.
The Company, as the
managing member of Merger Sub, has approved, and declared advisable
and in the best interests of Merger Sub and the Company as its sole
member, this Agreement and the transactions contemplated hereby,
including the Merger, as more fully provided in, and upon the terms
and subject to the conditions set forth in, this
Agreement.
D.
The Board of
Directors of the Company (the “Company Board”) has
determined to recommend that the stockholders of the Company vote
to adopt and approve this Agreement and the Merger, including the
amendment and restatement of the Company’s certificate of
incorporation and the issuance of shares of Company Common Stock
pursuant to the Merger, and (to the extent necessary to comply with
NASDAQ listing requirements) the Reverse Split upon the terms and
subject to the conditions set forth in this Agreement (the
“Company Board
Recommendation”).
E.
The Board of
Directors of BCHI has approved, and declared advisable and in the
best interests of BCHI and its shareholders, this Agreement and the
transactions contemplated hereby, including the Merger, as more
fully provided for in this Agreement.
F.
Concurrently with
the execution and delivery of this Agreement, each Principal
Company Stockholder has executed and delivered to BCHI a support
agreement in a form previously approved by BCHI (each, a
“Support
Agreement” and, collectively, the “Support Agreements”),
pursuant to which such Principal Company Stockholder has agreed,
among other things, subject to the terms and conditions of the
applicable Support Agreement, to vote his, her or its shares of
Company Common Stock in favor of the approval of the Merger, and to
take certain other actions in furtherance of the
Transactions.
G.
The shareholders of
BCHI have, by written consent, irrevocably adopted this Agreement
and approved the transactions contemplated hereby, including the
Merger, as required pursuant to the BCHI Charter, the BCHI Bylaws
and applicable Law.
H.
Each of the
shareholders of BCHI has entered into a subscription agreement (the
“Subscription
Agreements”) agreeing to (a) at the Closing, assign
and transfer the right of such shareholder to receive shares of
Company Common Stock issuable to such shareholder pursuant to the
Merger to a limited liability company organized by such
shareholders to own and hold all of such shares of Company Common
Stock (referred to herein as “Holding LLC”) and (b)
cause Holding LLC to execute and deliver, at the Closing, the
Stockholders’ Agreement and the Registration Rights
Agreement.
I.
In connection with
the execution and delivery of this Agreement, and as a condition
and inducement to each Party’s willingness to enter into this
Agreement, a certain financial institution has executed and
delivered a “highly confident letter” with respect to
debt facilities to be entered into by the Company and BCHI, the
proceeds of which, together with other financing facilities, will
be used to effect the Refinancing and the other transactions
contemplated by this Agreement, including paying expenses
associated with the Transactions.
J.
The Parties intend
the Merger to constitute a “reorganization” within the
meaning of section 368(a) of the Code, this Agreement to constitute
a “plan of reorganization,” and BCHI, Merger Sub and
the Company to constitute parties to the
reorganization.
The
Parties hereby agree as follows:
ARTICLE I
THE TRANSACTIONS
Section
1.1 The
Merger and Related Matters.
(a) The Merger. On the terms and
subject to the conditions set forth in this Agreement, and in
accordance with the applicable provisions of the Georgia Business
Corporation Code (the “GBCC”) and the Delaware
Limited Liability Company Act (the “Act”), BCHI will be
merged with and into Merger Sub at the Effective Time. At the
Effective Time, the separate corporate existence of BCHI will
cease, and Merger Sub will continue as the surviving entity (the
“Surviving
Company”) and a wholly owned Subsidiary of the Company
and will succeed to and assume all the rights and obligations of
BCHI in accordance with the GBCC and the Act.
(b) Effective Time. On the Closing
Date, the Company, Merger Sub and BCHI will cause to be filed with
the Secretaries of State of the State of Georgia and the State of
Delaware a certificate of merger, or other appropriate documents
(collectively, the “Certificate of Merger”),
executed in accordance with the relevant provisions of the GBCC and
the Act, and will make all other filings or recordings required
under the GBCC and the Act to effect the Merger and the
transactions provided for herein. The Merger will become effective
at such time as the Certificate of Merger is duly filed with such
Secretaries of State, or at such other time as BCHI and the Company
will agree and specify in the Certificate of Merger (the time the
Merger becomes effective being the “Effective
Time”).
(c) Effects. The Merger will have
the effects provided in this Agreement, including Article II, and in the
applicable provisions of the GBCC and the Act.
(d) Conversion of
Securities.
(i) At the Effective
Time, by virtue of the Merger and without any action on the part of
BCHI, Merger Sub, the Company or the holders of the BCHI Common
Stock, all of the shares of BCHI Common Stock (each, a
“Share”) issued and
outstanding immediately prior to the Effective Time (other than any
Shares to be cancelled pursuant to Section 1.1(d)(iii)) will be
converted automatically into the right to receive, in the
aggregate, in accordance with the terms of this Agreement, a number
of fully paid and non-assessable shares of Company Common Stock
equal to three (3) times the Fully-Diluted Company Share Total (the
“Merger
Consideration”). At the Closing, all of the shares of
Company Common Stock issuable to the shareholders of BCHI pursuant
to the Merger will, pursuant to the Subscription Agreements, be
issued to Holding, LLC.
(ii) From
and after the Effective Time, all Shares (other than any Shares to
be cancelled pursuant to Section 1.1(d)(iii)) will no
longer be outstanding, and, upon the conversion thereof, will
automatically be cancelled and will cease to exist. Except as set
forth in Section 1.1(d)(iii), as a
result of the Merger, each holder of a certificate or certificates
that immediately prior to the Effective Time represented
outstanding Shares (“Certificates”) will
thereafter cease to have any rights with respect to such Shares
except the right to receive the applicable shares of Company Common
Stock in consideration therefor, upon surrender of such Certificate
in accordance with Section
2.1(a).
(iii) At
the Effective Time, by virtue of the Merger and without any action
on the part of BCHI, Merger Sub or the Company, each Share held in
the treasury of BCHI or owned of record by any BCHI Subsidiary
immediately prior to the Effective Time will automatically be
cancelled without any conversion thereof and no payment or
distribution will be made with respect thereto.
(iv) All
of the limited liability company interests of Merger Sub issued and
outstanding immediately prior to the Effective Time will be
converted into and become limited liability company interests of
the Surviving Company.
(v) At the Effective
Time, by virtue of the Merger and without any action on the part of
BCHI, Merger Sub or the Company, all of the rights under each share
of Company Preferred Stock issued and outstanding immediately prior
to the Effective Time shall terminate and all of the shares of
Company Preferred Stock issued and outstanding immediately prior to
the Effective Time shall be deemed cancelled, as provided in the
Company Charter and the notice to the holders of shares of Company
Preferred Stock required by Section 6.15.
(e) Certificate of Formation and Limited
Liability Company Agreement. At the Effective Time, the
certificate of formation and limited liability company agreement of
Merger Sub will, by virtue of the Merger, be the certificate of
formation and limited liability company agreement, respectively, of
the Surviving Company until thereafter amended as provided therein
or by applicable Law.
(f) Directors. The Parties will
take all necessary action such that, from and after the Effective
Time, each Subsidiary of the Company will have two (2) directors
(or, in the case of a limited liability company, two (2) managers)
who are mutually acceptable to BCHI and the Company and who will
serve until the earlier of their resignation or removal or until
their respective successors are duly elected and qualified, as the
case may be.
(g) Officers. The officers of the
Surviving Company from and after the Effective Time will be
determined prior to the Closing by mutual agreement of BCHI and the
Company.
Section
1.2 Company
Matters. Unless otherwise
agreed to by BCHI and the Company prior to the Effective Time, the
Company will take all necessary action such that, effective at or
prior to the Effective Time:
(a) Certificate of Incorporation and
Bylaws. The certificate of incorporation of the Company
will, as of the Effective Time, be amended and restated to be the
form attached hereto as Exhibit A. Prior to the
Effective Time, BCHI and the Company will review and revise in good
faith the bylaws of the Company, which will be amended and
restated, effective as of the Effective Time, to be consistent with
similarly situated Delaware corporations.
(b) Board of Directors. The size of
the Company Board will be fixed at nine (9) members. The initial
members of the Company Board as of the Effective Time will be
determined prior to the Closing in accordance with the provisions
of the Stockholders’ Agreement; provided that such initial
members to be designated by the Company shall be determined by the
Company’s Compensation and Nominating Committee subject to
Company Board approval.
(c) Executive Officers. Matthew D.
Rosen will be the Chief Executive Officer of the Company and the
Chairman of the Company Board. Holcombe T. Green, Jr. will be the
Vice Chairman of the Company Board. The other officers of the
Company as of the Effective Time will be determined prior to the
Closing by mutual agreement of BCHI and the Company.
Section
1.3 Closing.
The closing (the “Closing”) of the Merger
will take place at the offices of Jones Day, 250 Vesey Street, New
York, New York 10281 at 10:00 a.m. local time on the later of
(a) the second Business Day following the satisfaction or, to the
extent permitted by Law, waiver of the conditions set forth in
Article VII
(other than those conditions that by their terms are to be
satisfied at the Closing, but subject to the satisfaction or, to
the extent permitted by Law, waiver of those conditions at
Closing), and (b) the earlier of (i) a date during the Marketing
Period specified by BCHI and the Company by mutual agreement, and
(ii) ten (10) Business Days following the final day of the
Marketing Period; except that if the Closing would otherwise occur
within the ten (10) Business Day period prior to the date on which
the Company’s Quarterly Report on Form 10-Q or the
Company’s Annual Report on Form 10-K (or any amendment to any
previously filed Company Report) would be required to be filed with
the SEC, the Closing will occur on the third (3rd) Business Day after
the filing by the Company of such report (subject, in each case, to
the satisfaction or waiver of such conditions as of the date
determined by this clause). In lieu of the foregoing, the Closing
may occur at such other place, time and date as may be agreed in
writing by BCHI and the Company. The date on which the Closing
occurs is referred to in this Agreement as the “Closing
Date.”
Section
1.4 Stockholders’
Agreement. At the Closing,
the Company, Holding LLC and the Principal Company Stockholders
will enter into a stockholders’ agreement, substantially in
the form of Exhibit
B (the “Stockholders’
Agreement”).
Section
1.5 Registration
Rights Agreement. At the Closing,
the Company and Holding, LLC will enter into a registration rights
agreement, substantially in the form of Exhibit C (the
“Registration Rights
Agreement”).
Section
1.6 Separation
Agreements. In the interim
period between the signing of this Agreement and the Closing, the
Parties will negotiate and cooperate in good faith to reach
agreement on the Separation Agreements in accordance with the terms
and conditions of Exhibit
D, and BCHI and/or certain of the BCHI Subsidiaries (other
than Spinco), on the one hand, and Spinco, on the other hand, will
enter into the Separation Agreements. BCHI hereby agrees that it
will not (and will cause the BCHI Subsidiaries not to) enter any
agreement between BCHI or any of the BCHI Subsidiaries (other than
Spinco), on the one hand, and Spinco, on the other hand, relating
to the Consumer/SMB Business without the prior written approval of
the Company, not to be unreasonably withheld, conditioned or
delayed.
ARTICLE II
EFFECTS OF THE MERGER
Section
2.1 Exchange
of Shares.
(a) Exchange Procedures. On the
Closing Date, immediately after the Effective Time, each holder of
record of Shares entitled to receive the Merger Consideration
pursuant to Section
1.1(d)(i) will surrender their Certificates to the Company
in exchange for shares of the Company Common Stock pursuant to
Section 1.1(d)(i);
provided, that, pursuant to the Subscription Agreements all of the
shares of Company Common Stock issuable to the holders of Shares
will be issued to Holding, LLC.
(b) No Further Rights in Shares.
All Merger Consideration issued or paid upon surrender of
Certificates in accordance with the terms of this Article II will be deemed to
have been issued or paid, as the case may be, in full satisfaction
of all rights pertaining to the Shares formerly represented by such
Certificates.
Section
2.2 Section 16.
The Company will cause any disposition of shares of Company Common
Stock, Company Options or restricted shares of Company Common Stock
or acquisitions of shares of Company Common Stock, options to
purchase Company Common Stock or restricted shares of Company
Common Stock resulting from the Transactions by each officer or
director of the Company who is subject to the reporting
requirements of Section 16(a) of the Exchange Act with respect
to the Company to be exempt under Rule 16b-3 promulgated under
the Exchange Act.
Section
2.3 No
Liability. Notwithstanding
anything in this Agreement to the contrary, none of the Company,
BCHI, Merger Sub, the Surviving Company or any other Person will be
liable to any former holder of Shares for any amount properly
delivered to a public official pursuant to any applicable abandoned
property, escheat or similar Law.
Section
2.4 Withholding
Rights. Each of the
Company, the Surviving Company, BCHI and Merger Sub will be
entitled to deduct and withhold from any amounts otherwise payable
pursuant to this Agreement such amount as it is required to deduct
and withhold with respect to the making of such payment under the
Code, the rules and regulations promulgated thereunder, any
provision of applicable state, provincial, territorial, local or
foreign Tax Law or any other Law. To the extent that amounts are so
withheld and paid over to the appropriate governmental authority,
such withheld amounts will be treated for the purposes of this
Agreement as having been paid to the Person in respect of which
such deduction and withholding was made.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE
COMPANY
Except
as (x) disclosed in the disclosure letter delivered by the Company
to BCHI immediately prior to the execution of this Agreement (it
being agreed that any information set forth in one section of such
disclosure letter will be deemed to apply to each other section
thereof to which its relevance as an exception to (or disclosure
for the purposes of) such other section is reasonably apparent)
(the “Company
Disclosure Letter”) or (y) set forth in a registration
statement, prospectus, report, form, schedule or other document
(including exhibits and all other information incorporated therein)
filed by the Company with or furnished to the SEC prior to the date
hereof, but excluding any risk factor disclosure under the headings
“Risk Factors,” “Forward Looking
Statements,” or other disclosures contained or referenced
therein to the extent they are predictive or forward looking, but
only to the extent that such documents are available on the
SEC’s Electronic Data Gathering and Retrieval System no later
than the third (3rd) Business Day prior
to the date of this Agreement (it being understood that this clause
(y) shall not be applicable to Section 3.2 or Section 3.3(a)), the Company
represents and warrants to BCHI as follows:
Section
3.1 Corporate
Organization.
(a) The Company is a
corporation duly organized, validly existing and in good standing
under the Laws of the State of Delaware. The Company has the
corporate power and authority to own or lease all of its properties
and assets and to carry on its business as it is now being
conducted, and is duly licensed or qualified to do business in each
jurisdiction in which the nature of the business conducted by it or
the character or location of the properties and assets owned or
leased by it makes such licensing or qualification necessary,
except where the failure to have such power and authority or to be
so licensed or qualified would not reasonably be expected to have,
individually or in the aggregate, a Company Material Adverse
Effect.
(b) Copies of the
articles of incorporation of the Company, as amended and restated
(the “Company
Charter”), and the bylaws of the Company, as amended
and restated (the “Company Bylaws”), as in
effect as of the date of this Agreement, have previously been made
available to BCHI.
(c) Section 3.1(c) of the
Company Disclosure Letter sets forth a list of each Company
Subsidiary, together with the jurisdiction of organization or
incorporation, as the case may be, and the jurisdictions in which
each Company Subsidiary is authorized to conduct business. Each
Company Subsidiary (i) is duly organized or formed, as the case may
be, and validly existing under the Laws of its jurisdiction of
organization or formation, (ii) is duly qualified to do business
and in good standing in all jurisdictions (whether federal, state,
provincial, territorial, local or foreign) where its ownership or
leasing of property or the conduct of its business requires it to
be so qualified, and (iii) has all the corporate or limited
liability company power and authority to own or lease its
properties and assets and to carry on its business as now
conducted, in the case of clauses (ii) and (iii), except as would
not reasonably be expected to have, individually or in the
aggregate, a Company Material Adverse Effect.
(d) Copies of the
articles of incorporation, or similar organizational document, as
applicable, of each Company Subsidiary, as amended and restated,
and the bylaws, or similar governing document, as applicable, of
each Company Subsidiary, as amended and restated, as in effect as
of the date of this Agreement, have previously been made available
to BCHI.
(e) Merger Sub is a
limited liability company duly organized, validly existing and in
good standing under the Laws of the State of Delaware. All of the
issued and outstanding limited liability company interests of
Merger Sub is, and at the Effective Time will be, owned by the
Company. Merger Sub has not conducted any business prior to the
date hereof and has, and prior to the Effective Time will have, no
assets, liabilities or obligations of any nature other than those
incident to its formation and pursuant to this Agreement and the
Transactions.
Section
3.2 Capitalization.
(a) Section 3.2(a) of the
Company Disclosure Letter sets forth the authorized capital stock
of the Company, as of the date of this Agreement, by class and
series and the number of issued and outstanding shares of each such
class and series (collectively, the “Company Capital Stock”)
and, in the case of each series of Company Preferred Stock, the
number of shares of Company Common Stock, as of the date of this
Agreement, that the issued and outstanding shares in such series
are convertible into. The number of shares of Company Common
Stock reserved for issuance pursuant to the Equity Compensation
Plans is variable in nature as, under the terms of the 2016 Equity
Compensation Plan, the number of shares available for issuance
thereunder is equal to (i) ten percent of the Company Common Stock
then outstanding, plus (ii) any shares for which options were
granted under the 2009 stock incentive plan that expire without
being exercised. No shares of Company Capital Stock are
held in the Company’s treasury. All of the issued and
outstanding shares of Company Capital Stock have been duly
authorized and validly issued and are fully paid, nonassessable and
free of preemptive rights..
(b) There are no
stockholders agreements, voting trusts, voting agreements or other
similar agreements or understandings with respect to the Company
Capital Stock to which the Company is a party or, to the knowledge
of the Company, between or among any of the Company’s
stockholders. Except as contemplated under this Agreement, awards
issued pursuant to the Equity Compensation Plans and as set forth
in the certificates of designation and preferences for the Company
Preferred Stock, no Person has any outstanding commitments, rights
of first offer or refusal, anti-dilution rights, preemptive rights,
rights of participation or any similar right to participate in the
Transaction. Except for the Company Options, the Company Warrants
and the Reverse Split and except as set forth in Section 3.2(b) of the Company
Disclosure Letter, as of the date of this Agreement, there are no
outstanding subscriptions, options, warrants, scrip rights to
subscribe to, calls, restricted shares, phantom stock rights,
rights of first offer or refusal, rights to require redemption or
repurchase, preemptive rights, anti-dilution rights, registration
rights, rights of participation, commitments or other agreements to
which the Company or any of the Company Subsidiaries is a party
relating to, or securities, rights or obligations convertible into
or exercisable or exchangeable for, or giving any Person any right
to subscribe for or acquire any, Equity Securities or other
securities of the Company or any of the Company Subsidiaries, or
Contracts, commitments or understandings by which the Company or
any of the Company Subsidiaries is or may become bound to issue
additional Equity Securities or other securities of the Company or
the Company Subsidiaries. Section 3.2(b)(i) of the
Company Disclosure Letter sets forth, as of the date hereof, with
respect to each unexercised Company Option (whether vested or
unvested) (i) the name of the holder of such Company Option, (ii)
whether such Company Option has vested, (iii) the number of shares
of Company Capital Stock that are issuable upon the exercise of
such Company Option, (iv) the date on which such Company Option was
granted and the term of such Company Option, (v) the vesting
schedule and vesting commencement date for such Company Option,
(vi) the exercise price per share of Company Capital Stock
purchasable under such Company Option, and (vii) whether such
Company Option has been designated an “incentive stock
option” as defined in Section 422 of the Code. Section 3.2(b)(ii) of the
Company Disclosure Letter sets forth, as of the date hereof, with
respect to each unexercised Company Warrant (A) the name of the
holder of such Company Warrant, (B) the number of shares of Company
Capital Stock that are issuable upon the exercise of such Company
Warrant, (C) the date on which such Company Warrant was issued and
the term of such Company Warrant, and (D) the exercise price per
share of Company Capital Stock purchasable under such Company
Warrant. Except as expressly contemplated by this Agreement or as
set forth in Section
3.2(b)(iii) of the Company Disclosure Letter, neither the
consummation of the Transactions nor any action taken or to be
taken by the Company or a Company Subsidiary in connection with the
Transactions will result in (x) any acceleration of vesting or
exercisability, whether or not contingent on the occurrence of any
event after consummation of the Transactions, in favor of any
holder of Company Options or (y) any additional benefits for any
holder of Company Options.
(c) There are no bonds,
debentures, notes or other indebtedness having the right to vote on
any matters on which stockholders of the Company may vote are
issued or outstanding as of the date of this
Agreement.
(d) Except as set forth
in Section 3.2(d)
of the Company Disclosure Letter, all of the issued and outstanding
shares of capital stock or other equity ownership interests of each
Company Subsidiary are owned by the Company, directly or
indirectly, free and clear of any Liens (other than transfer
restrictions under applicable federal, state, provincial or
territorial securities Laws and Liens that will be released at
Closing), and all of such shares or equity ownership interests are
duly authorized and validly issued and are fully paid,
nonassessable and free of preemptive rights. No Company Subsidiary
has or is bound by any outstanding subscriptions, options,
warrants, calls, commitments or agreements of any character calling
for the purchase or issuance of any shares of capital stock or any
other equity security of such Company Subsidiary or any securities
representing the right to purchase or otherwise receive any shares
of capital stock or any other equity security of such Company
Subsidiary. Except as set forth in Section 3.2(d) of the Company
Disclosure Letter, there are no outstanding obligations to which
the Company or any Company Subsidiary is a party (i) restricting
the transfer of or (ii) limiting the exercise of voting rights with
respect to any Equity Interest in any Company Subsidiary. Except
for the Company Subsidiaries, neither the Company nor any of the
Company Subsidiaries directly or indirectly owns any Equity
Interest in any Person. Section 3.2(d) of the Company
Disclosure Letter sets forth, for each Company Subsidiary, (i) the
number and type of any capital stock of, or other equity or voting
interests in, such Company Subsidiary that are outstanding as of
the date of this Agreement and (ii) the identity of each equity
holder of capital stock or other equity or other voting interest in
such Company Subsidiary and the number of shares or interests of
such Company Subsidiary held by each such holder as of the date of
this Agreement.
Section
3.3 Authority;
No Violation.
(a) Each of the Company
and Merger Sub has full corporate or limited liability company
power and authority to enter into this Agreement and to consummate
the Transactions. The execution and delivery of this Agreement and
the consummation of the Transactions have been duly and validly
adopted by the Company Board and the Company and the managing
member of Merger Sub, and, except for the adoption of this
Agreement by the Company, as the sole member of Merger Sub, and the
filing of the Certificate of Merger with the Secretary of State of
the State of Delaware, no other corporate or limited liability
company proceedings on the part of the Company or Merger Sub are
necessary to authorize the execution and delivery of this Agreement
or consummation of the Transactions. Except for (i) approval by the
holders of a majority of the outstanding shares of Company Common
Stock entitled to be voted in accordance with the DGCL at the
Stockholders Meeting, or any adjournment or postponement thereof,
to adopt this Agreement and approve the Merger, the amendment and
restatement of the Company’s Charter as provided by
Section 1.2(a), the
issuance of the shares of Company Common Stock as the Merger
Consideration and (to the extent necessary to comply with NASDAQ
listing requirements) the Reverse Split (ii) any approval of the
holders of the Company Preferred Stock of this Agreement or the
Transactions that is required pursuant to the Company Charter or
the Company Bylaws (collectively, the “Stockholder Approval”),
no votes or approvals of the holders of any class or series of
Equity Interests of the Company are necessary to approve this
Agreement and the consummation of the Transactions. The Company
Charter and Company Bylaws are the Company’s only
organizational documents, and there are no other Contracts defining
or governing the rights of the holders of any Company Capital Stock
or any of its other equity holders in their capacities as such,
and, to the knowledge of the Company, there are no Contracts
between or among the holders of Company Capital Stock defining or
governing the rights of the Company Capital Stock, as applicable.
The Company Board has (i) determined that this Agreement and
the Transactions are advisable and fair to and in the best
interests of the Company’s stockholders, and
(ii) resolved, subject to Section 6.3(c), to recommend
that the Company’s stockholders adopt this Agreement and
approve the Transactions. This Agreement has been duly and validly
executed and delivered by the Company and Merger Sub and, assuming
this Agreement constitutes the valid and binding agreement of BCHI
and the due authorization, execution and delivery of this Agreement
by BCHI, constitutes the valid and binding agreement of each of the
Company and Merger Sub, enforceable against the Company and Merger
Sub in accordance with its terms, except as such enforceability
(A) may be limited by bankruptcy, insolvency, fraudulent
conveyance, reorganization, moratorium or other similar Laws
affecting or relating to enforcement of creditors’ rights
generally and (B) is subject to general principles of equity
(regardless of whether enforceability is considered in a proceeding
at Law or in equity).
(b) Neither the
execution and delivery of this Agreement by the Company or Merger
Sub nor the consummation of the Transactions, nor compliance by the
Company or Merger Sub with any of the terms or provisions of this
Agreement, will (i) violate any provision of the certificate
of incorporation or bylaws or other equivalent organizational
document, in each case, as amended, of the Company or any of the
Company Subsidiaries or (ii) assuming that the consents,
approvals and filings referred to in Section 3.4 are duly obtained
and/or made, (A) violate any Law or Order applicable to the
Company, any of the Company Subsidiaries or any of their respective
material properties or assets, or any material Permit of the
Company or a Company Subsidiary or by which any of the material
assets of the Company or a Company Subsidiary are bound or subject,
or (B) violate, conflict with, result in a breach of any provision
of or the loss of any benefit under, constitute a default (or an
event which, with notice or lapse of time, or both, would
constitute a default) under, result in the termination of or a
right of termination or cancellation under, accelerate the
performance required by, require the consent of or notice to any
Person under, or result in the creation of any Lien (other than a
Permitted Lien) upon any of the respective properties or assets of
the Company or any of the Company Subsidiaries under, any Company
Material Contract.
Section
3.4 Consents
and Approvals. Except for
(a) the filing of the Certificate of Merger with the Secretary
of State of the State of Delaware pursuant to the Act, (b) the
filing of an amendment to the Company Charter to effect the Reverse
Split, (b) compliance with any applicable requirements of the
HSR Act and any other Laws analogous to the HSR Act existing in
foreign jurisdictions (together with the HSR Act,
“Antitrust
Laws”), (c) the filing with the SEC of a proxy
statement relating to the Stockholders Meeting (the
“Proxy
Statement”), and filings required by the applicable
requirements of the Securities Act or Exchange Act, (d) such
filings with and approvals of The NASDAQ Stock Market, LLC
(“NASDAQ”) to permit the
shares of Company Common Stock that are to be issued in the Merger
to be listed and issued on NASDAQ, (e) receipt of such consents
from, or registrations, declarations, notices or filings made to or
with State PSCs as are required in order to effect the transfer of
control of the Company Licenses or as are otherwise necessary to
consummate the Merger and other Transactions, including the
Financing (the “Company State
Approvals”), and (f) receipt of such consents from, or
registrations, declarations, notices or filings made to or with the
FCC as are required to in order to effect the transfer of control
of the Company Licenses or as are otherwise necessary to consummate
the Transactions, including the Financing (the “Company FCC Approval”),
no consents or approvals of or filings or registrations with or
notifications to any Governmental Entity are necessary in
connection with (i) the execution and delivery by the Company or
Merger Sub of this Agreement and (ii) the consummation by the
Company or Merger Sub of the Transactions except as would not
reasonably be expected to have, individually or in the aggregate, a
Company Material Adverse Effect.
Section
3.5 Reports.
(a) Except as set forth
on Section 3.5(a)
of the Company Disclosure Letter, the Company has filed with or
furnished to the SEC, on a timely basis, all registration
statements, reports, forms, documents and proxy statements required
(pursuant to applicable Law or Contract) to be filed or furnished,
as applicable, since June 30, 2014, excluding the Proxy Statement
(collectively, and in each case including all exhibits and
schedules thereto and documents incorporated by reference therein,
as such statements and reports may have been amended since the date
of their filing, the “Company Reports”). As of
their respective effective dates (in the case of Company Reports
that are registration statements filed pursuant to the requirements
of the Securities Act) and as of their respective filing or
furnished dates, as applicable (in the case of all other Company
Reports), or in the case of amendments thereto, as of the most
recent such amendment, the Company Reports complied in all material
respects with the requirements of the Securities Act, the Exchange
Act and SOX, as the case may be, and the rules and regulations of
the SEC thereunder, applicable to such Company Reports, in each
case to the extent in effect on the date of filing, and none of the
Company Reports as of such respective dates (or, if amended, the
date of the filing or furnishing, as applicable, of such amendment,
with respect to the disclosures that are amended) contained any
untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they
were made, not misleading, except to the extent corrected by a
subsequently filed Company Report filed with the SEC prior to the
date hereof.
(b) Each of the
principal executive officer of the Company and the principal
financial officer of the Company (or each former principal
executive officer of the Company and each former principal
financial officer of the Company, as applicable) has made all
applicable certifications required by Rule 13a-14 or 15d-14 under
the Exchange Act and Sections 302 and 906 of SOX with respect to
the Company Reports, and, to the knowledge of the Company, the
statements contained in such certifications are true and accurate.
For purposes of this Agreement, “principal executive
officer” and “principal financial officer” have
the meanings ascribed to such terms in SOX. Neither the Company nor
any of the Company Subsidiaries has outstanding, or has since June
30, 2014 arranged any outstanding, “extensions of
credit” to or for directors or executive officers of the
Company in violation of Section 402 of SOX.
(c) The Company
maintains a system of “internal control over financial
reporting” (as defined in Rules 13a-15(f) and 15d-15(f) of
the Exchange Act) sufficient to provide reasonable assurance
(i) that transactions are recorded as necessary to permit
preparation of financial statements in conformity with GAAP,
consistently applied, (ii) that receipts and expenditures are
made only in accordance with the authorizations of management and
directors and (iii) regarding prevention or timely detection
of the unauthorized acquisition, use or disposition of the
Company’s assets that could have a material effect on the
Company’s financial statements.
(d) The
“disclosure controls and procedures” (as defined in
Rules 13a-15(e) and 15d-15(e) of the Exchange Act) utilized by the
Company are reasonably designed to ensure that all material
information required to be disclosed by the Company in the reports
that it files or submits under the Exchange Act is recorded,
processed, summarized and reported within the time periods
specified in the rules and forms of the SEC, and that all such
information required to be disclosed is accumulated and
communicated to the Company’s management as appropriate to
allow timely decisions regarding required disclosure and to enable
the principal executive officer and principal financial officer of
the Company to make the certifications required under the Exchange
Act with respect to such reports.
(e) Since June 30,
2014, the Company has not identified, and is not aware of, any
(i) “significant deficiency” or
(ii) “material weakness” in the design or
operation of the Company’s internal controls over financial
reporting. For purposes of this Agreement, the terms
“significant deficiency” and “material
weakness” have the meanings assigned to them in Release
2004-001 of the Public Company Accounting Oversight Board, as in
effect on the date of this Agreement.
(f) None of the Company
Subsidiaries is, or at any time since June 30, 2014 has been, subject to
the reporting requirements of Sections 13(a) or 15(d) of the
Exchange Act.
Section
3.6 Financial
Statements; Liabilities.
(a) The consolidated
financial statements of the Company and the Company Subsidiaries
(including in each case, any related notes and schedules thereto,
where applicable) included in the Company Reports (collectively,
the “Company
Financial Statements”), fairly present in all material
respects the consolidated financial position of the Company and the
Company Subsidiaries as of the date thereof, and fairly present in
all material respects the results of the consolidated operations,
changes in stockholders’ equity, cash flows and consolidated
financial position of the Company and the consolidated Company
Subsidiaries for the respective fiscal periods or as of the date
therein set forth, except the Company Financial Statements are
subject, in the case of unaudited statements, to normal year-end
audit adjustments as permitted by GAAP and the applicable rules and
regulations of the SEC. Each of the Company Financial Statements
(including the related notes and schedules thereto, where
applicable), as of their respective dates, complied in all material
respects with applicable accounting requirements and with the
published rules and regulations of the SEC with respect thereto and
each of such statements (including the related notes and schedules
thereto, where applicable) and have been prepared, in all material
respects, in accordance with GAAP consistently applied during the
periods involved, except as indicated in such statements or in the
notes thereto and, in the case of unaudited interim financial
statements as may be permitted by the SEC for Quarterly Reports of
Form 10-Q.
(b) The interim
consolidated financial statements of the Company and the Company
Subsidiaries for the six months ended June 30, 2017 (collectively
the “Interim Company
Financial Statements”), fairly present in all material
respects the consolidated financial position of the Company and the
Company Subsidiaries as of the date thereof, and fairly present in
all material respects the results of the consolidated operations,
changes in stockholders’ equity, cash flows and consolidated
financial position of the Company and the consolidated Company
Subsidiaries for the respective fiscal periods or as of the date
therein set forth, except the Interim Company Financial Statements
are subject to normal year-end audit adjustments as permitted by
GAAP and the applicable rules and regulations of the SEC. The
Interim Company Financial Statements have been prepared, in all
material respects, in accordance with GAAP consistently applied,
except as indicated in such statements or in the notes
thereto.
(c) Except for (i)
those liabilities and obligations that are in their respective
amounts reflected or reserved against on the June 30, 2017
consolidated balance sheet of the Company and the Company
Subsidiaries included in the Company Financial Statements or
readily apparent in the notes thereto or (ii) liabilities or
obligations incurred in the ordinary course of business consistent
with past practice since the date of such balance sheet that are
immaterial in amount, neither the Company nor any of the Company
Subsidiaries have any liability or obligation of any nature
whatsoever (whether absolute, accrued, contingent or otherwise and
whether due or to become due and including any off-balance sheet
financings, loans, indebtedness, make whole or similar liabilities
or obligations) of a type required to be reflected or reserved for
on a consolidated balance sheet of the Company and the Company
Subsidiaries prepared in accordance with GAAP, except for
liabilities or obligations that would not reasonably be expected to
have a Company Material Adverse Effect.
Section
3.7 Absence
of Company Material Adverse Effect. Since January 1,
2017 through the date of this Agreement, no event or events have
occurred that have had or would reasonably be expected to have,
individually or in the aggregate, a Company Material Adverse
Effect.
Section
3.8 Legal
Proceedings.
(a) Except as set forth
in Section 3.8(a)
of the Company Disclosure Letter, neither the Company nor any of
the Company Subsidiaries is a party to any, and there are no
pending or, to the Knowledge of the Company, threatened (in
writing), legal, administrative, arbitral or other proceedings,
claims, actions, suits or governmental or regulatory investigations
of any nature (each, an “Action”), against the
Company or any of the Company Subsidiaries which would, if decided
adversely to the Company or any Company Subsidiary, prohibit the
Transactions or reasonably be expected to result in a material
liability or obligation of, or otherwise be materially adverse to,
the Company or a Company Subsidiary.
(b) There is no
outstanding material Order imposed upon the Company, any of the
Company Subsidiaries or the assets of the Company or any of the
Company Subsidiaries.
Section
3.9 Taxes
and Tax Returns. Each of the
Company and the Company Subsidiaries has duly and timely filed all
federal, state, foreign and local Tax Returns required to be filed
by any of them (all such returns being accurate and complete in all
material respects) and has duly and timely paid all Taxes (whether
or not such Taxes were shown as due and payable on such Tax
Returns) other than Taxes that are not yet delinquent or that are
being contested in good faith, have not been finally determined and
have been adequately reserved against. Any liability with respect
to deficiencies asserted as a result of any audit, examination or
similar proceeding of the Company or any Company Subsidiary Tax
Return by the IRS or any other taxing authority has been paid or is
covered by adequate reserves in accordance with GAAP in the Company
Financial Statements. There are no disputes pending, or claims
asserted in writing, for Taxes or assessments upon the Company or
any of the Company Subsidiaries, other than disputes, claims and
assessments that are not material to the Company and the Company
Subsidiaries either individually or in the aggregate. Neither the
Company nor any of the Company Subsidiaries is a party to or is
bound by any Tax sharing, allocation or indemnification agreement
or arrangement (other than such an agreement or arrangement
exclusively between or among the Company and the Company
Subsidiaries). Neither the Company nor any of the Company
Subsidiaries has agreed to or granted any extension or waiver of
the limitation period applicable to any Taxes or Tax Returns.
Neither the Company nor any of the Company Subsidiaries has
distributed the stock of any corporation, or had its stock
distributed, in a transaction described in or intended to satisfy
the requirements of Section 355 of the Code within the past three
(3) years. Each of the Company and the Company Subsidiaries has in
all material respects properly and timely withheld or collected and
timely paid over to the appropriate taxing authority (or each is
properly holding for such timely payment) all Taxes required to be
withheld, collected and paid over by applicable Law. There are no
Liens for Taxes upon any asset of the Company or any Company
Subsidiary other than Permitted Liens (within the meaning of clause
(c) of such term). Neither the Company nor any of the Company
Subsidiaries is a party to or bound by any advance pricing
agreement, closing agreement or other similar material agreement or
ruling relating to Taxes nor are there any pending requests for
such rulings or similar agreements by or before a taxing authority.
Neither the Company nor any of the Company Subsidiaries will be
required to include any item of income in, or exclude any item of
deduction from, taxable income for any period (or any portion
thereof) ending after the Closing Date, as a result of any: (i)
change in method of accounting for a Tax period ending on or before
the Closing Date, including under Section 481(a) of the Code or any
similar provision of applicable Law; (ii) installment sale or other
open transaction disposition made on or prior to the Closing Date;
(iii) prepaid amount received on or prior to the Closing Date; (iv)
closing agreement described in Section 7121 of the Code or any
similar provision of applicable Law executed on or prior to the
Closing Date; (v) intercompany transaction or excess loss account
described in Treasury Regulations Section 1.1502 (or any similar
provision of applicable Law); or (vi) indebtedness discharged in
connection with any election under Section 108(i) of the Code.
Other than the affiliated group of which the Company is the common
parent, neither the Company nor any of the Company Subsidiaries has
any liability under Treasury Regulations Section 1.1502-6 or any
similar provision of applicable Law, as a transferee or successor,
as a result of any contractual obligation, or otherwise for any
Taxes of any other Person. Neither the Company nor any of the
Company Subsidiaries has obtained any consent or clearance from or
entered into any settlement or arrangement with any taxing
authority that would be binding on the Surviving Company or any of
its Affiliates or result in a material Tax liability for the
Surviving Company or any of its Affiliates for any Tax period (or
portion thereof) ending after the Closing Date. Neither the Company
nor any of the Company Subsidiaries has engaged in a
“reportable transaction,” as defined in Section
6707A(c)(1) of the Code or Treasury Regulations Section
1.6011-4(b), or any transaction requiring disclosure under a
similar provision of applicable Law. Within the past three (3)
years, no written claim or nexus inquiry has been made by a taxing
authority in a jurisdiction where the Company or any Company
Subsidiary does not file Tax Returns that any of them is or may be
subject to tax by that jurisdiction or that any of them has a duty
to collect Taxes.
Section
3.10 Employee
Benefit Plans; Labor.
(a) Except as set forth
in Section 3.10(a)
of the Company Disclosure Letter, none of the Company, any Company
Subsidiary, nor any Company Commonly Controlled Entity maintains or
contributes to (i) any nonqualified deferred compensation,
post-termination or retirement plans for employees, (ii) any
qualified “defined contribution plans” (as such term is
defined under Section 3(34) of ERISA (whether or not subject to
ERISA)), (iii) any other defined contribution pension plan in
the relevant country, state, province, territory or the like, (iv)
any “defined benefit plans” (as such term is defined
under Section 3(35) of ERISA (whether or not subject to ERISA)),
(v) any other defined benefit pension plan in the relevant country,
state, province, territory or the like (the plans set forth in
clauses (ii), (iii), (iv) and (v) are collectively referred to
herein as the “Company Pension Plans”),
(vi) any “employee welfare benefit plans” (as such
term is defined under Section 3(1) of ERISA, (vii) any other group
insurance benefit arrangements in the relevant country, state,
province, territory or the like (whether or not subject to ERISA)
(the “Company
Welfare Plans”), or (viii) any compensatory or
benefit plans or programs, or equity or equity-based award plans,
including written individual contracts, employee agreements, plans,
programs, or arrangements, whether funded or unfunded, written or
oral, that currently are, or within the past six (6) fiscal years
of the Company or any Company Subsidiary, as appropriate, have
been, maintained, contributed to or sponsored (or are or have been
required to be maintained, contributed to or sponsored) in whole or
in part, by any of the Company, the Company Subsidiaries and the
Company Commonly Controlled Entities, for the benefit of, providing
any remuneration or benefits to, or covering any current or former
employee or retiree, any dependent, spouse or other family member
or beneficiary of such employee or retiree, or any director,
independent contractor, member, officer, consultant of any of the
Company, the Company Subsidiaries and the Company Commonly
Controlled Entities, or under (or in connection with) which the
Company or any Company Subsidiary or any of the Company Commonly
Controlled Entities may have any liability (collectively clauses
(i) through
(viii) are referred
to as “Company
Benefit Plans”).
(b) Each Company
Pension Plan that is intended to meet the requirements of a
“qualified plan” under Sections 401(a) and 501(a) of
the Code has either received a favorable determination letter from
the IRS that such Company Pension Plan is so qualified or has
requested such a favorable determination letter within the remedial
amendment period of Section 401(b) of the Code, or in the case of a
Company Pension Plan that is maintained pursuant to the adoption of
a master, prototype, or volume submitter plan document, the sponsor
of such master or prototype or volume submitter plan document has
obtained from the National Office of the IRS an opinion or
notification letter stating that the form of the master, prototype
or volume submitter document is acceptable for the establishment of
a qualified retirement plan. Each Company Benefit Plan, including
any amendments thereto, that is eligible for approval by, and/or
registration for and/or qualification for special Tax status with,
the appropriate taxation, social security and/or supervisory
authorities in the relevant country, state, province, territory or
the like (each, an “Company Approval”) has
received such Company Approval, or there remains a period of time
in which to obtain such Company Approval retroactive to the date of
any amendment or change in Law that has not previously received
such Company Approval. The Company Benefit Plans comply in form and
in operation, and have been administered in all material respects
in compliance with their terms and with the requirements of, as
applicable, the Code, ERISA, the Patient Protection and Affordable
Care Act and all other applicable Laws, and none of the Company,
the Company Subsidiaries and its Company Commonly Controlled
Entities have received any notice from any Governmental Entity
questioning or challenging such compliance that has not been
resolved.
(c) To the knowledge of
the Company, there have been no non-exempt “prohibited
transactions” (as that term is defined in Section 406 of
ERISA or Section 4975 of the Code) involving any of the Company
Benefit Plans. Except as set forth in Section 3.10(c) of the
Company Disclosure Letter, none of the assets of any Company
Pension Plan or Company Welfare Plan trust is an “employer
security” (within the meaning of Section 407(d)(1) of ERISA)
or “employer real property” (within the meaning of
Section 407(d)(2) of ERISA).
(d) (i) Neither
the Company nor any other Person that, together with the Company or
any Company Subsidiary, is treated as a single employer under
Section 414(b), (c), (m) or (o) of the Code or any other applicable
Law (a “Company
Commonly Controlled Entity”) (A) has sponsored,
maintained or contributed to, or been obligated to maintain or
contribute to, or has any liability under, any Company Pension Plan
that is subject to Title IV of ERISA or Section 412 or Section 430
of the Code or is otherwise a defined benefit pension plan in the
relevant country, state, province, territory or the like, and
(B) has any unsatisfied liability imposed under Title IV of
ERISA, and (ii) all contributions (including all employer
contributions and employee salary reduction contributions) or
insurance premiums that are due have been paid with respect to each
Company Benefit Plan, and all contributions or insurance premiums
for any period ending on or before the Closing Date that are not
yet due have been paid with respect to each such Company Benefit
Plan or accrued, in each case in accordance with the past custom
and practice of the Company, and with applicable Law and
administrative agency regulations.
(e) Neither the Company
nor any Company Subsidiary has communicated a commitment (whether
orally or in writing, whether as part of the collective bargaining
process or not) generally to employees, any employee representation
body or specifically to any employee regarding (i) any future
increase of benefit levels (or creation of new benefits) with
respect to the Company Benefit Plans beyond those reflected in such
plans, or (ii) the adoption or creation of any new benefit
plan.
(f) None of the
Company, the Company Subsidiaries and the Company Commonly
Controlled Entities currently contributes to or has had any
liability or potential liability with respect to (i) any
“multiemployer plan” (as defined in Section 3(37) of
ERISA) or (ii) any multi-employer pension plans or multi-employer
benefit plans in the relevant country, state, province, territory
or the like, during the five (5)-year period ending as of the
Closing Date.
(g) Except as set forth
in Section 3.10(g)
of the Company Disclosure Letter, none of the Company Welfare Plans
obligates the Company or any Company Subsidiary to provide any
current employee or former employee of the Company or a Company
Subsidiary (or any dependent thereof) any life insurance or medical
or health benefits after his or her termination of employment with
the Company or any Company Subsidiary, other than as required under
COBRA or any similar state Law. All amounts required to be included
in the Company’s most recent financial statements in respect
of any Company Welfare Plan have been included.
(h) No Company Benefit
Plan (excluding for this purpose any individual employment
agreement or arrangement) has a provision, and no commitment
(whether oral or in writing) has been made, that restricts the
Company or Company Subsidiaries from amending or terminating such
Company Benefit Plan with respect to the accrual of future
benefits; except that the legal obligation to bargain over
mandatory subjects of bargaining under any Law will not be
considered such a restriction.
(i) Except as set forth
in Section 3.10(i)
of the Company Disclosure Letter, no amounts payable under any
Company Benefit Plan will fail to be deductible for federal income
tax purposes by virtue of Section 280G of the Code or will fail to
be deductible for tax purposes under any other applicable Law.
Except as set forth in Section 3.10(i) of the
Company Disclosure Letter, consummation of the Transactions will
not (i) entitle any current employee or former employee (or spouse,
dependent or other family member of such employee) of the Company
or Company Subsidiaries to severance pay, unemployment
compensation, or any payment contingent upon a change in control or
ownership of the Company or Company Subsidiaries, or
(ii) accelerate the time of payment or vesting, or increase
the amount, of any compensation due to any such current employee or
former employee (or any spouse, dependent, or family member of such
employee). Neither the Company nor any Company Subsidiary has any
obligation to provide, and no Company Benefit Plan or other
agreement provides any Person with any amount of additional
compensation or gross-up if such Person is provided with amounts
subject to excise or additional taxes, interest or penalties
incurred pursuant to Sections 4999 or 409A of the Code or due to
the failure of any payment to be deductible under Section 280G of
the Code.
(j) (i) Each Company
Benefit Plan that is a “nonqualified deferred compensation
plan” (within the meaning of Section 409A(d)(1) of the Code)
subject to Section 409A of the Code is and has been, during the
five years prior to the date hereof, in all material respects in
documentary and operational compliance with Section 409A of the
Code and any guidance issued with respect thereto and (ii) no
Company Option is considered to be a non-qualified deferred
compensation arrangement subject to Section 409A of the
Code.
(k) The Company and the
Company Subsidiaries have correctly classified Persons engaged as
consultants or independent contractors for employment purposes and
have correctly administered Section 414(n) of the Code with respect
to the Company Pension Plans.
(l) The Company has
complied in all material respects with all Laws concerning
employment rights and obligations. Section 3.10(l) of the Company
Disclosure Letter lists each collective bargaining agreement to
which the Company or a Company Subsidiary is a party in respect of
the employees of the Company or a Company Subsidiary on the date of
this Agreement, and any membership of the Company or a Company
Subsidiary in any employers’ organization which is entitled
to conclude a collective bargaining agreement on behalf of its
member companies, and any collective bargaining agreement which,
although the Company or Company Subsidiary is not a party to it,
applies due to standard reference in employment agreements or by
state decree as a generally applicable collective bargaining
agreement. No collective bargaining agreement or shop agreement is
being negotiated or renegotiated in any material respect by the
Company or any of the Company Subsidiaries. There is no labor
dispute, work stoppage, slow down or strike against the Company or
any of the Company Subsidiaries pending or, to the knowledge of the
Company, threatened which would interfere with the respective
business activities of the Company or any of the Company
Subsidiaries (and no work stoppages, slow downs, labor disputes or
strikes occurred during the last five years). As of the date of
this Agreement, to the knowledge of the Company, neither the
Company nor any of the Company Subsidiaries has committed during
the three years prior to the date hereof any unfair labor practice
in connection with the operation of the respective businesses of
the Company or any of the Company Subsidiaries, and there is no
charge or complaint against the Company or any of the Company
Subsidiaries by the National Labor Relations Board or any
comparable Governmental Entity or in relation to any labor rules
and regulations or any other competent labor authority pending or
threatened in writing.
(m) Section 3.10(m) of the Company
Disclosure Letter sets forth a true and complete list of all
material (i) severance or employment agreements with
directors, officers, employees, or consultants of the Company or
any Company Subsidiary, (ii) severance programs of the Company
or any Company Subsidiary with or relating to its employees, or
(iii) plans, programs or other agreements of the Company or
any Company Subsidiary with or relating to its directors, officers,
employees or consultants which contain change in control
provisions.
(n) Except as set forth
in Section 3.10(n)
of the Company Disclosure Letter, there are no unresolved claims or
disputes under the terms of, or in connection with, the Company
Benefit Plans (other than routine undisputed claims for benefits
under the Company Benefit Plans or other immaterial claims or
disputes that are being handled in the normal course of plan
administration), and no action, legal or otherwise, has been
commenced with respect to any claim (including claims for benefits
under Company Benefit Plans). To the knowledge of the Company, no
facts exist which could give rise to any actions, audits, suits or
claims (other than in the ordinary course).
(o) No Company Benefit
Plan is or at any time was funded through a “welfare benefit
fund,” as defined in Section 419(e) of the Code, and no
benefits under any Company Benefit Plan are or at any time have
been provided through a “voluntary employees’
beneficiary association” (within the meaning of Section
501(c)(9) of the Code) or a “supplemental unemployment
benefit plan” (within the meaning of Section 501(c)(17) of
the Code).
Section
3.11 Compliance
with Law.
(a) The Company and
each of the Company Subsidiaries is, and at all times during the
five (5) years prior to the date hereof, have been in compliance in
all material respects with all Laws and Orders applicable to the
Company or any of the Company Subsidiaries or by which any property
or asset of the Company or any Company Subsidiary is bound. To the
knowledge of the Company, no investigation by any Governmental
Entity with respect to the Company or any Company Subsidiary is
pending, nor has any Governmental Entity indicated to the Company
an intention to conduct any such investigation with respect to,
either individually or in the aggregate, material matters or
material liabilities.
(b) None of the Company
or any of the Company Subsidiaries has received any notice of any
alleged violation of any Laws that remains unresolved or
outstanding, except where any such notice, individually or in the
aggregate, would not reasonably be expected to have a Company
Material Adverse Effect.
Section
3.12 Environmental
Matters. Except as
disclosed in Section
3.12 of the Company Disclosure Letter, the Company and each
of the Company Subsidiaries is, and at all times has been, in
compliance in all material respects with all Environmental Laws.
The Company and the Company Subsidiaries hold all Permits required
under applicable Environmental Laws to permit the Company and the
Company Subsidiaries to conduct their businesses as currently
conducted. The business and operations of the Company and the
Company Subsidiaries are in compliance with all such Permits. No
notice of violation, notification of liability, demand, request for
information, citation, summons or order has been received by the
Company or any Company Subsidiary, no complaint has been filed, no
penalty or fine has been assessed, and no investigation, action,
claim, suit or proceeding is pending or, to the knowledge of the
Company, threatened by any Person involving the Company or any
Company Subsidiary relating to or arising out of any Environmental
Law. No Hazardous Substances are or were located and no disposal or
Releases of Hazardous Substances have occurred at, on, above, under
or from any properties currently or, to the knowledge of the
Company at the time of the cessation of such ownership, lease,
operation or use, formerly owned, leased, operated or used by the
Company, any Company Subsidiary or any predecessors in interest
that, in each case, has resulted in or would reasonably be expected
to result in any material cost, liability or obligation of the
Company or any Company Subsidiary under any Environmental Law.
Neither the Company nor any Company Subsidiary, nor, to the
knowledge of the Company, any other Person, has caused or taken any
action that could reasonably be expected to result in any material
liability or obligation relating to (i) the environmental
conditions at, on, above, under, or about any properties or assets
currently or formerly owned, leased, operated or used by the
Company or any of their respective predecessors in interest or (ii)
the past or present use, management, handling, transport,
treatment, generation, storage, disposal, Release or threatened
Release of Hazardous Substances. The Company has provided to BCHI
all material environmental site assessments, audits, investigations
and studies in their possession, custody or control relating to
property or assets currently or formerly owned, leased, operated or
used by the Company or any Company Subsidiary. Neither the Company
nor any Company Subsidiary has been in business other than those
related to the provision of communication services that would
reasonably be expected to present environmental issues of a
materially different scope or magnitude than those presented in the
provision of communication services. Without limiting the
generality of the foregoing, neither the Company nor any Company
Subsidiary has operated or currently operates (i) any manufacturing
facilities, (ii) any facilities that are or have been permitted
under the Resource Conservation and Recovery Act or (iii) any
business that manages the hazardous wastes of any unrelated party.
The representations contained in the immediately prior sentence of
this Section 3.12
shall not be deemed to be breached unless the operation or
ownership of such other business or businesses has resulted in any
material cost, liability or obligation of the Company or any
Company Subsidiary under any Environmental Law.
Section
3.13 Material
Contracts.
(a) Except for
Contracts listed in Section 3.13(a) of the Company
Disclosure Letter (all Contracts set forth, or required to be set
forth, in Section
3.13(a) of the Company Disclosure Letter being referred to
herein as a “Company
Material Contract”), as of the date of this Agreement,
neither the Company nor any of the Company Subsidiaries is a party
to or bound by any Contract that is:
(i) a “material
contract” required to be filed as an exhibit to the
Company’s annual report on Form 10-K pursuant to Item
601(b)(10) of Regulation S-K of the SEC
(ii) a
“non-compete,” or similar Contract that restricts or
purports to restrict the geographic area in which the Company or
any of the Company Subsidiaries may conduct any line of business,
or that requires the referral of business opportunities by the
Company or any of the Company Subsidiaries;
(iii) a
joint venture, partnership or limited liability company Contract or
other similar Contract relating to the formation, creation,
operation, management or control of any joint venture, partnership
or limited liability company, other than any such Contract solely
between or among the Company and the Company
Subsidiaries;
(iv) a
Contract (other than a future contract, option contract or other
derivative transaction) that involves future expenditures by the
Company or any Company Subsidiary of more than $2,500,000 in any
one year period that cannot be terminated on less than 90
days’ notice without material payment or
penalty;
(v) an acquisition
Contract that contains “earn-out” or other contingent
payment obligations that could reasonably be expected to result in
future payments by the Company or a Company Subsidiary in excess of
$2,500,000;
(vi) a
Contract relating to indebtedness for borrowed money or any
financial guaranty involving an amount in excess of
$2,500,000;
(vii) a
Contract for the lease or sublease of real property material to the
business of the Company and the Company Subsidiaries;
(viii) a
Contract pursuant to which the Company or any Company Subsidiary
(A) is granted or obtains any right to use any material
Intellectual Property (excluding standard form Contracts granting
rights to use readily available shrink wrap or click wrap software
having an acquisition price of less than $100,000 per Contract),
(B) is restricted in its right to use or register any material
Company Intellectual Property, or (C) permits any other Person to
use, enforce, or register any material Company Intellectual
Property, in each case including any license agreements,
coexistence agreements, and covenants not to sue;
(ix) a
Contract relating to (A) the sale, outbound license or outbound
lease by the Company or any Company Subsidiary of any material
indefeasible rights of use of capacity infrastructure or peering
arrangements or (B) the purchase, inbound license or inbound lease
by the Company or any Company Subsidiary of any material
indefeasible rights of use of capacity infrastructure or peering
arrangements;
(x) a collective
bargaining agreement; or
(xi) a
Contract with material outstanding liabilities or obligations
relating to the disposition or acquisition by the Company or any
Company Subsidiary of assets or properties in excess of $2,500,000
not made in the ordinary course of business; or
(xii) any
employment, severance, consulting or other Contract with an
employee or former employee, officer or director of the Company or
any Company Subsidiary which will require the payment of amounts by
the Company or any Company Subsidiary in excess of $150,000 per
annum.
(b) Neither the Company
nor any Company Subsidiary is in breach of or default under the
terms of any Company Material Contract in any material respect. To
the knowledge of the Company, no other party to any Company
Material Contract is in breach of or default under the terms of any
Company Material Contract in any material respect. Each Company
Material Contract is a valid and binding obligation of the Company
or any Company Subsidiary that is a party thereto and, to the
knowledge of the Company, is in full force and effect, subject to
(A) bankruptcy, insolvency, fraudulent conveyance, reorganization,
moratorium or other similar Laws affecting or relating to
enforcement of creditors’ rights generally and (B) general
principles of equity (regardless of whether enforceability is
considered in a proceeding at Law or in equity). True, correct and
complete copies of each Company Material Contract (including all
modifications and amendments thereto and waivers thereunder) have
been made available to BCHI.
Section
3.14 Intellectual
Property; Data Privacy.
(a) Either the Company
or a Company Subsidiary owns, and has all right, title, and
interest in, duly licenses, or otherwise possesses all rights
necessary to use, all Intellectual Property used in their
respective businesses as currently conducted (collectively, the
“Company
Intellectual Property”).
(b) Section 3.14(b)(i) of the
Company Disclosure Letter sets forth all Company Registered
Intellectual Property. All required filings and fees related to
such Company Registered Intellectual Property have been timely
filed with and paid to the relevant Governmental Entities and
authorized registrars. Section 3.14(b)(ii) of the
Company Disclosure Letter sets forth all Intellectual Property
owned or purported to be owned by the Company or any Company
Subsidiary that is not Company Registered Intellectual Property and
which is material to the businesses of the Company and Company
Subsidiaries as currently conducted (collectively, together with
the Company Registered Intellectual Property, the
“Company Owned
Intellectual Property”).
(c) There are no
pending or, to the knowledge of the Company, threatened claims in
writing by any Person alleging infringement or misappropriation by
the Company or any Company Subsidiary arising from their use of the
Company Intellectual Property, and to the knowledge of the Company,
the conduct of the businesses of the Company and Company
Subsidiaries and their products and services do not infringe,
misappropriate, dilute or otherwise violate any Intellectual
Property rights of any Person.
(d) Neither the Company
nor any Company Subsidiary has made any claim during the past three
(3) years of any misappropriation or infringement by any third
party of its rights to or in connection with the use of any Company
Intellectual Property; and (ii) to the knowledge of the
Company, no Person is infringing or misappropriating any Company
Intellectual Property.
(e) The Company and the
Company Subsidiaries have taken reasonable measures to protect the
confidentiality of their material Trade Secrets including requiring
employees, contractors and other Persons having access thereto to
execute written nondisclosure agreements. To the knowledge of the
Company, none of the material Trade Secrets of the Company and the
Company Subsidiaries have been disclosed or authorized to be
disclosed by the Company or the Company Subsidiaries to any third
party other than pursuant to a valid and enforceable nondisclosure
agreement. To the knowledge of the Company, no third party to any
nondisclosure agreement with the Company or any Company Subsidiary
is in material breach, violation or default.
(f) Each Person who
contributed, developed or conceived any Company Owned Intellectual
Property has done so pursuant to a valid and enforceable written
agreement that (i) protects the confidential information disclosed
by the Company and its Subsidiaries and (ii) grants the Company and
its Subsidiaries exclusive ownership of the Person’s
contribution, development or conception and waives any
non-assignable interests in such contribution, development or
conception, such as moral rights.
(g) During the three
(3) years prior to the date hereof, to the knowledge of the
Company, there has been no act or omission in respect of the use or
enforcement of the Company Owned Intellectual Property that would
reasonably be expected to result in the abandonment, cancellation
or unenforceability of any such Intellectual Property.
(h) No source code for
any Company Proprietary Software has been delivered, licensed, or
made available to any escrow agent or other Person who is not an
employee of the Company or a Company Subsidiary. Neither the
Company nor any Company Subsidiary has any duty or obligation to
deliver, license, or make available the source code for any Company
Proprietary Software to any escrow agent or other Person who is not
an employee of the Company or any Company Subsidiary.
(i) No Company
Proprietary Software is subject to any “copyleft” or
other obligation or condition (including any obligation or
condition under any “open source” license such as the
GNU Public License, Lesser GNU Public License, or Mozilla Public
License) that has been or is used in the businesses of the Company
and its Subsidiaries in a manner that would (i) require or
condition the use or distribution of such Company Proprietary
Software on the disclosure, licensing, or distribution of any
source code for any portion of such Company Proprietary Software or
(ii) otherwise impose any limitation, restriction, or condition on
the right or ability of the Company or any Company Subsidiary to
use or distribute any Company Proprietary Software.
(j) The Company
Proprietary Software does not contain any program routine, device,
code or instructions (including any code or instructions provided
by third parties) or other undisclosed feature, including, without
limitation, a time bomb, virus, lock-out device, drop-dead device,
malicious logic, worm, Trojan horse, bug, error, defect or trap
door, that is designed to access, modify, delete, damage, disable,
deactivate, interfere with, or otherwise harm the Company
Proprietary Software or any of the Company’s information
technology systems, data or other electronically stored
information, or computer programs or systems.
(k) The Company and the
Company Subsidiaries, and to the knowledge of the Company all of
its and their providers of information technology services, have
(i) complied in all material respects with their respective
published privacy policies and internal privacy policies and
guidelines and all applicable Laws relating to privacy, data
protection, user data or Personal Data, including Personal Data of
customers, employees, contractors and third parties who have
provided information to the Company or any Company Subsidiary; and
(ii) implemented and maintained, in all material respects, a
comprehensive security plan that includes industry standard
administrative, technical and physical safeguards to ensure that
Personal Data is protected against loss, damage, unauthorized
access, unauthorized use, unauthorized modification, or other
misuse. There has been no material loss, damage, unauthorized
access, unauthorized use, unauthorized modification, or other
breach of security of Personal Data maintained by or on behalf of
the Company and the Company Subsidiaries. Within the past three (3)
years, no Person has made any material claim or commenced any
Action with respect to, and the Company and the Company
Subsidiaries have not, to the knowledge of the Company, experienced
any incident relating to, any actual or suspected loss, damage,
unauthorized access, unauthorized use, unauthorized modification,
or breach of security of Personal Data maintained or processed by
or on behalf of the Company and the Company Subsidiaries. Except
for disclosures of information permitted or required by privacy
Laws or authorized by the provider of Personal Data, to the
knowledge of the Company, neither the Company nor any of the
Company Subsidiaries has shared, sold, rented or otherwise made
available, and does not share, sell, rent or otherwise make
available, to third parties any Personal Data.
(l) The Company and the
Company Subsidiaries have implemented business continuity and
disaster recovery plans and have arranged for back-up data
processing services adequate to meet their data processing needs in
the event that the computer systems, networks, hardware, software,
databases, websites, and equipment of the Company or the Company
Subsidiaries or any of their material components is rendered
temporarily or permanently inoperative as a result of a natural or
other disaster. The computer systems, networks, hardware, software,
databases, websites, and equipment of the Company or the Company
Subsidiaries have not suffered any failures, errors or breakdowns
within the past three years that have caused any material
disruption or interruption in the business of the Company and the
Company Subsidiaries. The computer systems, networks, hardware,
software, databases, websites, and equipment of the Company or the
Company Subsidiaries have not suffered any failures, errors or
breakdowns within the past three (3) years that have caused any
material disruption or interruption in the business of the Company
or the Company Subsidiaries
Section
3.15 Title
to Properties; Assets. The Company and
each of the Company Subsidiaries have good and valid fee simple
title to, or valid leasehold interest in, its material tangible
properties and assets, except for such properties and assets as are
no longer used or useful in the conduct of its business or as have
been disposed of in the ordinary course of business. All such
material tangible properties and assets, other than properties and
assets in which the Company or any Company Subsidiary have a
leasehold interest, are free and clear of all Liens other than
Permitted Liens or Liens that will be released at
Closing.
Section
3.16 Real
Property. Section 3.16 of the Company
Disclosure Letter sets forth a list of all real property currently
owned or leased by the Company or any Company Subsidiaries and
indicates whether each such parcel of real property is owned or
leased. The Company or one of the Company Subsidiaries has good and
fee simple title to all real property owned by the Company or any
of the Company Subsidiaries as of the date of this Agreement (the
“Company Owned Real
Property”) and valid leasehold estates in all real
property leased or subleased (whether as tenant or subtenant) by
the Company or any of the Company Subsidiaries as of the date of
this Agreement (including improvements thereon, the
“Company Leased Real
Property”), in each case, free and clear of all Liens,
save only for Permitted Liens. Except as would not reasonably be
expected to have, individually or in the aggregate, a Company
Material Adverse Effect, the Company or one of the Company
Subsidiaries has exclusive possession of each Company Leased Real
Property and Company Owned Real Property, other than any use and
occupancy rights granted to third-party owners, tenants, guests,
hosts or licensees pursuant to agreements with respect to such real
property. There are no Contracts to sell, transfer or otherwise
dispose of any of the Company Owned Real Property or the Company
Leased Real Property, or to purchase or acquire any other interest
in real property.
Section
3.17 Regulatory
Matters.
(a) Except as set forth
on Section 3.17(a)
of the Company Disclosure Letter, and except with respect to
Permits required under applicable Environmental Laws (as to which
certain representations and warranties are made pursuant to
Section 3.12), the
Company and the Company Subsidiaries hold all Permits issued by the
FCC or the state public service or public utility commissions or
other similar state regulatory bodies (“State PSCs”), and all
other material regulatory Permits, including franchises, ordinances
and other agreements granting access to public rights of way,
issued or granted to the Company or any of the Company Subsidiaries
by a Governmental Entity (the “Company Licenses”) that
are required for the Company and each of the Company Subsidiaries
to conduct its business, as presently conducted in all material
respects.
(b) Each Company
License is in full force and effect and has not been suspended,
revoked, cancelled or adversely modified. No Company License is
subject to (i) any conditions or requirements that have not been
imposed generally upon licenses in the same service, unless such
conditions or requirements are set forth on the face of the
applicable authorization, or (ii) any pending proceeding by or
before any Governmental Entity, including the FCC or State PSCs to
suspend, revoke or cancel such Company License, or any judicial
review of a decision by any Governmental Entity, including the FCC
or State PSCs with respect thereto. To the knowledge of the
Company, there has not been any event, condition or circumstance
that would preclude any Company License from being renewed in the
ordinary course (to the extent that such Company License is
renewable by its terms).
(c) The licensee of
each Company License is in compliance in all material respects with
such Company License and has fulfilled and performed all of its
material obligations with respect thereto, including all reports,
notifications and applications required by any Law, including the
Communications Act of 1934 (the “Communications Act”) or
the rules, regulations, written policies and orders of the FCC
(together with the Communications Act, the “FCC Rules”) or similar
state telecommunications laws (the “State Telecommunications
Laws”) and the rules, regulations, written policies
and Orders of State PSCs (collectively with the State
Telecommunications Laws, the, “PSC Rules”), and the
payment of all regulatory fees and contributions, except as
permitted by applicable exemptions, waivers or similar concessions
or allowances. Without limiting the foregoing, the licensee of each
Company License is in material compliance with the applicable
requirements of the Federal and state Universal Service Fund
programs, the Federal Telecommunications Relay Service programs,
the Federal North American Numbering Plan Administration program,
the Federal Local Number Portability Administration program
(collectively, the “USF Programs”), the
Communications Assistance to Law Enforcement Act
(“CALEA”), and the
FCC’s regulations concerning treatment and protection of
Customer Proprietary Network Information (“CPNI”). All reports and
other submissions required in connection with the USF Programs,
CALEA, CPNI regulations, including contribution remittances, have
been timely filed in materially true, correct and complete form. To
the knowledge of the Company and the Company Subsidiaries, there
are no pending or threatened investigations, inquiries, audits,
examinations or other proceedings in connection with the
performance of the Company and the Company Subsidiaries of their
USF Programs, CALEA and CPNI obligations.
(d) Except as set forth
in Section 3.17(d)
of the Company Disclosure Letter, neither the Company nor any
Company Subsidiary has (i) implemented, or been alleged or found to
have implemented, an unauthorized change of an end user’s
carrier (“Slamming”) or (ii) placed
or been alleged or found to have placed an unauthorized charge on
customer billing (“Cramming”).
(e) Except as set forth
in Section 3.17(e)
of the Company Disclosure Letter, the Company and all Company
Subsidiaries have timely complied with any compensation,
restoration, reimbursement, reporting, or other obligations arising
in connection with public and private right-of-way access and pole
attachment agreements.
(f) Except as set forth
in Section 3.17(f)
of the Company Disclosure Letter, the Company and all Company
Subsidiaries have timely submitted all required international
traffic and circuit status reports in materially true, correct and
complete form.
(g) Except
as set forth in Section
3.17(g) of the Company Disclosure Letter, the licensee of
each Company License is in material compliance with the applicable
requirements of federal and state network outage reporting
(“NOR”)
requirements. All reports and other submissions required in
connection with federal and state NOR requirements have been timely
filed in materially true, correct and complete form. To the
knowledge of the Company and the Company Subsidiaries, there are no
pending or threatened investigations, inquiries, audits,
examinations or other proceedings in connection with the
performance of the Company and the Company Subsidiaries of their
NOR requirements.
(h) Except as set forth
in Section 3.17(h)
of the Company Disclosure Letter, the Company or a wholly owned
Subsidiary of the Company directly or indirectly owns all of the
Equity Interests and controls all of the voting power and
decision-making authority of each licensee of the Company Licenses.
No Company License, Order or other agreement, obtained from, issued
by or concluded with any State PSC would impose restrictions on the
ability of any Company Subsidiary to make payments, dividends or
other distributions to the Company or any Company Subsidiary that
limits, or would reasonably be expected to limit, the cash funding
and management alternatives of the Company on a consolidated basis
in a manner disproportionate to restrictions applied by other State
PSCs.
Section
3.18 Interconnection
Agreements. The Company or a
Company Subsidiary has entered into, with incumbent local exchange
carriers or other non-incumbent carriers, all interconnection
agreements, line sharing agreements, line splitting agreements and
other Contracts (the “Company Interconnection
Agreements”), that are necessary to conduct their
respective businesses as currently conducted. All Company
Interconnection Agreements entered into pursuant to Sections 251
and 252 of the Telecommunications Act of 1996 (the
“Telecommunications
Act”), including amendments to implement the
FCC’s Triennial Review Remand Order, to the extent such
amendments have been adopted, include the general terms, conditions
and pricing for any unbundled network elements (“UNEs”), collocation or
other network facilities or services provided under Sections 251
and 252 of the Telecommunications Act. All Company Interconnection
Agreements have been approved by the applicable Governmental
Entity, including the applicable State PSC, when required. The
Company and any Company Subsidiary, as applicable, that is a party
to a Company Interconnection Agreement has performed, in all
material respects, all material obligations required to be
performed by it under such Company Interconnection
Agreement.
Section
3.19 Network
Facilities. Except as set
forth in Section 3.19 of the
Company Disclosure Letter:
(a) All Company Owned
Network Facilities and Company Third-Party Network Facilities:
(i) are in all material respects in good working order and
condition and are without any material defects individually and in
the aggregate; (ii) are, individually and in the aggregate,
operated, installed, and maintained by the Company, a Company
Subsidiary, or their contractors in a manner that is in compliance
in all material respects with (x) generally accepted industry
standards for the United States or Canadian communications
industry, as applicable, (y) performance requirements in
service agreements with customers of the Company and the Company
Subsidiaries, and (z) all Laws, and (iii) comply,
individually and in the aggregate, in all material respects with
applicable performance standards.
(b) The Company or a
Company Subsidiary owns, free and clear of all Liens (other than
Permitted Liens and Liens to be discharged at Closing), all right,
title and interest in Company Owned Network Facilities. No third
party may revoke or otherwise encumber or interfere in any material
respect with such right, title, and interest.
(c) (i) Each
Contract under which any third party provides Network Facilities,
including leases, licenses, indefeasible rights of use of capacity
or infrastructure, pole attachment agreements and Right-of-Way
Agreements (a “Company Network Facility
Agreement”), to which the Company or any Company
Subsidiary is a party, is a valid, legally binding and enforceable
agreement and is in full force and effect, and neither the Company
nor any Company Subsidiary is in material breach of or material
default under any Company Network Facility Agreement, (ii) no
event has occurred which, with notice or lapse of time, would
constitute a material breach or material default by the Company or
any Company Subsidiary or permit termination, revocation, other
interference with performance of, modification or acceleration by
any third party of any Company Network Facility Agreement, and
(iii) as of the date hereof, no third party has repudiated,
revoked, terminated, or otherwise materially interfered with
performance of or has the right to terminate, repudiate, revoke, or
otherwise materially interfere with the performance of any Company
Network Facility Agreement. Any notices or other actions required
to be taken to renew the term of a Company Network Facility
Agreement for any upcoming renewal term have been taken or given in
the manner and within the time provided in such Company Network
Facility Agreement (or the time period provided for giving of such
notice or to undertake such action has not expired) to effectively
renew the term of such Company Network Facility Agreement for the
upcoming term thereof to the extent that such Company Network
Facility Agreement is renewable by its terms and the Company or the
applicable Company Subsidiary intends to renew such Company Network
Facility Agreement. To the knowledge of the Company, as of the date
of this Agreement, the Company and the Company Subsidiaries hold
all Company Network Facility Agreements necessary to conduct the
Company’s business and no event has occurred, or circumstance
exists, that, but for the passage of time or giving of notice,
would preclude any Company Network Facility Agreement from being
renewed in accordance with the terms thereof to the extent the
Company or the applicable Company Subsidiary intends to renew such
Company Network Facility Agreement.
Section
3.20 Insurance.
The Company and the Company Subsidiaries maintain insurance in such
amounts and against such risks as the Company believes to be
customary for the industries in which it and the Company
Subsidiaries operate. Neither the Company nor any of the Company
Subsidiaries has received notice of any pending or threatened
cancellation with respect to any such material insurance policy,
and each of the Company and the Company Subsidiaries is in
compliance in all material respects with all conditions contained
therein.
Section
3.21 Opinion.
Prior to the execution of this Agreement, the Company Board has
received an opinion of FTI Capital Advisors, LLC to the effect that
as of the date thereof and based upon and subject to the
assumptions, qualifications, limitations and matters set forth
therein, the Merger is fair to the holders of Company Common Stock
from a financial point of view. Such opinion has not been amended
or rescinded as of the date of this Agreement.
Section
3.22 Application
of Takeover Laws. Subject to the
accuracy of the representations and warranties in Section 4.23 (Share Ownership),
the Company and the Company Board have taken all necessary action,
if any, in order to render inapplicable to the Transactions any
restriction on business combinations contained in any applicable
Takeover Law which is or would reasonably be expected to become
applicable to BCHI, the Company or Merger Sub as a result of the
Transactions.
Section
3.23 Information
Supplied.
None of the information supplied or to be supplied by the Company
or a Company Subsidiary specifically for inclusion or incorporation
by reference in the Proxy Statement will, at the date it is first
mailed to the Company’s stockholders or at the time of the
Stockholders Meeting, contain any untrue statement of a material
fact or omit to state any material fact required to be stated
therein or necessary in order to make the statements therein, in
light of the circumstances under which they are made, not false or
misleading. Notwithstanding the foregoing sentence, no
representation or warranty is made by the Company with respect to
statements made or incorporated by reference therein based on or
derived from information supplied by BCHI specifically for
inclusion in the Proxy Statement. The information supplied by the
Company or a Company Subsidiary for inclusion or incorporation by
reference in the Proxy Statement will comply as to form in all
material respects with the requirements of the Exchange
Act.
Section
3.24 Affiliate
Transactions. Except as set
forth in Section
3.24 of the Company Disclosure Letter, there are not any
transactions, agreements, arrangements or understandings between
the Company or the Company Subsidiaries, on the one hand, and the
Company’s Affiliates (other than the Company Subsidiaries) or
other Persons, on the other hand, that would be required to be
disclosed under Item 404 of Regulation S-K under the Securities
Act.
Section
3.25 Broker’s
Fees. Except for FTI
Capital Advisors, LLC, no broker, finder or investment banker is
entitled to any brokerage, finder’s or other fee or
commission in connection with the Transactions based upon
arrangements made by or on behalf of the Company or any Company
Subsidiary.
Section
3.26 Directors
and Officers. Section 3.26 of the Company
Disclosure Letter sets forth a list of all officers, directors,
partners and/or managers of the Company and each of its
Subsidiaries as of the date hereof.
Section
3.27 No
Other Representations or Warranties. Except for the
representations and warranties expressly made by the Company in
this Article III,
neither the Company nor any other Person makes any representation
or warranty with respect to the Company or the Company Subsidiaries
or their respective business, operations, assets, liabilities,
condition (financial or otherwise) or prospects, notwithstanding
the delivery or disclosure to BCHI or any of its Affiliates or
Representatives of any documentation, forecasts or other
information with respect to any one or more of the
foregoing.
ARTICLE IV
REPRESENTATIONS
AND WARRANTIES OF BCHI
Except
as disclosed in the disclosure letter delivered by BCHI to the
Company immediately prior to the execution of this Agreement (it
being agreed that any information set forth in one section of such
disclosure letter will be deemed to apply to each other section
thereof to which its relevance as an exception to (or disclosure
for the purposes of) such other section is reasonably apparent)
(the “BCHI
Disclosure Letter”), BCHI represents and warrants to
the Company as follows:
Section
4.1 Corporate
Organization.
(a) BCHI is a
corporation duly organized, validly existing and in good standing
under the Laws of the State of Georgia. BCHI has the corporate
power and authority to own or lease all of its properties and
assets and to carry on its business as it is now being conducted,
and is duly licensed or qualified to do business in each
jurisdiction in which the nature of the business conducted by it or
the character or location of the properties and assets owned or
leased by it makes such licensing or qualification necessary,
except where the failure to have such power or authority or to be
so licensed or qualified would not reasonably be expected to have,
individually or in the aggregate, a BCHI Material Adverse
Effect.
(b) Copies of the
articles of incorporation of BCHI (the “BCHI Charter”), and the
bylaws of BCHI (the “BCHI Bylaws”), as in
effect as of the date of this Agreement, have previously been made
available to the Company.
(c) Section 4.1(c) of the BCHI
Disclosure Letter sets forth a list of each BCHI Subsidiary,
together with the jurisdiction of organization or incorporation, as
the case may be, and the jurisdictions in which each BCHI
Subsidiary is authorized to conduct business. Each BCHI Subsidiary
(i) is duly organized or formed, as the case may be, and validly
existing under the Laws of its jurisdiction of organization or
formation, (ii) is duly qualified to do business and in good
standing in all jurisdictions (whether federal, state, provincial,
territorial, local or foreign) where its ownership or leasing of
property or the conduct of its business requires it to be so
qualified, and (iii) has all the corporate or limited liability
company power and authority to own or lease its properties and
assets and to carry on its business as now conducted, in the case
of clauses (ii) and (iii), except as would not reasonably be
expected to have, individually or in the aggregate, a BCHI Material
Adverse Effect.
(d) Copies of the
articles of incorporation, notice of articles, or similar
organizational document, as applicable, of each BCHI Subsidiary, as
amended and restated, and the bylaws, or similar governing
document, as applicable, of each BCHI Subsidiary, as amended and
restated, as in effect as of the date of this Agreement, have
previously been made available to the Company.
Section
4.2 Capitalization.
(a) Section 4.2(a) of the BCHI
Disclosure Letter sets forth the authorized capital stock of BCHI
by class and the number of issued and outstanding shares of each
such class (collectively, the “BCHI Capital Stock”). No
shares of BCHI Capital Stock are held in BCHI’s treasury. All
of the issued and outstanding shares of BCHI Capital Stock have
been duly authorized and validly issued and are fully paid,
nonassessable and free of preemptive rights.
(b) There are no
stockholders agreements, voting trusts, voting agreements or other
similar agreements or understandings with respect to BCHI Capital
Stock to which BCHI is a party or, to the knowledge of BCHI,
between or among any of BCHI’s stockholders. Except as
contemplated under this Agreement, no Person has any outstanding
commitments, rights of first offer or refusal, anti-dilution
rights, preemptive rights, rights of participation or any similar
right to participate in the Transaction. Except as set forth in
Section 4.2(b)
of the BCHI Disclosure Letter, as of the date of this Agreement,
there are no outstanding subscriptions, options, warrants, scrip
rights to subscribe to, calls, restricted shares, phantom stock
rights, rights of first offer or refusal, rights to require
redemption or repurchase, preemptive rights, anti-dilution rights,
registration rights, rights of participation, commitments or other
agreements to which BCHI or any of BCHI Subsidiaries is a party
relating to, or securities, rights or obligations convertible into
or exercisable or exchangeable for, or giving any Person any right
to subscribe for or acquire any, Equity Securities or other
securities of BCHI or any of BCHI Subsidiaries, or Contracts,
commitments or understandings by which BCHI or any of BCHI
Subsidiaries is or may become bound to issue additional Equity
Securities or other securities of BCHI or BCHI
Subsidiaries.
(c) There are no bonds,
debentures, notes or other indebtedness having the right to vote on
any matters on which stockholders of BCHI may vote that are issued
or outstanding as of the date of this Agreement.
(d) All of the issued
and outstanding shares of capital stock or other equity ownership
interests of each BCHI Subsidiary are owned by BCHI, directly or
indirectly, free and clear of any Liens (other than transfer
restrictions under applicable federal, state, provincial or
territorial securities Laws and Liens that will be released at
Closing), and all of such shares or equity ownership interests are
duly authorized and validly issued and are fully paid,
nonassessable and free of preemptive rights. No BCHI Subsidiary has
or is bound by any outstanding subscriptions, options, warrants,
calls, commitments or agreements of any character calling for the
purchase or issuance of any shares of capital stock or any other
equity security of such BCHI Subsidiary or any securities
representing the right to purchase or otherwise receive any shares
of capital stock or any other equity security of such BCHI
Subsidiary. There are no outstanding obligations to which BCHI or
any BCHI Subsidiary is a party (i) restricting the transfer of or
(ii) limiting the exercise of voting rights with respect to any
Equity Interest in any BCHI Subsidiary. Except for the BCHI
Subsidiaries, neither BCHI nor any of the BCHI Subsidiaries
directly or indirectly owns any Equity Interest in any Person,
except for non-controlling investments made in the ordinary course
of business consistent with past practice in entities which are
not, individually or in the aggregate, material to BCHI and its
Subsidiaries taken as a whole. Section 4.2(d) of the BCHI
Disclosure Letter sets forth, for each BCHI Subsidiary, (i) the
number and type of any capital stock of, or other equity or voting
interests in, such BCHI Subsidiary that are outstanding as of the
date of this Agreement and (ii) the identity of each equity holder
of capital stock or other equity or other voting interest in such
BCHI Subsidiary and the number of shares or interests of such BCHI
Subsidiary held by each such holder as of the date of this
Agreement.
Section
4.3 Authority;
No Violation.
(a) BCHI has all
requisite corporate power and authority to enter into this
Agreement and to consummate the Transactions. The execution and
delivery of this Agreement and the consummation of the Transactions
have been duly and validly authorized by the Board of Directors of
BCHI, and this Agreement and the transactions contemplated hereby,
including the Merger, has been duly adopted and approved by the
holders of the BCHI capital stock, as required pursuant to the BCHI
Charter, the BCHI Bylaws and applicable Law. Except for the filing
of the Certificate of Merger with the Secretary of State of the
State of Georgia, no other corporate proceedings on the part of
BCHI are necessary to authorize the execution and delivery of this
Agreement and the consummation of the Transactions. This Agreement
has been duly and validly executed and delivered by BCHI and,
assuming this Agreement constitutes the valid and binding agreement
of the Company and Merger Sub, this Agreement constitutes the valid
and binding agreement of BCHI, enforceable against BCHI in
accordance with its terms, except as such enforceability
(i) may be limited by bankruptcy, insolvency, fraudulent
conveyance, reorganization, moratorium or other similar Laws
affecting or relating to enforcement of creditors’ rights
generally and (ii) is subject to general principles of equity
(regardless of whether enforceability is considered in a proceeding
at Law or in equity). The BCHI Charter and the BCHI Bylaws are the
only governing documents of BCHI, and there are no other Contracts
defining or governing the rights of the holders of any BCHI Capital
Stock or any of its other equity holders in their capacities as
such, and there are no Contracts between or among the holders of
BCHI Capital Stock defining or governing the rights of the BCHI
Capital Stock, as applicable. The BCHI Board has determined that
this Agreement and the Transactions are advisable and fair to and
in the best interest of BCHI stockholders.
(b) None of the
execution and delivery of this Agreement by BCHI, the consummation
of the Transactions, nor compliance by BCHI with any of the terms
or provisions of this Agreement, will (i) violate any
provision of the BCHI Charter, the BCHI Bylaws or
(ii) assuming that the consents, approvals and filings
referred to in Section
4.4 are duly obtained and/or made, (A) violate any Law or
Order applicable to BCHI, any of the BCHI Subsidiaries or any of
their respective material properties or assets, or any material
Permit of BCHI or a BCHI Subsidiary or by which any of the material
assets of BCHI or a BCHI Subsidiary are bound or subject, or (B)
violate, conflict with, result in a breach of any provision of or
the loss of any benefit under, constitute a default (or an event
which, with notice or lapse of time, or both, would constitute a
default) under, result in the termination of or a right of
termination or cancellation under, accelerate the performance
required by, require the consent of or notice to any Person under,
or result in the creation of any Lien (other than a Permitted Lien)
upon any of the respective properties or assets of BCHI or any of
the BCHI Subsidiaries under, any BCHI Material
Contract.
Section
4.4 Consents
and Approvals. Except for (a)
the filing of the Certificate of Merger with the Secretary of State
of the State of Georgia pursuant to the GBCC, (b) compliance with
any applicable requirements of the HSR Act and any other Antitrust
Laws, (c) the filing with the SEC of filings required by the
applicable requirements of the Securities Act or Exchange Act, (d)
such filings with and approvals of NASDAQ to permit the shares of
Company Common Stock that are to be issued in the Merger to be
listed and issued on NASDAQ, (e) receipt of such consents
from, or registrations, declarations, notices or filings made to or
with State PSCs with respect to the BCHI Licenses as are required
in order to consummate the Merger and other Transactions, including
the Financing (collectively with the Company State Approvals, the
“State
Approvals”), and (f) receipt of such consents from, or
registrations, declarations, notices or filings made to or with the
FCC with respect to the BCHI Licenses as are required in order to
consummate the Merger and other Transactions, including the
Financing (collectively with the Company FCC Approval, the
“FCC
Approval”) and (e) the consents or approvals
listed in Section 4.4 of the BCHI
Disclosure Letter, no consents or approvals of or filings or
registrations with or notifications to any Governmental Entity are
necessary in connection with (i) the execution and delivery by
BCHI of this Agreement and (ii) the consummation by BCHI of
the Transactions except as would not reasonably be expected to
have, individually or in the aggregate, a BCHI Material Adverse
Effect.
Section
4.5 Financial
Statements; Liabilities.
(a) The consolidated
financial statements of Birch Communications, Inc.
(“BCI”)
and the other BCHI Subsidiaries (including in each case, any
related notes and schedules thereto, where applicable) set forth in
Section 4.5 of the
BCHI Disclosure Letter (collectively, the “BCHI Financial
Statements”), fairly present in all material respects
the consolidated financial position of BCI and the other BCHI
Subsidiaries as of the date thereof, and fairly present in all
material respects the results of the consolidated operations,
changes in stockholders’ equity, cash flows and consolidated
financial position of BCI and the other BCHI Subsidiaries for the
respective fiscal periods or as of the date therein set forth,
except the BCHI Financial Statements are subject, in the case of
unaudited statements, to normal year-end audit adjustments in
amounts as permitted by GAAP. Each of the BCHI Financial Statements
(including the related notes and schedules thereto, where
applicable), as of their respective dates, complied in all material
respects with applicable accounting requirements and each of such
statements (including the related notes and schedules thereto,
where applicable) and have been prepared, in all material respects,
in accordance with GAAP consistently applied during the periods
involved, except as indicated in such statements or in the notes
thereto.
(b) The interim
consolidated financial statements of BCI and the other BCHI
Subsidiaries for the six months ended June 30, 2017 (collectively
the “Interim BCHI
Financial Statements”), fairly present in all material
respects the consolidated financial position of BCI and the other
BCHI Subsidiaries as of the date thereof, and fairly present in all
material respects the results of the consolidated operations,
changes in stockholders’ equity, cash flows and consolidated
financial position of BCI and the other BCHI Subsidiaries for the
respective fiscal periods or as of the date therein set forth,
except the Interim BCHI Financial Statements are subject to normal
year-end audit adjustments in amounts as permitted by GAAP. The
Interim BCHI Financial Statements have been prepared, in all
material respects, in accordance with GAAP consistently applied,
except as indicated in such statements or in the notes
thereto.
(c) Except for (i)
those liabilities and obligations that are in their respective
amounts reflected or reserved against on the June 30, 2017
consolidated balance sheet of BCI and the other BCHI Subsidiaries,
included in the BCHI Financial Statements or readily apparent in
the notes thereto, or (ii) liabilities or obligations incurred in
the ordinary course of business consistent with past practice since
the date of such balance sheet that are immaterial in amount,
neither BCHI nor any of the BCHI Subsidiaries have any liability or
obligation of any nature whatsoever (whether absolute, accrued,
contingent or otherwise and whether due or to become due and
including any off-balance sheet financings, loans, indebtedness,
make whole or similar liabilities or obligations) of a type
required to be reflected or reserved for on a consolidated balance
sheet of BCHI and the BCHI Subsidiaries prepared in accordance with
GAAP, except for liabilities or obligations that would not
reasonably be expected to have a BCHI Material Adverse
Effect.
(d) The unaudited
consolidated financial statements of BCHI and the other BCHI
Subsidiaries (including in each case, any related notes and
schedules thereto, where applicable) set forth in Section 4.5 of the BCHI
Disclosure Letter fairly present in all material respects the
consolidated financial position of BCHI and the other BCHI
Subsidiaries as of the date thereof, and fairly present in all
material respects the results of the consolidated operations,
changes in stockholders’ equity, cash flows and consolidated
financial position of BCHI and the other BCHI Subsidiaries for the
respective fiscal periods or as of the date therein set forth,
except that such financial statements are subject to normal
year-end audit adjustments in amounts as permitted by GAAP. Such
financial statements (including the related notes and schedules
thereto, where applicable), as of their respective dates, complied
in all material respects with applicable accounting requirements
and each of such statements (including the related notes and
schedules thereto, where applicable) and have been prepared, in all
material respects, in accordance with GAAP consistently applied
during the periods involved, except as indicated in such statements
or in the notes thereto. The unaudited consolidated financial
statements of BCHI and the other BCHI Subsidiaries for the fiscal
years ended December 31, 2014 through December 31, 2016 will not
differ in any respect (other than in deminimis respects) from the
audited consolidated financial statements of BCHI and the other
BCHI Subsidiaries for the fiscal years ended December 31, 2014
through December 31, 2016.
Section
4.6 Absence
of BCHI Material Adverse Effect. Since January 1,
2017 through the date of this Agreement, no event or events have
occurred that have had or would reasonably be expected to have,
individually or in the aggregate, a BCHI Material Adverse
Effect.
Section
4.7 Legal
Proceedings.
(a) Except as set forth
in Section 4.7 of
the BCHI Disclosure Letter, neither BCHI nor any of the BCHI
Subsidiaries is a party to any, and there are no pending or, to the
knowledge of BCHI, threatened (in writing), legal, administrative,
arbitral or other proceedings, claims, actions, suits or
governmental or regulatory investigations of any nature, against
BCHI or any of the BCHI Subsidiaries which would, if decided
adversely to BCHI or any BCHI Subsidiary, prohibit the Transactions
or reasonably be expected to result in a material liability or
obligation of, or otherwise be materially adverse to, BCHI or a
BCHI Subsidiary.
(b) There is no
outstanding material Order imposed upon BCHI, any of the BCHI
Subsidiaries or the assets of BCHI or any of the BCHI
Subsidiaries.
Section
4.8 Taxes
and Tax Returns. Each of BCHI and
the BCHI Subsidiaries has duly and timely filed all federal, state,
foreign and local Tax Returns required to be filed by any of them
(all such returns being accurate and complete in all material
respects) and has duly and timely paid all Taxes (whether or not
such Taxes were shown as due and payable on such Tax Returns) other
than Taxes that are not yet delinquent or that are being contested
in good faith, have not been finally determined and have been
adequately reserved against. Any liability with respect to
deficiencies asserted as a result of any audit, examination or
similar proceeding of BCHI or any BCHI Subsidiary Tax Return by the
IRS, the CRA, or any other taxing authority is covered by adequate
reserves in accordance with GAAP in the BCHI Financial Statements.
There are no disputes pending, or claims asserted in writing, for
Taxes or assessments upon BCHI or any of the BCHI Subsidiaries,
other than disputes, claims and assessments that are not material
to BCHI and the BCHI Subsidiaries either individually or in the
aggregate. Neither BCHI nor any of the BCHI Subsidiaries is a party
to or is bound by any Tax sharing, allocation or indemnification
agreement or arrangement (other than such an agreement or
arrangement exclusively between or among BCHI and the BCHI
Subsidiaries). Neither BCHI nor any of the BCHI Subsidiaries has
agreed to or granted any extension or waiver of the limitation
period applicable to any Taxes or Tax Returns. Neither BCHI nor any
of the BCHI Subsidiaries has distributed the stock of any
corporation, or had its stock distributed, in a transaction
described in or intended to satisfy the requirements of Section 355
of the Code within the past three (3) years. Each of BCHI and the
BCHI Subsidiaries has in all material respects properly and timely
withheld or collected and timely paid over to the appropriate
taxing authority (or each is properly holding for such timely
payment) all Taxes required to be withheld, collected and paid over
by applicable Law. There are no Liens for Taxes upon any asset of
BCHI or any BCHI Subsidiary other than Permitted Liens (within the
meaning of clause (c) of such term). Neither BCHI nor any of the
BCHI Subsidiaries is a party to or bound by any advance pricing
agreement, closing agreement or other similar material agreement or
ruling relating to Taxes nor are there any pending requests for
such rulings or similar agreements by or before a taxing authority.
Neither BCHI nor any of the BCHI Subsidiaries will be required to
include any item of income in, or exclude any item of deduction
from, taxable income for any period (or any portion thereof) ending
after the Closing Date, as a result of any: (i) change in method of
accounting for a Tax period ending on or before the Closing Date,
including under Section 481(a) of the Code or any similar provision
of applicable Law; (ii) installment sale or other open transaction
disposition made on or prior to the Closing Date; (iii) prepaid
amount received on or prior to the Closing Date; (iv) closing
agreement described in Section 7121 of the Code or any similar
provision of applicable Law executed on or prior to the Closing
Date; (v) intercompany transaction or excess loss account described
in Treasury Regulations Section 1.1502 (or any similar provision of
applicable Law); or (vi) indebtedness discharged in connection with
any election under Section 108(i) of the Code. Neither BCHI nor any
of the BCHI Subsidiaries has any liability under Treasury
Regulations Section 1.1502-6 or any similar provision of applicable
Law, as a transferee or successor, as a result of any contractual
obligation, or otherwise for any Taxes of any other Person. Neither
BCHI nor any of the BCHI Subsidiaries has obtained any consent or
clearance from or entered into any settlement or arrangement with
any taxing authority that would be binding on BCHI or any of its
Affiliates or result in a material Tax liability for BCHI or any of
its Affiliates for any Tax period (or portion thereof) ending after
the Closing Date. Neither BCHI nor any of the BCHI Subsidiaries has
engaged in a “reportable transaction,” as defined in
Section 6707A(c)(1) of the Code or Treasury Regulations Section
1.6011-4(b), or any transaction requiring disclosure under a
similar provision of applicable Law. Within the past three (3)
years, no written claim or nexus inquiry has been made by a taxing
authority in a jurisdiction where BCHI or any BCHI Subsidiary does
not file Tax Returns that any of them is or may be subject to tax
by that jurisdiction or that any of them has a duty to collect
Taxes. No facts, circumstances or events exist or have existed that
have resulted in or may result in the applications of any of
sections 79 to 80,04 of the ITA to BCHI or any BCHI Subsidiary.
Neither BCHI nor any BCHI Subsidiary is liable for Taxes of any
other person, and neither BCHI nor any BCHI Subsidiary has acquired
property from any person in circumstances where BCHI did or could
become liable for any Taxes of such person. The value of the
consideration paid or received by BCHI and each BCHI Subsidiary for
the acquisition, sale, transfer or provision of property (including
intangibles) or the provision of services (including financial
transactions) from or to a person with whom BCHI or BCHI
Subsidiary, as applicable, was not dealing at arm’s length
for purposes of the ITA was equal to the estimated fair market
value of such property acquired, provided or sold or services
purchased or provided. Neither BCHI nor any BCHI Subsidiary has
claimed any reserves for purposes of the ITA (or analogous
provincial or similar provisions) for the most recent taxation year
ending prior to the date hereof. Neither BCHI nor any BCHI
Subsidiary has made any payment, or is obligated to make any
payment, and neither BCHI nor any BCHI Subsidiary is party to any
agreement under which BCHI or such BCHI Subsidiary, as applicable,
could be obligated to make any payment, that, in each case, may not
be deductible by virtue of section 67 or 78 of the ITA or any
analogous provincial or similar provision. BCHI and the BCHI
Subsidiaries have duly registered with the applicable Governmental
Authority for Sales Tax purposes and at all times complied with all
Sales Tax obligations and requirements imposed pursuant to
applicable Law. All input tax credits and refunds claimed by BCHI
and each BCHI Subsidiary for Sales Tax purposes were calculated in
accordance with applicable Law. BCHI and the BCHI Subsidiaries have
complied with all registration, reporting, payment, collection and
remittance requirements in respect of Sales Taxes in accordance
with applicable Law. Except as set forth in Section 4.8 of the BCHI
Disclosure Letter, (i) BCHI is, and has been at all times during
its existence, a validly electing S corporation within the meaning
of Sections 1361 and 1362 of the Code, (ii) each of the BCHI
Subsidiaries is, and has been during its respective existence, an
entity disregarded as separate from BCHI for tax purposes,
(iii) BCHI has no potential liability for any Tax under
Section 1374 of the Code, and (iv) neither BCHI nor any BCHI
Subsidiary has ever been a member of a consolidated, combined or
unitary group for federal, state or local income tax
purposes.
Section
4.9 Employee
Benefit Plans; Labor.
(a) Except as set forth
in Section 4.9(a)
of the BCHI Disclosure Letter, none of BCHI, any BCHI Subsidiary,
nor any BCHI Commonly Controlled Entity maintains or contributes to
(i) any nonqualified deferred compensation, post-termination
or retirement plans for employees, (ii) any qualified
“defined contribution plans” (as such term is defined
under Section 3(34) of ERISA (whether or not subject to ERISA)),
(iii) any other defined contribution pension plan in the relevant
country, state, province, territory or the like, (iv) any
“defined benefit plans” (as such term is defined under
Section 3(35) of ERISA (whether or not subject to ERISA)), or (v)
any other defined benefit pension plan in the relevant country,
state, province, territory or the like (the plans set forth in
clauses (ii), (iii), (iv) and (v) are collectively referred to
herein as the “BCHI
Pension Plans”), (vi) any “employee welfare
benefit plans” (as such term is defined under Section 3(1) of
ERISA, or (vii) any other group insurance benefit arrangements in
the relevant country, state, province, territory or the like
(whether or not subject to ERISA)) (the “BCHI Welfare Plans”), or
(viii) any compensatory or benefit plans or programs, or
equity or equity-based award plans, including written individual
contracts, employee agreements, plans, programs, or arrangements,
whether funded or unfunded, written or oral, that currently are, or
within the past six (6) fiscal years of BCHI or any BCHI
Subsidiary, as appropriate, have been, maintained, contributed to
or sponsored (or are or have been required to be maintained,
contributed to or sponsored) in whole or in part, by any of BCHI,
the BCHI Subsidiaries and the BCHI Commonly Controlled Entities,
for the benefit of, providing any remuneration or benefits to, or
covering any current or former employee or retiree, any dependent,
spouse or other family member or beneficiary of such employee or
retiree, or any director, independent contractor, member, officer,
consultant of any of BCHI, the BCHI Subsidiaries and the BCHI
Commonly Controlled Entities, or under (or in connection with)
which BCHI or any BCHI Subsidiary or any of the BCHI Commonly
Controlled Entities may have any liability (collectively clauses
(i) through
(viii) are referred
to as “BCHI Benefit
Plans”).
(b) Each BCHI Pension
Plan that is intended to meet the requirements of a
“qualified plan” under Sections 401(a) and 501(a) of
the Code has either received a favorable determination letter from
the IRS that such BCHI Pension Plan is so qualified or has
requested such a favorable determination letter within the remedial
amendment period of Section 401(b) of the Code, or in the case of a
BCHI Pension Plan that is maintained pursuant to the adoption of a
master, prototype, or volume submitter plan document, the sponsor
of such master or prototype or volume submitter plan document has
obtained from the National Office of the IRS an opinion or
notification letter stating that the form of the master, prototype
or volume submitter document is acceptable for the establishment of
a qualified retirement plan. Each BCHI Benefit Plan, including any
amendments thereto, that is eligible for approval by, and/or
registration for and/or qualification for special Tax status with,
the appropriate taxation, social security and/or supervisory
authorities in the relevant country, state, province, territory or
the like (each, a “BCHI Approval”) has
received such BCHI Approval, or there remains a period of time in
which to obtain such BCHI Approval retroactive to the date of any
amendment or change in Law that has not previously received such
BCHI Approval. The BCHI Benefit Plans comply in form and in
operation, and have been administered in all material respects in
compliance with their terms and with the requirements of, as
applicable, the Code, ERISA, the Patient Protection and Affordable
Care Act and all other applicable Laws, and none of BCHI, the BCHI
Subsidiaries and its BCHI Commonly Controlled Entities have
received any notice from any Governmental Entity questioning or
challenging such compliance that has not been
resolved.
(c) To the knowledge of
BCHI, there have been no non-exempt “prohibited
transactions” (as that term is defined in Section 406 of
ERISA or Section 4975 of the Code) involving any of the BCHI
Benefit Plans. Except as set forth in Section 4.9(c) of the BCHI
Disclosure Letter, none of the assets of any BCHI Pension Plan or
BCHI Welfare Plan trust is an “employer security”
(within the meaning of Section 407(d)(1) of ERISA) or
“employer real property” (within the meaning of Section
407(d)(2) of ERISA).
(d) (i) Neither BCHI
nor any other Person that, together with BCHI or any BCHI
Subsidiary, is treated as a single employer under Section 414(b),
(c), (m) or (o) of the Code or any other applicable Law (a
“BCHI Commonly
Controlled Entity”) (A) has sponsored, maintained
or contributed to, or been obligated to maintain or contribute to,
or has any liability under, any BCHI Pension Plan that is subject
to Title IV of ERISA or Section 412 or Section 430 of the Code or
is otherwise a defined benefit pension plan in the relevant
country, state, province, territory or the like, and (B) has any
unsatisfied liability imposed under Title IV of ERISA, and (ii) all
contributions (including all employer contributions and employee
salary reduction contributions) or insurance premiums that are due
have been paid with respect to each BCHI Benefit Plan, and all
contributions or insurance premiums for any period ending on or
before the Closing Date that are not yet due have been paid with
respect to each such BCHI Benefit Plan or accrued, in each case in
accordance with the past custom and practice of BCHI, and with
applicable Law and administrative agency regulations.
(e) Neither BCHI nor
any BCHI Subsidiary has communicated a commitment (whether orally
or in writing, whether as part of the collective bargaining process
or not) generally to employees, any employee representation body or
specifically to any employee regarding (i) any future increase
of benefit levels (or creation of new benefits) with respect to the
BCHI Benefit Plans beyond those reflected in such plans, or (ii)
the adoption or creation of any new benefit plan.
(f) None of BCHI, the
BCHI Subsidiaries and the BCHI Commonly Controlled Entities
currently contributes to or has had any liability or potential
liability with respect to (i) any “multiemployer plan”
(as defined in Section 3(37) of ERISA) or (ii) any multi-employer
pension plans or multi-employer benefit plans in the relevant
country, state, province, territory or the like, during the five
(5)-year period ending as of the Closing Date.
(g) Except as set forth
in Section 4.9(g)
of the BCHI Disclosure Letter, none of the BCHI Welfare Plans
obligates BCHI or any BCHI Subsidiary to provide any current
employee or former employee of BCHI or a BCHI Subsidiary (or any
dependent thereof) any life insurance or medical or health benefits
after his or her termination of employment with BCHI or any BCHI
Subsidiary, other than as required under COBRA or any similar state
Law. All amounts required to be included in BCHI’s most
recent financial statements in respect of any BCHI Welfare Plan
have been included.
(h) No BCHI Benefit
Plan (excluding for this purpose any individual employment
agreement or arrangement) has a provision, and no commitment
(whether oral or in writing) has been made, that restricts BCHI or
BCHI Subsidiaries from amending or terminating such BCHI Benefit
Plan with respect to the accrual of future benefits; except that
the legal obligation to bargain over mandatory subjects of
bargaining under any Law will not be considered such a
restriction.
(i) No amounts payable
under any BCHI Benefit Plan will fail to be deductible for federal
income tax purposes by virtue of Section 280G of the Code or will
fail to be deductible for tax purposes under any other applicable
Law. Except as set forth in Section 4.9(i) of the BCHI
Disclosure Letter, consummation of the Transactions will not (i)
entitle any current employee or former employee of BCHI or a BCHI
Subsidiary (or spouse, dependent or other family member of such
employee) to severance pay, unemployment compensation, or any
payment contingent upon a change in control or ownership of BCHI or
BCHI Subsidiaries, or (ii) accelerate the time of payment or
vesting, or increase the amount, of any compensation due to any
such current employee or former employee of BCHI or a BCHI
Subsidiary (or any spouse, dependent, or family member of such
employee). Neither BCHI nor any BCHI Subsidiary has any obligation
to provide, and no BCHI Benefit Plan or other agreement provides
any Person with any amount of additional compensation or gross-up
if such Person is provided with amounts subject to excise or
additional taxes, interest or penalties incurred pursuant to
Sections 4999 or 409A of the Code or due to the failure of any
payment to be deductible under Section 280G of the
Code.
(j) Each BCHI Benefit
Plan that is a “nonqualified deferred compensation
plan” (within the meaning of Section 409A(d)(1) of the Code)
subject to Section 409A of the Code is and has been, during the
five years prior to the date hereof, in all material respects in
documentary and operational compliance with Section 409A of the
Code and any guidance issued with respect thereto.
(k) BCHI and the BCHI
Subsidiaries have correctly classified Persons engaged as
consultants or independent contractors for employment purposes and
have correctly administered Section 414(n) of the Code with respect
to the BCHI Pension Plans.
(l) BCHI has complied
in all material respects with all Laws concerning employment rights
and obligations. Section
4.9(l) of the BCHI Disclosure Letter lists each collective
bargaining agreement to which BCHI or a BCHI Subsidiary is a party
in respect of the employees of BCHI or a BCHI Subsidiary on the
date of this Agreement, and any membership of BCHI or a BCHI
Subsidiary in any employers’ organization which is entitled
to conclude a collective bargaining agreement on behalf of its
member companies, and any collective bargaining agreement which,
although BCHI or BCHI Subsidiary is not a party to it, applies due
to standard reference in employment agreements or by state decree
as a generally applicable collective bargaining agreement. No
collective bargaining agreement or shop agreement is being
negotiated or renegotiated in any material respect by BCHI or any
of the BCHI Subsidiaries. There is no labor dispute, work stoppage,
slow down or strike against BCHI or any of the BCHI Subsidiaries
pending or, to the knowledge of BCHI, threatened which would
interfere with the respective business activities of BCHI or any of
the BCHI Subsidiaries (and no work stoppages, slow downs, labor
disputes or strikes occurred during the last five years). As of the
date of this Agreement, to the knowledge of BCHI, neither BCHI nor
any of the BCHI Subsidiaries has committed during the three years
prior to the date hereof any unfair labor practice in connection
with the operation of the respective businesses of BCHI or any of
the BCHI Subsidiaries, and there is no charge or complaint against
BCHI or any of the BCHI Subsidiaries by the National Labor
Relations Board or any comparable Governmental Entity or in
relation to any labor rules and regulations or any other competent
labor authority pending or threatened in writing.
(m) Section 4.9(m) of the BCHI
Disclosure Letter sets forth a true and complete list of all
material (i) severance or employment agreements with
directors, officers, employees, or consultants of BCHI or any BCHI
Subsidiary, (ii) severance programs of BCHI or any BCHI
Subsidiary with or relating to its employees, or (iii) plans,
programs or other agreements of BCHI or any BCHI Subsidiary with or
relating to its directors, officers, employees or consultants which
contain change in control provisions.
(n) Except as set forth
in Section 4.9(n)
of the BCHI Disclosure Letter, there are no unresolved claims or
disputes under the terms of, or in connection with, the BCHI
Benefit Plans (other than routine undisputed claims for benefits
under the BCHI Benefit Plans or other immaterial claims or disputes
that are being handled in the normal course of plan
administration), and no action, legal or otherwise, has been
commenced with respect to any claim (including claims for benefits
under BCHI Benefit Plans). To the knowledge of BCHI, no facts exist
which could give rise to any actions, audits, suits or claims
(other than in the ordinary course).
(o) No BCHI Benefit
Plan is or at any time was funded through a “welfare benefit
fund,” as defined in Section 419(e) of the Code, and no
benefits under any BCHI Benefit Plan are or at any time have been
provided through a “voluntary employees’ beneficiary
association” (within the meaning of Section 501(c)(9) of the
Code) or a “supplemental unemployment benefit plan”
(within the meaning of Section 501(c)(17) of the
Code).
Section
4.10 Compliance
with Law.
(a) BCHI and each of
the BCHI Subsidiaries is, and at all times during the five (5)
years prior to the date hereof, have been in compliance in all
material respects with all Laws and Orders applicable to BCHI or
any of the BCHI Subsidiaries or by which any property or asset of
BCHI or any BCHI Subsidiary is bound. To the knowledge of BCHI, no
investigation by any Governmental Entity with respect to BCHI or
any BCHI Subsidiary is pending, nor has any Governmental Entity
indicated to BCHI an intention to conduct any such investigation
with respect to, either individually or in the aggregate, material
matters or material liabilities.
(b) None of BCHI
or any of the BCHI Subsidiaries has received any notice of any
alleged violation of any Laws that remains unresolved or
outstanding, except where any such notice, individually or in the
aggregate, would not reasonably be expected to have a BCHI Material
Adverse Effect.
Section
4.11 Environmental
Matters. BCHI and each of
the BCHI Subsidiaries is, and at all times have been, in compliance
in all material respects with all Environmental Laws. BCHI and the
BCHI Subsidiaries hold all Permits required under applicable
Environmental Laws to permit BCHI and the BCHI Subsidiaries to
conduct their businesses as currently conducted. The business and
operations of BCHI and the BCHI Subsidiaries are in compliance with
all such Permits. No notice of violation, notification of
liability, demand, request for information, citation, summons or
order has been received by BCHI or any BCHI Subsidiary, no
complaint has been filed, no penalty or fine has been assessed, and
no investigation, action, claim, suit or proceeding is pending or,
to the knowledge of BCHI, threatened by any Person involving BCHI
or any BCHI Subsidiary relating to or arising out of any
Environmental Law. No Hazardous Substances are or were located and
no disposal or Releases of Hazardous Substances have occurred at,
on, above, under or from any properties currently or, to the
knowledge of BCHI at the time of the cessation of such ownership,
lease, operation or use, formerly owned, leased, operated or used
by BCHI, any BCHI Subsidiary or any predecessors in interest that,
in each case, has resulted in or would reasonably be expected to
result in any material cost, liability or obligation of BCHI or any
BCHI Subsidiary under any Environmental Law. Neither BCHI nor any
BCHI Subsidiary, nor, to the knowledge of BCHI, any other Person,
has caused or taken any action that could reasonably be expected to
result in any material liability or obligation relating to (i) the
environmental conditions at, on, above, under, or about any
properties or assets currently or formerly owned, leased, operated
or used by BCHI or any BCHI Subsidiary or any of their respective
predecessors in interest or (ii) the past or present use,
management, handling, transport, treatment, generation, storage,
disposal, Release or threatened Release of Hazardous Substances.
BCHI has provided to the Company all material environmental site
assessments, audits, investigations and studies in their
possession, custody or control relating to property or assets
currently or formerly owned, leased, operated or used by BCHI or
any BCHI Subsidiary. Neither BCHI nor any BCHI Subsidiary has been
in business other than those related to the provision of
communication services that would reasonably be expected to present
environmental issues of a materially different scope or magnitude
than those presented in the provision of communication services.
Without limiting the generality of the foregoing, neither BCHI nor
any BCHI Subsidiary has operated or currently operates (i) any
manufacturing facilities, (ii) any facilities that are or have been
permitted under the Resource Conservation and Recovery Act or (iii)
any business that manages the hazardous wastes of any unrelated
party. The representations contained in the immediately prior
sentence of this Section
4.11 shall not be deemed to be breached unless the operation
or ownership of such other business or businesses has resulted in
any material cost, liability or obligation of BCHI or any BCHI
Subsidiary under any Environmental Law.
Section
4.12 Material
Contracts.
(a) Except for
Contracts listed in Section 4.12(a) of the BCHI
Disclosure Letter (all Contracts set forth, or required to be set
forth, in Section
4.12(a) of the BCHI Disclosure Letter being referred to
herein as a “BCHI
Material Contract”), as of the date of this Agreement,
neither BCHI nor any of the BCHI Subsidiaries is a party to or
bound by any Contract that is:
(i) a
“non-compete,” or similar Contract that restricts or
purports to restrict the geographic area in which BCHI or any of
the BCHI Subsidiaries may conduct any line of business, or that
requires the referral of business opportunities by BCHI or any of
the BCHI Subsidiaries;
(ii) a
joint venture, partnership or limited liability company Contract or
other similar Contract relating to the formation, creation,
operation, management or control of any joint venture, partnership
or limited liability company, other than any such Contract solely
between or among BCHI and the BCHI Subsidiaries;
(iii) a
Contract (other than a future contract, option contract or other
derivative transaction) that involves future expenditures by BCHI
or any BCHI Subsidiary of more than $2,500,000 in any one year
period that cannot be terminated on less than 90 days’ notice
without material payment or penalty;
(iv) an
acquisition Contract that contains “earn-out” or other
contingent payment obligations that could reasonably be expected to
result in future payments by BCHI or a BCHI Subsidiary in excess of
$2,500,000;
(v) a Contract relating
to indebtedness for borrowed money or any financial guaranty
involving an amount in excess of $2,500,000;
(vi) a
Contract for the lease or sublease of real property material to the
business of BCHI and the BCHI Subsidiaries;
(vii) a
Contract pursuant to which BCHI or any BCHI Subsidiary (A) is
granted or obtains any right to use any material Intellectual
Property (excluding standard form Contracts granting rights to use
readily available shrink wrap or click wrap software having an
acquisition price of less than $100,000 per Contract), (B) is
restricted in its right to use or register any material BCHI
Intellectual Property, or (C) permits any other Person to use,
enforce, or register any material BCHI Intellectual Property, in
each case including any license agreements, coexistence agreements,
and covenants not to sue;
(viii) a
Contract relating to (A) the sale, outbound license or outbound
lease by BCHI or any BCHI Subsidiary of any material indefeasible
rights of use of capacity infrastructure or peering arrangements or
(B) the purchase, inbound license or inbound lease by BCHI or any
BCHI Subsidiary of any material indefeasible rights of use of
capacity infrastructure or peering arrangements;
(ix) a
collective bargaining agreement;
(x) a Contract with
material outstanding liabilities or obligations relating to the
disposition or acquisition by BCHI or any BCHI Subsidiary of assets
or properties in excess of $2,500,000 not made in the ordinary
course of business; or
(xi) any
employment, severance, consulting or other Contract with an
employee or former employee, officer or director of BCHI or any
BCHI Subsidiary which will require the payment of amounts by BCHI
or any BCHI Subsidiary in excess of $150,000 per
annum.
(b) Neither BCHI nor
any BCHI Subsidiary is in breach of or default under the terms of
any BCHI Material Contract in any material respect. To the
knowledge of BCHI, no other party to any BCHI Material Contract is
in breach of or default under the terms of any BCHI Material
Contract in any material respect. Each BCHI Material Contract is a
valid and binding obligation of BCHI or any BCHI Subsidiary that is
a party thereto and, to the knowledge of BCHI, is in full force and
effect, subject to (A) bankruptcy, insolvency, fraudulent
conveyance, reorganization, moratorium or other similar Laws
affecting or relating to enforcement of creditors’ rights
generally and (B) general principles of equity (regardless of
whether enforceability is considered in a proceeding at Law or in
equity). True, correct and complete copies of each BCHI Material
Contract (including all modifications and amendments thereto and
waivers thereunder) have been made available to the
Company.
Section
4.13 Intellectual
Property; Data Privacy.
(a) Either BCHI or a
BCHI Subsidiary owns, and has all right, title, and interest in,
duly licenses, or otherwise possesses all rights necessary to use,
all Intellectual Property used in their respective businesses as
currently conducted (collectively, the “BCHI Intellectual
Property”).
(b) Section 4.13(b)(i) of the BCHI
Disclosure Letter sets forth all BCHI Registered Intellectual
Property. All required filings and fees related to such BCHI
Registered Intellectual Property have been timely filed with and
paid to the relevant Governmental Entities and authorized
registrars. Section
4.13(b)(ii) of the BCHI Disclosure Letter sets forth all
Intellectual Property owned or purported to be owned by BCHI or any
BCHI Subsidiary that is not BCHI Registered Intellectual Property
and which is material to the businesses of BCHI and BCHI
Subsidiaries as currently conducted (collectively, together with
the BCHI Registered Intellectual Property, the “BCHI Owned Intellectual
Property”).
(c) There are no
pending or, to the knowledge of BCHI, threatened claims in writing
by any Person alleging infringement or misappropriation by BCHI or
any BCHI Subsidiary arising from their use of the BCHI Intellectual
Property, and to the knowledge of BCHI, the conduct of the
businesses of BCHI and BCHI Subsidiaries and their products or
services do not infringe, misappropriate, dilute or otherwise
violate any Intellectual Property rights of any
Person.
(d) Neither BCHI nor
any BCHI Subsidiary has made any claim during the past three years
of any misappropriation or infringement by any third party of its
rights to or in connection with the use of any BCHI Intellectual
Property; and (ii) to the knowledge of BCHI, no Person is
infringing or misappropriating any BCHI Intellectual
Property.
(e) BCHI and the BCHI
Subsidiaries have taken reasonable measures to protect the
confidentiality of their material Trade Secrets including requiring
employees, contractors or other Persons having access thereto to
execute written nondisclosure agreements. To the knowledge of BCHI,
none of the material Trade Secrets of BCHI and the BCHI
Subsidiaries have been disclosed or authorized to be disclosed by
BCHI or the BCHI Subsidiaries to any third party other than
pursuant to a valid and enforceable nondisclosure agreement. To the
knowledge of BCHI, no third party to any nondisclosure agreement
with BCHI or any BCHI Subsidiary is in material breach, violation
or default.
(f) Each Person who
contributed, developed or conceived any BCHI Owned Intellectual
Property has done so pursuant to a valid and enforceable written
agreement that (i) protects the confidential information disclosed
by BCHI and its Subsidiaries and (ii) grants BCHI and its
Subsidiaries exclusive ownership of the Person’s
contribution, development or conception and waives any
non-assignable interests in such contribution, development or
conception, such as moral rights.
(g) During the three
(3) years prior to the date hereof, to the knowledge of BCHI, there
has been no act or omission in respect of the use or enforcement of
the BCHI Owned Intellectual Property that would reasonably be
expected to result in the abandonment, cancellation or
unenforceability of any such Intellectual Property.
(h) BCHI and the BCHI
Subsidiaries, and to the knowledge of BCHI all of its and their
providers of information technology services, have (i) complied in
all material respects with their respective published privacy
policies and internal privacy policies and guidelines and all
applicable Laws relating to privacy, data protection, user data or
Personal Data, including Personal Data of customers, employees,
contractors and third parties who have provided information to BCHI
or any BCHI Subsidiary; and (ii) implemented and maintained, in all
material respects, a comprehensive security plan that includes
industry standard administrative, technical and physical safeguards
to ensure that Personal Data is protected against loss, damage,
unauthorized access, unauthorized use, unauthorized modification,
or other misuse. There has been no material loss, damage,
unauthorized access, unauthorized use, unauthorized modification,
or other breach of security of Personal Data maintained by or on
behalf of BCHI and the BCHI Subsidiaries. Within the past three (3)
years, no Person has made any material claim or commenced any
Action with respect to, and BCHI and the BCHI Subsidiaries have
not, to the knowledge of BCHI, experienced any incident relating
to, any actual or suspected loss, damage, unauthorized access,
unauthorized use, unauthorized modification, or breach of security
of Personal Data maintained or processed by or on behalf of BCHI
and the BCHI Subsidiaries. Except for disclosures of information
permitted or required by privacy Laws or authorized by the provider
of Personal Data, to the knowledge of BCHI, neither BCHI nor any of
the BCHI Subsidiaries has shared, sold, rented or otherwise made
available, and does not share, sell, rent or otherwise make
available, to third parties any Personal Data.
(i) BCHI and the BCHI
Subsidiaries have implemented business continuity and disaster
recovery plans and have arranged for back-up data processing
services adequate to meet their data processing needs in the event
that the computer systems, networks, hardware, software, databases,
websites, and equipment of BCHI or the BCHI Subsidiaries or any of
their material components is rendered temporarily or permanently
inoperative as a result of a natural or other disaster. The
computer systems, networks, hardware, software, databases,
websites, and equipment of BCHI or the BCHI Subsidiaries have not
suffered any failures, errors or breakdowns within the past three
(3) years that have caused any material disruption or interruption
in the business of BCHI and the BCHI Subsidiaries.
Section
4.14 Title
to Properties; Assets. BCHI and each of
the BCHI Subsidiaries have good and valid fee simple title to, or
valid leasehold interest in, its material tangible properties and
assets, except for such properties and assets as are no longer used
or useful in the conduct of its business or as have been disposed
of in the ordinary course of business. All such material tangible
properties and assets, other than properties and assets in which
BCHI or any BCHI Subsidiary have a leasehold interest, are free and
clear of all Liens other than Permitted Liens or Liens that will be
released at Closing.
Section
4.15 Real
Property. Section 4.15 of the BCHI
Disclosure Letter sets forth a list of all real property currently
owned or leased by BCHI or any BCHI Subsidiaries and indicates
whether each such parcel of real property is owned or leased. BCHI
or one of the BCHI Subsidiaries has good and fee simple title to
all real property owned by BCHI or any of the BCHI Subsidiaries as
of the date of this Agreement (the “BCHI Owned Real
Property”) and valid leasehold estates in all real
property leased or subleased (whether as tenant or subtenant) by
BCHI or any of the BCHI Subsidiaries as of the date of this
Agreement (including improvements thereon, the “BCHI Leased Real
Property”), in each case, free and clear of all Liens,
save only for Permitted Liens. Except as would not reasonably be
expected to have, individually or in the aggregate, a BCHI Material
Adverse Effect, BCHI or one of the BCHI Subsidiaries has exclusive
possession of each BCHI Leased Real Property and BCHI Owned Real
Property, other than any use and occupancy rights granted to
third-party owners, tenants, guests, hosts or licensees pursuant to
agreements with respect to such real property. There are no
Contracts to sell, transfer or otherwise dispose of any of the BCHI
Owned Real Property or the BCHI Leased Real Property, or to
purchase or acquire any other interest in any real
property.
Section
4.16 Regulatory
Matters.
(a) Except as set forth
on Section 4.16(a)
of the BCHI Disclosure Letter, and except with respect to Permits,
including those required under applicable Environmental Laws (as to
which certain representations and warranties are made pursuant to
Section 4.11), BCHI
and the BCHI Subsidiaries hold all Permits issued by the FCC, State
PSCs, the CRTC or other relevant Canadian federal or provincial
Governmental Entities (“Canadian Authorities”),
and all other material regulatory Permits, including franchises,
ordinances and other agreements granting access to public rights of
way, issued or granted to BCHI or any of the BCHI Subsidiaries by a
Governmental Entity (the “BCHI Licenses”) that are
required for BCHI and each of the BCHI Subsidiaries to conduct its
business, as presently conducted, in all material
respects.
(b) Each BCHI License
is in full force and effect and has not been suspended, revoked,
cancelled or adversely modified. No BCHI License is subject to (i)
any conditions or requirements that have not been imposed generally
upon licenses in the same service, unless such conditions or
requirements are set forth on the face of the applicable
authorization, or (ii) any pending proceeding by or before any
Governmental Entity, including the FCC, State PSCs, the CRTC or
other Canadian Authorities to suspend, revoke or cancel such BCHI
License, or any judicial review of a decision by any Governmental
Entity, including the FCC, State PSCs, the CRTC or other Canadian
Authorities with respect thereto. To the knowledge of BCHI, there
has not been any event, condition or circumstance that would
preclude any BCHI License from being renewed in the ordinary course
(to the extent that such BCHI License is renewable by its
terms).
(c) The licensee of
each BCHI License is in compliance in all material respects with
such BCHI License and has fulfilled and performed all of its
material obligations with respect thereto, including all reports,
notifications and applications required by any Law, including the
Communications Act or FCC Rules or State Telecommunications Laws,
the PSC Rules, the Telecommunications Act (Canada), the
Radiocommunication Act
(Canada) and the rules, regulations, written policies and Orders of
the CRTC and other Canadian Authorities, and the payment of all
regulatory fees and contributions, except as permitted by
applicable exemptions, waivers or similar concessions or
allowances. Without limiting the foregoing, the licensee of each
BCHI License is in material compliance with the USF Programs,
CALEA, the FCC’s regulations concerning CPNI and the Canadian
competitive local exchange carrier obligations. All reports and
other submissions required in connection with the USF Programs,
CALEA, CPNI regulations and the Canadian competitive local exchange
carrier obligations, including contribution remittances, have been
timely filed in materially true, correct and complete form. To the
knowledge of BCHI and the BCHI Subsidiaries, there are no pending
or threatened investigations, inquiries, audits, examinations or
other proceedings in connection with the performance of BCHI and
the BCHI Subsidiaries of their USF Programs, CALEA, CPNI
obligations and the Canadian competitive local exchange carrier
obligations.
(d) Except as set forth
in Section 4.16(d)
of the BCHI Disclosure Letter, neither BCHI nor any BCHI Subsidiary
has (i) implemented, or been alleged or found to have implemented
any Slamming or (ii) Cramming.
(e) Except as set forth
in Section 4.16(e)
of the BCHI Disclosure Letter, BCHI and all BCHI Subsidiaries have
timely complied with any compensation, restoration, reimbursement,
reporting, or other obligations arising in connection with public
and private right-of-way access and pole attachment
agreements.
(f) Except as set forth
in Section 4.16(f)
of the BCHI Disclosure Letter, BCHI and all BCHI Subsidiaries have
timely submitted all required international traffic and circuit
status reports in materially true, correct and complete
form.
(g) Except as set forth
in Section 4.16(g)
of the BCHI Disclosure Letter, the licensee of each BCHI License is
in material compliance with the applicable requirements of federal
and state NOR requirements. All reports and other submissions
required in connection with federal and state NOR requirements have
been timely filed in materially true, correct and complete form. To
the knowledge of BCHI and the BCHI Subsidiaries, there are no
pending or threatened investigations, inquiries, audits,
examinations or other proceedings in connection with the
performance of BCHI and the BCHI Subsidiaries of their NOR
requirements.
(h) BCHI or a wholly
owned Subsidiary of BCHI directly or indirectly owns all of the
Equity Interests and controls all of the voting power and
decision-making authority of each licensee of the BCHI Licenses. No
BCHI License, Order or other agreement, obtained from, issued by or
concluded with any State PSC would impose restrictions on the
ability of any BCHI Subsidiary to make payments, dividends or other
distributions to BCHI or any BCHI Subsidiary that limits, or would
reasonably be expected to limit, the cash funding and management
alternatives of BCHI on a consolidated basis in a manner
disproportionate to restrictions applied by other State
PSCs.
Section
4.17 Interconnection
Agreements. BCHI or a BCHI
Subsidiary has entered into, with incumbent local exchange
carriers, or other non-incumbent carriers, all interconnection
agreements, line sharing agreements, line splitting agreements and
other Contracts (the “BCHI Interconnection
Agreements”) that are necessary to conduct their
respective businesses as currently conducted. All BCHI
Interconnection Agreements entered into pursuant to Sections 251
and 252 of the Telecommunications Act, including amendments to
implement the FCC’s Triennial Review Remand Order, to the
extent such amendments have been adopted, include the general
terms, conditions and pricing for any UNEs, collocation or other
network facilities or carrier services provided under Sections 251
and 252 of the Telecommunications Act. All BCHI Interconnection
Agreements have been approved by the applicable Governmental
Entity, including the CRTC or the applicable State PSC, when
required. BCHI and any BCHI Subsidiary, as applicable, that is a
party to a BCHI Interconnection Agreement has performed, in all
material respects, all material obligations required to be
performed by it under such BCHI Interconnection
Agreement.
Section
4.18 Network
Facilities. Except as set
forth in Section 4.18 of the BCHI
Disclosure Letter:
(a) All BCHI Owned
Network Facilities and BCHI Third-Party Network Facilities:
(i) are in all material respects in good working order and
condition and are without any material defects individually and in
the aggregate; (ii) are, individually and in the aggregate,
operated, installed, and maintained by BCHI, a BCHI Subsidiary, or
their contractors in a manner that is in compliance in all material
respects with (x) generally accepted industry standards for
the United States or Canadian communications industry, as
applicable, (y) performance requirements in service agreements
with customers of BCHI and the BCHI Subsidiaries, and (z) all
Laws, and (iii) comply, individually and in the aggregate, in
all material respects with applicable performance
standards.
(b) BCHI or a BCHI
Subsidiary owns, free and clear of all Liens (other than Permitted
Liens and Liens to be discharged at Closing), all right, title and
interest in BCHI Owned Network Facilities. No third party may
revoke or otherwise encumber or interfere in any material respect
with such right, title, and interest.
(c) (i) Each
Contract under which any third party provides Network Facilities,
including leases, licenses, indefeasible rights of use of capacity
or infrastructure, pole attachment agreements and Right-of-Way
Agreements (a “BCHI
Network Facility Agreement”), to which BCHI or any
BCHI Subsidiary is a party, is a valid, legally binding and
enforceable agreement and is in full force and effect, and neither
BCHI nor any BCHI Subsidiary is in material breach of or material
default under any BCHI Network Facility Agreement, (ii) no
event has occurred which, with notice or lapse of time, would
constitute a material breach or material default by BCHI or any
BCHI Subsidiary or permit termination, revocation, other
interference with performance of, modification or acceleration by
any third party of any BCHI Network Facility Agreement, and
(iii) as of the date hereof, no third party has repudiated,
revoked, terminated, or otherwise materially interfered with
performance of or has the right to terminate, repudiate, revoke, or
otherwise materially interfere with the performance of any BCHI
Network Facility Agreement. Any notices or other actions required
to be taken to renew the term of a BCHI Network Facility Agreement
for any upcoming renewal term have been taken or given in the
manner and within the time provided in such BCHI Network Facility
Agreement (or the time period provided for giving of such notice or
to undertake such action has not expired) to effectively renew the
term of such BCHI Network Facility Agreement for the upcoming term
thereof to the extent that such BCHI Network Facility Agreement is
renewable by its terms and BCHI or the applicable BCHI Subsidiary
intends to renew such BCHI Network Facility Agreement. To the
knowledge of BCHI, as of the date of this Agreement, BCHI and the
BCHI Subsidiaries hold all BCHI Network Facility Agreements
necessary to conduct BCHI’s business and no event has
occurred, or circumstance exists, that, but for the passage of time
or giving of notice, would preclude any BCHI Network Facility
Agreement from being renewed in accordance with the terms thereof
to the extent BCHI or the applicable BCHI Subsidiary intends to
renew such BCHI Network Facility Agreement.
Section
4.19 Insurance.
BCHI and the BCHI Subsidiaries maintain insurance in such amounts
and against such risks as BCHI believes to be customary for the
industries in which it and the BCHI Subsidiaries operate. Neither
BCHI nor any of the BCHI Subsidiaries has received notice of any
pending or threatened cancellation with respect to any such
material insurance policy, and each of BCHI and the BCHI
Subsidiaries is in compliance in all material respects with all
conditions contained therein.
Section
4.20 Information
Supplied.
None of the information supplied or to be supplied by BCHI or a
BCHI Subsidiary specifically for inclusion in the Proxy Statement
will, at the date it is first mailed to the Company’s
stockholders or at the time of the Stockholders Meeting, contain
any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order
to make the statements therein, in light of the circumstances under
which they are made, not false or misleading. Notwithstanding the
foregoing sentence, no representation or warranty is made by BCHI
with respect to statements made therein based on or derived from
information supplied by the Company specifically for inclusion or
incorporation by reference in the Proxy Statement. The information
supplied by BCHI or a BCHI Subsidiary for inclusion in the Proxy
Statement will comply as to form in all material respects with the
requirements of the Exchange Act and the rules and regulations
thereunder.
Section
4.21 Affiliate
Transactions. Except as set
forth in Section
4.21 of the BCHI Disclosure Letter, there are not any
transactions, agreements, arrangements or understandings between
BCHI or the BCHI Subsidiaries, on the one hand, and BCHI’s
Affiliates (other than the BCHI Subsidiaries), on the other
hand.
Section
4.22 Broker’s
Fees. Except as set
forth in Section
4.22 of the BCHI Disclosure Letter, no broker, finder or
investment banker is entitled to any brokerage, finder’s or
other fee or commission in connection with the Transactions based
upon arrangements made by or on behalf of BCHI or any BCHI
Subsidiary.
Section
4.23 Share
Ownership. Neither BCHI nor
any BCHI Subsidiary has been, at any time during the three years
prior to the date hereof, an “interested stockholder”
of the Company, as defined in Section 203 of the DGCL. As of the
date of this Agreement, none of BCHI, any of the BCHI Subsidiaries
or any of their respective Affiliates owns (directly or indirectly,
beneficially or of record) any shares of capital stock of the
Company and none of BCHI, any BCHI Subsidiary or their respective
Affiliates holds any rights to acquire shares of capital stock of
the Company except pursuant to this Agreement.
Section
4.24 Directors
and Officers. Section 4.24 of the BCHI
Disclosure Letter sets forth a list of all officers, directors,
partners and/or managers of the Company and each of its
Subsidiaries as of the date hereof.
Section
4.25 No
Other Representations or Warranties. Except for the
representations and warranties expressly made by BCHI in this
Article IV, neither
BCHI nor any other Person makes any representation or warranty with
respect to BCHI or the BCHI Subsidiaries or their respective
business, operations, assets, liabilities, condition (financial or
otherwise) or prospects, notwithstanding the delivery or disclosure
to BCHI or any of its Affiliates or Representatives of any
documentation, forecasts or other information with respect to any
one or more of the foregoing.
ARTICLE V
PRE-CLOSING COVENANTS
Section
5.1 Conduct
of Businesses by the Company and BCHI Prior to the Effective
Time. During the period
from the date of this Agreement to the earlier of the termination
of this Agreement in accordance with its terms and the Effective
Time (except as contemplated or permitted by this Agreement, as
required by a Governmental Entity or applicable Law, as the Company
or BCHI, as applicable, may otherwise consent in writing, or, in
the case of BCHI, as set forth in Section 5.3 of the BCHI
Disclosure Letter or on Exhibit D), each of the Company
and BCHI will, and will cause each of their Subsidiaries to, use
commercially reasonable efforts to (a) conduct, in all material
respects, its business in the ordinary course, including the timely
payment of all Taxes, (b) preserve intact its business organization
and its significant business relationships and to preserve
satisfactory relationships with its employees and keep available
the services of its current officers and key employees and to
maintain its current rights and franchises, (c) maintain
insurance upon all of its material assets in such amounts and of
such kinds comparable to that in effect on the date of the
Agreement, and (d) maintain all Permits and timely pay all
material fees, charges and other amounts to Governmental
Entities.
Section
5.2 Company
Forbearances. Without limiting
the generality of Section 5.1, during the
period from the date of this Agreement to the earlier of the
termination of this Agreement in accordance with its terms and the
Effective Time (except as permitted by this Agreement or as
required by applicable Law), the Company will not, and will cause
each of the Company Subsidiaries not to, without the prior written
consent of BCHI:
(a) incur any
indebtedness for borrowed money, assume, guarantee, endorse or
otherwise as an accommodation become responsible for the
obligations of any other Person (but not including accrual of
interest on or maturity of obligations incurred before the date of
this Agreement), or make any loan or advance, other than (A)
letters of credit, surety bonds or guarantees of payment or
performance obligations of the Company or any of the Company
Subsidiaries, (B) short-term indebtedness for borrowed money
incurred solely to refinance any existing short-term indebtedness
for borrowed money, in each case, in the ordinary course of
business, consistent with past practice, and (C) borrowings under
any revolver existing on the date of this Agreement;
(b) (i) issue, grant,
sell or pledge, or agree to issue, grant, sell or pledge, any
shares of its capital stock or any securities or obligations
convertible (whether currently convertible or convertible only
after the passage of time or the occurrence of certain events) into
or exchangeable for any shares of its capital stock, except (A) on
exercise or conversion of currently outstanding Company Options or
Company Warrants, (B) grants of Company Options in the ordinary
course of business under the Equity Compensation Plans in effect on
the date of this Agreement to employees hired after the date of
this Agreement, consistent with past practices; provided that (1)
the aggregate number of shares of Company Common Stock for which
such Company Options are exercisable will not exceed 200,000, (2)
the exercise price of all such Company Options will be no less than
the fair market value at the time they are granted and (3) no
Company Options will be granted to officers of the Company without
the prior written consent of BCHI or (C) as dividends in respect of
any shares of Company Preferred Stock payable in shares of Company
Common Stock in accordance with the respective certificates of
designations and preferences for the applicable series of Company
Preferred Stock, (ii) adjust, split, combine, consolidate or
reclassify any of its capital stock or other ownership interests
except for any such transaction by a wholly owned Company
Subsidiary that remains a wholly owned Company Subsidiary after the
consummation of such transaction, or (iii) make, declare or pay any
dividend, or make any other distribution on, or directly or
indirectly redeem, purchase or otherwise acquire, any shares of its
capital stock or any securities or obligations convertible (whether
currently convertible or convertible only after the passage of time
or the occurrence of certain events) into or exchangeable for any
shares of its capital stock, except (A) dividends in respect of any
shares of Company Preferred Stock payable in shares of Company
Common Stock in accordance with the respective certificates of
designations and preferences for the applicable series of Company
Preferred Stock, or (B) dividends paid by any of the Company
Subsidiaries to the Company or to any of its wholly owned
Subsidiaries;
(c) except as required
by Law or any Contract (including any Company Benefit Plan) in
effect on the date of this Agreement or as otherwise set forth in
Section 5.2(c)
of the Company Disclosure Letter:
(i) materially increase
any wages, salaries, compensation, pension, or other fringe
benefits or perquisites payable to any director, executive officer
or employee with a base salary equal to or greater than
$150,000;
(ii) enter
into or amend any employment or severance agreements with any
director or executive officer;
(iii) establish
any material bonus or incentive plan;
(iv) pay
any pension or retirement allowance not allowed by any existing
plan or agreement or by applicable Law;
(v) pay any bonus to
any director or executive officer;
(vi) become
a party to, amend or commit itself to, any pension, retirement,
profit-sharing or welfare benefit plan or agreement with or for the
benefit of any employee of the Company or a Company Subsidiary,
except in each case, in the ordinary course of business and as
would not result in a material increase in cost or liability to the
Company; or
(vii) amend
any Equity Compensation Plan or agreement thereunder.
(d) sell, lease,
transfer or otherwise dispose of any of its properties or assets to
any Person other than a Company Subsidiary, except for the disposal
of obsolete assets or assets sold in the ordinary course of
business;
(e) make any
acquisition (including by merger) of the capital stock (or other
equity interests) or a material portion of the assets of any other
Person;
(f) enter into any new
line of business that is material to the Company and the Company
Subsidiaries, taken as a whole, or materially change any of its
technology or operating policies that are material, individually or
in the aggregate, to the Company and the Company Subsidiaries,
taken as a whole, except as required by applicable
Law;
(g) amend the Company
Charter or the Company Bylaws or any organizational document of a
Company Subsidiary or take any action to exempt any Person (other
than BCHI or the BCHI Subsidiaries) from DGCL Section 203 or any
similarly restrictive provisions of its organizational
documents;
(h) except as required
by GAAP or the SEC, make any material change in its methods or
principles of accounting;
(i) except as required
by applicable Law, make, change or rescind any Tax election, change
any Tax accounting period, adopt or change any Tax accounting
method, amend any material Tax Return, enter into any closing
agreement, settle any Tax claim or assessment relating to the
Company or any of the Company Subsidiaries, obtain any Tax ruling,
surrender any right to claim a refund of material Taxes, or consent
to any extension or waiver of the limitation period applicable to
any Tax claim or assessment relating to the Company or any of the
Company Subsidiaries;
(j) enter into, renew,
amend in any material respect or waive any of its material rights
under any Company Material Contract, except in the ordinary course
of business and which would not materially and adversely affect the
business of the Company and the Company Subsidiaries;
(k) adopt or recommend
a plan of complete or partial dissolution, liquidation,
recapitalization, restructuring or other
reorganization;
(l) make any
discretionary contributions to pension or retirement plans in
excess of the minimum required contributions as required by the
Pension Protection Act of 2006 or similar legal requirements for
plans outside the United States;
(m) conduct the
businesses of the Company or any Company Subsidiary in a manner
that would cause the Company or any Company Subsidiary to become an
“investment company” subject to registration under the
Investment Company Act;
(n) terminate or permit
any material Permit of the Company or a Company Subsidiary to
lapse, other than in accordance with the terms and regular
expiration of any such Permit, or fail to apply on a timely basis
for any renewal of any renewable material Permit of the Company or
a Company Subsidiary;
(o) materially change
recurring or non-recurring rates, promotions, sales incentives,
commission plans, credit policies or collections
procedures;
(p) fail to pay or
satisfy, or delay the payment or satisfaction of, any accounts
payable or other obligations, in any manner outside of the ordinary
course of business or inconsistent with past practices of the
Company and the Company Subsidiaries (and in any event, fail to pay
or satisfy any accounts payable or other obligations when due
without imposition of any penalty or charge);
(q) take any action
outside the ordinary course of business consistent with past
practices that would materially diminish the working capital of the
Company and the Company Subsidiaries; or
(r) agree to take, make
any commitment to take, or adopt any resolutions of its board of
directors in support of, any of the actions prohibited by this
Section 5.2.
Notwithstanding
any of the above restrictions, the Company may, prior to the
Closing, (i) issue equity or debt securities in connection with
capital raising activities, in an aggregate amount of net proceeds
to the Company not to exceed $10,000,000 and (ii) effectuate the
Reverse Split and take all actions necessary, including amending
the Company Charter, to effectuate the Reverse Split.
Section
5.3 BCHI
Forbearances. Without limiting
the generality of Section 5.1, during the
period from the date of this Agreement to the earlier of the
termination of this Agreement in accordance with its terms and the
Effective Time (except as permitted by this Agreement, as required
by applicable Law, as set forth in Section 5.3 of the BCHI
Disclosure Letter or as set forth on Exhibit D), BCHI will not, and
will cause each of the BCHI Subsidiaries not to, without the prior
written consent of the Company (which consent will not be
unreasonably withheld, conditioned or delayed):
(a) incur any
indebtedness for borrowed money, assume, guarantee, endorse or
otherwise as an accommodation become responsible for the
obligations of any other Person (but not including accrual of
interest on or maturity of obligations incurred before the date of
this Agreement), or make any loan or advance, other than letters of
credit, surety bonds or guarantees of payment or performance
obligations of BCHI or any of the BCHI Subsidiaries and (B)
short-term indebtedness for borrowed money incurred solely to
refinance any existing short-term indebtedness for borrowed money,
in each case, in the ordinary course of business, consistent with
past practice;
(b) (i) issue, grant,
sell or pledge, or agree to issue, grant, sell or pledge, any
shares of its capital stock or any securities or obligations
convertible (whether currently convertible or convertible only
after the passage of time or the occurrence of certain events) into
or exchangeable for any shares of its capital stock; (ii) adjust,
split, combine, consolidate or reclassify any of its capital stock
or other ownership interests; or (iii) make, declare or pay any
dividend, or make any other distribution on, or directly or
indirectly redeem, purchase or otherwise acquire, any shares of its
capital stock or any securities or obligations convertible (whether
currently convertible or convertible only after the passage of time
or the occurrence of certain events) into or exchangeable for any
shares of its capital stock, except (A) pro rata stock dividends or
(B) dividends paid by any of the BCHI Subsidiaries to BCHI or to
any of its wholly owned Subsidiaries;
(c) except as required
by Law, a Contract (including, any BCHI Benefit Plan) in effect on
the date of this Agreement or as otherwise set forth in
Section 5.3(c)
of the BCHI Disclosure Letter:
(i) materially increase
any wages, salaries, compensation, pension, or other fringe
benefits or perquisites payable to any director, executive officer
or employee with a base salary equal to or greater than
$150,000;
(ii) enter
into or amend any employment or severance agreements with any
director or executive officer;
(iii) establish
any material bonus or incentive plan;
(iv) pay
any pension or retirement allowance not allowed by any existing
plan or agreement or by applicable Law;
(v) pay any material
bonus to any director or executive officer; or
(vi) become
a party to, amend or commit itself to, any pension, retirement,
profit-sharing or welfare benefit plan or agreement with or for the
benefit of any employee of BCHI or a BCHI Subsidiary, except in
each case, in the ordinary course of business and as would not
result in a material increase in cost or liability to the
Company;
(d) sell, lease,
transfer or otherwise dispose of any of its properties or assets to
any Person other than a BCHI Subsidiary, except for the disposal of
obsolete assets or assets sold in the ordinary course of
business;
(e) make any
acquisition (including by merger) of the capital stock (or other
equity interests) or a material portion of the assets of any other
Person;
(f) enter into any new
line of business that is material to BCHI and the BCHI
Subsidiaries, taken as a whole, or materially change any of its
technology or operating policies that are material, individually or
in the aggregate, to BCHI and the BCHI Subsidiaries, taken as a
whole, except as required by applicable Law;
(g) amend the BCHI
Charter or the BCHI Bylaws or any organizational documents of any
BCHI Subsidiary;
(h) except as required
by GAAP or the SEC, make any material change in its methods or
principles of accounting;
(i) except as required
by applicable Law, make, change or rescind any Tax election, change
any Tax accounting period, adopt or change any Tax accounting
method, amend any material Tax Return, enter into any closing
agreement, settle any Tax claim or assessment relating to BCHI or
any of the BCHI Subsidiaries, obtain any Tax ruling, surrender any
right to claim a refund of material Taxes, or consent to any
extension or waiver of the limitation period applicable to any Tax
claim or assessment relating to BCHI or any of the BCHI
Subsidiaries;
(j) enter into, renew,
amend in any material respect or waive any of its material rights
under any BCHI Material Contract, except in the ordinary course of
business consistent with past practice and which would not
materially and adversely affect the business of BCHI and the BCHI
Subsidiaries;
(k) adopt or recommend
a plan of complete or partial dissolution, liquidation,
recapitalization, restructuring or other
reorganization;
(l) make any
discretionary contributions to pension or retirement plans in
excess of the minimum required contributions as required by the
Pension Protection Act of 2006 or similar legal requirements for
plans outside the United States;
(m) conduct the
businesses of BCHI or any BCHI Subsidiary in a manner that would
cause BCHI or any BCHI Subsidiary to become an “investment
company” subject to registration under the Investment Company
Act;
(n) terminate or permit
any material Permit of BCHI or a BCHI Subsidiary to lapse, other
than in accordance with the terms and regular expiration of any
such Permit, or fail to apply on a timely basis for any renewal of
any renewable material Permit of BCHI or a BCHI
Subsidiary;
(o) materially change
recurring or non-recurring rates, promotions, sales incentives,
commission plans, credit policies or collections
procedures;
(p) fail to pay or
satisfy, or delay the payment or satisfaction of, any accounts
payable or other obligations, in any manner outside of the ordinary
course of business or inconsistent with past practices of BCHI and
the BCHI Subsidiaries (and in any event, fail to pay or satisfy any
accounts payable or other obligations when due without imposition
of any penalty or charge);
(q) take any action
outside the ordinary course of business consistent with past
practices that would materially diminish the working capital of
BCHI and the BCHI Subsidiaries; or
(r) agree to take, make
any commitment to take, or adopt any resolutions of its board of
directors in support of, any of the actions prohibited by this
Section 5.3.
Notwithstanding
any of the above restrictions, BCHI may prior to the Closing cause
any or all of the BCHI Subsidiaries that are corporations to be, in
effect, converted into limited liability companies, by conversion,
merger or other means under applicable state or provincial
Law.
ARTICLE VI
ADDITIONAL AGREEMENTS
Section
6.1 Filings;
Other Actions; Notification.
(a) The Parties will
use their respective reasonable best efforts to (i) take, or cause
to be taken, all appropriate action and do, or cause to be done,
all things necessary, proper or advisable under applicable Law,
including Antitrust Laws, or otherwise to consummate and make
effective the Transactions as promptly as practicable,
(ii) obtain from any Governmental Entity any consents,
licenses, permits, waivers, approvals, authorizations or Orders,
including the FCC Approval and State Approvals, required to be
obtained by a Party, or any of their respective Subsidiaries, or to
avoid any Action by any Governmental Entity (including those in
connection with the Antitrust Laws), in connection with the
authorization, execution and delivery of this Agreement and the
consummation of the Transactions and (iii) (A) as promptly as
reasonably practicable, and in any event within fifteen (15)
Business Days after the date hereof, make all necessary filings,
and thereafter make any other required submissions, with respect to
this Agreement required under the HSR Act, (B) as promptly as
reasonably practicable, and in any event within fifteen (15)
Business Days after the date hereof, make all necessary filings,
and thereafter make any other required submissions, with respect to
this Agreement required in order to obtain the FCC Approval, (C) as
promptly as reasonably practicable, and in any event within thirty
(30) Business Days after the date hereof, make all necessary
filings, and thereafter make any other required submissions, with
respect to this Agreement required in order to obtain the State
Approvals, and (D) as promptly as reasonably practicable after the
date hereof, make all necessary filings, and thereafter make any
other required submissions, with respect to this Agreement required
under any other applicable Law. The Company and BCHI will furnish
to each other all information required for any application or other
filing under the rules and regulations of any applicable Law in
connection with the Transactions.
(b) The Company and
BCHI shall give (or shall cause their respective Subsidiaries to
give) any notices to third parties, and use, and cause their
respective Subsidiaries to use, their reasonable best efforts to
obtain any third party consents, (i) necessary, proper or advisable
to consummate the Transactions, or (ii) required to prevent a
Company Material Adverse Effect or BCHI Material Adverse Effect,
respectively, from occurring prior to or after the Effective
Time.
(c) Without limiting
the generality of anything contained in this Section 6.1, each Party hereto
will: (i) give the other parties prompt notice of the making or
commencement of any Action with respect to the Merger or any of the
other Transactions; (ii) keep the other parties informed as to the
status of any such request or Action; (iii) promptly inform the
other parties of any communication to or from any Governmental
Entity regarding the Merger or any of the other Transactions; (iv)
respond as promptly as practicable to any additional requests for
information received by any Party from any Antitrust Authority, the
FCC, any State PSC or any other Governmental Entity with respect to
the Transactions or filings contemplated by Section 7.1(a); and (v) use
reasonable best efforts to (A) obtain termination or expiration of
the waiting period under the HSR Act and such other approvals,
consents and clearances as may be necessary, proper or advisable
under any applicable laws and obtain such approvals, consents and
clearances as may be necessary, proper or advisable under any
applicable Laws and (B) prevent the entry in any Action brought by
a Governmental Entity or any other Person of any Order which would
prohibit, make unlawful or delay the consummation of the
Transactions. Each Party will consult and cooperate with the other
parties and will consider in good faith the views of the other
parties in connection with any filing, analysis, appearance,
presentation, memorandum, brief, argument, opinion or proposal made
or submitted in connection with the Merger or any of the other
Transactions. In addition, except as may be prohibited by any
Governmental Entity or by applicable Law, in connection with any
such request or Action, each Party hereto will permit
Representatives of the other parties to be present at each meeting
or conference relating to such request or Action and to have access
to and be consulted in connection with any document, opinion or
proposal made or submitted to any Governmental Entity in connection
with such request or Action.
(d) Notwithstanding
anything to the contrary in this Agreement, nothing in this
Agreement will be deemed to require the Company, BCHI or any of
their respective Affiliates (i) to divest or hold separate any
assets or agree to limit its future activities, method or place of
doing business, including any assets acquired by the Company, BCHI
or any of their respective Affiliates in connection with the
Transactions, (ii) to commence any litigation against any Person in
order to facilitate the consummation of the Transactions or (iii)
to defend against any litigation filed with or brought by any
Governmental Entity seeking to prevent the consummation of, or
impose limitations on, any of the Transactions.
Section
6.2 Preparation
of Proxy Statement; Stockholders Meeting.
(a) As promptly as
practicable following the date of this Agreement (but no later than
thirty (30) days after binding commitments in respect of the
Financing (or, if Alternative Financing is being used, the
Alternative Financing) have been entered into by a Financing
Source), the Company will file the Proxy Statement with the SEC.
The Company will use reasonable best efforts to have the Proxy
Statement disseminated to its stockholders as promptly as
practicable after such filing is cleared by the SEC, and in any
event no later than seven (7) Business Days after the Proxy
Statement is cleared by the SEC. BCHI will furnish to the Company
all information concerning itself and its Subsidiaries, and provide
such other assistance (including using reasonable best efforts to
assist the Company in preparing pro forma financial information
required to be included in the Proxy Statement), as may be
reasonably requested in connection with the preparation, filing and
distribution of the Proxy Statement by the Company.
(b) Each Party agrees
that none of the information supplied by such Party for inclusion
or incorporation by reference in the Proxy Statement shall, on the
date mailed to the stockholders of the Company and at the time of
the Stockholders Meeting, contain any untrue statement of a
material fact or omit to state a material fact necessary in order
to make the statements therein, in light of the circumstances under
which they are made, not misleading.
(c) The Company will
provide BCHI with a reasonable opportunity to review and comment on
the Proxy Statement, and will incorporate the reasonable comments
of BCHI therein; provided, that no filing or mailing of, or
amendment or supplement to, the Proxy Statement will be made by the
Company without BCHI’s prior written consent (which will not
be unreasonably withheld, conditioned or delayed). The Company
will, as promptly as practicable after receipt thereof, provide
BCHI with copies of any written comments and advise BCHI of any
oral comments with respect to the Proxy Statement received from the
SEC. The Company will use its reasonable best efforts, in
cooperation with BCHI, to respond as promptly as practicable to any
comments received from the SEC with respect to the Proxy
Statement.
(d) If at any time
prior to the Effective Time (i) any change occurs with respect to
the Parties, or any of their respective Affiliates, directors or
officers, or (ii) any information relating to the Parties, or any
of their respective Affiliates, directors or officers, is
discovered by any of the Parties, in the case of each of clauses
(i) and (ii), which should be set forth in an amendment or
supplement to the Proxy Statement so that the Proxy Statement would
not contain any untrue statement of a material fact or omit to
state a material fact necessary in order to make the statements
therein, in light of the circumstances under which they are made,
not misleading, the Party that observes such change or discovers
such information shall promptly notify the other Party, and the
Company shall file as promptly as practicable with the SEC an
appropriate amendment or supplement to the Proxy Statement
describing such change or information and, as required by Law,
disseminate the information contained in such amendment or
supplement to the shareholders of the Company.
(e) The Company will
take all lawful action to call, give notice of, convene and hold a
meeting of the stockholders of the Company (the “Stockholders Meeting”),
on a date as promptly as practicable after the SEC has authorized
distribution of and has advised the Company that it has no comments
or additional comments on the Proxy Statement, for the purpose of
obtaining the Stockholder Approval and shall take all lawful action
to solicit and obtain the Stockholder Approval. Subject to
Section 6.3(c), the
Company Board will recommend to the stockholders of the Company the
adoption of this Agreement. The Company may only postpone or
adjourn the Stockholder’s Meeting (i) to solicit additional
proxies for the purpose of obtaining the Stockholder Approval, (ii)
for the absence of a quorum, and (iii) to allow reasonable
additional time for the filing and/or mailing of any supplemental
or amended disclosure that the Company has determined after
consultation with outside legal counsel is reasonably likely to be
required under applicable Law and for such supplemental or amended
disclosure to be disseminated and reviewed by stockholders of the
Company prior to the Stockholders Meeting. The only matters to be
voted upon at the Stockholders Meeting are (i) the Merger and this
Agreement, including the amendment and restatement of the
Company’s Charter, the issuance of shares of Company Common
Stock pursuant to the Merger, and (to the extent necessary to
comply with NASDAQ listing requirements) the Reverse Split (ii) any
adjournment or postponement of the Stockholders Meeting and (iii)
any other matters as are required by applicable Law.
Section
6.3 No
Solicitation or Change of Recommendation.
(a) No Solicitation.
(i) Except as set forth
in Section
6.3(a)(ii) and Section 6.3(a)(iii), the
Company agrees that neither it nor any of the Company Subsidiaries,
nor any of their respective officers, managers or directors will,
and that they will instruct and cause their respective Affiliates
and Representatives (collectively, the “Company Non-Solicit
Parties”) not to, directly or indirectly:
(A) initiate, solicit
or knowingly facilitate or encourage any inquiries, discussions
regarding, or the making or submission of, any proposal, request or
offer that constitutes, or could reasonably be expected to lead to,
an Alternative Proposal;
(B) approve, endorse,
recommend or enter into any Contract or agreement in principle,
whether written or oral, with any Person (other than BCHI)
concerning any letter of intent, memorandum of understanding,
acquisition agreement, merger agreement, joint venture agreement,
partnership agreement or other similar Contract concerning an
Alternative Proposal (other than negotiating and entering into a
confidentiality agreement as described in Section 6.3(a)(iii)) (an
“Alternative
Acquisition Agreement”);
(C) terminate, amend,
release, modify, or fail to enforce any provision of, or grant any
permission, waiver or request under, any standstill,
confidentiality or similar Contract entered into by the Company or
a Company Subsidiary in respect of or in contemplation of an
Alternative Proposal (other than to the extent the Company Board
determines in good faith, after consultation with its outside
financial and legal advisors, that failure to take any such actions
under this Section
6.3(a)(i)(C) would reasonably be expected to be inconsistent
with the directors’ duties or obligations under applicable
Law);
(D) conduct, engage in,
continue or otherwise participate in any discussions or
negotiations to facilitate any proposal that constitutes an
Alternative Proposal;
(E) furnish any
non-public information relating to the Company or any of the
Company Subsidiaries, or afford access to the books or records or
Representatives of any of the Company or any of the Company
Subsidiaries, to any third party that, to the knowledge of the
Company, after consultation with its Representatives, is seeking to
make, or has made, an Alternative Proposal;
(F) resolve or publicly
propose or announce to do any of the foregoing.
(ii) Notwithstanding
anything to the contrary in this Agreement and subject to the
conditions in Section
6.3(a)(iii) and solely in response to a Bona Fide
Alternative Proposal made on or after the date of this Agreement
and prior to the Stockholder Approval, the Company Non-Solicit
Parties may, with respect to the Person that has made such Bona
Fide Alternative Proposal:
(A) provide information
or afford access to the books and records or Representatives of the
Company or any Company Subsidiary; and
(B) engage or
participate in any discussions or negotiations with such Person
(and its Representatives) with respect to such Bona Fide
Alternative Proposal.
(iii) The
Company may not take the actions described in Section 6.3(a)(ii) unless,
prior to taking any such action:
(A) the Company has (1)
received from such Person an executed confidentiality agreement on
terms that are no less restrictive than those contained in the
Confidentiality Agreement (and compliant with the last sentence of
Section 6.3(g));
provided that such confidentiality agreement (x) shall not be
required to contain standstill provisions and (y) shall not contain
any provisions that would prevent the Company from complying with
its obligation to provide the required disclosure to BCHI pursuant
to this Section
6.3, and (2) disclosed to BCHI (and, if applicable,
contemporaneously provided copies of) any non-public information to
be provided to such Person and any books or records to which such
Person will be afforded access, in each case, to the extent not
previously provided to BCHI;
(B) the Company has
delivered to BCHI written notice prior to taking any such action
(1) stating that the Company Board intends to take such action, (2)
stating that the Company Board has made the determination set forth
in Section
6.3(a)(iii)(C) and (3) including an unredacted copy of such
Bona Fide Alternative Proposal (including any materials relating to
such Person’s proposed equity and debt financing, if any) and
an executed copy of the confidentiality agreement described in
Section
6.3(a)(iii)(A); and
(C) the Company Board
has determined in good faith, after consultation with its outside
financial and legal advisors that (1) such Bona Fide Alternative
Proposal either constitutes a Superior Proposal or is reasonably
likely to result in a Superior Proposal and (2) the failure to take
such action would reasonably be expected to be inconsistent with
the directors’ duties or obligations under applicable
Law.
(b) No Change of Recommendation.
Except as set forth in Section 6.3(c), the Company
will not, and will cause the other Company Non-Solicit Parties not
to:
(i) withdraw, qualify
or modify, in a manner adverse to BCHI, the Company Board
Recommendation;
(ii) fail
to announce publicly, within ten (10) Business Days after a tender
offer or exchange offer relating to any securities of the Company
has been commenced, that the Company Board recommends rejection of
such tender or exchange offer;
(iii) fail
to include the Company Board Recommendation in the notice
distributed to the stockholders of the Company pursuant to
Section
6.2(e);
(iv) approve,
adopt or recommend any Alternative Proposal; or
(v) resolve or publicly
propose to do any of the foregoing (any such prohibited action
described in Section
6.3(b)(i) through this Section 6.3(b)(v) being
referred to as a “Change of
Recommendation”);
provided
that the making of any determination of the Company Board (or any
committee thereof) to provide, or the provision of, a Change of
Recommendation Notice in compliance with the terms of this
Agreement will not, in and of itself, be deemed a Change of
Recommendation.
(c) Certain Permitted Changes of
Recommendation. Subject to Section 6.3(d), at any time
prior to receiving the Stockholder Approval, the Company Board in
response to a Superior Proposal may effect, or cause the Company to
effect, as the case may be, a Change of Recommendation if: (i) the
Company Board determines that after complying with Section 6.3(d), a Bona Fide
Alternative Proposal constitutes a Superior Proposal and (ii) the
Company Board determines in good faith, after consultation with its
outside financial and legal advisors, that the failure to take such
action would be inconsistent with the directors’ duties or
obligations under applicable Law.
(d) Procedure Prior to Changes in the
Recommendation. The Company Board will be entitled to
effect, or cause the Company to effect, a Change of Recommendation
in connection with a Superior Proposal (to the extent permitted
under Section
6.3(c)), only if (A) the Company shall have delivered to
BCHI a written notice (a “Change of Recommendation
Notice”) (1) stating that the Company Board intends to
take such actions pursuant to Section 6.3(c), (2) stating
that the Company Board has made the determinations set forth in
Sections 6.3(c)(i)
and 6.3(c)(ii) and
(3) including an unredacted copy of such Superior Proposal and
unredacted form of any Alternative Acquisition Agreement related to
such Superior Proposal (including any materials relating to such
Person’s proposed equity and debt financing, if any) and (B)
the Negotiation Period shall have expired. During the five (5)
Business Day period commencing on the date of BCHI’s receipt
of such Change of Recommendation Notice (such period, as may be
extended pursuant to this Section 7.3(d), the
“Negotiation
Period”), the Company will engage, and will cause its
Representatives to be available for the purpose of engaging, in
good faith negotiations with BCHI (to the extent BCHI desires to
negotiate) regarding an amendment of this Agreement so that the
Alternative Proposal that is the subject of the Change of
Recommendation Notice ceases to be a Superior Proposal. Each time
the financial or other material terms or conditions of such Bona
Fide Alternative Proposal (or terms or conditions related thereto,
such as the proposed equity and debt financing) are amended or
modified, the Company will be required to deliver to BCHI a new
Change of Recommendation Notice (including, as attachments thereto,
amended forms of the written Alternative Acquisition Agreements
relating to such Bona Fide Alternative Proposal) and the
Negotiation Period will be extended by an additional two (2)
Business Days from the date of BCHI’s receipt of such new
Change of Recommendation Notice.
(e) Certain Permitted Disclosure.
Nothing contained in this Section 6.3 will be deemed to prohibit
the Company from complying with its required disclosure obligations
under applicable Law with regard to an Alternative Proposal or
making any disclosure to the stockholders of the Company if the
Company Board determines in good faith, after consultation with its
outside legal counsel, that the failure to make such disclosure
would be inconsistent with the directors’ duties or
obligations under applicable Law; provided, however, that neither
the Company nor the Company Board (or any committee thereof) will
affect any Change of Recommendation, except in accordance with
Section 6.3(c) and
Section 6.3(d); and
provided, further, that in no event will any
“Stop-Look-and-Listen” communication contemplated by
Rule 14d-9(f) under the Exchange Act be deemed to be a Change of
Recommendation or to violate this Section 6.3. Disclosure of the
type described in this Section 6.3(e) (other than the type
described in the second proviso of the foregoing sentence) that is
not an express rejection of any Alternative Proposal or an express
confirmation that the Company Board Recommendation remains in
effect will be deemed to be a Change of
Recommendation.
(f) Existing
Discussions. The Company will, and will cause the Company
Subsidiaries and their respective officers, managers and directors
and their respective Affiliates and Representatives to, immediately
cease and cause to be terminated any discussions or negotiations
with, or any solicitation or intentional assistance or
encouragement of, any Person with respect to any Alternative
Proposal (or that could reasonably be expected to lead to or result
in an Alternative Proposal) which are on-going as of the date of
this Agreement and request that any such Person promptly return or
destroy (and confirm destruction of) all confidential information
concerning the Company and any Company Subsidiary. The Company will
take the necessary steps to promptly inform, on the date of this
Agreement, the individuals or entities referred to in the preceding
sentence of this Section
6.3(f).
(g) Notice.
Without limiting anything in this Section 6.3, the Company will
promptly (and, in any event, within 24 hours) notify BCHI orally
and in writing if any inquiries, proposals or offers with respect
to an Alternative Proposal or requests for non-public information
relating to the Company or any Company Subsidiary (other than
requests for information in the ordinary course of business
consistent with past practice and unrelated to an Alternative
Proposal) are received by, or any discussions or negotiations with
respect to an Alternative Proposal are sought to be initiated or
continued with, the Company or any Company Subsidiary or any of
their respective Representatives, indicating, in connection with
such notice, the name of such Person and the material terms and
conditions of such discussions, proposals, offers or requests, and
including in the written version of such notice, an unredacted copy
of any written (including via electronic transmission) proposals,
offers or requests, in each case, including any amendments or
modifications thereto. The Company will promptly (and, in any
event, within 24 hours after any amendment or modification of, or
development with respect to, any such, proposal, offer, request or
Alternative Proposal, or at the reasonable request of BCHI) notify
BCHI orally and in writing of the status of any such inquiries,
proposals, offers or requests, including any material developments,
notifications, amendments or modifications thereto and furnish to
BCHI copies of any written inquiries, correspondence and draft
documentation in connection with such discussions, proposals,
offers or requests. The Company will not, and will cause its
respective Subsidiaries and Representatives not to, enter into any
Contract that would prohibit them from providing the information
required to be provided to BCHI pursuant to this Section 6.3(g).
Section
6.4 Access
to Information.
(a) Upon reasonable
notice, BCHI and the Company will, and will cause each of their
respective Subsidiaries to, afford to BCHI or the Company, as
applicable, and to their respective officers, employees,
accountants, counsel, lenders, financial advisors and other
Representatives reasonable access during normal business hours
during the period prior to the Effective Time to all their
respective owned or leased properties, books, Contracts,
commitments, personnel (including contractors and distributors),
records, Tax Returns, work papers and all other information
concerning its business, operations, status of compliance with
Environmental Law, properties and personnel as BCHI or the Company,
as applicable, may reasonably request; except that each of BCHI and
the Company, as applicable, and its Representatives will conduct
any such activities in such a manner as not to interfere
unreasonably with the business or operations of BCHI or the
Company, as applicable, and their respective Subsidiaries; except
further that neither BCHI nor the Company, as applicable, or their
respective Subsidiaries will be required to provide any access or
disclose any information if such access or disclosure would
contravene any applicable Law or where such access or disclosure
would jeopardize the attorney-client privilege of the institution
in possession or control of such information or contravene any
fiduciary duty or binding agreement entered into prior to the date
of this Agreement; except further that the foregoing shall not
require BCHI or the Company to permit any inspection or to disclose
any information that in the reasonable judgement of BCHI or the
Company, as the case may be, would result in the disclosure of any
trade secrets of third parties.
(b) All information and
materials provided pursuant to this Agreement will be subject to
the provisions of the Confidentiality Agreement, dated as of May
18, 2017, by and among the Company, Birch Equity Partners, LLC and
Birch Communications, Inc. (the “Confidentiality
Agreement”).
(c) No investigation by
either of the Parties or their respective Representatives will
affect the representations and warranties of the other set forth in
this Agreement.
Section
6.5 Employee
Matters.
(a) After the Closing
Date through the date of termination for the applicable BCHI
Employee, the Company will provide, and will cause its Affiliates
to provide, each employee of BCHI or any BCHI Subsidiary as of the
Closing Date who is employed by the Company or any of the Company
Subsidiaries after the Closing Date (the “BCHI Employees”) with
such employee compensation and benefits as the Company or its
Affiliate (as applicable), in its sole discretion considers to be
appropriate, subject to the provisions of this Section 6.5 and applicable
Law.
(b) To the extent
commercially reasonable, and without duplication of any benefits,
the Company (i) will give, and cause its Affiliates to give,
each BCHI Employee the same service credit under any Company
Benefit Plan that covers such BCHI Employee after the Closing Date
as would have been granted to such BCHI Employee by BCHI or any
BCHI Subsidiary, as applicable, prior to the Closing under any
comparable BCHI Benefit Plan, for all purposes (including
eligibility to participate, vesting in eligible benefits and levels
of benefits) other than for benefit accrual purposes under a
defined benefit pension plan, (ii) will give, and cause its
Affiliates to give, each BCHI Employee service credit granted by
the Company or its Subsidiary, as applicable, under any Company
Benefit Plan that covers such BCHI Employee after the Closing Date
for service prior to the Closing, based upon the provisions of such
Company Benefit Plan, for purposes of entitlement to benefits
thereunder (except for purposes of benefits accrual under a defined
benefits pension plan), (iii) will allow, and cause its Affiliates
to allow, such BCHI Employees to participate in each Company
Benefit Plan providing welfare benefits (including medical, life
insurance, long-term and short-term disability insurance and
long-term care insurance) in the plan year in which the Closing
occurs without regard to preexisting-condition limitations, waiting
periods, evidence of insurability or other exclusions or
limitations, and (iv) will credit, and cause its Affiliates to
credit, the BCHI Employees with any expenses incurred within the
year in which the Closing Date occurs, but prior to the Closing
Date, that were credited by BCHI pursuant to the comparable BCHI
Benefit Plans for purposes of determining deductibles, co-pays and
other applicable limits under the Company Benefit Plans, in which
they participate and any similar replacement plans.
(c) For the period of
the year in which the Closing occurs that is after the Closing
Date, the Company will continue, and cause its Affiliates to
continue, to credit to each BCHI Employee all vacation and personal
holiday time that such BCHI Employee has accrued but not used
through the Closing Date and is entitled to use as of the Closing
Date, subject to the Company’s vacation day carryover
policy.
(d) Nothing in this
Agreement will create any right or obligation which is enforceable
by any employee, former employee, BCHI Employee or any other Person
with respect to any terms or conditions of employment, including,
but not limited to, the benefits and compensation described in this
Section 6.5. For
the avoidance of doubt, any amendments to the Company’s, the
Company Subsidiaries’, and the Surviving Company’s
benefit and compensation plans, programs or arrangements will occur
only in accordance with their respective terms and will be pursuant
to action taken by the Company, the Company Subsidiaries, or the
Surviving Company which are independent of the consummation of this
Agreement or any continuing obligations hereunder. Nothing in this
Section 6.5 shall
be construed as prohibiting the Company or its Affiliates from
terminating any BCHI Employee’s employment as the Company or
such Affiliate determines appropriate in its sole discretion,
subject to the terms of any employment agreement and applicable
Law.
Section
6.6 Indemnification;
Directors’ and Officers’ Insurance.
(a) From the Effective
Time, the Company will, and will cause its Subsidiaries to,
indemnify, defend and hold harmless (including by advancing
expenses) each current and former director, officer and employee of
(i) BCHI and its Subsidiaries and (ii) the Company and each of its
Subsidiaries (each, a “D&O Indemnified
Party” and, collectively, the “D&O Indemnified
Parties”) against all claims, liabilities, losses,
damages, judgments, fines, penalties, costs and expenses (including
fees and expenses of legal counsel) in connection with any actual
or threatened claim, suit, action, proceeding or investigation
(whether civil, criminal, administrative or investigative) (each, a
“Claim”), whenever
asserted, arising out of, relating to or in connection with any
action or omission relating to their position with BCHI or its
Subsidiaries, or the Company and its Subsidiaries, as the case may
be, occurring or alleged to have occurred before or at the
Effective Time (including any Claim relating in whole or in part to
the Agreement or the Transactions), to the fullest extent permitted
under applicable Law. Each of (x) the Company Charter, the
Company Bylaws and the respective organizational documents of each
of the Company Subsidiaries as currently in effect, and
(y) any indemnification agreements with a D&O Indemnified
Party listed on Section
6.6(a) of the Company Disclosure Letter or Section 6.6(a) of the BCHI
Disclosure Letter, which will in each case survive the Transactions
and continue in full force and effect to the extent permitted by
applicable Law, will not, from and after the Effective Time, be
amended, repealed or otherwise modified in a manner that would
adversely affect the rights thereunder of the D&O Indemnified
Parties except, in the case of clauses (x) and (y), as required by applicable
Law. Without limiting the foregoing, at the Effective Time, the
Surviving Company will, and the Company will cause the Surviving
Company to cause the certificate of formation and limited liability
company agreement of the Surviving Company to include provisions
for limitation of liabilities of directors and officers,
indemnification, advancement of expenses and exculpation of the
D&O Indemnified Parties no less favorable to the D&O
Indemnified Parties than as set forth in the Company Charter and
Company Bylaws in effect on the date of this Agreement, which
provisions will, from and after the Effective Time, not be amended,
repealed or otherwise modified in a manner that would adversely
affect the rights thereunder of the D&O Indemnified Parties
except as required by applicable Law.
(b) Prior to the
Effective Time, the Company will and, if it is unable to, the
Company will cause the Surviving Company as of the Effective Time
to obtain and fully pay for “tail” insurance policies
with a claims period of at least six (6) years from and after the
Effective Time from the Company’s current insurance carrier,
as applicable, or from an insurance carrier with the same or better
credit rating as such current insurance carrier with respect to
directors’ and officers’ liability insurance and
fiduciary liability insurance (the “D&O Insurance”) for
the persons who, as of the date of this Agreement, are covered by
either BCHI’s existing D&O Insurance or the
Company’s existing D&O Insurance, as applicable. Such
“tail” insurance policies will have terms, conditions,
retentions and levels of coverage at least as favorable as
BCHI’s existing D&O Insurance, with respect to matters
existing or occurring at or prior to the Effective Time (including
in connection with this Agreement and the Transactions); except
that the maximum aggregate premium for such insurance policies for
any such year will not be in excess of the Maximum Premium. The
Company will cause the Surviving Company to maintain such
“tail” insurance policies in full force and effect for
their full term. If Company for any reason fails to obtain such
“tail” insurance policies as of the Effective Time, the
Surviving Company will, and the Company will cause the Surviving
Company to, continue to maintain in effect, at no expense to the
D&O Indemnified Parties, for a period of at least six (6) years
from and after the Effective Time, each of BCHI’s D&O
Insurance and the Company’s D&O Insurance, as applicable,
in place as of the date of this Agreement with terms, conditions,
retentions and levels of coverage at least as favorable as provided
in the respective existing policies as of the date of this
Agreement, or, if such insurance is unavailable, the Surviving
Company will, and the Company will cause the Surviving Company to,
purchase the best available D&O Insurance for such six(6)-year
period from an insurance carrier with the same or better credit
rating as BCHI’s current insurance carrier with respect to
its existing D&O Insurance with terms, conditions, retentions
and with levels of coverage at least as favorable as provided in
BCHI’s existing policies as of the date of this Agreement;
except that the Surviving Company will not be required to pay an
aggregate premium for such insurance policies in excess of 150% of
the annual premium paid by BCHI for coverage for its last full
fiscal year for such insurance (the “Maximum Premium”); and if
the premiums of such insurance coverage exceed such amount, the
Surviving Company will be obligated to obtain a policy with the
greatest coverage available for a cost not exceeding such
amount.
(c) The provisions of
this Section 6.6
are (i) intended to be for the benefit of, and will be
enforceable by, each D&O Indemnified Party, his or her heirs
and his or her representatives and (ii) in addition to, and
not in substitution for or limitation of, any other rights to
indemnification or contribution that any such Person may have by
Contract or otherwise.
(d) In the event that
the Company, the Surviving Company or any of their respective
successors or assigns (i) consolidates with or merges into any
other Person and is not the continuing or surviving corporation or
entity of such consolidation or merger or (ii) transfers or
conveys all or substantially all of its properties and assets to
any Person, then, and in each such case, proper provision will be
made so that the successors and assigns of the Company and the
Surviving Company will assume all of the obligations thereof set
forth in this Section
6.6.
Section
6.7 NASDAQ
Listing; Reverse Split. The Company will
use reasonable best efforts to cause the Company Common Stock
issued in the Merger to be approved for listing on NASDAQ, subject
to official notice of issuance, as promptly as practicable after
date of this Agreement, and in any event prior to the Closing Date.
To the extent necessary to comply with NASDAQ listing requirements,
the Company shall submit to the holders of Company Common Stock at
the Stockholders’ Meeting a proposal to approve and adopt an
amendment to the Company Certificate of Incorporation to authorize
the Company Board to effect a five-to-one reverse split of all
outstanding shares of Company Common Stock, such that each holder
of shares of Company Common Stock shall receive one share of
Company Common Stock for every five shares of Company Common Stock
held by such holder (the “Reverse Split”),
effective prior to the Effective Time.
Section
6.8 Advice
of Changes. Each of BCHI and
the Company will promptly advise the other of any change or event,
of which it has knowledge, (a) having or reasonably likely to
have a BCHI Material Adverse Effect or a Company Material Adverse
Effect, as the case may be, or (b) that would or would be
reasonably likely to cause or constitute a material breach of any
of its representations, warranties or covenants contained in this
Agreement if it would result in the failure of closing conditions
in Section 7.3(a) or
Section 7.3(b)
or Section 7.2(a) or
Section 7.2(b),
respectively, by the Outside Date, except that (i) no such
notification will affect the representations, warranties or
covenants of the Parties (or remedies with respect thereto) or the
conditions to the obligations of the Parties under this Agreement
and (ii) a failure to comply with this Section 6.8 will not
constitute the failure of any condition set forth in Article VII to be
satisfied unless the underlying BCHI Material Adverse Effect,
Company Material Adverse Effect or material breach would
independently result in the failure of a condition set forth in
Article VII to
be satisfied.
Section
6.9 Control
of the Other Party’s Business. Nothing contained
in this Agreement will give BCHI, directly or indirectly, the right
to control or direct the operations of the Company or the Company
Subsidiaries or will give the Company, directly or indirectly, the
right to control or direct the operations of BCHI or its
Subsidiaries prior to the Effective Time. Prior to the Effective
Time, each of BCHI and the Company will exercise, consistent with
the terms and conditions of this Agreement, complete control and
supervision over its and its Subsidiaries’ respective
operations.
Section
6.10 Subsidiary
Compliance. The Company, as
the sole stockholder of Merger Sub prior to the Effective Time,
will cause Merger Sub to comply with and perform all of its
obligations under or relating to this Agreement prior to the
Effective Time and to consummate the Transactions on the terms and
conditions set forth in this Agreement.
Section
6.11 Financing.
(a) Subject to the
terms and conditions of this Agreement, BCHI and the Company will
use their reasonable best efforts to take, or cause to be taken,
all actions and to do, or cause to be done, all things necessary,
proper or advisable to arrange and obtain the financing in an
aggregate amount necessary to effect the Refinancing, and to
otherwise complete the Transactions, including paying expenses
associated with the Transactions, which financing will be on the
terms and conditions satisfactory to BCHI and the Company, each in
its sole and absolute discretion (the “Financing”). BCHI and the
Company will each use its reasonable best efforts to (I) negotiate
and enter into commitments for, and then definitive agreements with
respect to, the Financing as promptly as practicable (such
commitments and definitive agreements, the “Financing Agreements”),
(II) satisfy on a timely basis (taking into account the Marketing
Period) all conditions in the Financing Agreements applicable to
BCHI and the Company and their respective Subsidiaries to obtaining
the Financing as promptly as practicable, (III) consummate the
Financing at or prior to the Closing and (IV) enforce the
counterparties’ obligations and its rights under the
Financing Agreements, including by suit or other appropriate
proceeding to cause the lenders under the Financing to fund in
accordance with their respective commitments if all conditions to
funding the Financing in the applicable Financing Agreements have
been satisfied or waived. BCHI and the Company will keep each other
reasonably informed on a timely basis of the status of its
respective efforts to arrange the Financing and to satisfy the
conditions thereof. If any portion of the amount of the Financing
becomes reasonably likely to be unavailable on the material terms
and conditions contemplated by the applicable Financing Agreements,
each of BCHI and the Company will use its commercially reasonable
efforts to arrange and obtain alternative financing from
alternative sources in an amount sufficient to consummate the
Transactions with terms and conditions not materially less
favorable, taken as a whole, to the Parties than the terms and
conditions set forth in the applicable Financing Agreements
(“Alternative
Financing”) as promptly as practicable following the
occurrence of such event but no later than the final day of the
Marketing Period. In such event, (1) the term
“Financing” will be deemed to include the Alternative
Financing, and (2) the term “Financing Agreements” will
be deemed to include any commitment letters and definitive
agreement with respect to the Alternative Financing.
Notwithstanding anything contained in this Section 6.11 or in any other
provision of this Agreement, in no event will the Parties be
required (i) to amend or waive any of the terms or conditions
hereof or of the Financing Agreements or (ii) to consummate the
Closing any earlier than required under clause (b) of the first
sentence of Section
1.3.
(b) Each Party will
provide, and will cause its Subsidiaries to provide, and will use
reasonable best efforts to cause its Representatives to provide,
all cooperation that is customary and necessary in connection with
arranging, obtaining and syndicating the Financing and causing the
conditions in the Financing Agreements to be satisfied, including
using reasonable best efforts in (i) assisting with, and
designating one or more members of senior management of the Company
to participate in, the preparation of customary offering and
syndication documents and materials, including, including private
placement or offering memoranda, bank information memoranda, bank
syndication material and packages, lender and investor
presentations, rating agency materials and presentations and
similar documents and materials, in connection with the Financing,
and providing reasonable and customary authorization letters to the
Financing Sources authorizing the distribution of information to
prospective lenders and containing customary information (all such
documents and materials, collectively, the “Offering Documents”),
(ii) preparing and furnishing to the Financing Sources as promptly
as practicable all Required Information to the extent it is
available to such Party and all other information and disclosures
relating to such Party and its Subsidiaries (including their
businesses, operations, financial projections and prospects) as may
be reasonably necessary in preparation of the Offering Documents
(including execution of customary authorization and management
representation letters), (iii) designating one or more members of
senior management of such Party to participate in a reasonable
number of due diligence sessions in connection with the Financing,
including direct contact between such senior management and the
Financing Sources and potential lenders in the Financing, drafting
sessions, management presentations, rating agency presentations,
lender meetings and one or more road shows, (iv) requesting such
Party’s independent auditors to cooperate in obtaining
customary accountant’s comfort letters and consents from such
Party’s independent auditors, (v) assisting in the
preparation of, and executing and delivering, definitive financing
documents, including guarantee and collateral documents, hedging
agreements and other certificates and documents (including a
certificate of the chief financial officer of such Party and its
Subsidiaries with respect to solvency matters before giving effect
to the Financing or the consummation of the Transactions), (vi)
subject to any contractual agreement in effect, facilitating the
pledging of collateral for the Financing, including taking
commercially reasonable actions necessary to permit the Financing
Sources to evaluate such Party and its Subsidiaries’ real
property and current assets, cash management and accounting
systems, policies and procedures for the purpose of establishing
collateral arrangements and establishing, as of the Effective Time,
bank and other accounts and blocked account agreements and lockbox
arrangements in connection with the Financing, (vii) obtaining from
such Party’s existing lenders such consents, approvals,
authorizations and instruments which may be reasonably necessary in
connection with the Financing and collateral arrangements,
including customary payoff letters, lien releases, instruments of
termination or discharge, (viii) preparing any supplements to the
above information as may be required pursuant to the Financing
Agreements and (ix) cooperating with the other Parties to satisfy
the conditions precedent to the Financing to the extent within the
control of such Party and its Subsidiaries, and taking all
corporate or limited liability company actions, subject to the
occurrence of the Effective Time, reasonably necessary to permit
the consummation of the Financing and to permit the proceeds
thereof to be made available to the Company and the Surviving
Company immediately upon the Effective Time. In connection with the
foregoing, the Company will file with the SEC all Company Reports
for the annual and quarterly fiscal periods ending on and after the
date hereof as soon as practicable but in any event not later than
(i) 90 days following the end of the Company’s fiscal year,
in the case of annual reports on Form 10-K and (ii) 45 days
following the end of each fiscal quarter of the Company, in the
case of quarterly reports on Form 10-Q. Each of the Company and
BCHI hereby consent to the use of their and their respective
Subsidiaries’ logos in connection with the Financing in a
form and manner agreed with the Party whose logo is being used;
except that such logos are to be used solely in a manner that is
not intended, or reasonably likely, to harm or disparage the Party
whose logo is being used or the reputation or goodwill of such
Party. Each Party will use its reasonable best efforts to
periodically update any Required Information (to the extent it is
available) to be included in any Offering Document to be used in
connection with such Financing such that any such Required
Information does not contain any untrue statement of material fact
or omit to state any material fact necessary in order to make the
statements contained therein not misleading.
Section
6.12 Transaction
Litigation. Each Party will
give the other Party prompt notice of any Action commenced or, to
the knowledge of the Company or to the knowledge of BCHI, as the
case may be, threatened, against the such Party or its directors,
officers, managers, partners or Affiliates relating to this
Agreement or the Transactions (collectively, “Transaction Litigation”).
The Parties will consult with each other regarding the defense or
settlement of any Transaction Litigation and neither Party will
compromise, settle, come to an arrangement regarding or agree to
compromise, settle or come to an arrangement regarding any
Transaction Litigation or consent to the same, without the prior
written consent of the other Party (which consent will not be
unreasonably withheld, conditioned or delayed). In connection with
any Transaction Litigation and the Parties’ performance of
their obligations under this Section 6.12, BCHI and the
Company will enter into a customary common interest or joint
defense agreement or implement such other techniques as reasonably
required to preserve any attorney-client privilege or other
applicable legal privilege; except that no Party will be required
to provide information if doing so, in the opinion of its legal
counsel, would cause the loss of any attorney-client privilege or
other applicable legal privilege; except that, if any information
is withheld pursuant to the foregoing exception, such Party will
inform the other Party as to the general nature of what is being
withheld and the Parties will use reasonable best efforts to enable
the informing Party to provide such information without causing the
loss of any attorney-client or other applicable legal
privilege.
Section
6.13 Publicity.
The initial press release with respect to the execution of this
Agreement will be a joint press release to be reasonably agreed
upon by BCHI and the Company. Following such initial press release,
none of the Parties will, and neither the Company nor BCHI will
permit any of its Subsidiaries to, issue or cause the publication
of any press release or similar public announcement with respect
to, or otherwise make any public statement concerning, the
Transactions without the prior consent (which consent will not be
unreasonably withheld, conditioned or delayed) of BCHI, in the case
of a proposed announcement or statement by the Company, or the
Company, in the case of a proposed announcement or statement by
BCHI; except that either of BCHI or the Company may, without the
prior consent of the other (but after prior consultation with the
other to the extent practicable under the circumstances) issue or
cause the publication of any press release or other public
announcement to the extent such Party may reasonably conclude may
be required by applicable Law. The restrictions set forth in this
Section 6.13 will
not apply to any release or public statement in connection with any
dispute between BCHI and the Company regarding this Agreement or
the Transactions; except that the foregoing will not limit the
ability of any Party to make internal announcements to their
respective employees and other stockholders that are not
inconsistent in any material respects with the prior public
disclosures regarding the Transactions.
Section
6.14 Takeover
Laws. If any Takeover
Law is or may become applicable to the Transactions, the Company
and BCHI, including the Company Board and the board of directors of
BCHI, will grant such approvals and take such actions as are
necessary so that the Transactions may be consummated as promptly
as practicable on the terms contemplated by this agreement and the
Parties will otherwise act to eliminate or minimize the effects of
such Takeover Law on the Merger.
Section
6.15 Actions
Concerning Company Preferred Stock. The Parties will,
and will cause their Affiliates to, take all necessary action to
cause written notice as contemplated under the Company Charter to
be given to each holder of shares of Company Preferred Stock, at
least forty-five (45) days prior to the Closing Date, such that
such holder has fifteen (15) days in which to exercise its
conversion rights under the respective certificates of designations
and preferences for the applicable series of Company Preferred
Stock.
Section
6.16 Separation
of Consumer/SMB Business. Prior to the
Closing, the Parties will cooperate in good faith to consummate the
transactions contemplated by Exhibit D pursuant to
agreements negotiated in good faith by the Parties (the
“Separation
Agreements”) and upon the terms and subject to the
conditions mutually agreed upon by the Company and BCHI in
accordance with Exhibit
D.
Section
6.17 Divestiture
or Dissolution of Fusion Global. The Company will
use reasonable best efforts to effectuate, on or prior to the
Closing, (i) the divestiture of its ownership interest in Fusion
Global Services LLC, a Delaware limited liability company
(“Fusion
Global”) and the entrance into a profit sharing
arrangement with the purchaser of Fusion Global (such divestiture
and profit sharing arrangement, the “Fusion Global
Arrangement”) or (ii) the dissolution of Fusion
Global.
Section
6.18 BCHI
Financial Statements. As soon as
practicable after the execution of this Agreement, BCHI will
deliver to the Company audited consolidated financial statements of
BCHI and the other BCHI Subsidiaries for the fiscal years ended
December 31, 2014 through December 31, 2016.
ARTICLE VII
CLOSING CONDITIONS
Section
7.1 Conditions
to Each Party’s Obligation to Effect the
Merger. The respective
obligations of the Parties to effect the Merger will be subject to
the satisfaction (or waiver by BCHI and the Company) at or prior to
the Effective Time of the following conditions:
(a) Stockholder Approval. The
Company shall have obtained the Stockholder Approval.
(b) Regulatory Consents. Each of
the State Approvals and the FCC Approval shall have been obtained
and in effect, and any waiting period prescribed by Law with
respect to such approvals before the Transaction may be consummated
shall have expired.
(c) Antitrust Approvals. The
waiting period (and any extension thereof) applicable to the
consummation of the Transactions under the HSR Act shall have
expired or been terminated.
(d) No Injunctions or Restraints;
Illegality. No Law or Order shall be in effect or shall have
been enacted, entered, promulgated or enforced by any Governmental
Entity that prohibits or makes illegal consummation of the
Transactions.
(e) Financing. The Financing (or,
if Alternative Financing is being used, the Alternative Financing)
shall have been funded.
(f) NASDAQ Listing. The shares of
Company Common Stock issuable to Holding, LLC as contemplated by
Article II shall
have been approved for listing on NASDAQ, subject to official
notice of issuance.
(g) Company Preferred Stock. All of
the shares of Company Preferred Stock, and all of the shares of any
other class or series of preferred stock of the Company outstanding
as of immediately prior to the Effective Time, shall have been
cancelled or converted into shares of Company Common Stock in
accordance with the applicable provisions of the respective
certificates of designations and preferences for the applicable
series of Company Preferred Stock or other class or series of
preferred stock.
(h) Transaction Agreements. Each of
the Stockholders Agreement and the Registration Rights Agreement
shall have been executed and delivered by each of the parties
thereto.
(i) Fusion Global Arrangement or
Dissolution of Fusion Global. The Company shall have
consummated the Fusion Global Arrangement or shall have dissolved
Fusion Global.
(j) Separation of Consumer/SMB
Business. The Separation Agreements shall have been entered
into and the transactions contemplated by the Separation Agreements
shall have been consummated.
(k) Selection of Directors. All
nine of the initial members of the Company Board shall have been
determined in accordance with the provisions of the
Stockholders’ Agreement.
Section
7.2 Conditions
to Obligations of BCHI. The obligation of
BCHI to effect the Merger is also subject to the satisfaction, or
waiver by BCHI, at or prior to the Effective Time, of the following
conditions:
(a) Representations and Warranties.
The representations and warranties of the Company set forth in this
Agreement (except for the representations and warranties set forth
in Section 3.1,
Section 3.2,
Section 3.3 and
Section 3.25)
shall be true and correct as of the date of this Agreement and as
of the Effective Time as though made on and as of the Effective
Time (except that representations and warranties that by their
terms speak specifically as of the date of this Agreement or
another date will be true and correct as of such date), except that
this condition will be deemed satisfied unless all inaccuracies in
such representations and warranties in the aggregate constitute a
Company Material Adverse Effect at the Closing Date (ignoring
solely for purposes of this proviso any reference to Company
Material Adverse Effect or other materiality qualifiers contained
in such representations and warranties), and BCHI shall have
received a certificate signed on behalf of the Company by an
officer of the Company to the foregoing effect. The representations
and warranties of the Company set forth in Section 3.1, Section 3.2, Section 3.3 and Section 3.25 shall be true
and correct in all material respects as of the date of this
Agreement and as of the Effective Time as though made on and as of
the Effective Time.
(b) Performance of Obligations of the
Company. Each of the Company and Merger Sub shall have
performed in all material respects all covenants and agreements
required to be performed by it under this Agreement at or prior to
the Closing Date, and BCHI will have received a certificate signed
on behalf of the Company by an officer of the Company to such
effect.
(c) Company Material Adverse
Effect. There shall not have occurred at any time after the
date of this Agreement any Company Material Adverse
Effect.
Section
7.3 Conditions
to Obligations of the Company and Merger Sub. The obligation of
the Company and Merger Sub to effect the Merger is also subject to
the satisfaction or waiver by the Company, on behalf of itself and
Merger Sub, at or prior to the Effective Time of the following
conditions:
(a) Representations and Warranties.
The representations and warranties of BCHI set forth in this
Agreement (except for the representations and warranties set forth
in Section 4.1,
Section 4.2,
Section 4.3,
Section 4.5(d) and
Section 4.22)
shall be true and correct as of the date of this Agreement and as
of the Effective Time as though made on and as of the Effective
Time (except that representations and warranties that by their
terms speak specifically as of the date of this Agreement or
another date will be true and correct as of such date), except that
this condition will be deemed satisfied unless all inaccuracies in
such representations and warranties in the aggregate constitute a
BCHI Material Adverse Effect at the Closing Date (ignoring solely
for purposes of this proviso any reference to BCHI Material Adverse
Effect or other materiality qualifiers contained in such
representations and warranties), and the Company shall have
received a certificate signed on behalf of BCHI by an officer of
BCHI to the foregoing effect. The representations and warranties of
BCHI set forth in Section
4.1, Section
4.2, Section
4.3 and Section 4.22 shall be true
and correct in all material respects as of the date of this
Agreement and as of the Effective Time as though made on and as of
the Effective Time. The representation and warranty of BCHI set
forth in Section
4.5(d) shall be true and correct as of the date of this
Agreement and as of the Effective Time as though made on and as of
the Effective Time.
(b) Performance of Obligations of
BCHI. BCHI shall have performed in all material respects all
covenants and agreements required to be performed by it under this
Agreement at or prior to the Closing Date, and the Company will
have received a certificate signed on behalf of BCHI by an officer
of BCHI to such effect.
(c) BCHI Material Adverse Effect.
There shall not have occurred at any time after the date of this
Agreement any BCHI Material Adverse Effect.
(d) FIRPTA Certificate. BCHI shall
have delivered to the Company an executed notice to the IRS
prepared in accordance with the requirements of Treasury
Regulations Sections 1.897-2(h)(2) and 1.1445-2(c)(3) that is
reasonably acceptable to the Company and dated as of the Closing
Date, along with written authorization for the Company to deliver
such notice to the IRS on behalf of BCHI following the
Closing.
Section
7.4 Frustration
of Closing Conditions. No Party may rely
on the failure of any condition set forth in Section 7.1, Section 7.2, or Section 7.3, as the case may
be, to be satisfied, if such Party’s failure to perform any
material obligation required to be performed by it has been the
primary cause of, or primarily results in, such
failure.
ARTICLE VIII
TERMINATION AND AMENDMENT
Section
8.1 Termination.
This Agreement may be terminated and the Transactions abandoned at
any time prior to the Effective Time:
(a) by the mutual
written consent of the Company and BCHI duly authorized by each of
the Company Board and the board of directors of BCHI,
respectively.
(b) by either of the
Company or BCHI:
(i) by written notice
to the other Party at any time after the Outside Date, if the
Closing has not been consummated on or before the Outside Date;
except that, if on the Outside Date (A) the conditions set forth in
Section 7.1(b)
and Section 7.1(c)
not satisfied but all of the other conditions to Closing have been
satisfied or waived (other than those conditions that by their
nature are to be satisfied at the Closing) and the condition set
forth in Section 7.1(b) remains
capable of being satisfied and (B) no final and non-appealable
order imposed by any Governmental Entity preventing the
consummation of the Transactions is in effect as of such date of
determination, then the Outside Date may be extended until April
30, 2018 at the
election of either BCHI or the Company by written notice to the
other at or before 11:59 p.m., New York time, on the Outside Date;
and except that the right to terminate this Agreement under this
Section 8.1(b)(i) will not
be available (x) to a Party if the inability to satisfy such
conditions was due to the failure of such Party to perform any of
its obligations under this Agreement or (y) to a Party if another
Party has filed (and is then pursuing) an action seeking specific
performance as permitted by Section 9.10;
(ii) if
any Law or Order having the effect set forth in Section 7.1(c) is in
effect and has become final and nonappealable;
(iii) if
(x) the Stockholders Meeting (including any adjournments and
postponements thereof) shall have been held and completed and the
Company’s stockholders shall have voted on a proposal to
adopt this Agreement and (y) the Stockholder Approval shall
not have been obtained at such meeting (and shall not have been
adopted at any adjournment or postponement thereof); provided, however, that a Party shall not
be permitted to terminate this Agreement pursuant to this
Section 8.1(b)(iii)
if the failure to obtain the Stockholder Approval results from a
material breach of this Agreement by such Party; or
(iv) if
binding commitments in respect of the Financing (or, if Alternative
Financing is being used, the Alternative Financing) at the Closing
shall not have been entered into by a Financing Source on or before
the date that is 60 days after the date
hereof.
(c) by BCHI if the
Company has breached any of its representations or warranties set
forth in this Agreement (or if any such representations or
warranties fail to be true) or the Company has failed to perform
any of its covenants or agreements set forth in this Agreement,
which breach or failure (A) would (if it occurred or was
continuing as of the Closing Date) give rise to the failure of a
condition set forth in Section 7.2(a) or
Section 7.2(b)
and (B) is incapable of being cured, or is not cured by the
Company by the earlier of (1) the Outside Date and (2) 30 days
following receipt of written notice from BCHI of such breach or
failure.
(d) by the Company if
BCHI has breached any of its representations or warranties set
forth in this Agreement (or if any such representations or
warranties fail to be true) or BCHI has failed to perform its
covenants or agreements set forth in this Agreement, which breach
or failure (A) would (if it occurred or was continuing as of the
Closing Date) give rise to the failure of a condition set forth in
Section 7.3(a)
or Section 7.3(b) and (B) is
incapable of being cured, or is not cured, by BCHI by the earlier
of (1) the Outside Date and (2) 30 days following receipt of
written notice from the Company of such breach or
failure.
(e) by BCHI if (i) the
Company has breached any of its obligations under Section 6.3 (No Solicitation or
Change of Recommendation) or (ii) the Company Board has made a
Change of Recommendation (whether or not in compliance with
Section 6.3(c)
(Certain Permitted Changes of Recommendation)).
(f) by the Company if
the Company Board has made a Change of Recommendation and is in
compliance with, and has not breached any provisions of,
Section
6.3.
Section
8.2 Effect
of Termination. In the event of
the termination of this Agreement as provided in Section 8.1, written notice
thereof will be given to the other Party or Parties, specifying the
provision of this Agreement pursuant to which such termination is
made, and this Agreement will become null and void (other than the
provisions of this Section 8.2, Section 8.3 and the provisions
in Article IX
(General Provisions), all of which will survive termination of this
Agreement). Upon termination pursuant to this Article VIII, there will
be no liability on the part of the Parties or their respective
directors, managers, officers and Affiliates; except that, upon the
termination of this Agreement nothing will be deemed to
(i) release any Party from any liability to any other Party
for any breach by such Party of this Agreement prior to such
termination or (ii) impair the right of any Party to compel
specific performance by any other Party of its obligations under
this Agreement as provided in Section 9.10 of this
Agreement.
Section
8.3 Fees
and Expenses. Except as
otherwise expressly provided in this Agreement, if the Transactions
are not consummated, the fees and expenses incurred by each Party
in connection with the negotiation, preparation, execution and
delivery of this Agreement and the documents and instruments
contemplated hereby and in connection with the Transactions
contemplated hereby, including all fees and disbursements of
advisors retained by any Party will be the sole responsibility of
such incurring and retaining Party.
ARTICLE IX
GENERAL PROVISIONS
Section
9.1 Notices.
All notices and other communications in connection with this
Agreement will be in writing and will be deemed to have been duly
given: (a) on the date of service if served personally on the Party
to whom notice is to be given; (b) on the day of transmission if
sent by e-mail to the e-mail address given below (provided no
delivery failure message is received by the sender); (c) on the
Business Day after delivery to an overnight courier or the Express
Mail service maintained by the United States Postal Service; or (d)
on the fifth day after mailing, if mailed to the Party to whom
notice is to be given, by first class mail, registered or
certified, postage prepaid and properly addressed, to the Party as
follows:
(a) if to the Company,
Merger Sub, or Surviving Company to:
Fusion
Telecommunications International, Inc.
420
Lexington Avenue, Suite 1718
New
York, New York 10170
Attention: James P.
Prenetta, Jr., Executive Vice President and General
Counsel
Email:
jprenetta@fusionconnect.com
with a
copy to (which will not constitute notice):
Greenberg Traurig,
LLP
200
Park Avenue
New
York, New York 10166
Attention: Dennis
J. Block
Email:
dblock@gtlaw.com
(b) if to BCHI,
to:
Birch
Communications Holdings, Inc.
c/o
Birch Communications, Inc.
320
Interstate North Pkwy SE
Atlanta, Georgia
30339
Attention: Gordon
P. Williams, Jr., Senior Vice President and General
Counsel
Email:
chuck.williams@birch.com
with a
copy to (which will not constitute notice):
Jones
Day
1420
Peachtree Street, N.E.
Suite
800
Atlanta, Georgia
30309-3053
Attention: William
B. Rowland
Email:
wbrowland@jonesday.com
Section
9.2 Interpretation.
(a) When a reference is
made in this Agreement to Articles, Sections, Exhibits, Schedules
or Disclosure Letters, such reference will be to an Article or
Section of or Exhibit, Schedule or Disclosure Letter to this
Agreement unless otherwise indicated. The table of contents and
headings contained in this Agreement are for reference purposes
only and will not affect in any way the meaning or interpretation
of this Agreement. Whenever the words “include,”
“includes” or “including” are used in this
Agreement, they will be deemed to be followed by the words
“without limitation.” Unless the context otherwise
requires, (i) ”or” is disjunctive but not
necessarily exclusive, (ii) words in the singular include the
plural and vice versa, and (iii) the use in this Agreement of
a pronoun in reference to a Party hereto includes the masculine,
feminine or neuter, as the context may require. References to
statutes include all regulations promulgated thereunder and
references to statutes or regulations will be construed as
including all statutory and regulatory provisions consolidating,
amending or replacing the statute or regulation.
(b) The Company
Disclosure Letter and BCHI Disclosure Letter as well as all other
schedules and all exhibits hereto, will be deemed part of this
Agreement and included in any reference to this Agreement. The
representations and warranties of BCHI and the Company are made and
given, and the covenants are agreed to, subject to the disclosures
and exceptions set forth in the Company Disclosure Letter and BCHI
Disclosure Letter. In no event will the listing of any matter in
the Company Disclosure Letter or BCHI Disclosure Letter be deemed
or interpreted to expand the scope the respective Party’s
representations, warranties or covenants set forth in this
Agreement. All attachments to the Company Disclosure Letter and
BCHI Disclosure Letter are incorporated by reference into the
Company Disclosure Letter and BCHI Disclosure Letter, respectively,
in which they are directly or indirectly referenced.
Notwithstanding anything in this Agreement to the contrary, the
mere inclusion of an item therein as an exception to a
representation or warranty will not be deemed an admission that
such item represents a material exception or material fact, event
or circumstance or that such item has had or would, individually or
in the aggregate, have a Company Material Adverse Effect or BCHI
Material Adverse Effect, as the case may be.
(c) The Parties have
participated jointly in negotiating and drafting this Agreement. In
the event that an ambiguity or a question of intent or
interpretation arises, this Agreement will be construed as if
drafted jointly by the Parties, and no presumption or burden of
proof will arise favoring or disfavoring any Party by virtue of the
authorship of any provision of this Agreement.
Section
9.3 Counterparts.
This Agreement may be executed in two or more counterparts, all of
which will be considered one and the same agreement and will become
effective when counterparts have been signed by each of the Parties
and delivered to the other Party, it being understood that each
Party need not sign the same counterpart.
Section
9.4 Entire
Agreement; Third Party Beneficiaries. This Agreement
(including the documents and the instruments referred to in this
Agreement), together with the Confidentiality Agreement,
(a) constitutes the entire agreement and supersedes all prior
agreements and understandings, both written and oral, among the
Parties with respect to the subject matter of this Agreement,
(b) is not intended to confer on any Person, other than the
Parties and their respective successors and permitted assigns, any
rights or remedies hereunder, except (i) as provided in
Section 6.6
(which is intended for the benefit of the D&O Indemnified
Parties, each of whom will be a third party beneficiary of
Section 6.6)
and (ii) for the Financing Sources and their respective
successors, legal representatives and permitted assigns (each of
which will be a third party beneficiary with respect to their
respective rights under this Section 9.4, Section 9.8 and
Section 9.11). None
of the Financing Sources will have any liability to the Company or
its Affiliates relating to or arising out of this Agreement, the
Financing or otherwise, whether at law, or equity, in contract, in
tort or otherwise, and neither the Company nor any of its
Affiliates will have any rights or claims against any of the
Financing Sources hereunder or thereunder. In no event will the
Company be entitled to seek the remedy of specific performance of
this Agreement against the Financing Sources.
Section
9.5 Amendment.
Subject to compliance with applicable Law, at any time prior to the
Effective Time, this Agreement may be amended or supplemented in
any and all respects, whether before or after receipt of the
Stockholder Vote by written agreement signed by each of the
Parties; except that, after receipt of the Stockholder Vote, there
may not be, without further approval of such stockholders, any
amendment of this Agreement that changes the amount or the form of
the consideration to be delivered under this Agreement to the
holders of Shares, other than as contemplated by this Agreement.
This Agreement may not be amended except by an instrument in
writing signed on behalf of each of the Parties.
Section
9.6 Extension;
Waiver. At any time prior
to the Effective Time, the Company (on behalf of itself and Merger
Sub), by action taken or authorized by the Company Board and by the
board of directors of BCHI, may, to the extent legally allowed,
(a) extend the time for the performance of any of the
obligations or other acts of the other Party, (b) waive any
inaccuracies in the representations and warranties contained in
this Agreement, and (c) waive compliance with any of the
agreements or conditions contained in this Agreement, except that,
after any approval of the Transactions by the stockholders of the
Company, there may not be, without further approval of such
stockholders, any extension or waiver of this Agreement or any
portion hereof that reduces the amount or changes the form of the
consideration to be delivered to the holders of Shares under this
Agreement, other than as contemplated by this Agreement. Any
agreement on the part of a Party to any such extension or waiver
will be valid only if set forth in a written instrument signed on
behalf of such Party, but such extension or waiver or failure to
insist on strict compliance with an obligation, covenant, agreement
or condition will not operate as a waiver of, or estoppel with
respect to, any subsequent or other failure.
Section
9.7 Governing
Law. This Agreement
will be governed and construed in accordance with the internal Laws
of the State of Delaware, without regard to any applicable conflict
of laws principles (whether of the State of Delaware or any other
jurisdiction).
Section
9.8 Jurisdiction.
(a) Each of the Parties
hereby irrevocably and unconditionally submits, for itself and its
property, to the exclusive jurisdiction and venue of the Chancery
Court of the State of Delaware and, in the absence of such
jurisdiction, the United States District Court for the District of
Delaware, and, in the absence of such federal jurisdiction, the
parties consent to be subject to the exclusive jurisdiction of any
Delaware state court sitting in New Castle County (together, the
“Chosen Courts”), in
any action or proceeding arising out of or relating to this
Agreement or the Transactions or for recognition or enforcement of
any judgment relating thereto, and each of the Parties hereby
irrevocably and unconditionally (i) agrees not to commence any
such action or proceeding except in the Chosen Courts,
(ii) agrees that any claim in respect of any such action or
proceeding may be heard and determined in the Chosen Courts, and
any appellate court hearing actions or proceedings therefrom,
(iii) waives, to the fullest extent it may legally and
effectively do so, any objection which it may now or hereafter have
to the laying of venue of any such action or proceeding in the
Chosen Courts, and (iv) waives, to the fullest extent it may
legally and effectively do so, the defense of an inconvenient forum
to the maintenance of such action or proceeding in the Chosen
Courts. Each of the Parties agrees that a final judgment in any
such action or proceeding will be conclusive and may be enforced in
other jurisdictions by suit on the judgment or in any other manner
provided by Law.
(b) Notwithstanding the
foregoing, each of the Parties agrees that it will not bring any
action, cause of action, claim, cross-claim or third-party claim of
any kind or description, whether in law or in equity, whether in
contract or in tort or otherwise, against the Financing Sources in
any way relating to this Agreement or any of the Transactions,
including but not limited to any dispute arising out of or relating
in any way to the Financing Agreements or the performance thereof,
in any forum other than the Supreme Court of the State of New York,
Borough of Manhattan, or, if under applicable law, exclusive
jurisdiction is vested in the federal courts of the State of New
York (and appellate courts thereof). Each of the Parties agrees
that a final judgment in any such action or proceeding will be
conclusive and may be enforced in other jurisdictions by suit on
the judgment or in any other manner provided by Law.
(c) EACH PARTY HERETO
ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY WHICH MAY ARISE UNDER
THIS AGREEMENT IS LIKELY TO INVOLVE COMPLICATED AND DIFFICULT
ISSUES, AND THEREFORE IT HEREBY IRREVOCABLY AND UNCONDITIONALLY
WAIVES ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY
LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO
THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY, INCLUDING
ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THE FINANCING
AGREEMENTS OR THE PERFORMANCE THEREOF. EACH PARTY CERTIFIES AND
ACKNOWLEDGES THAT (i) NO REPRESENTATIVE, AGENT OR ATTORNEY OF
ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH
OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE
EITHER OF SUCH WAIVERS, (ii) IT UNDERSTANDS AND HAS CONSIDERED
THE IMPLICATIONS OF SUCH WAIVERS, (iii) IT MAKES SUCH WAIVERS
VOLUNTARILY, AND (iv) IT HAS BEEN INDUCED TO ENTER INTO THIS
AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND
CERTIFICATIONS IN THIS SECTION 9.8(c).
Section
9.9 Assignment.
Neither this Agreement nor any of the rights, interests or
obligations hereunder will be assigned by any of the Parties
(whether by operation of law or otherwise) without the prior
written consent of the other Parties and any attempt to do so will
be null and void; except that each of BCHI, the Company and Merger
Sub may assign its rights and obligations hereunder to the
Financing Sources providing the Financing pursuant to the terms
thereof to the extent necessary for purposes of creating a security
interest herein or otherwise assigning as collateral in respect of
such Financing, but no such assignment will release any assigning
Party from its obligations hereunder. Subject to the preceding
sentence, this Agreement will be binding upon, inure to the benefit
of and be enforceable by the Parties and their respective permitted
successors and assigns.
Section
9.10 Specific
Performance. The Parties agree
that immediate, extensive and irreparable damage, for which
monetary damages would not be an adequate remedy, would occur in
the event that the Parties do not perform their obligations under
the provisions of this Agreement in accordance with its specified
terms or otherwise breach such provisions. Accordingly, the Parties
acknowledge and agree that the Parties will be entitled, in
addition to any other remedy to which they are entitled at law or
in equity, to an injunction or injunctions, specific performance or
other equitable relief to prevent breaches of this Agreement and to
enforce specifically the terms and provisions hereof (including the
obligation of the Parties to consummate the Merger) in the Chosen
Courts without proof of damages or otherwise, and that such
explicit rights to specific enforcement are an integral part of the
Transactions and, without such rights, neither the Company nor BCHI
would have entered into this Agreement. Each of the Parties agrees
that it will not oppose the granting of an injunction, specific
performance and other equitable relief on the basis that the other
Parties have an adequate remedy at law or an award of specific
performance is not an appropriate remedy for any reason at law or
in equity.
Section
9.11 Waivers.
Any failure of any of the Parties to comply with any obligation,
covenant, agreement or condition herein may be waived by the Party
or Parties entitled to the benefits thereof, except in the case of
any express waiver of Section 9.4, Section 9.8, Section 9.10, and this
Section 9.11 which
is, individually or in the aggregate, materially adverse to any
Financing Source, which waiver will only be effective with respect
to such Financing Source if such Financing Source has consented
thereto or to the extent that the consent of such Financing Source
is not required to be obtained under the applicable provisions of
the Financing Agreements relating to waivers of this Agreement,
only by a written instrument signed by the Party granting such
waiver, but such waiver or failure to insist upon strict compliance
with such obligation, covenant, agreement or condition will not
operate as a waiver of, or estoppel with respect to, any subsequent
or other failure.
Section
9.12 No
Survival of Representations and Warranties.
The representations and warranties of contained herein and in any
certificate or other writing delivered pursuant hereto shall not
survive the Effective Time.
Section
9.13 Severability.
If any term, provision, covenant or restriction of this Agreement
is held by a court of competent jurisdiction or other authority to
be invalid, void, unenforceable, such term, provision, covenant or
restriction will be deemed to be modified to the extent necessary
to render it valid, effective and enforceable, and the remainder of
the terms, provisions, covenants and restrictions of this Agreement
will remain in full force and effect and will in no way be
affected, impaired or invalidated.
Section
9.14 Non-Recourse.
Except for any claim or cause of action arising under or related to
any Support Agreement, any claim or cause of action based upon,
arising out of, or related to this Agreement may only be brought
against Persons that are expressly named as Parties, and then only
with respect to the specific obligations set forth herein. Except
for any liability or obligation arising under or related to any
Support Agreement, no former, current or future direct or indirect
equityholders, controlling Persons, stockholders, directors,
officers, employees, members, managers, agents, trustees,
Affiliates, general or limited partners or assignees of the Parties
(except permitted assignees under Section 9.9) or of any former,
current or future direct or indirect equityholder, controlling
Person, stockholder, director, officer, employee, member, manager,
agent, trustee, Affiliate, general or limited partner or assignee
of any of the foregoing (collectively, but for the avoidance of
doubt excluding the Parties) will have any liability or obligation
for any of the representations, warranties, covenants, agreements,
obligations or liabilities of any Party under this Agreement or for
any Action based on, in respect of, or by reason of, the
Transactions (including the breach, termination or failure to
consummate any of the Transactions), in each case whether based on
contract, tort or strict liability, by the enforcement of any
assessment, by any legal or equitable Action, by virtue of any
statute, regulation or applicable Law or otherwise and whether by
or through attempted piercing of the corporate, limited liability
company or partnership veil, by or through a claim by or on behalf
of a Party hereto or another Person or otherwise.
Section
9.15 Definitions.
For the purposes of this Agreement:
“Act”
has the meaning set forth in Section 1.1(a).
“Action”
has the meaning set forth in Section 3.8(a).
“Affiliate”
means a Person that directly or indirectly, through one or more
intermediaries, control, is controlled by, or is under common
control with, the first-mentioned Person. For this purpose,
“control” (including the terms “controlled
by” and “under common control with”) means the
possession, directly or indirectly or as trustee or executor, of
the power to direct or cause the direction of the management or
policies of a Person, whether through the ownership of stock, by
Contract or otherwise.
“Agreement”
has the meaning set forth in the Preamble.
“Alternative
Acquisition Agreement” has the meaning set forth in
Section
6.3(a)(i)(B).
“Alternative
Financing” has the meaning set forth in Section 6.11(a).
“Alternative
Proposal” means any proposal or offer made by a Person
(other than BCHI, a BCHI Subsidiary or an Affiliate of BCHI or a
BCHI Subsidiary) relating to (a) any direct or indirect acquisition
or purchase, in a single transaction or a series of related
transactions, of (i) 15% or more of the consolidated total assets
of the Company and the Company Subsidiaries, taken as a whole, or
(ii) 5% or more of the voting securities of the Company, (b) any
tender offer or exchange offer that if consummated would result in
any Person beneficially owning, directly or indirectly, 5% or more
of any class of outstanding Equity Interests of the Company or any
Company Subsidiary, (c) any merger, consolidation, exclusive
license, business combination, joint venture, partnership, share
exchange or other transaction involving the Company or any Company
Subsidiary pursuant to which any Person or its holders of Equity
Interests would beneficially own, directly or indirectly, 5% or
more of any class of outstanding Equity Interests of the Company or
any Company Subsidiary or the surviving entity resulting, directly
or indirectly, from any such transaction or (d) concerning any
recapitalization, liquidation, dissolution or any other similar
transaction involving the Company or any Company Subsidiary, which
represents, individually or in the aggregate, 15% or more of the
Company’s consolidated assets, in each case, other than the
Transactions.
“Antitrust
Authorities” means the Antitrust Division of the
United States Department of Justice, the United States Federal
Trade Commission or the antitrust or competition law authorities of
any other jurisdiction (whether United States, foreign or
multinational).
“Antitrust
Laws” has the meaning set forth in Section 3.4.
“Award
Agreements” has the meaning set forth in Section 2.3(b).
“BCHI”
has the meaning set forth in the Preamble.
“BCHI
Approval” has the meaning set forth in Section 4.9(b).
“BCHI
Benefit Plans” has the meaning set forth in
Section
4.9(a).
“BCHI
Bylaws” has the meaning set forth in Section 4.1(b).
“BCHI
Capital Stock” has the meaning set forth in
Section
4.2(a).
“BCHI
Charter” has the meaning set forth in Section 4.1(b).
“BCHI
Commonly Controlled Entity” has the meaning set forth
in Section 4.9(d).
“BCHI
Common Stock” means the common stock, par value $0.01
per share, of BCHI.
“BCHI
Disclosure Letter” has the meaning set forth in the
preamble to Article
IV.
“BCHI
Employees” has the meaning set forth in Section 6.5(a).
“BCHI
Financial Statements” has the meaning set forth in
Section
4.5(a).
“BCHI
Intellectual Property” has the meaning set forth in
Section
4.13(a).
“BCHI
Interconnection Agreements” has the meaning set forth
in Section
4.17.
“BCHI
Leased Real Property” has the meaning set forth in
Section
4.15.
“BCHI
Licenses” has the meaning set forth in Section 4.16(a).
“BCHI
Material Adverse Effect” means any change, event,
effect, occurrence, state of facts or development that,
individually or in the aggregate, (a) has had or would reasonably
expected to have a material adverse effect on the business, results
of operations, assets, liabilities or condition (financial or
otherwise) of BCHI and the BCHI Subsidiaries, taken as a whole, (b)
has a material adverse effect on the ability of BCHI to consummate
the Transactions or (c) would prevent the consummation by BCHI of
the Transactions by the Outside Date; provided, however, that in no
event will any of the following (including the effect of any of the
following) be taken into account in determining whether, with
regard to clause (a) there has been or will be, a “BCHI
Material Adverse Effect”: (i) changes, events, effects,
occurrences, states of facts or developments generally affecting
the United States or global economy or the financial, credit, debt,
securities or other capital markets in the United States or any
other jurisdiction, including changes in interest rates,
(ii) changes in GAAP or the interpretation thereof or changes
in Laws, the interpretation thereof or political, legislative or
regulatory conditions (A) applicable to BCHI or the BCHI
Subsidiaries or any of its or their respective properties or assets
or (B) generally affecting the industries in which BCHI and the
BCHI Subsidiaries operate, (iii) acts of war or terrorism (or the
escalation of the foregoing) or natural or weather-related
disasters or other force majeure events (including hurricanes,
floods or earthquakes), and (iv) any failure to meet internal
or published projections, forecasts or revenue or earnings
predictions for any period, except that the underlying causes of
such change or failure will not be excluded by this clause
(iv), except, in
the case of clauses (i), (ii) and (iii) to the extent
disproportionately affecting BCHI and the BCHI Subsidiaries when
compared to other Persons operating in the same
industries.
“BCHI
Material Contract” has the meaning set forth in
Section
4.12(a).
“BCHI
Network Facility Agreement” has the meaning set forth
in Section
4.18(c).
“BCHI
Owned Network Facilities” means Network Facilities
that are owned by BCHI or any BCHI Subsidiary.
“BCHI
Owned Real Property” has the meaning set forth in
Section
4.15.
“BCHI
Owned Intellectual Property” has the meaning set forth
in Section
4.13(b)(ii).
“BCHI
Pension Plans” has the meaning set forth in
Section 4.9(a).
“BCHI Proprietary
Software” means all
Software owned or purported to be owned by BCHI or a BCHI
Subsidiary.
“BCHI
Registered Intellectual Property” means BCHI
Intellectual Property owned or purported to be owned by BCHI or any
BCHI Subsidiary that is registered or for which an application for
registration has been submitted by BCHI or any BCHI
Subsidiary.
“BCHI
Subsidiary” means any direct or indirect Subsidiary of
BCHI.
“BCHI
Third-Party Network Facilities” means all of the
Network Facilities of BCHI and its Subsidiaries that are not owned
by BCHI or any of its Subsidiaries but are provided under lease,
license, indefeasible rights of use of capacity or infrastructure
or other BCHI Network Facility Agreement, including Right-of-Way
Agreements, between BCHI or any BCHI Subsidiary, on the one hand,
and a third party, on the other hand.
“BCHI
Welfare Plans” has the meaning set forth in
Section 4.9(a).
“BCI”
has the meaning set forth in Section 4.5(a).
“Bona
Fide Alternative Proposal” means an unsolicited
written bona fide Alternative Proposal that was not received or
obtained in violation of Section 6.3.
“Business
Day” means a day other than a Saturday, a Sunday or
another day on which commercial banking institutions in New York,
New York are authorized or required by Law to be
closed.
“CALEA”
has the meaning set forth in Section 3.17(c).
“Canadian
Authorities” has the meaning set forth in Section 4.16(a).
“Certificate
of Merger” has the meaning set forth in Section 1.1(b).
“Certificates”
has the meaning set forth in Section 1.1(d)(i).
“Change
of Recommendation” has the meaning set forth in
Section
6.3(b)(vi).
“Change
of Recommendation Notice” has the meaning set forth in
Section
6.3(d).
“Chosen
Courts” has the meaning set forth in Section 9.8(a).
“Claim”
has the meaning set forth in Section 6.6(a).
“Closing”
has the meaning set forth in Section 1.4.
“Closing
Date” has the meaning set forth in Section 1.4.
“COBRA”
means the Consolidated Omnibus Budget Reconciliation Act of 1985,
as amended, and as codified in Section 4980B of the Code and
Section 601 et. seq. of ERISA.
“Code”
means the Internal Revenue Code of 1986, as amended.
“Communications
Act” has the meaning set forth in Section 3.17(c).
“Company”
has the meaning set forth in the Preamble.
“Company
Approval” has the meaning set forth in Section 3.10(b).
“Company
Benefit Plans” has the meaning set forth in
Section
3.10(a).
“Company
Board” has the meaning set forth in the
Recitals.
“Company
Board Recommendation” has the meaning set forth in the
Recitals.
“Company
Bylaws” has the meaning set forth in Section 3.1(b).
“Company
Capital Stock” has the meaning set forth in
Section
3.2(a).
“Company
Charter” has the meaning set forth in Section 3.1(b).
“Company
Common Stock” means the common stock, par value $.01
per share, of the Company.
“Company
Commonly Controlled Entity” has the meaning set forth
in Section 3.10(d).
“Company
Disclosure Letter” has the meaning set forth in the
preamble to Article III.
“Company
FCC Approval” has the meaning set forth in
Section
3.4.
“Company
Financial Statements” has the meaning set forth in
Section
3.6(a).
“Company
Intellectual Property” has the meaning set forth in
Section
3.14(a).
“Company
Interconnection Agreements” has the meaning set forth
in Section
3.18.
“Company
Leased Real Property” has the meaning set forth in
Section
3.16.
“Company
Licenses” has the meaning set forth in Section 3.17(a).
“Company
Material Adverse Effect” means any change, event,
effect, occurrence, state of facts or development that,
individually or in the aggregate, (a) has had or would reasonably
be expected to have a material adverse effect on the business,
results of operations, assets, liabilities or condition (financial
or otherwise) of the Company and the Company Subsidiaries, taken as
a whole, (b) has a material adverse effect on the ability of the
Company to consummate the Transactions or (c) would prevent the
consummation by the Company of the Transactions by the Outside
Date; provided, however, that in no event will any of the following
(including the effect of any of the following) be taken into
account in determining whether, with regard to clause (a), there
has been or will be, a “Company Material Adverse
Effect”: (i) changes, events, effects, occurrences, states of
facts or developments generally affecting the United States or
global economy or the financial, credit, debt, securities or other
capital markets in the United States or any other jurisdiction,
including changes in interest rates, (ii) changes in GAAP or
the interpretation thereof or changes in Laws, the interpretation
thereof or political, legislative or regulatory conditions (A)
applicable to the Company or the Company Subsidiaries or any of its
or their respective properties or assets or (B) generally affecting
the industries in which the Company and the Company Subsidiaries
operate, (iii) acts of war or terrorism (or the escalation of the
foregoing) or natural or weather-related disasters or other force
majeure events (including hurricanes, floods or earthquakes), and
(iv) any failure to meet internal or published projections,
forecasts or revenue or earnings predictions for any period, except
that the underlying causes of such change or failure will not be
excluded by this clause (iv), except, in the case of
clauses (i),
(ii) and
(iii) to the extent
disproportionately affecting the Company and the Company
Subsidiaries when compared to other Persons operating in the same
industries.
“Company
Material Contract” has the meaning set forth in
Section
3.13(a).
“Company
Network Facility Agreement” has the meaning set forth
in Section
3.19(c).
“Company
Non-Solicit Parties” has the meaning set forth in
Section
6.3(a)(i).
“Company
Options” means each unexercised and unexpired option
to purchase Company Capital Stock that is outstanding immediately
prior to the Effective Time.
“Company
Owned Intellectual Property” has the meaning set forth
in Section
3.14(b)(ii).
“Company
Owned Network Facilities” means Network Facilities
that are owned by the Company or any Company
Subsidiary.
“Company
Owned Real Property” has the meaning set forth in
Section
3.16.
“Company
Pension Plans” has the meaning set forth in
Section 3.10(a).
“Company
Preferred Stock” means each share of Series A-1
Preferred Stock, Series A-2 Preferred Stock, Series A-4 Preferred
Stock and Series B-2 Preferred Stock of the Company.
“Company Proprietary
Software” means all
Software owned by the Company or a Company
Subsidiary.
“Company
Registered Intellectual Property” means Company
Intellectual Property owned or purported to be owned by the Company
or any Company Subsidiary that is registered or for which an
application for registration has been submitted by the Company or
any Company Subsidiary.
“Company
Reports” has the meaning set forth in Section 3.5(a).
“Company
State Approvals” has the meaning set forth in
Section
3.4.
“Company
Subsidiary” means any direct or indirect Subsidiary of
the Company, and will include Merger Sub.
“Company
Third-Party Network Facilities” means all of the
Network Facilities of the Company and its Subsidiaries that are not
owned by the Company or any of its Subsidiaries but are provided
under lease, license, indefeasible rights of use of capacity or
infrastructure or other Company Network Facility Agreement,
including Right-of-Way Agreements, between the Company or any
Company Subsidiary, on the one hand, and a third party, on the
other hand.
“Company
Warrants” means each
warrant to purchase Company Common Stock that is outstanding and
unexercised as of the Effective Time.
“Company
Welfare Plans” has the meaning set forth in
Section
3.10(a).
“Confidentiality
Agreement” has the meaning set forth in Section 6.4(b).
“Consumer/SMB
Business” has the meaning set forth in Exhibit D.
“Contracts”
means any contracts, agreements, arrangements, licenses (or
sublicenses), notes, bonds, mortgages, indentures, commitments,
leases (or subleases) or other instruments or obligations, whether
written or oral.
“CPNI”
has the meaning set forth in Section 3.17(c).
“CRA”
means the Canada Revenue Agency.
“Cramming”
has the meaning set forth in Section 3.17(d).
“CRTC”
means the Canadian Radio-television and Telecommunications
Commission.
“D&O
Indemnified Parties” has the meaning set forth in
Section
6.6(a).
“D&O
Insurance” has the meaning set forth in Section 6.6(b).
“DGCL”
means the Delaware General Corporation Law.
“Effective
Time” has the meaning set forth in Section 1.1(b).
“Environment”
means soil, soil vapor, surface water, groundwater, land, sediment,
surface or subsurface structures or strata or ambient
air.
“Environmental
Law” means any Law regulating or relating to the
protection of human health, safety (as it relates to Releases of
Hazardous Substances), natural resources or the Environment,
including, without limitation, laws relating to wetlands,
pollution, contamination or the use, generation, management,
handling, transport, treatment, disposal, storage, Release or
threatened Release of Hazardous Substances.
“Equity
Interest” means any share, capital stock, partnership,
limited liability company, membership or similar interest in any
Person.
“ERISA”
means the Employee Retirement Income Security Act of 1974, as
amended.
“Equity
Compensation Plans” means the equity compensation
plans and agreements of the Company and the Company Subsidiaries
described in Section 9.15 of the
Company Disclosure Letter.
“Exchange
Act” means the Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated
thereunder.
“FCC”
means the Federal Communications Commission.
“FCC
Approval” has the meaning set forth in Section 4.4.
“FCC
Rules” has the meaning set forth in Section 3.17(c).
“Financing”
has the meaning set forth in Section 6.11(a).
“Financing
Agreements” has the meaning set forth in Section 6.11(a).
“Financing
Source” means, in its capacity as such, any lender
providing a binding commitment for the Financing pursuant to a
Financing Agreement, or any Affiliates, employees, officers,
directors, agents or advisors of any such lender.
“Fully-Diluted
Company Share Total” means, as of immediately prior to
the Effective Time, the number of shares of Company Common Stock
issued and outstanding, plus the number of shares of Company Common
Stock issued or issuable upon the conversion of the Company
Preferred Stock and any other class or series of preferred stock of
the Company outstanding as of immediately prior to the Effective
Time, plus the number of shares of Company Common Stock issuable
upon the exercise of all In-the-Money Company Warrants (as adjusted
for stock splits and calculated using the treasury stock method).
For the avoidance of doubt, all shares of Company Common Stock that
are (a) issued after the date hereof pursuant to Section 5.2, or (b) issuable
upon the conversion of Company Preferred Stock, any other class or
series of preferred stock of the Company, or any other security or
debt instrument, in each case, issued after the date hereof
pursuant to Section
5.2, will be included in the Fully-Diluted Company Share
Total, unless otherwise agreed by the Parties.
“Fusion
Global” has the meaning set forth in Section 6.17.
“Fusion
Global Arrangement” has the meaning set forth in
Section
6.17.
“GAAP”
means U.S. generally accepted accounting principles.
“GBCC”
has the meaning set forth in Section 1.1(a).
“Governmental
Entity” means any federal, state, provincial,
territorial, municipal, local or foreign government, governmental
authority, regulatory or administrative agency, governmental
commission, department, board, bureau, agency or instrumentality,
court or tribunal, arbitration or mediation body or appointing
authority, or self-regulatory organization.
“Hazardous
Substances” means any substance that: (i) is or
contains asbestos, urea formaldehyde insulation, polychlorinated
biphenyls, petroleum, petroleum products or petroleum-derived
substances or wastes, radon gas, microbial or microbiological
contamination or related materials, (ii) requires investigation or
remedial action pursuant to any Environmental Law or (iii) is
defined, listed or identified as a “hazardous waste,”
“hazardous substance,” “toxic substance” or
words of similar import thereunder or (iv) is regulated under any
Environmental Law.
“Holding
LLC” has the meaning set forth in the
Recitals.
“HSR
Act” means the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended, and the rules and regulations
promulgated thereunder.
“Intellectual
Property” means all of the following anywhere in the
world and all legal rights, title or interest in, under or in
respect of the following arising under Law, whether or not filed,
perfected, registered or recorded and whether now or later
existing, filed, issued or acquired, including all renewals:
(a) all patents and applications for patents (including all
invention disclosures) and all related reissues, reexaminations,
divisions, renewals, extensions, provisionals, continuations and
continuations in part, (b) all copyrights, copyright
registrations and copyright applications, copyrightable works and
all other corresponding rights, (c) all trade dress and trade
names, logos, Internet addresses and domain names, trademarks and
service marks and related registrations and applications, including
any intent to use applications, supplemental registrations and any
renewals or extensions, all other indicia of commercial source or
origin and all goodwill associated with any of the foregoing,
(d) all Software (including source and object code), firmware,
development tools, proprietary languages, algorithms, files,
records, technical drawings and related documentation, data and
manuals and rights therein, (e) all inventions (whether
patentable or unpatentable and whether or not reduced to practice),
know how, technology, technical data, (f) trade secrets,
confidential business information, financial, marketing and
business data, pricing and cost information, business and marketing
plans, advertising and promotional materials, customer,
distributor, reseller and supplier lists and information,
correspondence, records, and other documentation, and other
proprietary information of every kind (collectively, if and to the
extent proprietary, held as confidential and protectable as a
“trade secret” under applicable Law,
“Trade
Secrets”), (g) all databases and data collections
and all rights therein, (h) all other proprietary rights (including
moral rights) and (i) all copies and tangible embodiments of
any of the foregoing (in whatever form or medium).
“Interim
BCHI Financial Statements” has the meaning set forth
in Section
4.5(b).
“Interim
Company Financial Statements” has the meaning set
forth in Section
3.6(b).
“In-the-Money
Company Warrants” means any Company Warrant that is
outstanding and unexercised as of immediately prior to the
Effective Time and has a per share exercise price that is less than
the volume weighted average daily closing price of the Company
Common Stock, as reported by NASDAQ (or any successor to such
exchange), for the ten consecutive trading days ending on the
Business Day preceding the Closing Date (as adjusted for stock
splits); provided, that all Company Warrants issued after the
execution of this Agreement will be deemed to be In-the-Money
Company Warrants.
“IRS”
means the Internal Revenue Service.
“ITA”
means the Income Tax Act
(Canada), as amended.
“knowledge
of the Company” means the actual knowledge of Matthew
D. Rosen, Gordon Hutchins, Jr., Michael R. Bauer, Russell P.
Markman and James Prenetta, after reasonable
investigation.
“knowledge
of BCHI” means the actual knowledge of Gordon P.
Williams, Vincent Oddo, Kevin Dotts, James O’Brien and
Michelle Ansley, after reasonable investigation.
“Law”
means any federal, state, provincial, territorial, local,
municipal, foreign or other law, statute, constitution, principle
of common law, resolution, ordinance, code, order, writ, edict,
decree, rule, regulation, judgment, ruling, policy, guideline or
requirement issued, enacted, adopted, promulgated, implemented or
otherwise put into effect by or under the authority of any
Governmental Entity.
“Liens”
means any lien, mortgage, pledge, conditional or installment sale
agreement, encumbrance, covenant, restriction, option, right of
first refusal, easement, security interest, deed of trust,
right-of-way, encroachment, community property interest or other
claim or restriction of any nature, whether voluntarily incurred or
arising by operation of Law.
“Marketing
Period” means the first period of twenty (20)
consecutive days (or such other period as may be mutually agreed
upon by the Parties) throughout and on the last day of which (a)
the Financing Sources will have received the Required Information,
and (b) all conditions set forth in Section 7.1, Section 7.2 and Section 7.3 (other than those
that by their nature will not be satisfied until the Effective
Time) have been satisfied and nothing has occurred and no condition
exists that would cause any of the conditions set forth in
Section 7.1,
Section 7.2 and
Section 7.3 not to
be satisfied assuming the Effective Time were to be scheduled for
any time during such consecutive 20-day period (or such other
period as may be mutually agreed upon by the Parties).
Notwithstanding the foregoing, the “Marketing Period”
will not commence and will be deemed not to have commenced if, on
or prior to the completion of such consecutive 20-day period (or
such other period as may be mutually agreed upon by the Parties),
(i) the Company will have announced any intention to restate any
financial statements or financial information included in the
Required Information or that any such restatement is under
consideration or may be a possibility, in which case the Marketing
Period will be deemed not to commence unless and until such
restatement has been completed and the applicable Required
Information has been amended or the Company has announced that it
has concluded that no restatement will be required, or (ii) the
Company will have failed to file any report with the SEC when due,
in which case the Marketing Period will be deemed not to commence
unless and until all such reports have been filed.
“Maximum
Premium” has the meaning set forth in Section 6.6(b).
“Merger”
has the meaning set forth in the Recitals.
“Merger
Consideration” has the meaning set forth in
Section
1.1(d).
“Merger
Sub” has the meaning set forth in the
Preamble.
“NASDAQ”
has the meaning set forth in Section 3.4.
“Negotiation
Period” has the meaning set forth in Section 6.3(d).
“Network
Facilities” means all material network facilities
(including cables, wires, conduits, switches, and other equipment
and facilities) and related material operating support systems,
network operations centers, and land and buildings associated
therewith.
“NOR”
has the meaning set forth in Section 3.17(g).
“Offering
Documents” has the meaning set forth in Section 6.11(b).
“Order”
means any judgment, order, decision, writ, injunction, decree,
stipulation, award, ruling, or other finding or agency requirement
of a Governmental Entity, or arbitration award.
“Outside
Date” means April 2, 2018, or if extended to a later
date pursuant to and in accordance with Section 8.1(b)(ii), any such
later date.
“Party”
has the meaning set forth in the Preamble.
“Permits”
means all licenses, franchises, permits, variances, Orders,
approvals, certificates, authorizations, registrations and rights
of or with all Governmental Entities.
“Permitted
Lien” means (a) Liens in respect of any
liabilities and obligations reflected in the financial statements
of the Company and the Company Subsidiaries included in the Company
Reports or the BCHI Financial Statements, (b) with respect to
owned real property and leased real property, (i) defects,
exceptions, restrictions, rights of way, easements, covenants,
encroachments and other similar encumbrances or imperfections of
title, none of which materially impair or interfere with the
present users of such property, and (ii) zoning, entitlement,
land use, environmental regulations, and building restrictions,
none of which materially impair or interfere with the present uses
of such property, (c) Liens for current Taxes not yet
delinquent or being contested in good faith by appropriate
proceedings and for which adequate reserves have been established
in accordance with GAAP on the Company’s or BCHI’s, as
applicable, financial statements, and (d) pledges or deposits
in connection with workers’ compensation or unemployment
insurance, (e) mechanics’, carriers’, workmen’s,
repairmen’s or other like Liens that arise or are incurred in
the ordinary course of business for amounts not yet due and payable
and (f) any other Liens that, in the aggregate, do not materially
impair the continued use and operation of the assets or properties
to which they relate.
“Person”
means any individual (in any capacity) or legal entity, including a
Governmental Entity.
“Personal
Data” means any data or information from, about, or
related to an identified or identifiable individual that (i) alone
or in combination with other data information could be used,
directly or indirectly, to identify an individual or otherwise
facilitate decisions regarding individuals, (ii) constitutes
personal data or personal information under any applicable Law or
any applicable privacy policy, including, individual’s
combined first and last name, home address, telephone number, fax
number, email address, Social Security number or other Government
Entity-issued identifier (including state identification number,
driver’s license number, or passport number), geolocation
information of an individual or device, biometric data, medical or
health information, credit card or other financial information
(including bank account information), cookie identifiers associated
with registration information, or any other browser- or
device-specific number or identifier not controllable by the end
user, and web or mobile browsing or usage information that is
linked to the foregoing.
“Proxy
Statement” has the meaning set forth in Section 3.4.
“Principal
Company Stockholders” means Marvin S. Rosen, Matthew
D. Rosen, Philip D. Turits, Michael J. Del Giudice, Jack Rosen,
Larry Blum, Paul C. O’Brien and William Rubin.
“PSC
Rules” has the meaning set forth in Section 3.17(c).
“Refinancing”
means (i) the repayment in full and termination of (x) the
principal debt facilities of the Company and BCHI, (y) the
subordinated notes of BCHI, dated October 28, 2016, in favor of
Holcombe T. Green, Jr., R. Kirby Godsey and the Holcombe T. Green,
Jr. 2013 Five-Year Annuity Trust, and (z) the subordinated note of
the Company, dated November 14, 2016, in favor of Marvin S. Rosen,
in each case, with the proceeds of the Financing and (ii) the
release and termination of any and all security interests and liens
in connection with any of the foregoing.
“Registration
Rights Agreement” has the meaning set forth in
Section
1.5.
“Release”
means any releasing, disposing, discharging, injecting, spilling,
leaking, leaching, pumping, dumping, emitting, emptying, seeping,
dispersal, migration, transporting, placing and the like,
including, without limitation, the moving of any materials through,
into or upon, any land, soil, surface water, groundwater or air, or
otherwise entering into the indoor or outdoor
environment.
“Representatives”
means any officer, director, employee, investment bank, accountant,
attorney or other advisor or representative of a
Person.
“Required
Information” means all customary financial and other
information regarding BCHI, the Company and their respective
Subsidiaries as may be reasonably requested by a Party or a
Financing Source in connection with the Financing, including
financial statements prepared in accordance with GAAP, financial
information necessary for the preparation of pro forma financial
statements customary for debt offerings under Rule 144A under the
Securities Act, projections, audit reports, a draft of a customary
comfort letter (including “negative assurance comfort”)
with respect to such financial information by auditors of the
Company which such auditors are prepared to issue upon completion
of customary procedures letter.
“Reverse
Split” has the meaning set forth in Section 6.7.
“Right-of-Way
Agreement” means a right-of-way agreement, license
agreement or other agreement permitting or requiring a Person to
lay, build, operate, maintain or place cable, wires, conduits or
other equipment and facilities over land, underwater or
underground.
“Sales
Taxes” means the goods and services tax and the
harmonized sales tax imposed under Part IX of the Excise Tax Act (Canada), the Quebec
sales tax imposed under An Act
Respecting the Quebec Sales Tax and the provincial sales tax
imposed under the Provincial Sales
Tax Act (British Columbia), the Provincial Sales Tax Act (Saskatchewan)
and the Retail Sales Tax
Act (Manitoba).
“SEC”
means the Securities and Exchange Commission.
“Securities
Act” means the Securities Act of 1933, as amended, and
the rules and regulations promulgated thereunder.
“Separation
Agreements” has the meaning set forth in Section 6.16.
“Share”
has the meaning set forth in Section 1.1(d)(i).
“Slamming”
has the meaning set forth in Section 3.17(d).
“Software”
means any computer software program, together with any error
corrections, updates, modifications, or enhancements thereto, in
both machine-readable form and human readable form, including all
comments and any procedural code.
“SOX”
means the Sarbanes-Oxley Act of 2002.
“Spinco”
has the meaning set forth in Exhibit D.
“State
Approvals” has the meaning set forth in Section 4.4.
“State
PSCs” has the meaning set forth in Section 3.17(a).
“State
Telecommunications Laws” has the meaning set forth in
Section
3.17(c).
“Stockholder
Approval” has the meaning set forth in Section 3.3(a).
“Stockholders’
Agreement” has the meaning set forth in Section 1.4.
“Stockholders
Meeting” has the meaning set forth in Section 6.2(e).
“Subscription
Agreements” has the meaning set forth in the
Recitals.
“Subsidiary”
means, with respect to a Person, another Person in which such first
Person owns, directly or indirectly, (a) any amount of the voting
securities, other voting rights or voting partnership interests of
which is sufficient to elect at least a majority of its board of
directors or other governing body or (b) a majority of the Equity
Interests of such other Person.
“Superior
Proposal” means a Bona Fide Alternative Proposal that
the Company Board has determined in good faith, after consultation
with its outside financial and legal advisors (taking into account
the various legal, financial, regulatory and other aspects of such
Bona Fide Alternative Proposal, including the financing terms
thereof, the nature of the consideration offered, the expected
timing and risk and likelihood of consummation), (a) is reasonably
likely to be consummated in accordance with its terms and (b) if
consummated, would result in a transaction more favorable to each
of the stockholders of the Company from a financial point of view
than the Transactions (after taking into account any revisions to
the terms of the Transactions proposed by BCHI, whether pursuant to
Section 6.3(d) or
otherwise); provided, however, that for purposes of the definition
of “Superior Proposal,” the references to “20% or
more” in the definition of Alternative Proposal will be
deemed to be references to “more than
95%.”
“Support
Agreements” has the meaning set forth in the
Recitals.
“Surviving
Company” has the meaning set forth in Section 1.1(a).
“Takeover
Laws” means any state takeover Law or other state Law
that purports to limit or restrict business combinations or the
ability to acquire or vote Company Common Stock, including any
“business combination,” “control share
acquisition,” “fair price,”
“moratorium” or other similar anti-takeover
Law.
“Tax”
or “Taxes” means any (a)
federal, state, local and foreign income, excise, gross receipts,
gross income, ad valorem, profits, gains, property, estimated,
capital, sales, transfer, use, value added, payroll, employment,
unemployment, workers’ compensation, severance, withholding,
duties, intangibles, franchise, backup withholding and other taxes
of any kind, charges, levies or like assessments, including
escheat, together with all penalties, and additions and interest
thereto, whether disputed or not, and whether liability is imposed
directly or by virtue of an obligation to indemnify or otherwise
assume or succeed to the Taxes of another Person and (b) liability
for the payment of any amounts of the type described in clause
(a) of this
sentence as a result of being a member of an affiliated,
consolidated, combined, unitary or aggregate group for any taxable
period.
“Tax
Return” includes all returns, reports, claims for
refund and forms (including elections, designations, attachments,
declarations, disclosures, schedules, estimates, information
returns and TD Form 90-22.1, and its successor form FinCEN Form
114) relating to Taxes, including any amendment thereof and any
document with respect to or accompanying payments of estimated
Taxes, or with respect to or accompanying requests for the
extension of time in which to file any such return, report,
document or declaration.
“Telecommunications
Act” has the meaning set forth in Section 3.18.
“Trade
Secrets” has the meaning set forth in the definition
of Intellectual Property.
“Transaction
Litigation” has the meaning set forth in Section 6.12.
“Transactions”
means the Merger, the matters described in Section 1.2 and the other
transactions contemplated by this Agreement.
“Treasury
Regulations” means the regulations promulgated under
the Code by the U.S. Department of the Treasury.
“UNEs”
has the meaning set forth in Section 3.18.
“USF
Programs” has the meaning set forth in Section 3.17(c).
[Remainder of Page Intentionally Left Blank]
IN
WITNESS WHEREOF, the Parties have caused this Agreement to be
executed by their respective officers thereunto duly authorized as
of the date first above written.
FUSION
TELECOMMUNICATIONS INTERNATIONAL, INC.
By:
/s/ Gordon Hutchins,
Jr.
Name:
Gordon Hutchins, Jr.
Title:
President and Chief Operating Officer
FUSION
BCHI ACQUISITION LLC
By:
/s/ Gordon Hutchins,
Jr.
Name:
Gordon Hutchins, Jr.
Title:
Manager
BIRCH
COMMUNICATIONS HOLDINGS, INC.
By:
/s/ Gordon P. Williams,
Jr.
Name:
Gordon P. Williams, Jr.
Title:
Senior Vice President and General Counsel
Exhibit B
STOCKHOLDERS’ AGREEMENT
This
STOCKHOLDERS’ AGREEMENT (this “Agreement”) is entered
into as of [●], 2017 among Fusion Telecommunications
International, Inc., a Delaware corporation (the
“Company”),
BCHI Holdings, LLC, a Georgia limited liability company
(“Holding
LLC”), the other Persons set forth on Schedule I hereto (the
“Initial FTI
Stockholders”) and each Person that becomes a party to
this Agreement by delivering to the Company and Holding LLC a duly
executed joinder to this Agreement in the form attached hereto as
Exhibit A hereto or
such other form approved by Holding LLC and the Company (together,
with the Initial FTI Stockholders, the “FTI Stockholders” and
each an “FTI
Stockholder).
RECITALS
A.
This Agreement is
being entered into in connection with the consummation of the
transactions contemplated by the Merger Agreement, dated as of
August 26, 2017 (as amended or modified from time to time, the
“Merger
Agreement”), by and among the Company, Birch
Communications Holdings, Inc., a Georgia corporation,
and Fusion BCHI
Acquisition LLC, a Delaware limited liability company.
B.
After giving effect
to the transactions contemplated by the Merger Agreement, Holding
LLC and the Initial FTI Stockholders own the equity securities of
the Company in the respective amounts indicated on Schedule I hereto.
C.
Holding LLC, the
FTI Stockholders and the Company wish to set forth certain
agreements regarding the relationships among them and the
governance of the Company.
In
consideration of the premises, and of the representations,
warranties, covenants and agreements set forth herein, the Company
and each Stockholder agree as follows:
ARTICLE
I
DEFINITIONS
Certain
Defined Terms. As used herein, the following terms shall
have the following meanings:
“Affiliate”
means (i) with respect to any Person, any other Person directly or
indirectly controlling, controlled by or under common control with,
such Person, (ii) with respect to Holding LLC, any member of
Holding LLC or any trust therefor, and (iii) with respect to any
natural person, any spouse or lineal descendant of such person, and
in each case, any trust therefor.
“Agreement”
has the meaning set forth in the preamble.
“beneficial
owner” or “beneficially own” has the
meaning given such term in Rule 13d-3 under the Exchange Act, and a
Person’s beneficial ownership of Common Stock or other Equity
Securities of the Company shall be calculated in accordance with
the provisions of such rule. For the avoidance of doubt, no Person
shall be deemed to beneficially own any security solely as a result
of such Person’s execution of this Agreement.
“Board”
means the Board of Directors of the Company.
“Business
Day” means any day that is not a Saturday, Sunday or
other day on which banks are required or authorized by law to be
closed in New York City.
“Bylaws”
means the Bylaws of the Company, as in effect on the date hereof
and as the same may be amended, supplemented or otherwise modified
from time to time in accordance with the terms
thereof.
“Cause”
shall mean the occurrence of any of the following:
(A) any action or
omission by the applicable Director that constitutes (1) a criminal
act committed in connection with or related to the activities of
the Company or (2) fraud, willful misconduct or gross negligence in
the performance of such Director’s duties as a director of
the Company or otherwise relating to the activities of the
Company;
(B) the conviction of
the applicable Director of any criminal offense unrelated to the
activities of the Company that constitutes a felony or for which a
term of imprisonment of any duration is imposed (other than an
offense under any road traffic legislation, not accompanied by any
other criminal offense that constitutes a felony);
(C) a breach by the
applicable Director of a material securities law or regulation or a
material rule of any securities exchange of the Securities and
Exchange Commission; or
(D) if such Director
also is a party to a consulting, services, severance or employment
agreement with the Company and such term is defined therein, the
meaning as set forth in such agreement.
“Charter”
means the Certificate of Incorporation of the Company, as in effect
on the date hereof and as the same may be amended, supplemented or
otherwise modified from time to time.
“Closing”
means the closing of the Transaction as defined in and as
contemplated by the Merger Agreement.
“Common
Stock” means the common stock, par value $.01 per
share, of the Company, and any securities issued in respect
thereof, or in substitution therefor, in connection with any stock
split, dividend or combination, or any reclassification,
recapitalization, merger, consolidation, exchange or other similar
reorganization.
“Communications
Act” means the Communications Act of
1934.
“Company”
has the meaning set forth in the preamble.
“Control”
(including the terms “controlling”,
“controlled
by” and “under common control
with”), with respect to the relationship between or
among two or more Persons, means the possession, directly or
indirectly, of the power to direct or cause the direction of the
affairs or management of a Person, whether through the ownership of
voting securities, as trustee or executor, by contract or
otherwise.
“Covered
Claims” has the meaning set forth in Section 4.16(a).
“Director”
means any member of the Board.
“Equity
Securities” means any and all shares of Common Stock
or other equity securities of the Company, securities of the
Company convertible into, or exchangeable or exercisable for
(whether presently convertible, exchangeable or exercisable or
not), such shares, and options, warrants or other rights (whether
presently convertible, exchangeable or exercisable or not) to
acquire such shares of Common Stock or other equity securities of
the Company.
“Exchange
Act” means the Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated
thereunder.
“FCC
Regulations” means the rules, regulations, published
decisions, published orders and policies promulgated by the Federal
Communications Commission and in effect from time to
time.
“FTI
Director” means, as of any date, each Person who is a
director of the Company on such date and who was designated as a
director nominee in accordance with the provisions of Section 2.1(b)(ii) and elected
to the Board at an annual or special meeting of the stockholders of
the Company.
“FTI
Stockholders” has the meaning set forth in the
preamble.
“FTI
Nominating Committee” means, as of any date on which
an action or decision of the FTI Nominating Committee is required
or permitted to be taken pursuant to this Agreement, the FTI
Directors serving on the Board on such date.
“Group”
has the meaning set forth in Section 13(d)(3) of the Exchange
Act.
“Holding
LLC” has the meaning set forth in the
preamble.
“Information”
means all confidential information about the Company or any of its
Subsidiaries that is or has been furnished to any Stockholder or
any of its Representatives by or on behalf of the Company or any of
its Subsidiaries, or any of their respective Representatives
(whether written or oral or in electronic or other form and whether
prepared by the Company or any of its Subsidiaries or their
respective Representatives), together with that portion of all
written or electronically stored documentation prepared by such
Stockholder or its Representatives based on or reflecting, in whole
or in part, such information; provided, however, that the term
“Information” shall not
include any information that (i) is or becomes generally available
to the public through no action or omission by such Stockholder or
its Representatives in violation of this Agreement, (ii) is or
becomes available to such Stockholder on a non-confidential basis
from a source, other than the Company or any of its Subsidiaries,
or any of their respective Representatives, that, to such
Stockholder’s knowledge, after reasonable inquiry, is not
prohibited from disclosing to such Stockholder by a contractual,
legal or fiduciary obligation or (iii) is independently developed
by a Stockholder or its Representatives or Affiliates without use
of any Information.
“Initial
FTI Stockholders” has the meaning set forth in the
preamble.
“Law”
means the law of any jurisdiction, whether international,
multilateral, multinational, national, federal, state, provincial,
local or common law, or an order, act, statute, ordinance,
regulation, rule, extension order or code promulgated by a
governmental authority (including any department, court, agency or
official, or non-governmental self-regulatory organization, agency
or authority and any political subdivision or instrumentality
thereof).
“Merger
Agreement” has the meaning provided in the first
recital.
“Person”
means any individual, corporation, limited liability company,
limited or general partnership, joint venture, association,
joint-stock company, trust, unincorporated organization, government
or any agency or political subdivisions thereof or any Group
comprised of two or more of the foregoing.
“Representatives”
means with respect to any Person, any of such Person’s, or
its Affiliates’, directors, officers, employees, general
partners, Affiliates, direct or indirect shareholders, members or
limited partners, attorneys, accountants, financial and other
advisers, and other agents and representatives, including, in the
case of any Stockholder, any designee nominated for election to the
Board or a committee thereof by such Stockholder.
“Sale
of the Company” means, in any one or more related
transactions, a merger (other than a merger solely for the purpose
of forming a holding company with no change in indirect ownership
or to effect a change in the Company’s state of
incorporation), business combination or sale of all or
substantially all of the Company’s assets, in each case, as a
result of which the Directors immediately prior to such transaction
do not represent a majority of the Board immediately following the
consummation of such transaction (or series of transactions), or
the stockholders of the Company immediately prior to such
transaction do not, immediately following the consummation of such
transaction (or series of transactions), continue to own equity
securities representing more than 50% of the vote and of the equity
of the Company, of the ultimate controlling Person (in the case of
a merger or business combination) or Person succeeding to ownership
of all or substantially all of the Company’s assets (in the
case of a sale of assets).
“Secondary
Indemnitors” has the meaning assigned to such term in
Section
4.16.
“Securities
Act” means the Securities Act of 1933, as amended, and
the rules and regulations promulgated thereunder.
“Specified
Indemnitee” has the meaning set forth in Section 4.16.
“Stockholder”
means each of Holding LLC and the FTI Stockholders.
“Subsidiary”
means, with respect to any Person, (i) any corporation of which a
majority of the securities entitled to vote generally in the
election of directors thereof, at the time as of which any
determination is being made, or a majority of the economic
interests in such Person’s equity, are owned by such Person,
either directly or indirectly, and (ii) any joint venture, general
or limited partnership, limited liability company or other legal
entity in which such Person is the record or beneficial owner,
directly or indirectly, of a majority of the voting or equity
interests or of which such Person is the general partner or
managing member.
“Transfer”
means, directly or indirectly, to sell, transfer, assign,
hypothecate or similarly dispose of (by merger, operation of law or
otherwise), either voluntarily or involuntarily, or to enter into
any contract, option or other arrangement or understanding with
respect to, the sale, transfer, assignment, hypothecation or
similar disposition of (by merger, operation of law or otherwise),
any shares of Equity Securities beneficially owned by a
Person.
“Transferee”
means any Person to whom any Stockholder or any transferee thereof
Transfers Equity Securities in accordance with the terms
hereof.
“Voting
Securities” means at any time the then-issued and
outstanding Common Stock and any other securities of the Company of
any kind or class having power generally to vote for the election
of Directors.
Other
Definitional Provisions. Unless otherwise expressly
provided, for the purposes of this Agreement, the following rules
of interpretation shall apply:
(a) When a reference is
made in this Agreement to an article or a section, paragraph,
exhibit or schedule, such reference will be to an article or a
section, paragraph, exhibit or schedule hereof unless otherwise
clearly indicated to the contrary.
(b) Whenever the words
“include,” “includes” or
“including” are used in this Agreement, they will be
deemed to be followed by the words “without
limitation.”
(c) The words
“hereof,” “herein” and
“herewith” and words of similar import will, unless
otherwise stated, be construed to refer to this Agreement as a
whole and not to any particular provision of this
Agreement.
(d) The meaning
assigned to each term defined herein will be equally applicable to
both the singular and the plural forms of such term, and words
denoting any gender will include all genders. Where a word or
phrase is defined herein, each of its other grammatical forms will
have a corresponding meaning.
(e) A reference to any
period of days will be deemed to be to the relevant number of
calendar days, unless otherwise specified.
(f) The word
“dollars” and symbol “$” mean U.S.
dollars.
(g) References herein
to any Person shall include such Person’s heirs, executors,
personal representatives, administrators, successors and
assigns.
(h) The word
“or” shall be disjunctive but not
exclusive.
(i) The parties hereto
have participated jointly in the negotiation and drafting of this
Agreement. In the event an ambiguity or question of intent or
interpretation arises, this Agreement will be construed as if
drafted jointly by the parties, and no presumption or burden of
proof will arise favoring or disfavoring any party by virtue of the
authorship of any provisions hereof.
(j) Any statute or rule
defined or referred to herein or in any agreement or instrument
that is referred to herein means such statute or rule as from time
to time amended, modified or supplemented, including by succession
of comparable successor statutes or rules and references to all
attachments thereto and instruments incorporated
therein.
CORPORATE GOVERNANCE
Board
of Directors Matters.
(a) Board Size and Composition.
Effective as of the Closing, in accordance with Section
[●] of
the Bylaws, the size of the Board has been fixed at nine
Directors.
(b) Nomination of Directors.
Subject to Section
2.1(e), each Stockholder agrees with the Company that it
shall: (i) appear in person or by proxy at each annual meeting or
special meeting of the stockholders of the Company at which
Directors are to be elected for the purposes of obtaining a quorum;
(ii) at each such stockholders’ meeting, vote, in person or
by proxy, all of the Voting Securities owned by it on the date of
such meeting in favor of election of the following designees
nominated for election to the Board pursuant to this Section 2.1(b) and in
accordance with the Bylaws and the nomination procedures of the
Company; and (iii) in any action by written consent of the holders
of Voting Securities for the purpose of electing Directors, consent
to election of the following designees nominated for election to
the Board pursuant to this Section 2.1(b) and in
accordance with the Bylaws and the nomination procedures of the
Company:
(i) four (4) Persons
(at least one (1) of whom shall be an independent director within
the meaning of the NASDAQ listing standards) designated as nominees
for election to the Board by Holding LLC;
(ii) four
(4) Persons (at least one (1) of whom shall be an independent
director within the meaning of the NASDAQ listing standards)
designated as nominees for election to the Board by the FTI
Nominating Committee; and
(iii) one
(1) Person designated as a nominee for election to the Board (who
shall be an independent director within the meaning of the NASDAQ
listing standards) by Holding LLC with the prior written approval
(not to be unreasonably withheld, conditioned or delayed) of the
FTI Nominating Committee.
In the
event that either Holding LLC or the FTI Nominating Committee fails
to designate any nominee that it is entitled to designate pursuant
to this Section
2.1(b), then the Company will provide written notice of such
failure to Holding LLC or the FTI Nominating Committee, as
applicable. If such failure is not cured within ten (10) Business
Days following the transmission of such notice by the Company, then
the Board will be entitled to designate a nominee for such
position. The rights of each of Holdings LLC and the FTI Nominating
Committee to designate nominees for election to the Board as set
forth in this Section
2.1(b) are personal to each of Holdings LLC and the FTI
Nominating Committee and may not be exercised by any Transferee,
except that in the event Holding LLC no longer holds any Common
Stock but its Affiliates continue to hold Common Stock Transferred
by Holding LLC to such Affiliates (whether directly or by Transfers
through other Affiliates of Holding LLC), and such rights have not
been terminated pursuant to Section 2.1(e), the rights of
Holdings LLC to designate nominees pursuant to this Section 2.1(b) may be exercised
by the Affiliates of Holding LLC to which such Common Stock was
Transferred.
(c) Chairman and Vice Chairman of the
Board. Matthew D. Rosen will be the initial Chairman of the
Board and Holcombe T. Green, Jr. will be the initial Vice Chairman
of the Board.
(d) Removal and Replacement;
Vacancies.
(i) In the event that a
vacancy is created at any time by the death, disability,
retirement, resignation or removal of any Director nominated for
election to the Board pursuant to Section 2.1(b), the Company, by
action of the remaining Directors, shall, and the Stockholders
agree with the Company to use their reasonable best efforts to
cause the remaining Directors to, fill the vacancy created thereby
with a replacement nominee designated by the entity (i.e., either
Holding LLC or the FTI Nominating Committee) that had designated
such Director for nomination pursuant to Section 2.1(b) as promptly as
practicable. If such vacant position had been held by a Person
nominated under Section
2.1(b)(iii), then the nomination of the replacement nominee
shall be subject to the prior written approval of the FTI
Nominating Committee, in accordance with Section
2.1(b)(iii).
(ii) In
the event that a vacancy is created at any time by the death,
disability, retirement, resignation or removal of any Director
nominated for election to the Board pursuant to Section 2.1(b) and the
remaining Directors have not caused the vacancy created thereby to
be filled pursuant to Section 2.1(d)(i) by a new
designee of the appropriate Person promptly after both Holding LLC
and the FTI Nominating Committee have been notified of such
vacancy, then in such case the Company shall take all such actions
as and when requested by whichever of Holding LLC or the FTI
Nominating Committee is entitled, pursuant to Section 2.1(b) to designate a
Person to fill such vacancy (the “Designating
Stockholder”), and each other Stockholder hereby
agrees with the Company to vote, or act by written consent with
respect to, all Voting Securities beneficially owned by it on the
date of the relevant vote or action to act to fill the vacancy with
a Person designated as a replacement by the Designating Stockholder
in accordance with Section
2.1(b). Upon the written request of any Person having rights
under Section
2.1(b), each other Stockholder agrees with the Company to
vote, or act by written consent with respect to, all Voting
Securities beneficially owned by it on the date of the relevant
action to, remove any Director nominated by such Person for
election to the Board pursuant to Section 2.1(b) and to elect any
replacement Director designated for nomination by such Person
pursuant to this Section
2.1(d).
(iii) Subject
to Section 2.1(e),
unless otherwise requested in writing by the Person entitled to
nominate such Person for election to the Board under Section 2.1(b), no other
Stockholder shall take any action to cause the removal of any
Directors nominated by such Person for election to the Board
pursuant to Section
2.1(b); provided, that any Director may be removed by the
Board for Cause and, in such case, the resulting vacancy will be
filled with a Person designated as a replacement by the Designating
Stockholder in accordance with Section 2.1(b) .
(iv) Any
vacancy on the Board that results from the termination of rights of
nomination pursuant to Section 2.1(e) may be filled by
action of a majority of the Board, in accordance with the Bylaws
and applicable nomination procedures of the Company.
(e) Termination of Rights of
Nomination.
(i) Upon such time as
Holding LLC and its Affiliates cease to beneficially own,
collectively, at least 20% of the number of shares of Common Stock
they collectively beneficially own immediately following the
Closing, Holding LLC
shall cease to have the right to designate any nominee for election
to the Board pursuant to Section 2.1(b).
(ii) Unless
otherwise mutually agreed by Holding LLC and the FTI Nominating
Committee, upon such time as the aggregate number of issued and
outstanding shares of Common Stock beneficially owned by Marvin
Rosen and Matt Rosen is less than that number of shares of Common
Stock equal to 1.5% of the then issued and outstanding shares of
Common Stock, the FTI Nominating Committee shall cease to have the
right to designate any nominee for election to the Board pursuant
to Section
2.1(b).
Company
Cooperation. The Company shall take such action as may be
required under applicable Law, the Charter and the Bylaws (subject
to such vote of the Board as may be required) (a) to cause the
Board to consist of the number of Directors specified in
Section 2.1(a) and
(b) to cause one of the Directors to be appointed and serve as the
Chairman of the Board and another of the Directors to be appointed
and serve as the Vice Chairman of the Board in accordance with
Section 2.1(c). The
Company agrees to include in the slate of nominees to be voted upon
by stockholders of the Company the Persons designated for
nomination to the Board in accordance with Section 2.1(b). The Company
agrees that no modification or amendment of the Charter or the
Bylaws that is inconsistent with the provisions of this Agreement
shall be effective without the approval of Holding LLC and the FTI
Nominating Committee.
FTI
Nominating Committee. The FTI Nominating Committee will only
take such actions under this Agreement as authorized in writing
(email being sufficient), including the nomination of individuals
for election to the Board by the FTI Nominating Committee pursuant
to Section
2.1(b)(ii), by a majority of the FTI Nominating
Committee.
FTI
Stockholders. Notwithstanding anything to the contrary
herein, at such time as any Person shall cease to serve as an FTI
Director for any reason, such Person shall no longer be an FTI
Stockholder within the meaning of this Agreement and the rights and
obligations of such Person under this Agreement shall terminate at
such time. At such time as any Person shall be elected as an FTI
Director such Person shall become an FTI Stockholder within the
meaning of this Agreement but only upon execution and delivery, to
the Company and Holding LLC, of a duly executed joinder to this
Agreement in the form attached hereto as Exhibit A hereto or such other
form approved by Holding LLC and the Company.
Affiliate
Transactions. Except for such transactions as are
contemplated by agreements to which the Company is a party on the
date hereof or to be entered into on the date hereof, any
transaction between the Company or any Subsidiary of the Company,
on the one hand, and a Stockholder or any Affiliate of such
Stockholder, on the other, shall require the approval of a majority
of the disinterested members of the Board.
ARTICLE
III
REPRESENTATIONS AND
WARRANTIES
Representations
and Warranties of the Company. The Company represents and
warrants to each Stockholder as follows:
(a) the Company has all
requisite corporate power and authority to enter into this
Agreement and to perform its obligations hereunder, and to
consummate the transactions contemplated hereby. This Agreement has
been duly authorized, executed and delivered by the Company and
constitutes a valid and binding obligation of the Company
enforceable against the Company in accordance with its terms,
except to the extent that the enforcement hereof may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or
similar Laws affecting the enforcement of creditors’ rights
generally and general equitable principles, regardless of whether
such enforceability is considered in a proceeding at law or in
equity; and
(b) the execution and
delivery of this Agreement by the Company, the performance of its
obligations hereunder, and the consummation of the transactions
contemplated hereby will not violate, conflict with or result in a
breach, or constitute a default (with or without notice or lapse of
time or both) under any provision of the Charter or
Bylaws.
Representations
and Warranties of the Stockholders. Each Stockholder,
severally and not jointly, represents and warrants, solely with
respect to itself, to each other Stockholder and to the Company as
follows:
(c) such Stockholder
has all requisite power and authority to enter into this Agreement
and to perform its obligations hereunder, and to consummate the
transactions contemplated hereby. This Agreement has been duly
authorized, executed and delivered by such Stockholder and
constitutes a valid and binding obligation of such Stockholder
enforceable against such Stockholder in accordance with its terms,
except to the extent that the enforcement thereof may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or
similar Laws affecting the enforcement of creditors’ rights
generally and general equitable principles, regardless of whether
such enforceability is considered in a proceeding at law or in
equity; and
(d) the execution and
delivery of this Agreement by such Stockholder, the performance of
its obligations hereunder, and the consummation of the transactions
contemplated hereby will not violate, conflict with or result in a
breach, or constitute a default (with or without notice or lapse of
time or both) under any provision of its charter, bylaws or other
similar organizational documents.
ARTICLE IV
MISCELLANEOUS
Not
A “Group”. The Stockholders and the Company
acknowledge that the arrangements contemplated by this Agreement
are not intended to constitute the formation of a Group. Each
Stockholder agrees that, for purposes of determining beneficial
ownership of such Stockholder, it shall disclaim any beneficial
ownership by virtue of this Agreement of the Company’s
securities owned by the other Stockholders, and the Company agrees
to recognize such disclaimer in its Exchange Act and Securities Act
reports.
Termination.
This Agreement shall terminate upon the earliest of (a) a Sale of
the Company or (b) the date on which the rights of Holding LLC or
the FTI Nominating Committee pursuant to Section 2.1(b) to nominate
individuals for election to the Board have terminated in accordance
with the terms of Section
2.1(e); provided, however, that, notwithstanding
anything in this Section
4.2 to the contrary, the rights and obligations of any
particular Stockholder (other than an FTI Stockholder) under this
Agreement shall terminate on the date on which such Stockholder no
longer beneficially owns any Equity Securities; provided, further, that, notwithstanding
anything in this Section
4.2 to the contrary, the termination of the rights and
obligations of any Person who ceases to serve as an FTI Director
for any reason shall be governed by Section 2.4.
Confidentiality.
Each Stockholder agrees with the Company to, and agrees with the
Company to use commercially reasonable efforts to cause its
Representatives to, keep confidential and not divulge any
Information; provided, however, that nothing herein
shall prevent any Stockholder from disclosing such Information (a)
upon the order of any court or administrative agency, (b) upon the
request or demand of any regulatory agency or authority having
jurisdiction over such Stockholder or Representative, (c) to the
extent required by Law or legal process or required or requested
pursuant to subpoena, interrogatories or other discovery requests,
(d) to the extent necessary in connection with the exercise of any
remedy hereunder, (e) to other Stockholders, or (f) to such
Stockholder’s Representatives that in the reasonable judgment
of such Stockholder need to know such Information; provided, further, that, in the case of
clause (a), (b) or (c), such Stockholder shall notify the Company
of the proposed disclosure as far in advance of such disclosure as
reasonably practicable and, if requested by the Company, use
commercially reasonable efforts (but at the sole expense of the
Company) to ensure that any Information so disclosed is accorded
confidential treatment, when and to the extent
available.
Amendments
and Waivers. Except as otherwise provided herein, no
modification, amendment or waiver of any provision of this
Agreement shall be effective without the approval of the Company,
Holding LLC and the FTI Nominating Committee; provided, however, that (a) this
Agreement may not be amended, modified or waived in any manner
adversely affecting the rights or obligations of any Stockholder
without the prior written consent of such Stockholder, (b) no
amendment, modification or waiver to Section 2.1 (directly or by
amendment of the definitions used therein) shall adversely affect
the rights of Holding LLC or the FTI Nominating Committee to
designate nominee(s) for election to the Board in accordance with
this Agreement without the consent of Holding LLC or the FTI
Nominating Committee, as the case may be, (c) amendment,
modification or waiver of this Section 4.4 shall require the
prior written consent of each Stockholder, and (d) any Stockholder
may terminate or waive (in writing) the benefit of any provision of
this Agreement with respect to itself for any purpose.
Successors,
Assigns and Transferees. Except as expressly set forth
herein, this Agreement shall bind and inure to the benefit of, and
be enforceable by, the parties hereto and their respective
successors and permitted assigns.
Notices.
All notices and other communications to be given to any party
hereunder shall be sufficiently given for all purposes hereunder if
in writing and delivered by hand, courier or overnight delivery
service, or when received in the form of an email or other
electronic transmission (receipt confirmation requested), and shall
be directed to the address set forth below (or at such other
address or email address as such party shall designate by like
notice):
if to
the Company, to:
Fusion
Telecommunications International, Inc.
420
Lexington Avenue, Suite 1718
New
York, New York 10170
Attention: James P.
Prenetta, Jr. Executive Vice President and General
Counsel
Email:
jprenetta@fusionconnect.com
if to
any Stockholder, to the address of such Stockholder as shown in
Schedule I
hereto.
Further
Assurances. At any time or from time to time after the date
hereof, the parties agree to cooperate with each other, and at the
request of any other party, to execute and deliver any further
instruments or documents and to take all such further action as the
other party may reasonably request in order to evidence or
effectuate the consummation of the transactions contemplated hereby
and to otherwise carry out the intent of the parties
hereunder.
Entire
Agreement; Third Party Beneficiaries. Except as otherwise
expressly set forth herein, this Agreement embodies the complete
agreement and understanding among the parties hereto with respect
to the subject matter hereof and supersedes and preempts any prior
understandings, agreements or representations by or among the
parties, written or oral, that they may have related to the subject
matter hereof in any way. This Agreement is not intended to confer
in or on behalf of any Person not a party to this Agreement any
rights, benefits, causes of action or remedies with respect to the
subject matter or any provision thereof.
Delays
or Omissions. It is agreed that no delay or omission to
exercise any right, power or remedy accruing to any party, upon any
breach, default or noncompliance by another party under this
Agreement, shall impair any such right, power or remedy, nor shall
it be construed to be a waiver of any such breach, default or
noncompliance, or any acquiescence therein, or of or in any similar
breach, default or noncompliance thereafter occurring. It is
further agreed that any waiver, permit, consent or approval of any
kind or character on the part of any party hereto of any breach,
default or noncompliance under this Agreement or any waiver on such
party’s part of any provisions or conditions of this
Agreement, must be in writing and shall be effective only to the
extent specifically set forth in such writing. All remedies, either
under this Agreement, by Law, or otherwise afforded to any party,
shall be cumulative and not alternative.
Governing
Law. This Agreement will be governed by and construed in
accordance with the Laws of the State of Delaware applicable to
contracts made and to be performed within the State of Delaware,
without giving effect to conflicts of law rules that would require
or permit the application of the Laws of another
jurisdiction.
Specific
Performance; Jurisdiction.
(a) The parties agree
that irreparable damage would occur for which money damages would
not suffice in the event that any of the provisions of this
Agreement were not performed in accordance with their specific
terms or were otherwise breached and that the parties would not
have any adequate remedy at law. It is accordingly agreed that any
non-breaching party shall be entitled to seek an injunction,
temporary restraining order or other equitable relief exclusively
in the Delaware Court of Chancery enjoining any such breach and
enforcing specifically the terms and provisions hereof, or in the
event (but only in the event) that such court does not have subject
matter jurisdiction over such action or proceeding, in the United
States District Court for the District of Delaware or another court
sitting in the state of Delaware. Each party agrees not to raise
any objections to the availability of the equitable remedy of
specific performance to prevent or restrain breaches or threatened
breaches of, or to enforce compliance with, the covenants and
obligations of such party under this Agreement. The provisions of
this Section
4.11(a) are in addition to any other remedy to which any
party is entitled at law, in equity or otherwise.
(b) Each of the parties
hereto irrevocably agrees that any legal action or proceeding in
connection with or with respect to this Agreement and the rights
and obligations arising hereunder, or for recognition and
enforcement of any judgment in respect of this Agreement and the
rights and obligations arising hereunder brought by the other party
hereto or its successors or assigns shall be brought and determined
exclusively in the Delaware Court of Chancery, or in the event (but
only in the event) that such court does not have subject matter
jurisdiction over such action or proceeding, in the United States
District Court for the District of Delaware or another court
sitting in the state of Delaware. The parties hereto further agree
that any dispute between the parties regarding the approval by the
FTI Nominating Committee of any Person designated by Holding LLC
pursuant to Section
2.1(b)(iii) will be submitted to the Delaware Court of
Chancery with a request to rule on an expedited basis. Each of the
parties hereto hereby irrevocably submits with regard to any such
action or proceeding for itself and in respect of its property,
generally and unconditionally, to the personal jurisdiction of the
aforesaid courts and agrees that it will not bring any action in
connection with or relating to this Agreement or any of the
transactions contemplated by this Agreement in any court other than
the aforesaid courts. Each of the parties hereto hereby irrevocably
waives, and agrees not to assert, by way of motion, as a defense,
counterclaim or otherwise, in any action or proceeding in
connection with or with respect to this Agreement, (i) any claim
that it is not personally subject to the jurisdiction of the
above-named courts for any reason other than the failure to serve
in accordance with this Section 4.11, (ii) any claim
that it or its property is exempt or immune from jurisdiction of
any such court or from any legal process commenced in such courts
(whether through service of notice, attachment prior to judgment,
attachment in aid of execution of judgment, execution of judgment
or otherwise) and (iii) to the fullest extent permitted by the
applicable Law, any claim that (A) the suit, action or proceeding
in such court is brought in an inconvenient forum, (B) the venue of
such suit, action or proceeding is improper or (C) this Agreement,
or the subject matter hereof, may not be enforced in or by such
courts.
(c) Each of the parties
hereto irrevocably consents to the service of any summons and
complaint and any other process in any other action in connection
with or relating to this Agreement, on behalf of itself or its
property, by the personal delivery of copies of such process to
such party or by sending or delivering a copy of the process to the
party to be served at the address and in the manner provided for
the giving of notices in Section 4.6. Nothing in this
Section 4.11 shall
affect the right of any party hereto to serve legal process in any
other manner permitted by Law.
Waiver
of Jury Trial. Each party hereby waives, to the fullest
extent permitted by applicable Law, any right it may have to a
trial by jury in respect of any suit, action or other proceeding
arising out of this Agreement or any transaction contemplated
hereby. Each party (i) certifies and acknowledges that no
representative, agent or attorney of any other party has
represented, expressly or otherwise, that such other party would
not, in the event of litigation, seek to enforce the foregoing
waiver, and (ii) acknowledges that it understands and has
considered the implications of this waiver and makes this waiver
voluntarily, and that it and the other parties have been induced to
enter into the Agreement by, among other things, the mutual waivers
and certifications in this Section 4.12.
Severability.
If any term, provision, covenant or restriction of this Agreement
is held by a court of competent jurisdiction or other authority to
be invalid, void or unenforceable, the remainder of the terms,
provisions, covenants and restrictions of this Agreement shall
remain in full force and effect and shall in no way be affected,
impaired or invalidated so long as the economic or legal substance
of the transactions contemplated hereby is not affected in any
manner materially adverse to any party hereto. Upon such a
determination, the parties shall negotiate in good faith to modify
this Agreement so as to effect the original intent of the parties
as closely as possible in a mutually acceptable manner in order
that the transactions contemplated hereby be consummated as
originally contemplated to the fullest extent
possible.
Titles
and Subtitles. The titles of the sections and subsections of
this Agreement are for convenience of reference only and will not
affect the meaning or interpretation of this
Agreement.
Counterparts;
Electronic Signatures. This Agreement may be executed in
counterparts, each of which shall constitute one and the same
instrument. Signatures provided by electronic transmission in
“pdf” or equivalent format will be deemed to be
original signatures.
Certain
Indemnification Matters. The Company hereby acknowledges
that an Indemnitee (as defined in the Charter) who is an officer,
director, partner, member, manager, employee, managing director or
Affiliate of, or a Director nominee pursuant to Section 2.1 of, a Stockholder
(each such Indemnitee, a “Specified Indemnitee”)
may have certain rights to indemnification, advancement of expenses
and/or insurance pursuant to charter documents, constitutive
agreements or other agreements with such Stockholder or Affiliates
of such Stockholder or other Person (other than the Company and its
Affiliates) of which such Specified Indemnitee is an officer,
director, partner, member, manager, employee, managing director or
Affiliate (collectively, the “Secondary Indemnitors”).
In furtherance of the foregoing, the Company hereby covenants and
agrees as follows:
(d) The Company shall
be the indemnitor of first resort for any claims or proceedings
(collectively, “Covered Claims”) for
which any Specified Indemnitee is entitled, under the Charter or
otherwise, to indemnification by the Company (i.e., the Company’s obligations
to each such Specified Indemnitee with respect to any Covered Claim
are primary and any obligations of any Secondary Indemnitor to
advance expenses or to provide indemnification for the same
expenses or liabilities incurred by any such Specified Indemnitee
with respect Covered Claims are secondary).
(e) Subject to Sections
1 and 2 of Article
IX of the Charter, the
Company shall pay the expenses (including attorneys’ fees and
expenses) incurred by any Specified Indemnitee in defending any
Covered Claim in advance of such Covered Claim’s final
disposition, without regard to any rights any such Specified
Indemnitee may have against any Secondary Indemnitor.
(f) The Company hereby
irrevocably waives, relinquishes and releases each Secondary
Indemnitor from any and all claims against such Secondary
Indemnitor for contribution, subrogation or any other recovery of
any kind in respect of any Covered Claim.
The
Company further agrees that no advancement or payment by any
Secondary Indemnitor on behalf of any such Specified Indemnitee
with respect to any Covered Claim for which any such Specified
Indemnitee has sought indemnification from the Company shall affect
the foregoing and any such Secondary Indemnitor shall have a right
of contribution and/or subrogation to the extent of such
advancement or payment to all of the rights of recovery of such
Specified Indemnitee against the Company. Any amendment, repeal or
modification of this Section 4.16 shall not
adversely affect any right or protection of a Specified Indemnitee
or Secondary Indemnitor existing prior to such repeal or
modification.
Rights
and Obligations of Transferees. No Stockholder shall
Transfer any Equity Securities except in compliance with the
Securities Act, the Charter (as defined in the Merger Agreement),
any applicable state or foreign securities Laws and this Agreement,
or if such Transfer would violate the Communications Act or FCC
Regulations and such Stockholder has been so advised by the
Company. Without limiting the generality of the foregoing, no such
Transfer shall be made or recognized in the books and records of
the Company if such Transfer would result in a violation of the
Communications Act or FCC Regulations. Any Transfers in violation
of this Agreement shall be null and void.
[Remainder
of page intentionally left blank]
IN
WITNESS WHEREOF, the parties hereto have caused this
Stockholders’ Agreement to be executed effective as of the
date set forth in the first paragraph hereof.
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FUSION
TELECOMMUNICATIONS INTERNATIONAL, INC.
Title:
BCHI
HOLDINGS, LLC
Name:
Title:
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Schedule I--Stockholder Information
Stockholder
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Equity Securities
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Notice Information
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EXHIBIT A
FORM
OF JOINDER TO
STOCKHOLDERS’
AGREEMENT
This
JOINDER to the Stockholders’ Agreement, dated as of
__________, 2017 (the “Stockholders’
Agreement”), of Fusion Telecommunications
International, Inc., a Delaware corporation (the
“Company”),
BCHI Holdings, LLC, a Georgia limited liability company
(“Holding
LLC”) and the other Persons set forth on Schedule I of the
Stockholders’ Agreement (the “Initial FTI
Stockholders”) is executed on behalf of the
undersigned (“FTI
Stockholder”), effective as of the date set forth on
the signature page below, with reference to the following
facts:
A. Capitalized
terms used herein but not otherwise defined shall have the meanings
set forth in the Stockholders’ Agreement.
B. FTI
Stockholder is, as of the date set forth below, an FTI
Director.
NOW,
THEREFORE, in consideration of the mutual covenants contained
herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the undersigned
hereby agrees as follows:
1. Agreement
to be Bound. FTI Stockholder hereby agrees that upon
execution of this Joinder, FTI Stockholder shall become a party to
the Stockholders’ Agreement as an “FTI
Stockholder” and shall be fully bound by, and subject to, all
of the covenants, terms and conditions of the Stockholders’
Agreement applicable to FTI Stockholder.
2. Equity
Securities. As of the date of this Agreement, the FTI
Stockholder owns [INSERT AMOUNT AND TYPE OF COMPANY EQUITY
SECURITIES OWNED BY STOCKHOLDER.]
3. Counterparts.
This Joinder may be executed in separate counterparts each of which
shall be an original and all of which taken together shall
constitute one and the same agreement.
4. Notices.
For purposes of Section
4.6 of the Stockholders’ Agreement, all notices,
demands or other communications to FTI Stockholder shall be
directed to FTI Stockholder’s address set forth below FTI
Stockholder’s signature below.
[Signature Page Follows]
IN WITNESS WHEREOF, Stockholder has
executed this Joinder effective as of the date set forth
below.
FTI
STOCKHOLDER:
ADDRESS:
Exhibit C
REGISTRATION RIGHTS AGREEMENT
This
REGISTRATION RIGHTS AGREEMENT (this “Agreement”) is made and
entered into effective as of [●], 2017, by and among Fusion
Telecommunications International, Inc., a Delaware corporation (the
“Company”), BCHI Holdings,
LLC, a Georgia limited liability company (the “Initial Stockholder”),
and each Person (as defined below) that becomes a party to this
Agreement by delivering to the Company a duly executed joinder to
this Agreement in the form attached hereto as Exhibit A or such other form
approved by the Company having the same effect thereof pursuant to
Section 6.1 (together with Initial Stockholder, each, a
“Stockholder,” and,
collectively, the “Stockholders”).
RECITALS
A. The
Company is party to a Merger Agreement, dated as of August 26,
2017, by and among Birch Communications Holdings, Inc., Fusion BCHI
Acquisition LLC and the Company (the “Merger
Agreement”).
B. Pursuant
to the terms of the Merger Agreement, the Initial Stockholder will
acquire shares (the “Closing Shares”) of the
Company’s common stock, $0.01 par value per share (the
“Company Common
Stock”).
C. In
connection with the transactions contemplated by the Merger
Agreement, the Company has agreed to provide the registration
rights provided in this Agreement.
D. The
Company and the Stockholders are entering into this Agreement to
set forth the terms and conditions applicable to such registration
rights.
NOW,
THEREFORE, in consideration of the mutual agreements contained
herein, the Company and the Initial Stockholder agree as
follows:
ARTICLE V
DEFINITIONS
Capitalized terms
not otherwise defined herein have the meaning set forth in the
Merger Agreement. As used in this Agreement, the following terms
have the following meanings:
“Affiliate” of any
particular Person means any other Person controlling, controlled by
or under common control with such particular Person, where
“control” means the possession, directly or indirectly,
of the power to direct the management and policies of a Person
whether through the ownership of voting securities or
otherwise.
“Agreement” has the
meaning set forth in the preamble.
“Business Day” means any
day other than a weekend or public holiday.
“Closing Shares” has the
meaning set forth in the recitals.
“Closing Shares Registration
Statement” means the Company’s Registration
Statement on Form S-1 or S-3 (or a successor form) that covers the
resale, to be made on a delayed or continuous basis, of Closing
Shares representing no greater than 25% of the total number of all
Closing Shares that constitute Registrable Securities (and may
include other Registrable Securities held by the other
Stockholders, as set forth herein), under Rule 415 under the
Securities Act, or any similar rule that may be adopted by the SEC,
and all amendments and supplements to such Registration Statement,
including post-effective amendments, in each case including the
prospectus contained therein, all exhibits thereto and all material
incorporated by reference therein.
“Closing Shares Shelf
Expiration” has the meaning set forth in Section 2.1.
“Company” has the meaning
set forth in the preamble and shall include the Company’s
successors.
“Company Common Stock” has
the meaning set forth in the recitals.
“Controlling Person” has
the meaning set forth in Section 5.1.
“Demand Registration” has
the meaning set forth in Section 2.2.
“Demand Registration
Request” has
the meaning set forth in Section 2.2.
“Demand Registration
Statement” means a Registration Statement filed by the
Company with the SEC pursuant to Section 2.2 hereof, and all
amendments and supplements to such Registration Statement,
including post-effective amendments, in each case including the
prospectus contained therein, all exhibits thereto and all material
incorporated by reference therein.
“Exchange Act” means the
Securities Exchange Act of 1934, as amended, and the rules and
regulations promulgated thereunder, as amended from time to
time.
“Immediate Family” means,
with respect to any individual, such individual’s spouse,
parents, parents-in-law, descendants, brothers, sisters,
brothers-in-law, sisters-in-law and children-in-law.
“Initiating Stockholder”
has the meaning set forth in Section 2.2.
“Merger Agreement” has the
meaning set forth in the recitals.
“NASDAQ” means The NASDAQ
Stock Market, LLC.
“Partner
Distribution” has the meaning set forth in
Section
2.2.
“Permitted
Interruption” has the meaning set forth in
Section
2.6(c).
“Permitted Transferee”
means, (a) with respect to any Stockholder that is an individual,
(i) members of the Immediate Family of such Stockholder or (ii) any
trust or partnership established solely for the benefit of the
Immediate Family Member of such Stockholder, or (b) with respect to
any Stockholder that is not an individual, an Affiliate (other than
any “portfolio company” described below) of such
Stockholder; provided, however, that in no event shall
any “portfolio company” (as such term is customarily
used among institutional investors) of any Stockholder or any
entity controlled by any portfolio company of any Stockholder
constitute a “Permitted Transferee” of such
Stockholder.
“Person” means an
individual, limited liability company, association, joint stock
company, partnership, corporation, trust, estate or unincorporated
organization.
“Piggyback Registration”
has the meaning set forth in Section 2.3.
“Piggyback Stockholders”
has the meaning set forth in Section 2.3.
“Registrable Securities”
means all shares of Company Common Stock held by the Stockholders
at any time, including the Closing Shares, and any shares of
Company Common Stock issued or issuable to any Stockholder with
respect thereto by way of stock dividend or distribution, stock
split, or in connection with any combination of shares,
recapitalization, merger, share exchange, conversion, consolidation
or similar transaction (including pursuant to Article I of the
Merger Agreement), whether now owned or acquired by Stockholders or
acquired at a later time; provided, however, that any such shares
of Company Common Stock shall cease to be Registrable Securities
(i) when they have been sold pursuant to a Registration Statement,
(ii) when they have been sold pursuant to Rule 144 of the
Securities Act, (iii) with respect to any Stockholder, at such time
as the entire amount of such Stockholder’s Registrable
Securities may be sold in a single sale, in the opinion of counsel
satisfactory to the Company and such holder, each in their
reasonable judgment, without any limitation as to volume pursuant
to Rule 144 of the Securities Act, (iv) when they have been
transferred to any Person other than a Permitted Transferee to whom
registration rights are assigned in accordance with Section 6.1 hereof, or (v) when
they have ceased to be outstanding.
“Registration Expenses”
has the meaning set forth in Section 3.7.
“Registration Statement”
means the Closing Shares Registration Statement, a Demand
Registration Statement and any other registration statement
prepared and filed with the SEC pursuant to Article II hereof, and all
amendments and supplements to such Registration Statement,
including post-effective amendments, in each case including the
prospectus contained therein, all exhibits thereto and all material
incorporated by reference therein.
“Required Stockholders”
means the holders of at least a majority of the Registrable
Securities held by the Stockholders.
“SEC” means the Securities
and Exchange Commission.
“Securities Act” means the
Securities Act of 1933, as amended, and the rules and regulations
promulgated thereunder, as amended from time to time.
“Shelf Takedown” has the
meaning set forth in Section 2.1.
“Stockholder(s)” has the
meaning set forth in the preamble, and such term shall include any
transferee to whom registration rights granted pursuant to this
Agreement are validly assigned pursuant to Section 6.1
hereof.
“underwritten offering”
means a registered underwritten offering in which securities of the
Company are sold to one or more underwriters for reoffering to the
public.
“WKSI” means a
“well-known seasoned issuer” as defined in Rule 405
promulgated by the SEC.
ARTICLE VI
CLOSING SHARES REGISTRATION STATEMENT; Demand and Piggyback
Rights
Section
6.1 Closing Shares Registration
Statement. The Company shall prepare the Closing Shares
Registration Statement and file it with the SEC, and shall use
reasonable best efforts to cause the Closing Shares Registration
Statement to be declared effective by the SEC no later than 120
days from the date hereof. The Company shall use reasonable best
efforts to cause the Closing Shares Registration Statement to
remain effective (subject to Section 2.6(c)) until the
earlier to occur of (i) the date on which all Registrable
Securities included within the Closing Shares Registration
Statement have been sold (other than to a Permitted Transferee to
whom registration rights are effectively assigned in accordance
with Section 6.1
hereof) or (ii) the fifth (5th) anniversary of the
date that the Closing Shares Registration Statement is declared
effective by the SEC (the end of such period, the
“Closing Shares
Shelf Expiration”). The Stockholders who hold
Registrable Securities each shall be entitled, at any time and from
time to time when the Closing Shares Registration Statement is
effective, to sell such Registrable Securities pursuant to such
Closing Shares Registration Statement (a “Shelf Takedown”). The
resale of shares of Registrable Securities pursuant to the Closing
Shares Registration Statement may from time to time from and after
the date the Closing Shares Registration Statement is declared
effective by the SEC and until the Closing Shelf Expiration, upon
the written request of any Stockholder that holds, together with
its Affiliates, at least a simple majority of the Registrable
Securities issued pursuant to the transactions contemplated by the
Merger Agreement to such Stockholder and its Affiliates and
included under the Closing Shares Registration Statement, be an
underwritten offering; provided, however, that the Company shall
not be required to effect an underwritten Shelf Takedown unless the
gross proceeds from the sale of Registrable Securities in such
offering are reasonably expected to be at least $10,000,000
(without regard to any underwriting discount or commission); and
provided,
further, that the
Company shall not be required to effect more than one (1)
underwritten Shelf Takedown in any 90-day period or more than three
(3) underwritten Shelf Takedowns in any 365-day period. In the
event that any Stockholder requests an underwritten Shelf Takedown
pursuant to this Section
2.1 (the “Requesting Stockholder”),
then the other Stockholders, if any, in each of such
Stockholder’s discretion, shall have the right to participate
in such underwritten Shelf Takedown of Registrable Securities
registered under the Closing Shares Registration Statement, subject
to this Section
2.1, and (ii) the Company shall promptly notify each of the
Stockholders (other than the Requesting Stockholder) of such
underwritten Shelf Takedown, and such Stockholders shall have five
(5) Business Days after receipt of such notice to request, by
written notice to the Company and the Requesting
Stockholder, that
Registrable Securities held by such Stockholder and registered
pursuant to the Closing Shares Registration Statement be sold
pursuant to such proposed underwritten Shelf Takedown. The Company
and the Stockholders shall use their reasonable best efforts to
cooperate in taking any customary actions necessary or appropriate,
including making necessary filings with the SEC, to permit any such
Stockholder to participate in such proposed underwritten Shelf
Takedown in such circumstances. If the Closing Shares Registration
Statement ceases to be effective for any reason at any time prior
to the Closing Shares Shelf Expiration, the Company shall use its
reasonable best efforts to obtain the prompt withdrawal of any
order suspending the effectiveness thereof, and in any event shall
within 45 days of such cessation of effectiveness amend the Closing
Shares Registration Statement in a manner to obtain the withdrawal
of the order suspending the effectiveness thereof. In any
underwritten Shelf Takedown, the majority of the Stockholders
requesting such underwritten Shelf Takedown shall have the right to
select the plan of distribution, to select one counsel for the
selling Stockholders and to designate the lead managing underwriter
in connection with any underwritten Shelf Takedown pursuant to such
registration and each other managing underwriter for any such
underwritten Shelf Takedown; provided, that in each case,
each such underwriter is reasonably satisfactory to the Company,
which approval shall not be unreasonably withheld or delayed. If
the managing underwriters advise the Requesting Stockholder and the
Company that, in their opinion, the number of shares of Common
Stock requested to be included in such underwritten Shelf Takedown
exceeds the amount that can be sold in such underwritten Shelf
Takedown without adversely affecting the distribution (including
the timing and/or price at which the Registrable Securities can be
sold) of the shares of Company Common Stock being offered, such
underwritten offering will include only the number of shares of
Company Common Stock that the underwriters advise can be sold in
such underwritten offering without having an adverse effect on the
distribution (including the timing and/or price at which the
Registrable Securities can be sold) of the shares of Company Common
Stock being offered. The Company will include in such underwritten
Shelf Takedown pursuant to the Closing Shares Registration
Statement, to the extent of the number of shares of Company Common
Stock which the Requesting Stockholder and the Company are so
advised can be sold in such underwritten Shelf Takedown, the
Registrable Securities of the Stockholders, pro rata, on the basis of the number of
shares of Company Common Stock requested to be included by such
Stockholders.
Section
6.2 Demand Registration Rights. As
of and after the Closing Shares Shelf Expiration, each Stockholder
shall have the right to require the Company to file one or more
registration statements under the Securities Act covering all or
any part of its and its Affiliates’ Registrable Securities (a
“Demand
Registration”) by delivering a written request (the
“Demand Registration
Request”) therefor to the Company specifying the
number of Registrable Securities to be included in such
registration and the intended method of distribution thereof (each
such Stockholder so requesting a Demand Registration, an
“Initiating
Stockholder”). Any Demand Registration Request may
request that the Company register Registrable Securities on an
appropriate form, including a long-form registration statement on
Form S-1 (or any similar long-form registration statement), a shelf
registration statement, and, if the Company is a WKSI, an automatic
shelf registration statement; provided, however, that the Company shall
only be obligated to register such Registrable Securities if the
sale of the Registrable Securities requested to be registered by
such Stockholder is reasonably expected to result in aggregate
gross cash proceeds of at least $20,000,000 (without regard to any
underwriting discount or commission); and provided, further, that unless otherwise
approved by the Board, the Company shall not be obligated to file a
Registration Statement relating to any registration request under
this Section 2.2
within a period of 180 days after the effective date of any other
Registration Statement. The Company shall, as promptly as
reasonably practicable (subject to Section 2.6(c)), use its
reasonable best efforts to file with the SEC (no later than forty
five (45) days from the Company’s receipt of the applicable
Demand Request) and cause to be declared effective such
registration under the Securities Act of the Registrable Securities
which the Company has been so requested to register, for
distribution in accordance with such intended method of
distribution, including a distribution to, and resale by, the
members or partners of the Initial Stockholder (a
“Partner
Distribution”), and (y) if requested by the
Stockholders, obtain acceleration of the effective date of the
registration statement relating to such registration. The Company
shall use reasonable best efforts to cause any Registration
Statement filed pursuant to this Section 2.2 (subject to
Section 2.6(c)
hereof) to remain effective until the earlier of (i) the date on
which all Registrable Securities included within such Registration
Statement have been sold (other than to a Permitted Transferee to
whom registration rights are effectively assigned in accordance
with Section 6.1
hereof) and (ii) the expiration of 180 days (or, if such
registration is a shelf-registration statement that permits sales
of Registrable Securities on a delayed or continuous basis pursuant
to Rule 415 under the Securities Act, one (1) year) from the date
such Registration Statement first becomes effective (exclusive of
any period during which the holders of Registrable Securities are
prohibited or impaired from disposition of Registrable Securities
by reason of the occurrence of a Permitted Interruption), at which
time the Company shall have the right to deregister any of such
securities that remain unsold. The Company shall, at
the request of any Stockholder (including to effect a Partner
Distribution), file any prospectus supplement or post-effective
amendments, or include in the initial Registration Statement any
disclosure or language, or include in any prospectus supplement or
post-effective amendment any disclosure or language, and otherwise
take any action, reasonably deemed necessary or advisable by such
Stockholder (including to effect a Partner Distribution).
Notwithstanding anything contained herein to the contrary, the
Company shall not be required to effect more than five (5) Demand
Registrations pursuant to this Section 2.2.
Section
6.3 Piggyback Registration Rights.
If the Company at any time proposes to register any securities
(whether pursuant to the exercise of Demand Registration rights by
a Stockholder of the Company or at the initiative of the Company)
under the Securities Act (other than the Closing Shares
Registration Statement solely as provided in Section 2.1) in connection with
a public offering of such securities for cash, whether for its own
account or for the account of other securityholders, and the form
of registration statement to be used may be used for the
registration of Registrable Securities held by the Stockholders,
the Company shall give prompt written notice of its intention to do
to each Stockholder at least fifteen (15) Business Days prior to
filing any registration statement, and the Stockholders
(“Piggyback
Stockholders”), may, by written notice to the Company,
request that any or all Registrable Securities not otherwise
registered pursuant to a Registration Statement (other than the
Closing Shares Registration Statement solely as provided in
Section 2.1) be
included in such proposed registration of securities by the Company
under the Securities Act (a “Piggyback Registration”).
Upon the written request of any such Piggyback Stockholder, made
within ten (10) Business Days following the receipt of any such
written notice (which request shall specify the maximum number of
Registrable Securities intended to be disposed of by such Piggyback
Stockholder and the intended method of distribution thereof), the
Company shall, subject to this Section 2.3, use its reasonable
best efforts to cause all such Registrable Securities, the
Piggyback Stockholders of which have so requested the registration
thereof, to be registered under the Securities Act with the
securities which the Company at the time proposes to register to
permit the sale or other disposition by the Piggyback Stockholders
(in accordance with the intended method of distribution thereof) of
the Registrable Securities to be so registered, including, if
necessary, by filing with the SEC a post-effective amendment or a
supplement to the registration statement filed by the Company or
the prospectus related thereto. There is no limitation on the
number of such Piggyback Registrations pursuant to the preceding
sentence which the Company is obligated to effect. No registration
of Registrable Securities effected under this Section 2.3 shall relieve the
Company of its obligations to effect Demand Registrations under
Section 2.2
hereof.
Section
6.4 Additional Demand
Registrations. If the Company effects the registration of
less than all of the Registrable Securities requested to be
included by the Initiating Stockholder in a Demand Registration
under Section 2.2,
then the Stockholders shall be entitled to request an additional
Demand Registration with respect to such Registrable Securities
that were not so registered. If the Company withdraws or suspends
any Demand Registration pursuant to Section 2.6(c) before the
expiration of such Demand Registration pursuant to Section 2.2, and before all of
the Registrable Securities covered by such Demand Registration have
been sold pursuant thereto, the Initiating Stockholder shall be
entitled to request an additional Demand Registration with respect
to such Registrable Securities that were not so sold. Any such
additional Demand Registration shall be requested and effected in
the manner and subject to the procedures that applied with respect
to the Demand Registration that was the subject of the cutback in
Section
3.4.
Section
6.5 Effective Registration
Statement. A Demand
Registration pursuant to Section 2.2 shall not be deemed
to have been effected unless (i) a Registration Statement with
respect thereto has become effective and, after it has become
effective, such Demand Registration is not interfered with by any
stop order, injunction or other order or requirement of the SEC or
other governmental agency or court for any reason, and (ii) the
sale of Registrable Securities contemplated thereby (if
underwritten) has been consummated.
Section
6.6 Limitations on Demand and Piggyback
Rights.
(a) With respect to any
registrations requested pursuant to Section 2.2 or Section 2.3, the Company may
include in such registration any other equity securities of the
Company. Notwithstanding anything in this Agreement to the
contrary, the Stockholders will not have piggyback or other
registration rights with respect to registered primary offerings by
the Company (i) covered by a Form S-8 Registration Statement (or a
successor form) applicable to employee benefit-related offers and
sales, (ii) where the securities are not being sold for cash, (iii)
covered by a registration statement on Form S-4 (or successor form)
or (iv) relating to a corporate reorganization pursuant to Rule 145
promulgated by the SEC.
(b) Any demand for the
filing of a Registration Statement will be subject to the
constraints of any customary and reasonable lockup arrangements
entered into by the Company in connection with a then pending
underwritten offering, and such demand must be deferred until such
lockup arrangements no longer apply. If a demand has been made
under this Article
II, no further demands may be made so long as the related
offering is still being pursued in good faith.
(c) The Company may
postpone the filing of any Registration Statement or suspend the
effectiveness of any Registration Statement (including, without
limitation, the Closing Shares Registration Statement), any
amendment or post-effective amendment thereto or prospectus
supplement for a reasonable “blackout period” not in
excess of 60 days if the board of directors of the Company
determines in good faith that such registration, offering,
amendment or supplement (i) would materially interfere with a bona
fide business, financing or acquisition (including any merger,
reorganization, consolidation, tender offer or similar transaction)
transaction of the Company because it would be reasonably likely to
require premature disclosure of material, nonpublic information,
the premature disclosure of which the board of directors reasonably
determines in the exercise of its good faith judgment (and not for
the avoidance of its obligations under this Agreement) would not be
in the best interests of the Company, or (ii) could not be effected
by the Company in compliance with the applicable financial
statement requirements under the Securities Act or Exchange Act
(such event described in this Section 2.6(c) during which the
Company is not required to make such filing, amendment or
supplement is herein referred to as a “Permitted Interruption”);
provided,
however, that the
Company shall not postpone the filing of a demanded Registration
Statement or suspend the effectiveness of any Registration
Statement pursuant to this Section 2.6 more than once in
any 90-day period. If a Permitted Interruption affects a
Registration Statement during the period such Registration
Statement remains effective, the Company agrees to notify each of
the Stockholders so affected by a Permitted Interruption in writing
as promptly as practicable upon each of the commencement and the
termination of each Permitted Interruption. The Company shall not
be required in such notice of a Permitted Interruption to disclose
the cause for such Permitted Interruption, and each Stockholder
agrees, subject to applicable law, that it will not disclose
receipt of such notice of Permitted Interruption to any Person.
Each Stockholder agrees that, upon receipt of any such notice from
the Company, such Stockholder will forthwith discontinue
disposition of Registrable Securities pursuant to the applicable
Registration Statement until the earlier of (i) such
Stockholder’s receipt of the Company’s notice as to the
termination of the Permitted Interruption and (ii) 90 days after
receipt of the original notice of a Permitted Interruption. In the
event of a Permitted Interruption, the duration of the applicable
period in which a Registration Statement is to remain effective
shall be extended by the number of days of such period. The Company
shall reimburse each holder of Registrable Securities for all
reasonable and documented out-of pocket costs and expenses incurred
by such Stockholder in connection with the postponement or
withdrawal of such a filing.
ARTICLE VII
Notices, Cutbacks and Other Matters
Section
7.1 Notifications Regarding Registration
Statements. In
order for one or more Initiating Stockholders to exercise their
right to demand that a Registration Statement be filed, they must
so notify the Company in writing indicating the number of shares
sought to be registered. The Company will keep the Stockholders
contemporaneously apprised of all pertinent aspects of its pursuit
of any registration, whether pursuant to a Demand Registration or
otherwise, with respect to which a Piggyback Registration
opportunity is available. Pending any required public disclosure
and subject to applicable legal requirements, the parties will
maintain the confidentiality of these discussions.
Section
7.2 Notifications Regarding Registration
Piggyback Rights. Subject to Section 2.3, in the event that
any sale of shares pursuant to a Registration Statement is
underwritten, the Company shall promptly notify each Piggyback
Stockholder of such development and the Piggyback Stockholders
shall have fifteen (15) days after receipt of such notice to
request the registration by the Company under the Securities Act of
Registrable Securities not otherwise registered pursuant to a
Registration Statement (other than the Closing Shares Registration
Statement) in connection with such proposed registration of
securities.
Section
7.3 Plan of Distribution;
Underwriters. In connection with any Demand Registration,
the majority of the Initiating Stockholders participating in such
Demand Registration shall have the right to select the plan of
distribution, to select one counsel for the selling Stockholders
and to designate the lead managing underwriter in connection with
any underwritten offering pursuant to such registration and each
other managing underwriter for any such underwritten offering;
provided, that in
each case, each such underwriter is reasonably satisfactory to the
Company, which approval shall not be unreasonably withheld or
delayed.
Section
7.4 Cutbacks. If the managing
underwriters advise the Company and the selling Stockholders that,
in their opinion, the number of shares requested to be included in
an underwritten offering (other than any resale of Registrable
Securities pursuant to the Closing Shares Registration Statement
that is an underwritten offering, which shall be subject to
Section 2.1)
exceeds the amount that can be sold in such offering without
adversely affecting the distribution (including the timing and/or
price at which the Registrable Securities can be sold) of the
shares being offered, such offering will include only the number of
shares that the underwriters advise can be sold in such offering
without having an adverse effect on the distribution (including the
timing and/or price at which the Registrable Securities can be
sold) of the shares being offered. The Company will include in such
Registration Statement (other than any resale of Registrable
Securities pursuant to the Closing Shares Registration Statement
that is an underwritten offering, which shall be subject to
Section 2.1), to
the extent of the number which the Company is so advised can be
sold in such offering, first, all securities proposed
by the Company, if any, to be sold for its own account;
second, Registrable
Securities requested by the Stockholders to be included in such
Registration Statement, pro
rata, on the basis of the number of shares of Company Common
Stock requested to be included in such Registration
Statement.
Section
7.5 Withdrawals. Even if shares
held by a Stockholder have been part of a registered underwritten
offering, such Stockholder may, no later than the time at which the
public offering price and underwriters’ discount are
determined with the managing underwriter, decline to sell all or
any portion of the shares being offered for its account. In the
event of such a withdrawal, the Company and any Stockholder having
the right to participate in such offering may, in their discretion,
include additional shares in such offering in replacement of any
shares so withdrawn without requiring any further notice or
piggyback registration rights with respect to the Stockholder that
has withdrawn its shares.
Section
7.6 Lockups. In connection with any
underwritten offering of Registrable Securities, (a) the Company
(and each of its executive officers
and directors) and (b) each Stockholder which is selling
shares of Company Common Stock pursuant to its rights hereunder
will agree to be bound by the underwriting agreement’s lockup
restrictions (which must apply, and continue to apply, in like
manner to each of the Company (and
each of its executive officers and directors) and
Stockholders participating in the underwritten offering) that are
agreed to (i) by the Company (if a majority of the shares being
sold in such underwritten offering are being sold for its account)
or (ii) by Stockholders holding a majority of shares being sold by
all Stockholders in such underwritten offering (if a majority of
the shares being sold in such underwritten offering are being sold
by Stockholders), as applicable.
Section
7.7 Expenses. All costs and
expenses incurred in connection with any Registration Statement or
registered offering that includes shares held by Stockholders,
whether or not a Registration Statement becomes effective or the
offering is consummated, including all registration and filing
fees, printing expenses, reasonable fees and disbursements of
counsel (including the fees and disbursements of one outside
counsel for the Stockholders (selected by the holders of the
majority of the Registrable Securities to be included in such
Registration Statement) and of the independent certified public
accountants), and the expense of qualifying such shares under state
blue sky laws (all such expenses, the “Registration Expenses”),
will be borne by the Company. However, any underwriters’,
brokers’ and dealers’ discounts and commissions, or
similar fees of securities industry professionals, and applicable
transfer taxes, if any, in each case relating to shares sold for
the account of a Stockholder will be borne by such Stockholder.
Notwithstanding anything herein to the contrary, the Company shall
not be required to pay fees and disbursements of any outside
counsel retained by any Stockholder or by any underwriter in
connection with any Registration Statement or registered offering,
except as expressly set forth above in this Section 3.7.
ARTICLE VIII
FACILITATING REGISTRATIONS AND OFFERINGS
Section
8.1 General. If the Company becomes
obligated under this Agreement to facilitate a registration and
offering of shares on behalf of Stockholders, the Company will do
so with the same degree of care and dispatch as would reasonably be
expected in the case of a registration and offering by the Company
of shares for its own account. Without limiting this general
obligation, the Company will fulfill its specific obligations as
described in this Article
IV.
Section
8.2 Registration Statements. In
connection with each Registration Statement (including the Closing
Shares Registration Statement and any other Registration Statement
that is demanded by Stockholders or as to which piggyback rights
otherwise apply), the Company will:
(a) (i) prepare and
file with the SEC a Registration Statement (or an amendment or
supplement to the Closing Shares Registration Statement) covering
the applicable shares, (ii) file amendments thereto as warranted,
(iii) seek the effectiveness thereof, and (iv) file with the SEC
prospectuses and prospectus supplements as may be required, all in
consultation with the Stockholders and as reasonably necessary in
order to permit the offer and sale of such shares in accordance
with the applicable plan of distribution;
(b) within a
reasonable time prior to the filing of any Registration Statement,
any prospectus, any amendment to a Registration Statement,
amendment or supplement to a prospectus or any free writing
prospectus, provide copies of such documents to the selling
Stockholders and to the underwriter or underwriters of an
underwritten offering, if applicable, and to their respective
counsel; fairly consider such reasonable changes in any such
documents prior to or after the filing thereof as the counsel to
the Stockholders or the underwriter or the underwriters may
request; and make such of the representatives of the Company as
shall be reasonably requested by the selling Stockholders or any
underwriter available for discussion of such
documents;
(i) within a reasonable
time prior to the filing of any document which is to be
incorporated by reference into a Registration Statement or a
prospectus, provide copies of such document to counsel for the
Stockholders and underwriters; fairly consider such reasonable
changes in such document prior to or after the filing thereof as
counsel for such Stockholders or such underwriter shall request;
and make such of the representatives of the Company as shall be
reasonably requested by such counsel available for discussion of
such document;
(c) cause each
Registration Statement and the related prospectus and any amendment
or supplement thereto, as of the effective date of such
Registration Statement, amendment or supplement and during the
distribution of the registered shares (x) to comply in all material
respects with the requirements of the Securities Act and the rules
and regulations of the SEC and (y) not to contain any untrue
statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading;
(d) notify each
Stockholder promptly, and, if requested by such Stockholder,
confirm such advice in writing, (i) when a Registration Statement
has become effective and when any post-effective amendments and
supplements thereto become effective if such Registration Statement
or post-effective amendment is not automatically effective upon
filing pursuant to Rule 462 promulgated by the Securities Act, (ii)
of the issuance by the SEC or any state securities authority of any
stop order, injunction or other order or requirement suspending the
effectiveness of a Registration Statement or the initiation of any
proceedings for that purpose, (iii) if, between the effective date
of a Registration Statement and the closing of any sale of
securities covered thereby pursuant to any agreement to which the
Company is a party, the representations and warranties of the
Company contained in such agreement cease to be true and correct in
all material respects or if the Company receives any notification
with respect to the suspension of the qualification of the shares
for sale in any jurisdiction or the initiation of any proceeding
for such purpose, and (iv) of the happening of any event during the
period a Registration Statement is effective as a result of which
such Registration Statement or the related prospectus contains any
untrue statement of a material fact or omits to state any material
fact required to be stated therein or necessary to make the
statements therein not misleading;
(e) promptly furnish to
counsel for each underwriter, if any, and for the respective
Stockholders copies of any correspondence with the SEC or any state
securities authority relating to the Registration Statement or
prospectus;
(f) otherwise comply
with all applicable rules and regulations of the SEC, including
making available to its security holders an earnings statement
covering at least 12 months which shall satisfy the provisions of
Section 11(a) of the Securities Act and Rule 158 thereunder (or any
similar provision then in force); and
(g) use all reasonable
efforts to obtain the withdrawal of any order suspending the
effectiveness of a Registration Statement at the earliest possible
time.
Section
8.3 Due Diligence. In connection
with each registration and offering of shares to be sold by
Stockholders, the Company will, in accordance with customary
practice, make available for inspection by representatives of the
Stockholders and underwriters and any counsel or accountant
retained by such Stockholder or underwriters all relevant financial
and other records, pertinent corporate documents and properties of
the Company and cause appropriate officers, managers and employees
of the Company to supply all information reasonably requested by
any such representative, underwriter, counsel or accountant in
connection with their due diligence exercise.
Section
8.4 Information from Stockholders.
Each Stockholder that holds shares covered by any Registration
Statement will furnish to the Company such information regarding
itself as is required to be included in the Registration Statement,
the ownership of shares by such Stockholder and the proposed
distribution by such Stockholder of such shares, and make such
customary representations to the Company, as the Company may from
time to time reasonably request in writing. Each Stockholder
authorizes the Company to include such information in the
applicable Registration Statement or other documents prepared or
filed in connection therewith. Each Stockholder further agrees to
promptly notify the Company of any inaccuracies or changes in the
information provided to the Company that it becomes aware of that
may occur subsequent to the date hereof at any time while a
Registration Statement including shares owned by such Stockholder
remains effective. Each Stockholder agrees to distribute
Registrable Securities included in the Registration Statement only
in the manner described in the applicable Registration
Statement.
Section
8.5 Additional Agreements of
Stockholders.
(a) Each Stockholder
agrees to, following such time that such Stockholder becomes aware,
as expeditiously as possible, notify the Company of the occurrence
of any event that makes any statement made in any Registration
Statement or any related prospectus regarding such Stockholder
untrue in any material respect or that requires the making of any
changes in either a Registration Statement or prospectus regarding
such Stockholder.
(b) Each Stockholder
agrees that, upon receipt of any notice from the Company of the
happening of any event of the kind described in Section 4.2(d)(ii) or
Section 4.2(d)(iv)
hereof, such Stockholder will forthwith discontinue disposition of
Registrable Securities pursuant to the Registration Statement until
such Stockholder’s receipt of the copies of any necessary
supplements or amendments to such Registration Statement or
applicable prospectus, and, if so directed by the Company, such
Stockholder will deliver to the Company all copies in its
possession, other than permanent file copies then in such
Stockholder’s possession, of the Registration Statement or
applicable prospectus covering such Registrable Securities at the
time of receipt of such notice. Each Stockholder agrees that in the
event it receives any notice from the Company under Section 4.2(d)(ii) or
Section 4.2(d)(iv),
it will not disclose such fact to any person.
Section
8.6 Non-Closing Shares Registration
Statements. In connection with any non-shelf registered
offering or shelf registration that is demanded by Stockholders in
accordance with Section
2.2 or as to which piggyback rights apply pursuant to
Section 2.3, the
Company will:
(a) cooperate with the
Stockholders selling shares and the sole underwriter or managing
underwriter of an underwritten offering shares, if any, to
facilitate the timely preparation and delivery of certificates
representing the shares to be sold and not bearing any restrictive
legends; and enable such shares to be in such denominations
(consistent with the provisions of the governing documents thereof)
and registered in such names as the selling Stockholders or the
sole underwriter or managing underwriter of an underwritten
offering of shares, if any, may reasonably request at least five
(5) Business Days prior to any sale of such shares;
(b) furnish to each
Stockholder and to each underwriter, if any, participating in the
relevant offering, without charge, as many copies of the applicable
prospectus, including each preliminary prospectus, and any
amendment or supplement thereto and such other documents as such
Stockholder or underwriter may reasonably request in order to
facilitate the public sale or other disposition of the shares; the
Company hereby consents to the use of the prospectus, including
each preliminary prospectus, by each such Stockholder and
underwriter in connection with the offering and sale of the shares
covered by the prospectus or the preliminary
prospectus;
(c) (i) use all
reasonable efforts to register or qualify the shares being offered
and sold, no later than the time the applicable registration
statement becomes effective, under all applicable state securities
or “blue sky” laws of such jurisdictions as each
underwriter, if any, or any Stockholder holding shares covered by a
registration statement, shall reasonably request; (ii) use all
reasonable efforts to keep each such registration or qualification
effective during the period such registration statement is required
to be kept effective; and (iii) do any and all other acts and
things which may be reasonably necessary or advisable to enable
each such underwriter, if any, and Stockholder to consummate the
disposition in each such jurisdiction of such shares owned by such
Stockholder; provided, however, that the Company shall
not be obligated to qualify as a foreign corporation or as a dealer
in securities in any jurisdiction in which it is not so qualified
or to consent to be subject to general service of process (other
than service of process in connection with such registration or
qualification or any sale of shares in connection therewith) in any
such jurisdiction;
(d) use all reasonable
efforts to cause all shares being sold to be qualified for
inclusion in or listed on NASDAQ or any other U.S. securities
exchange on which shares issued by the Company are then so
qualified or listed if so requested by the Stockholders, or if so
requested by the underwriter or underwriters of an underwritten
offering of shares, if any;
(e) cooperate and
assist in any filings required to be made with Financial Industry
Regulatory Authority and in the performance of any due diligence
investigation by any underwriter in an underwritten
offering;
(f) use all reasonable
efforts to facilitate the distribution and sale of any shares being
offered, including by making road show presentations, holding
meetings with and making calls to potential investors and taking
such other actions as shall be requested by the lead managing
underwriter of an underwritten offering; and
(g) enter into
customary agreements (including, in the case of an underwritten
offering, underwriting agreements in customary form, and including
provisions with respect to indemnification and contribution in
customary form and consistent with the provisions relating to
indemnification and contribution contained herein) and take all
other customary and appropriate actions in order to expedite or
facilitate the disposition of such shares and in connection
therewith:
(i) make such
representations and warranties to the selling Stockholders and the
underwriters, if any, in form, substance and scope as are
customarily made by issuers to underwriters in similar underwritten
offerings;
(ii) obtain
opinions of counsel to the Company and updates thereof (which
counsel and opinions (in form, scope and substance) shall be
reasonably satisfactory to the lead managing underwriter, if any)
addressed to each selling Stockholder and the underwriters, if any,
covering the matters customarily covered in opinions requested in
sales of securities or underwritten offerings and such other
matters as may be reasonably requested by such Stockholders and
underwriters;
(iii) obtain
“cold comfort” letters and updates thereof from the
Company’s independent certified public accountants addressed
to the selling Stockholders, if permissible, and the underwriters,
if any, which letters shall be customary in form and shall cover
matters of the type customarily covered in “cold
comfort” letters to underwriters in connection with primary
underwritten offerings;
(iv) to
the extent requested and customary for the relevant transaction,
enter into a securities sales agreement with the Stockholders
providing for, among other things, the appointment of such
representative as agent for the selling Stockholders for the
purpose of soliciting purchases of shares, which agreement shall be
customary in form, substance and scope and shall contain customary
representations, warranties and covenants
The
above shall be done at such times as customarily occur in similar
non-shelf registered offerings or shelf registrations, as
applicable.
ARTICLE IX
INDEMNIFICATION
Section
9.1 Indemnification by the Company.
In the event of any registration under the Securities Act by any
Registration Statement, pursuant to rights granted in this
Agreement, of shares held by Stockholders, the Company will hold
harmless Stockholders, each director, officer, employee and
Affiliate of the Stockholders and each other person, if any, who
controls any Stockholder within the meaning of the Securities Act
(each, a “Controlling Person”),
against any losses, claims, damages, or liabilities (including
legal fees and costs of court), joint or several, to which
Stockholders or such Controlling Person may become subject under
the Securities Act or otherwise, insofar as such losses, claims,
damages, or liabilities (or any actions in respect thereof) arise
out of or are based upon any untrue statement or alleged untrue
statement of any material fact (a) contained, on its effective
date, in any Registration Statement under which such securities
were registered under the Securities Act or any amendment or
supplement to any of the foregoing, or which arise out of or are
based upon the omission or alleged omission to state a material
fact required to be stated therein or necessary to make the
statements therein not misleading or (b) contained in any
preliminary prospectus, if used prior to the effective date of such
Registration Statement, or in the final prospectus (as amended or
supplemented if the Company shall have filed with the SEC any
amendment or supplement to the final prospectus), or which arise
out of or are based upon the omission or alleged omission (if so
used) to state a material fact required to be stated in such
prospectus or necessary to make the statements in such prospectus
not misleading; and will reimburse Stockholders and each such
Controlling Person for any legal or any other expenses reasonably
incurred by them in connection with investigating or defending any
such loss, claim, damage, or liability; provided, however, that the Company shall
not be liable to any Stockholder or Controlling Persons in any such
case to the extent that any such loss, claim, damage, or liability
arises out of or is based upon an untrue statement or alleged
untrue statement or omission or alleged omission made in such
Registration Statement or such amendment or supplement, solely in
reliance upon and in conformity with information furnished to the
Company through a written instrument duly executed by such
Stockholder specifically for use in the preparation thereof. In
connection with any underwritten public offering effected under a
Registration Statement, the Company will agree to indemnify the
underwriters on terms and conditions customary for such an
offering. This indemnity shall remain in full force and effect
regardless of any investigation made by or on behalf of an
indemnified party, and shall survive the transfer (in accordance
with the terms hereof) of such Registrable Securities by the seller
thereof.
Section
9.2 Indemnification by
Stockholders. Each Stockholder will, severally and not
jointly, indemnify and hold harmless (in the same manner and to the
same extent as set forth in Section 5.1) the Company, each
director, officer, employee and Affiliate of the Company and any
Person who controls the Company within the meaning of the
Securities Act with respect to any statement or omission from such
Registration Statement, or any amendment or supplement to it, if
such statement or omission was made solely in reliance upon and in
conformity with information furnished to the Company through a
written instrument duly executed by such Stockholder specifically
regarding such Stockholder for use in the preparation of such
Registration Statement or amendment or supplement; provided, however, that such Stockholder
shall not be liable in any such case to the extent that prior to
the filing of any such Registration Statement amendment or
supplement, such Stockholder has furnished in writing to the
Company information expressly for use in such Registration
Statement or prospectus or any amendment or supplement which
corrected or made not misleading information previously furnished
to the Company. This indemnity shall remain in full force and
effect, regardless of any investigation made by or on behalf of the
Company, its directors, officers or controlling Persons, and shall
survive the transfer of such Registrable Securities by the seller
thereof. Notwithstanding the foregoing, the liability of any such
Stockholder shall not exceed an amount equal to the net proceeds
realized by such Stockholder from the sale of Registrable
Securities pursuant to such Registration Statement.
Section
9.3 Indemnification Procedures.
Promptly after receipt by an indemnified party of notice of the
commencement of any action involving a claim referred to in the
preceding Sections of this Article V, the indemnified
party will, if a resulting claim is to be made or may be made
against and indemnifying party, give written notice to the
indemnifying party of the commencement of the action. The failure
of any indemnified party to give notice shall not relieve the
indemnifying party of its obligations in this Article V, except to the extent
that the indemnifying party is actually prejudiced by the failure
to give notice. If any such action is brought against an
indemnified party, the indemnifying party will be entitled to
participate in and to assume the defense of the action with counsel
reasonably satisfactory to the indemnified party, and after notice
from the indemnifying party to such indemnified party of its
election to assume defense of the action, the indemnifying party
will not be liable to such indemnified party for any legal or other
expenses incurred by the latter in connection with the
action’s defense. An indemnified party shall have the right
to employ separate counsel in any action or proceeding and
participate in the defense thereof, but the fees and expenses of
such counsel shall be at such indemnified party’s expense
unless (a) the employment of such counsel has been specifically
authorized in writing by the indemnifying party, which
authorization shall not be unreasonably withheld, (b) the
indemnifying party has not assumed the defense and employed counsel
reasonably satisfactory to the indemnified party within 60 days
after notice of any such action or proceeding, or (c) the named
parties to any such action or proceeding (including any impleaded
parties) include the indemnified party and the indemnifying party
and the indemnified party shall have been advised by such counsel
that there may be one or more legal defenses available to the
indemnified party that are different from or additional to those
available to the indemnifying party (in which case the indemnifying
party shall not have the right to assume the defense of such action
or proceeding on behalf of the indemnified party), it being
understood, however, that the indemnifying party shall not, in
connection with any one such action or separate but substantially
similar or related actions in the same jurisdiction arising out of
the same general allegations or circumstances, be liable for the
reasonable fees and expenses of more than one separate firm of
attorneys (in addition to all local counsel which is necessary, in
the good faith opinion of both counsel for the indemnifying party
and counsel for the indemnified party in order to adequately
represent the indemnified parties) for the indemnified party and
that all such fees and expenses shall be reimbursed as they are
incurred upon written request and presentation of invoices. Whether
or not a defense is assumed by the indemnifying party, the
indemnifying party will not be subject to any liability for any
settlement made without its consent. No indemnifying party will
consent to entry of any judgment or enter into any settlement which
(i) does not include as an unconditional term the giving by the
claimant or plaintiff, to the indemnified party, of a release from
all liability in respect of such claim or litigation or (ii)
involves the imposition of equitable remedies or the imposition of
any non-financial obligations on the indemnified
party.
Section
9.4 Contribution. If the
indemnification required by this Article V from the indemnifying
party is unavailable to or insufficient to hold harmless an
indemnified party in respect of any indemnifiable losses, claims,
damages, liabilities, or expenses, then the indemnifying party
shall contribute to the amount paid or payable by the indemnified
party as a result of such losses, claims, damages, liabilities, or
expenses in such proportion as is appropriate to reflect (a) the
relative benefit of the indemnifying and indemnified parties and
(b) if the allocation in clause (a) is not permitted by applicable
law, in such proportion as is appropriate to reflect the relative
benefit referred to in clause (a) and also the relative fault of
the indemnified and indemnifying parties, in connection with the
actions which resulted in such losses, claims, damages,
liabilities, or expenses, as well as any other relevant equitable
considerations. The relative fault of the indemnifying party and
the indemnified party shall be determined by reference to, among
other things, whether any action in question, including any untrue
or alleged untrue statement of a material fact, has been made by,
or relates to information supplied by, such indemnifying party or
parties, and the parties’ relative intent, knowledge, access
to information, and opportunity to correct or prevent such action.
The amount paid or payable by a party as a result of the losses,
claims, damage, liabilities, and expenses referred to above shall
be deemed to include any legal or other fees or expenses reasonably
incurred by such party in connection with any investigation or
proceeding. The Company and Stockholders agree that it would not be
just and equitable if contribution pursuant to this Section 5.4 were determined by
pro rata allocation or by
any other method of allocation which does not take account of the
equitable considerations referred to in the prior provisions of
this Section 5.4.
Notwithstanding the provisions of this Section 5.4, no indemnifying or
contributing party shall be required to contribute any amount in
excess of the amount by which the total price at which the
securities were offered to the public by such party exceeds the
amount of any damages which such party has otherwise been required
to pay by reason of an untrue statement or omission. No person
guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such a
fraudulent misrepresentation.
ARTICLE X
OTHER AGREEMENTS
Section
10.1 Transfer of
Rights.
(a) This Agreement is
personal to the parties hereto and not assignable or transferable;
provided,
however, that
notwithstanding the foregoing, a Stockholder may assign and
transfer its rights and obligations under this Agreement to a
Permitted Transferee in connection with a transfer or sale of
Registrable Securities to such Person, which assignment or transfer
shall only be effective upon receipt by the Company of a duly
executed commitment by such Permitted Transferee to be bound by the
terms of this Agreement, in the form attached hereto as
Exhibit A, in which
case this Agreement shall be assigned to, and may be enforced by,
such Permitted Transferee, and such Permitted Transferee shall
thereupon have all of the rights and obligations of its transferor
hereunder.
(b) In the event the
Company engages in a merger or consolidation in which the
Registrable Securities are converted into securities of another
company, and which securities are not tradable without registration
under the Securities Act, appropriate arrangements will be made so
that the registration rights provided under this Agreement continue
to be provided to Stockholders by the issuer of such securities. To
the extent such new issuer, or any other company acquired by the
Company in a merger or consolidation, was bound by registration
rights obligations that would conflict with the provisions of this
Agreement, the Company will, unless the Required Stockholders
otherwise agree, use its best efforts to modify any such
“inherited” registration rights obligations so as not
to interfere in any material respects with the rights provided
under this Agreement.
Section
10.2 Limited Liability.
Notwithstanding any other provision of this Agreement, neither the
members, general partners, limited partners or managing directors,
or any directors or officers of any members, general or limited
partner, advisory director, nor any future members, general
partners, limited partners, advisory directors, or managing
directors, if any, of any Stockholder shall have any personal
liability for performance of any obligation of such Stockholder
under this Agreement in excess of the respective capital
contributions of such members, general partners, limited partners,
advisory directors or managing directors to such
Stockholder.
Section
10.3 Rule 144. If the Company is
subject to the requirements of Section 13, 14 or 15(d) of the
Exchange Act, the Company covenants that it will file any reports
required to be filed by it under the Securities Act and the
Exchange Act (or, if the Company is subject to the requirements of
Section 13, 14 or 15(d) of the Exchange Act but is not
required to file such reports, it will, upon the request of any
Stockholder, make such information available) and it will take such
further action as any Stockholder may reasonably request, so as to
enable such Stockholder to sell Registrable Securities without
registration under the Securities Act within the limitation of the
exemptions provided by (a) Rule 144 under the Securities
Act, as such Rule may be amended from time to time, or (b) any
similar rule or regulation hereafter adopted by the SEC. Upon the
request of any Stockholder, the Company will deliver to such
Stockholder a written statement as to whether it has complied with
such requirements.
Section
10.4 In-Kind Distributions. If any
Stockholder seeks to effectuate an in-kind distribution of all or
part of its Registrable Securities to its direct or indirect
equityholders, the Company will work with such Stockholder and the
Company’s transfer agent to facilitate such in-kind
distribution in the manner reasonably requested by such
Stockholder.
Section
10.5 No Inconsistent Agreements. The
Company has not entered into, and on or after the date of this
Agreement will not enter into, any agreement that conflicts with
the provisions hereof.
ARTICLE XI
MISCELLANEOUS
Section
11.1 Notices. All notices, demands
and other communications hereunder shall be in writing and shall be
deemed to have been duly given (i) on the date so given, if
delivered personally, (ii) on the date sent, if delivered by
facsimile with telephone confirmation of receipt, (iii) on the
second Business Day following the date deposited in the mail if
mailed via an internationally recognized overnight courier and (iv)
on the fourth (4th) Business Day
following the date deposited in the mail if mailed via registered
or certified mail, return receipt requested, postage prepaid, in
each case, to the other party at the following
addresses:
if to
any Stockholder, to the address listed on Annex A, with copies (which
shall not constitute notice) to the respective persons listed on
Annex
A.
if to
the Company, to:
Fusion
Telecommunications International, Inc.
420
Lexington Avenue, Suite 171
New
York, New York 10170
Attention: James P.
Prenetta, Jr., Executive Vice President and General
Counsel
Email:
jprenetta@fusionconnect.com
Section
11.2 Section Headings. The article
and section headings in this Agreement are for reference purposes
only and shall not affect the meaning or interpretation of this
Agreement. References in this Agreement to a designated
“Article” or “Section” refer to an Article
or Section of this Agreement unless otherwise specifically
indicated.
Section
11.3 Use of Terms. Whenever required
by the context, any pronoun used in this Agreement shall include
the corresponding masculine, feminine or neuter forms, and the
singular form of nouns, pronouns and verbs shall include the plural
and vice versa. Whenever the words “include”,
“included” or “including” are used in this
Agreement, they are deemed to be followed by the words
“without limitation”. Reference to any agreement,
document or instrument means such agreement, document or instrument
as amended or otherwise modified from time to time in accordance
with the terms thereof. When used in this Agreement, words such as
“herein”, “hereinafter”,
“hereof”, “hereto”, and
“hereunder” shall refer to this Agreement as a whole,
unless the context clearly requires otherwise. The use of the words
“or,” “either” and “any” shall
not be exclusive. The parties hereto have participated jointly in
the negotiation and drafting of this Agreement. In the event an
ambiguity or question of intent or interpretation arises, this
Agreement shall be construed as if drafted jointly by the parties
hereto, and no presumption or burden of proof shall arise favoring
or disfavoring any party by virtue of the authorship of any of the
provisions of this Agreement.
Section
11.4 Governing Law. This Agreement
will be governed and construed in accordance with the internal Laws
of the State of Delaware, without regard to any applicable conflict
of laws principles (whether of the State of Delaware or any other
jurisdiction).
Section
11.5 Consent to Jurisdiction and Service of
Process. Each of the parties to this Agreement hereby
irrevocably and unconditionally submits, for itself and its
property, to the exclusive jurisdiction and venue of the Chancery
Court of the State of Delaware and, in the absence of such
jurisdiction, the United States District Court for the District of
Delaware, and, in the absence of such federal jurisdiction, the
parties consent to be subject to the exclusive jurisdiction of any
Delaware state court sitting in New Castle County (together, the
“Chosen Courts”), in any action or proceeding arising
out of or relating to this Agreement or the Transactions or for
recognition or enforcement of any judgment relating thereto, and
each of the Parties hereby irrevocably and unconditionally (i)
agrees not to commence any such action or proceeding except in the
Chosen Courts, (ii) agrees that any claim in respect of any such
action or proceeding may be heard and determined in the Chosen
Courts, and any appellate court hearing actions or proceedings
therefrom, (iii) waives, to the fullest extent it may legally and
effectively do so, any objection which it may now or hereafter have
to the laying of venue of any such action or proceeding in the
Chosen Courts, and (iv) waives, to the fullest extent it may
legally and effectively do so, the defense of an inconvenient forum
to the maintenance of such action or proceeding in the Chosen
Courts. Each of the parties to this Agreement agrees that a final
judgment in any such action or proceeding will be conclusive and
may be enforced in other jurisdictions by suit on the judgment or
in any other manner provided by law.
Section
11.6 WAIVER OF JURY TRIAL. EACH
PARTY HERETO ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY WHICH MAY
ARISE UNDER THIS AGREEMENT IS LIKELY TO INVOLVE COMPLICATED AND
DIFFICULT ISSUES, AND THEREFORE IT HEREBY IRREVOCABLY AND
UNCONDITIONALLY WAIVES ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN
RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF OR
RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.
EACH PARTY CERTIFIES AND ACKNOWLEDGES THAT (I) NO REPRESENTATIVE,
AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR
OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF
LITIGATION, SEEK TO ENFORCE EITHER OF SUCH WAIVERS, (II) IT
UNDERSTANDS AND HAS CONSIDERED THE IMPLICATIONS OF SUCH WAIVERS,
(III) IT MAKES SUCH WAIVERS VOLUNTARILY, AND (IV) IT HAS BEEN
INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE
MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 7.6.
Section
11.7 Amendments; Termination. This
Agreement may be amended or modified only by an instrument in
writing executed by the Company and the Required Stockholders. Any
such amendment and modification will apply to all Stockholders
equally, without distinguishing between them. This Agreement will
terminate as to any Stockholder when it no longer holds any
Registrable Securities. This Agreement will no longer be applicable
to Registrable Securities that are registered in a public offering
on NASDAQ or any other U.S. securities exchange on which
Registrable Securities issued by the Company are then so qualified
or listed.
Section
11.8 Entire Agreement. This
Agreement constitutes the entire agreement and understanding of the
parties with respect to the transactions contemplated hereby and
thereby. The registration rights granted under this Agreement
supersede any registration, qualification or similar rights with
respect to any of the shares of Company Common Stock granted under
any other agreement to the parties hereto.
Section
11.9 Severability. The invalidity or
unenforceability of any specific provision of this Agreement shall
not invalidate or render unenforceable any of its other provisions.
Any provision of this Agreement held invalid or unenforceable shall
be deemed reformed, if practicable, to the extent necessary to
render it valid and enforceable and to the extent permitted by law
and consistent with the intent of the parties to this
Agreement.
Section
11.10 Counterparts. This Agreement
may be executed in multiple counterparts, including by means of
facsimile, each of which shall be deemed an original, but all of
which together shall constitute the same instrument.
[Remainder
of page intentionally blank]
IN WITNESS WHEREOF, the parties have duly executed this
Agreement effective as of the date first written
above.
FUSION
TELECOMMUNICATIONS INTERNATIONAL, INC.
Name:
Title:
[Signature Page to
Registration Rights Agreement]
A-130
BCHI
HOLDINGS, LLC
Name:
Title:
Notices:
[Signature Page to
Registration Rights Agreement]
A-131
EXHIBIT A
FORM OF JOINDER TO
REGISTRATION RIGHTS AGREEMENT
This
JOINDER to the Registration Rights Agreement, dated as of
__________, 2017 (the “Registration Rights
Agreement”), of Fusion Telecommunications
International, Inc., a Delaware corporation (the
“Company”),
is executed on behalf of the undersigned (“Stockholder”), effective
as of the date set forth on the signature page below, with
reference to the following facts:
A. Capitalized
terms used herein but not otherwise defined shall have the meanings
set forth in the Registration Rights Agreement.
B. Stockholder
has acquired Registrable Securities from a Stockholder (in this
instance, as defined in the Registration Rights Agreement) (the
“Original
Stockholder”), is the Permitted Transferee of the
Original Stockholder and, in connection with such transfer, the
registration rights of such Original Stockholder are being assigned
to Stockholder in accordance with the terms of Section 6.1 of the Registration
Rights Agreement, and the Registration Rights Agreement requires
Stockholder to become a party thereto if Stockholder desires to
avail itself of the registration rights therein, and Stockholder
agrees to do so in accordance with the terms thereof.
NOW,
THEREFORE, in consideration of the mutual covenants contained
herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the undersigned
hereby agrees as follows:
1. Agreement
to be Bound. Stockholder hereby agrees that upon execution
of this Joinder, Stockholder shall become a party to the
Registration Rights Agreement as a “Stockholder” and
shall be fully bound by, and subject to, all of the covenants,
terms and conditions of the Registration Rights Agreement
applicable to Stockholder and the Registrable Securities held by
Stockholder as though an original party thereto.
2. Counterparts.
This Joinder may be executed in separate counterparts each of which
shall be an original and all of which taken together shall
constitute one and the same agreement.
3. Notices.
For purposes of Section
7.1 of the Registration Rights Agreement, all notices,
demands or other communications to Stockholder shall be directed to
Stockholder’s address set forth below Stockholder’s
signature below.
[Signature Page Follows]
IN WITNESS WHEREOF, Stockholder has
executed this Joinder effective as of the date set forth
below.
STOCKHOLDER:
ADDRESS:
Exhibit D
Consumer/SMB Business Carve-out
Prior
to the Closing, BCHI and the BCHI Subsidiaries will distribute to
the shareholders of BCHI the equity of an entity containing certain
assets associated with their consumer and single line business
services business as more fully described below, and will enter
into agreements and arrangements, containing, among others, terms
set forth below, each of which distributions, agreements and
arrangements will be preapproved by the Company. As used herein, on
and after the Effective Time, BCHI means the Surviving Company and
its Subsidiaries.
1.
Distribution. Immediately prior
to the Effective Time, BCHI will distribute to its shareholders all
the equity interests in Spinco (as defined below) (the
“Distribution”). The time
of the Distribution is herein referred to as the
“Distribution
Time”.
2.
Assets. Prior to the
Distribution Time, BCHI and the BCHI Subsidiaries will transfer to
a newly created Subsidiary of BCHI or to Tempo Telecom, LLC or
another current subsidiary of BCHI approved by the Company (such
company being hereinafter referred to as “Spinco”) (i) all customer
contracts and accounts relating thereto with respect to the then
existing consumer business of BCHI and the BCHI Subsidiaries and
all customer contracts and accounts relating thereto with respect
to their single-line business services business (collectively, the
“Consumer/SMB
Business Customers”), (ii) any assets that are used
solely to support the Consumer/SMB Business Customers, (iii) any
other assets that are reasonably agreed by the Parties as necessary
to support the services provided to the Consumer/SMB Business
Customers, and (iv) the patents set forth on Annex 1 to this Exhibit D and any associated
marks in the United States and Canada, which patents will be
licensed to the Surviving Company under a perpetual, royalty free,
worldwide license. The services currently provided by BCHI and the
BCHI Subsidiaries to the Consumer/SMB Business Customers include
landline local voice services, associated long distance voice
services, associated ancillary services such as adjunct-to-basic
services that are intended to facilitate completion of calls
through utilization of basic telephone service facilities
including, but not limited to, call waiting, speed dialing, caller
ID, call blocking, call forwarding, and voicemail, and associated
carrier access services; the Tempo consumer wireless voice and data
services; and Canadian consumer landline local voice services and
related features (including, but not limited to, call waiting,
speed dialing, caller ID, call blocking, call forwarding, and
voicemail) associated long distance voice services (including, but
not limited to long distance calling plans, post-paid and prepaid
calling cards), and associated ancillary services (such as
adjunct-to-basic services that are intended to facilitate
completion of calls through utilization of basic telephone service
facilities including, but not limited to 9-1-1 emergency service,
local operator service, 4-1-1 directory assistance, 3-1-1
non-Emergency municipal government services, 6-1-1 repairs, and
7-1-1 message relay service) (collectively, the “Consumer/SMB
Business”).
3.
Liabilities. The Parties agree
that Spinco will, as of the Distribution Time, have accounts
receivable and accounts payable that have a net aggregate value of
$0. The Parties will cooperate in good faith to determine which
accounts receivable and accounts payable related to the
Consumer/SMB Business will be transferred to Spinco prior to the
Distribution Time to achieve such net $0 aggregate value. No
liabilities, other than those associated with the accounts payable,
will be assumed by Spinco other than accounts payable as determined
by this Section
3.
4.
Employees. The Parties will
cooperate in good faith to determine the employees of BCHI and its
Subsidiaries to be offered employment by Spinco in connection with
the Distribution.
5.
Wholesale Agreement. The
Company and BCHI will mutually develop the terms of a wholesale
agreement under the terms of which Spinco will purchase specific
services from the Surviving Company, these services will include
services currently purchased by BCHI and the BCHI Subsidiaries from
various third-party carriers and services available directly from
the Company and its Subsidiaries; the agreement will be structured
in a manner designed to enable the parties to maximize the benefit
of any existing volume discounts provided by third party
carriers.
6.
Transition Services
Agreement.
(a) The Company and
BCHI will negotiate the terms of a transition services agreement,
under which Surviving Company and its Subsidiaries will provide
Spinco and its Subsidiaries with various agreed upon support
services that are reasonably required by Spinco to support the
Consumer/SMB Business Customers, for a period of up to three (3)
years following the Distribution Time. The cost of such services
will be mutually agreed upon by the Company and BCHI.
(b) If, prior to
the Distribution Time, Spinco is unable to obtain all required
regulatory approvals, licenses and permits necessary for it to
legally operate the Consumer/SMB Business, Spinco and the Surviving
Company will enter into a management agreement, the terms of which
will be agreed by BCHI and the Company in advance of the
Distribution Time.
(c) If the transactions
contemplated by this Exhibit D cannot be consummated
on the terms set forth herein due to the failure to obtain any
required regulatory approvals or consents with respect to any
material contracts or arrangements, BCHI and the Company will work
in good faith to restructure these transactions in a manner that
provides the parties with substantially the same economic and
commercial position as if such transactions had occurred as set
forth in this Exhibit
D.
7.
Valuation; Adjustments to
Distribution.
(b) The value of the
Consumer/SMB Business as of the Distribution Time will be
calculated as follows (the “Distribution Value”): (i)
EBITDA of the Consumer/SMB Business for the last full calendar
month prior to the Distribution Time; multiplied by (ii) 12; multiplied by (iii) $3.48. For purposes
of the foregoing, EBITDA of the Consumer/SMB Business will be
calculated in accordance with the methodology used in creating the
information included on Annex 2 to this Exhibit D. BCHI will calculate
the Distribution Value in good faith and provide the calculation to
the Company for its reasonable verification. If the Company and
BCHI are unable to reach agreement concerning the value of the
Consumer/SMB Business, the parties will submit the matter to an
independent accounting firm for their determination.
(c) If the Distribution
Value is less than $25 million, then, immediately prior to the
Distribution Time, BCHI will deliver to Spinco a promissory note
payable to Spinco in an amount equal to the excess of $25 million
over the Distribution Value. This promissory note will be payable
on the one-year anniversary of the Closing Date and may be settled
by Surviving Company, at its election, either in cash or in shares
of Company Common Stock, such shares to be calculated in accordance
with the formula set forth in clause (c) below.
(d) If the Distribution
Value is greater than $25 million (the “Excess Value”), then the
BCHI shareholders will either (i) make a cash payment, at the
Distribution Time, to BCHI in an amount equal to the Excess Value,
or (ii) cause Spinco to issue a promissory note payable to BCHI in
an amount equal to the Excess Value, payable on the one-year
anniversary of the Closing Date, which at the election of Spinco
can be paid in cash, or paid by the transfer of a number of shares
of the common stock of the Company equal to (rounded up or down to
the nearest whole share) (1) the Excess Value, divided by (2) the
greater of (A) $2.00, or (B) the weighted average daily closing
price of the Company Common Stock, as reported by NASDAQ (or any
successor to such exchange), for the ten (10) consecutive trading
days ending immediately prior to the third Business Day preceding
the date of such transfer.
****************************************************************
Annex 1
Patents
of the Consumer/SMB Business
Patent Title
|
Application No.
|
Registration No.
|
Country
|
CALL
SCREENING SYSTEM AND METHOD
|
2597377
|
2,597,377
|
Canada
|
CALL
SCREENING SYSTEM AND METHOD
|
12/673,377
|
8,577,002
|
United
States
|
Annex 2
EBITDA
of the Consumer/SMB Business
August
26, 2017
PRIVATE & CONFIDENTIAL
Fusion
Telecommunications International, Inc.
420
Lexington Avenue, Suite 1718
New
York, New York 10170
Ladies
and Gentlemen:
Reference is made
to the Agreement and Plan of Merger, dated as of the date hereof
(as it may be amended or modified from time to time in the future,
the “Merger
Agreement”), by and among Fusion Telecommunications
International, Inc., a Delaware corporation (the
“Company”),
Birch Communications Holdings, Inc., a Georgia corporation, and
Fusion BCHI Acquisition LLC, a Delaware limited liability company.
Capitalized terms used but not defined herein have the meaning
given to them in the Merger Agreement.
Subject
to the occurrence of the Closing, for a period of eighteen (18)
months following the Closing (the “Indemnity Period”), BCHI
Holdings, LLC, a Georgia limited liability company
(“Holdings”) agrees to
indemnify and hold harmless the Company for and against any and all
losses in excess of $500,000 that are related to, or arise from,
any of the pending matters listed below that are incurred during
the Indemnity Period; provided, that in no event will Holdings be
responsible for any such losses exceeding $25,000,000 in the
aggregate (the “Cap”). Holdings shall
have the right to assume the defense of these matters and shall
have the right to settle such matters so long as such settlement
does not involve any monetary payment by the Company and/or its
Subsidiaries and does not otherwise have a material adverse effect
on the business of the Company and its Subsidiaries. Amounts owed
by Holdings under this indemnity may be paid in cash or through the
transfer to the Company of a number of shares of Company Common
Stock equal to (rounded up or down to the nearest whole share) (1)
the amount of such obligation divided by (2) the greater of (A)
$2.00, or (B) the weighted average daily closing bid price of the
Company Common Stock, as reported by NASDAQ (or any successor to
such exchange), for five (5) consecutive trading days ending
immediately prior to the third (3rd) Business Day
preceding the date of such transfer. Any cash payment and/or return
of shares of Company Common Stock shall be completed within five
(5) Business Days of the date that the Company’s (or its
subsidiary’s) liability has been determined. During the
Indemnity Period, Holdings shall, at all times, maintain in its
name liquid assets and shares of Company Common Stock with an
aggregate value of no less than the Cap; provided, that for the
purposes of determining the value of shares of Company Common
Stock, such shares will not be deemed to have a value of less than
$2.00 per share, regardless of the then-current market price for
such shares.
1.
EB-IHD-17-00023706,
Federal Communications Commission Letter of Inquiry to Birch
Communications, Inc. (dated May 2, 2017).
2.
California Public
Utilities Commission Data Request No. 1 (dated October 1, 2015),
Data Request No. 2 (dated March 8, 2016), Data Request No. 3 (dated
March 7, 2017); Data Request No. 4 (dated July 27, 2017) to Birch
Telecom of the West, Inc. and Cbeyond Communications,
LLC.
3.
Wyoming Universal
Service Fund Audit Notification Letter (dated August 1,
2017).
4.
Kansas Corporation
Commission Docket No. 18-BTKT-033-KSF, Audit of Birch Telecom of Kansas, Inc. by the
Kansas Universal Service Fund (KUSF) Administrator Pursuant to
K.S.A. 2016 Supp. 66-2010(b) for KUSF Operating Year 20, Fiscal
Year March 2016-February 2017.
5.
Kansas Corporation
Commission Docket No. 18-TEMT-043-KSF, Audit of Tempo Telecom, LLC by the Kansas
Universal Service Fund (KUSF) Administrator Pursuant to K.S.A. 2016
Supp. 66-2010(b) for KUSF Operating Year 20, Fiscal Year March
2016-February 2017.
6.
Kansas Corporation
Commission Docket No. 18-ICIT-041-KSF, Audit of Ionex Communications, Inc. by the
Kansas Universal Service Fund (KUSF) Administrator Pursuant to
K.S.A. 2016 Supp. 66-2010(b) for KUSF Operating Year 20, Fiscal
Year March 2016-February 2017.
7.
Richard W. Huskey v. Birch Communications, Inc., Ionex
Communications, Inc., Birch Telecom of Missouri, Inc and certain
named individual defendants (Circuit Court of St. Louis County,
Missouri)
8.
Riepen v. Cbeyond, Inc. et al
This
letter agreement will be governed by, and construed and enforced in
accordance with, the internal Laws of the State of Delaware,
without regard to any applicable conflict of laws principles
(whether of the State of Delaware or any other jurisdiction). This
letter agreement may be executed in two or more counterparts, all
of which will be considered one and the same agreement and will
become effective when counterparts have been signed by each of the
parties hereto and delivered to the other party, it being
understood that each party need not sign the same
counterpart.
[Signatures
are on the following page.]
If you
agree with the foregoing, please sign and return a copy of this
letter agreement, which will constitute our agreement with respect
to the subject matter hereof.
Very
truly yours,
BCHI
HOLDINGS, LLC
By:
/s/ Holcombe T. Green,
Jr.
Name:
Holcombe T. Green, Jr.
Title:
Manager
ACKNOWLEDGED
AND AGREED to
as of
this 26th day of August, 2017:
FUSION
TELECOMMUNICATIONS
INTERNATIONAL,
INC.
By:
/s/ James P. Prenetta,
Jr.
Name:
James P. Prenetta, Jr.
Title:
Executive Vice President and General Counsel
[Signature Page to Side Letter]
FIRST
AMENDMENT
TO
AGREEMENT
AND PLAN OF MERGER
This
FIRST AMENDMENT TO AGREEMENT AND PLAN OF MERGER, dated as of
September 15, 2017 (this “Amendment”), is entered
into by and among Fusion Telecommunications International, Inc., a
Delaware corporation (the “Company”), Fusion BCHI
Acquisition LLC, a Delaware limited liability company
(“Merger
Sub”), and Birch Communications Holdings, Inc., a
Georgia corporation (“BCHI”). Capitalized terms
used but not otherwise defined herein shall have the meanings given
to them in the Merger Agreement.
RECITALS
A.
The Parties
previously entered into that certain Agreement and Plan of Merger,
dated as of August 26, 2017 (the “Merger
Agreement”).
B.
The Parties desire
to amend the Merger Agreement as set forth herein.
The
Parties hereby agree as follows:
1. Amendment. The Merger Agreement
is hereby amended as follows:
a. the phrase
“as promptly as reasonably practicable, and in any event
within fifteen (15) Business Days after the date hereof” in
Section 6.1(a)(iii)(A) is hereby deleted and replaced with
“within seven (7) Business Days after receipt of binding
commitment letters with respect to the Financing determined by both
Parties to be sufficient from a Financing Source or Financing
Sources”; and
b. the phrase
“as promptly as reasonably practicable, and in any event
within fifteen (15) Business Days after the date hereof” in
Section 6.1(a)(iii)(B) is hereby deleted and replaced with
“within seven (7) Business Days after receipt of binding
commitment letters with respect to the Financing determined by both
Parties to be sufficient from a Financing Source or Financing
Sources”.
2. Effect of Amendment. This
Amendment shall not constitute a waiver, amendment or modification
of any other provision of the Merger Agreement not expressly
referred to in Section 1 of this Amendment. Except as specifically
modified and amended hereby, the Merger Agreement shall remain
unchanged and in full force and effect. From and after the date
hereof, each reference in the Merger Agreement to “this
Agreement”, “hereunder”, “hereof”,
“herein” or words of similar meaning shall mean and be
a reference to the Merger Agreement as amended by this Amendment.
Notwithstanding the foregoing, references to the date of the Merger
Agreement, and references to the “date hereof”,
“the date of this Agreement” or words of similar
meaning in the Merger Agreement shall continue to refer to August
26, 2017.
3. Governing Law. This Amendment
will be governed by, and construed and enforced in accordance with,
the internal Laws of the State of Delaware, without regard to any
applicable conflict of laws principles (whether of the State of
Delaware or any other jurisdiction).
4. Jurisdiction. Section 9.8
(Jurisdiction) of the Merger Agreement is incorporated herein by
reference and made a part hereof as if fully set forth
herein.
5. Counterparts. This Amendment
may be executed in two or more counterparts, all of which will be
considered one and the same agreement and will become effective
when counterparts have been signed by each of the Parties and
delivered to the other Parties, it being understood that each Party
need not sign the same counterpart. PDF transmissions of this
Amendment shall be deemed to be the same as the delivery of an
executed original.
[Signatures
appear on following page.]
IN
WITNESS WHEREOF, the Parties have caused this Amendment to be
executed by their respective officers thereunto duly authorized as
of the date first above written.
FUSION
TELECOMMUNICATIONS INTERNATIONAL, INC.
By:
/s/ James P. Prenetta,
Jr.
Name:
James P. Prenetta, Jr.
Title:
Executive Vice President and
General
Counsel
FUSION
BCHI ACQUISITION LLC
By:
/s/ Gordon Hutchins,
Jr.
Name:
Gordon Hutchins, Jr.
Title:
Manager
BIRCH
COMMUNICATIONS HOLDINGS, INC.
By:
/s/ Gordon P.
Williams
Name:
Gordon P. Williams
Title:
Senior Vice President and General Counsel
SECOND
AMENDMENT
TO
AGREEMENT
AND PLAN OF MERGER
This
SECOND AMENDMENT TO AGREEMENT AND PLAN OF MERGER, dated as of
September 29, 2017 (this “Amendment”), is entered
into by and among Fusion Telecommunications International, Inc., a
Delaware corporation (the “Company”), Fusion BCHI
Acquisition LLC, a Delaware limited liability company
(“Merger
Sub”), and Birch Communications Holdings, Inc., a
Georgia corporation (“BCHI”). Capitalized terms
used but not otherwise defined herein shall have the meanings given
to them in the Merger Agreement.
RECITALS
A. The Parties
previously entered into that certain Agreement and Plan of Merger,
dated as of August 26, 2017, as amended by the First Amendment to
Agreement and Plan of Merger, dated as of September 15, 2017 (the
“Merger
Agreement”).
B. The Parties
desire to amend the Merger Agreement as set forth
herein.
The
Parties hereby agree as follows:
6. Amendment. The Merger Agreement
is hereby amended as follows:
a. the phrase
“as promptly as reasonably practicable, and in any event
within fifteen (15) Business Days after the date hereof” in
Section 6.1(a)(iii)(C) is hereby deleted and replaced with
“within seven (7) Business Days after receipt of binding
commitment letters with respect to the Financing determined by both
Parties to be sufficient from a Financing Source or Financing
Sources”.
7. Effect of Amendment. This
Amendment shall not constitute a waiver, amendment or modification
of any other provision of the Merger Agreement not expressly
referred to in Section 1 of this Amendment. Except as specifically
modified and amended hereby, the Merger Agreement shall remain
unchanged and in full force and effect. From and after the date
hereof, each reference in the Merger Agreement to “this
Agreement”, “hereunder”, “hereof”,
“herein” or words of similar meaning shall mean and be
a reference to the Merger Agreement as amended by this Amendment.
Notwithstanding the foregoing, references to the date of the Merger
Agreement, and references to the “date hereof”,
“the date of this Agreement” or words of similar
meaning in the Merger Agreement shall continue to refer to August
26, 2017.
8. Governing Law. This Amendment
will be governed by, and construed and enforced in accordance with,
the internal Laws of the State of Delaware, without regard to any
applicable conflict of laws principles (whether of the State of
Delaware or any other jurisdiction).
9. Jurisdiction. Section 9.8
(Jurisdiction) of the Merger Agreement is incorporated herein by
reference and made a part hereof as if fully set forth
herein.
10. Counterparts. This Amendment
may be executed in two or more counterparts, all of which will be
considered one and the same agreement and will become effective
when counterparts have been signed by each of the Parties and
delivered to the other Parties, it being understood that each Party
need not sign the same counterpart. PDF transmissions of this
Amendment shall be deemed to be the same as the delivery of an
executed original.
[Signatures
appear on following page.]
IN
WITNESS WHEREOF, the Parties have caused this Amendment to be
executed by their respective officers thereunto duly authorized as
of the date first above written.
FUSION
TELECOMMUNICATIONS INTERNATIONAL, INC.
By:
/s/ James P. Prenetta,
Jr.
Name:
James P. Prenetta, Jr.
Title:
Executive Vice President and
General
Counsel
FUSION
BCHI ACQUISITION LLC
By:
/s/ Gordon Hutchins,
Jr.
Name:
Gordon Hutchins, Jr.
Title:
Manager
BIRCH
COMMUNICATIONS HOLDINGS, INC.
By:
/s/ Gordon P. Williams,
Jr.
Name:
Gordon P. Williams, Jr.
Title:
Senior Vice President and General Counsel
AMENDED
AND RESTATED THIRD AMENDMENT
TO
AGREEMENT
AND PLAN OF MERGER
This
AMENDED AND RESTATED THIRD AMENDMENT TO AGREEMENT AND PLAN OF
MERGER, dated as of October 27, 2017 (this “Restatement”), is entered
into by and among Fusion Telecommunications International, Inc., a
Delaware corporation (the “Company”), Fusion BCHI
Acquisition LLC, a Delaware limited liability company
(“Merger
Sub”), and Birch Communications Holdings, Inc., a
Georgia corporation (“BCHI”). This Restatement
supersedes the Third Amendment to Agreement of Plan of Merger
executed by the Company, Merger Sub BCHI on October 24, 2017 (the
“Original Third Amendment”). Capitalized terms used but
not otherwise defined herein shall have the meanings given to them
in the Merger Agreement.
RECITALS
A. The Parties
previously entered into that certain Agreement and Plan of Merger,
dated as of August 26, 2017, as amended by the First Amendment to
Agreement and Plan of Merger, dated as of September 15, 2017, the
Second Amendment to Agreement and Plan of Merger, dated as of
September 29, 2017 and the Original Third Amendment (collectively,
the “Merger
Agreement”).
B. The Parties
desire to further amend the Merger Agreement as set forth
herein.
The
Parties hereby agree as follows:
1.
Section 6.1(a) of the Merger
Agreement is hereby deleted in its entirety and replaced with the
following:
“a. The
Parties will use their respective reasonable best efforts to (i)
take, or cause to be taken, all appropriate action and do, or cause
to be done, all things necessary, proper or advisable under
applicable Law, including Antitrust Laws, or otherwise to
consummate and make effective the Transactions as promptly as
practicable, (ii) obtain from any Governmental Entity any
consents, licenses, permits, waivers, approvals, authorizations or
Orders, including the FCC Approval and State Approvals, required to
be obtained by a Party, or any of their respective Subsidiaries, or
to avoid any Action by any Governmental Entity (including those in
connection with the Antitrust Laws), in connection with the
authorization, execution and delivery of this Agreement and the
consummation of the Transactions and (iii) (A) by no later than
October 31, 2017, make all necessary filings, and thereafter make
any other required submissions, with respect to this Agreement
required under the HSR Act, (B) by no later than October 31, 2017,
make all necessary filings, and thereafter make any other required
submissions, with respect to this Agreement required in order to
obtain the FCC Approval, (C) (i) by no later than November 15,
2017, make all necessary filings with respect to this Agreement
required in order to obtain the State Approvals, and (ii) by no
later than November 30, 2017 make all other required submissions
with all remaining State PSCs, and (D) by no later than November
30, 2017, make any other necessary filings, and thereafter make any
other required submissions, with respect to this Agreement required
under any other applicable Law. The Company and BCHI will furnish
to each other all information required for any application or other
filing under the rules and regulations of any applicable Law in
connection with the Transactions.”
11. Section 6.7 of the Merger
Agreement is hereby amended by deleting the second sentence thereof
and replacing it with the following:
“To the
extent necessary to comply with NASDAQ listing requirements, the
Company shall submit to the holders of Company Common Stock at the
Stockholders’ Meeting a proposal to approve and adopt an
amendment to the Company Certificate of Incorporation to authorize
the Company Board to effect a reverse split of all outstanding
shares of Company Common Stock in the range of 3:1 and 5:1, such
ratio to be determined by the Company Board after consultation with
BCHI, such that each holder of shares of Company Common Stock shall
receive one share of Company Common Stock for every three to five
shares (as determined applicable) of Company Common Stock held by
such holder (the “Reverse Split”),
effective prior to the Effective Time.”
12. The phrase
“60 days after the date hereof” in Section 8.1(b)(iv) of the
Merger Agreement is hereby deleted and replaced with “120
days after the date hereof”.
13. The reference to
20% in the proviso at the end of the definition of “Superior
Proposal” set forth in Section 9.15, is hereby deleted
and replaced with “15%”.
14. Effect of Restatement. This
Restatement shall not constitute a waiver, amendment or
modification of any other provision of the Merger Agreement not
expressly contemplated hereby. Except as specifically modified and
amended hereby, the Merger Agreement shall remain unchanged and in
full force and effect. From and after the date hereof, each
reference in the Merger Agreement to “this Agreement”,
“hereunder”, “hereof”, “herein”
or words of similar meaning shall mean and be a reference to the
Merger Agreement as amended by this Restatement. Notwithstanding
the foregoing, references to the date of the Merger Agreement, and
references to the “date hereof”, “the date of
this Agreement” or words of similar meaning in the Merger
Agreement shall continue to refer to August 26, 2017.
15. Governing Law. This Restatement
will be governed by, and construed and enforced in accordance with,
the internal Laws of the State of Delaware, without regard to any
applicable conflict of laws principles (whether of the State of
Delaware or any other jurisdiction).
16. Jurisdiction. Section 9.8 (Jurisdiction) of
the Merger Agreement is incorporated herein by reference and made a
part hereof as if fully set forth herein.
17. Counterparts. This Restatement
may be executed in two or more counterparts, all of which will be
considered one and the same agreement and will become effective
when counterparts have been signed by each of the Parties and
delivered to the other Parties, it being understood that each Party
need not sign the same counterpart. PDF transmissions of this
Restatement shall be deemed to be the same as the delivery of an
executed original.
[Signatures
appear on following page.]
IN
WITNESS WHEREOF, the Parties have caused this Restatement to be
executed by their respective officers thereunto duly authorized as
of the date first above written.
FUSION
TELECOMMUNICATIONS INTERNATIONAL, INC.
By:
/s/ James P. Prenetta,
Jr.
Name:
James P. Prenetta, Jr.
Title:
Executive Vice President and
General
Counsel
FUSION
BCHI ACQUISITION LLC
By:
/s/ Gordon Hutchins,
Jr.
Name:
Gordon Hutchins, Jr.
Title:
Manager
BIRCH
COMMUNICATIONS HOLDINGS, INC.
By:
/s/ Gordon P. Williams,
Jr.
Name:
Gordon P. Williams, Jr.
Title:
Senior Vice President and General Counsel
ANNEX B
FORM OF CERTIFICATE OF AMENDMENT
[attached hereto]
CERTIFICATE OF AMENDMENT
OF THE
CERTIFICATE OF INCORPORATION
OF
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
Fusion
Telecommunications International, Inc., a corporation duly
organized and existing under the General Corporation Law of the
State of Delaware (the “Corporation”), does hereby
certify that:
FIRST: The name of the corporation is
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
SECOND: The original certificate of
incorporation of the Corporation was dated September 16, 1997 and
recorded with the Secretary of State of the State of Delaware on
September 17, 1997 (such certificate of incorporation, as amended
and restated and in effect thereafter, the “Certificate of
Incorporation”).
THIRD: The Certificate of Incorporation
of the Corporation is hereby amended by deleting the first
paragraph Article Fourth thereof and inserting in lieu of said
paragraph the following:
“FOURTH: The total number of
shares of capital stock which the Corporation shall have authority
to issue is 100,000,000, of which 90,000,000 shall be shares of
Common Stock, par value $0.01 per share and 10,000,000 shall be
shares of preferred stock, par value $0.01 per
share.”
The
Certificate of Incorporation of the Corporation is further hereby
amended by adding the following as subsection “f” of
Article Fourth:
“
f. 2017 Reverse Stock Split.
(i)
Upon the filing and
effectiveness, pursuant to the General Corporation Law of the State
of Delaware, of this Certificate of Amendment to the Certificate of
Incorporation of the Corporation, which shall become effective as
of 7:00 p.m., Eastern time, on the date this Certificate of
Amendment to the Certificate of Incorporation is filed with the
Secretary of State of the State of Delaware (the “Effective
Time”), each [three][five] shares of the Corporation’s
Common Stock, par value $0.01 per share, issued and outstanding
immediately prior to the Effective Time shall be combined into one
(1) validly issued, fully paid and non-assessable share of Common
Stock, par value $0.01 per share, without any further action by the
Corporation or the holder thereof, subject to the treatment of
fractional share interests as described below (the “Reverse
Stock Split”). The conversion and exercise prices of
outstanding preferred stock, common stock purchase warrants and
options to purchase common stock and the number of shares of Common
Stock issuable thereunder shall be proportionately adjusted to
reflect the terms of the Reverse Stock Split consistent with the
terms of such instruments. No fractional shares shall be issued as
a result of the Reverse Stock Split, and any fractional share to
which a stockholder may be entitled as a result of the Reverse
Stock Split shall be rounded up to the nearest whole
share.
(ii)
Each certificate
that immediately prior to the Effective Time represented shares of
Common Stock (“Old Certificates”) shall thereafter
represent that number of shares of Common Stock into which the
shares of Common Stock represented by the Old Certificate shall
have been combined, subject to the elimination of fractional share
interests as described above.”
FIFTH: Pursuant to resolution of the
Corporation’s Board of Directors, an annual meeting of the
Corporation’s stockholders was duly called and held, upon
notice in accordance with Section 222 of the of the General
Corporation Law of the State of Delaware at which meeting the
necessary number of shares as required by statute were voted in
favor of amending the Certificate of Incorporation as provided
herein.
SIXTH: The foregoing amendment was fully
adopted in accordance with the provisions of Section 242 of the
General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, the Corporation has
caused this Certificate of Amendment to be signed by its duly
authorized officer, this day of , 2018.
FUSION
TELECOMMUNICATIONS INTERNATIONAL, INC.
By:
_________________________________
Name:
James P. Prenetta, Jr.
Title:
Executive Vice President and
General
Counsel
Exhibit A
SECOND AMENDED AND RESTATED CERTIFICATE OF
INCORPORATION
OF
[FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.]1
ARTICLE
I
The
name of the corporation is [Fusion Telecommunications
International, Inc.] (the “Company”).
The
address of the Company’s registered office in the State of
Delaware is 251 Little Falls Drive, County of New Castle, City of
Wilmington 19808. The name of the Company’s registered agent
at such address is Corporation Service Company.
The
purpose of the Company is to engage in any lawful act or activity
for which corporations may be organized under the General
Corporation Law of the State of Delaware, as amended (the
“DGCL”).
Authorized Capital Stock. The
Company is authorized to issue two classes of capital stock,
designated Common Stock and Preferred Stock. The total number of
shares of capital stock that the Company is authorized to issue is
160,000,000 shares, consisting of 150,000,000 shares of Common
Stock, par value $0.01 per share, and 10,000,000 shares of
Preferred Stock, par value $0.01 per share.
Preferred Stock. The Preferred
Stock may be issued in one or more series. The Board of Directors
of the Company (the “Board”) is hereby
authorized to issue the shares of Preferred Stock in such series
and to fix from time to time before issuance the number of shares
to be included in any such series and the designation, powers,
preferences and relative participating, optional or other rights,
if any, and the qualifications, limitations or restrictions
thereof. The authority of the Board with respect to each such
series will include, without limiting the generality of the
foregoing, the determination of any or all of the
following:
the
number of shares of any series and the designation to distinguish
the shares of such series from the shares of all other
series;
the
voting powers, if any, and whether such voting powers are full or
limited in such series;
the
redemption provisions, if any, applicable to such series, including
the redemption price or prices to be paid;
1
Prior to closing,
the parties may mutually agree to change the name of the
Company.
whether
dividends, if any, will be cumulative or noncumulative, the
dividend rate of such series, and the dates and preferences of
dividends on such series;
the
rights of such series upon the voluntary or involuntary dissolution
of, or upon any distribution of the assets of, the
Company;
the
provisions, if any, pursuant to which the shares of such series are
convertible into, or exchangeable for, shares of any other class or
classes or of any other series of the same or any other class or
classes of stock, or any other security, of the Company or any
other corporation or other entity, and the rates or other
determinants of conversion or exchange applicable
thereto;
the
right, if any, to subscribe for or to purchase any securities of
the Company or any other corporation or other entity;
the
provisions, if any, of a sinking fund applicable to such series;
and
any
other relative, participating, optional, or other special powers,
preferences or rights and qualifications, limitations, or
restrictions thereof;
all as
may be determined from time to time by the Board and stated or
expressed in the resolution or resolutions providing for the
issuance of such Preferred Stock (collectively, a
“Preferred Stock
Designation”).
Common Stock. Subject to the
rights of the holders of any series of Preferred Stock, the holders
of Common Stock will be entitled to one vote on each matter
submitted to a vote at a meeting of stockholders for each share of
Common Stock held of record by such holder as of the record date
for such meeting.
The
Board may make, amend, and repeal the Bylaws of the Company;
provided, that nothing herein will limit the power of the
stockholders of the Company to make, amend and repeal Bylaws. Any
Bylaw made by the Board under the powers conferred hereby may be
amended or repealed by the Board (except as specified in any such
Bylaw so made or amended) or by the stockholders in the manner
provided in the Bylaws of the Company. The Company may in its
Bylaws confer powers upon the Board in addition to the foregoing
and in addition to the powers and authorities expressly conferred
upon the Board by applicable law.
Subject
to the rights of the holders of any series of Preferred
Stock:
(a) any action required
or permitted to be taken by the stockholders of the Company may be
taken at a duly called annual or special meeting of stockholders of
the Company or without a meeting by means of any consent in writing
of such stockholders; and
(b) special meetings of
stockholders of the Company may be called only (i) by the
Chairman of the Board (the “Chairman”), (ii) by
the Chief Executive Officer of the Company (the “Chief Executive
Officer”), or (iii) by the Secretary of the
Company (the “Secretary”) acting at the
request of the Chairman, the Chief Executive Officer, a majority of
the total number of Directors that the Company would have if there
were no vacancies on the Board (the “Whole Board”), or
stockholders of the Company holding at least a majority of voting
power of the outstanding Voting Stock. For the purposes of this
Certificate of Incorporation, “Voting Stock” means stock
of the Company of any class or series entitled to vote generally in
the election of Directors.
At any
annual meeting or special meeting of stockholders of the Company,
only such business will be conducted or considered as has been
brought before such meeting in the manner provided in the Bylaws of
the Company.
Number, Election, and Terms of
Directors. Subject to the rights, if any, of the holders of
any series of Preferred Stock to elect additional Directors under
circumstances specified in a Preferred Stock Designation, the
number of the Directors of the Company will not be less than one
nor more than nine and will be fixed from time to time by, or in
the manner provided in, the Bylaws of the Company. Subject to
adjustment per the Bylaws, the number of Directors as of the date
of this Second Amended and Restated Certificate of Incorporation is
fixed at nine. At each annual meeting of the stockholders of the
Company, the successors to the Directors whose term expires at that
meeting will be elected by plurality vote of all votes cast at such
meeting to hold office for a term expiring at the annual meeting of
stockholders held in the year following the year of their election
and until their successors are elected and qualified. Election of
Directors of the Company need not be by written ballot unless
requested by the presiding officer or by the holders of a majority
of the Voting Stock present in person or represented by proxy at a
meeting of the stockholders at which Directors are to be elected.
If authorized by the Board, such requirement of a written ballot
shall be satisfied by a ballot submitted by electronic
transmission, provided that any such electronic transmission must
either set forth or be submitted with information from which it can
be determined that the electronic transmission was authorized by
the stockholder or proxy holder.
Newly Created Directorships and
Vacancies. Subject to the rights, if any, of the holders of
any series of Preferred Stock to elect additional Directors under
circumstances specified in a Preferred Stock Designation, newly
created directorships resulting from any increase in the number of
Directors and any vacancies on the Board resulting from death,
resignation, disqualification, removal, or other cause will be
filled solely by the affirmative vote of a majority of the
remaining Directors then in office, even though less than a quorum
of the Board, or by a sole remaining Director. Any Director elected
in accordance with the preceding sentence will hold office for the
remainder of the full term of the Director whose seat is being
filled and until such Director’s successor has been elected
and qualified. No decrease in the number of Directors constituting
the Board may shorten the term of any incumbent
Director.
To the
full extent permitted by the Delaware General Corporation Law and
any other applicable law currently or hereafter in effect, no
Director of the Company will be personally liable to the Company or
its stockholders for or with respect to any breach of fiduciary
duty or other act or omission as a Director of the Company. No
repeal or modification of this Article VIII will adversely affect
the protection of any Director of the Company provided hereby in
relation to any breach of fiduciary duty or other act or omission
as a Director of the Company occurring prior to the effectiveness
of such repeal or modification.
Right to Indemnification. Each
person who was or is made a party or is threatened to be made a
party to or is otherwise subject to or involved in any claim,
demand, action, suit or proceeding, whether civil, criminal,
administrative or investigative (a “Proceeding”), by reason
of the fact that he or she is or was a director or an officer of
the Company or is or was serving at the request of the Company as a
director, officer, employee or agent of another company or of a
partnership, joint venture, trust or other enterprise, including
service with respect to an employee benefit plan (an
“Indemnitee”), whether the
basis of such Proceeding is alleged action in an official capacity
as a director, officer, employee or agent or in any other capacity
while serving as a director, officer, employee or agent, shall be
indemnified by the Company to the fullest extent permitted or
required by the Delaware General Corporation Law and any other
applicable law, as the same exists or may hereafter be amended
(but, in the case of any such amendment, only to the extent that
such amendment permits the Company to provide broader
indemnification rights than such law permitted the Company to
provide prior to such amendment), against all expense, liability
and loss (including attorneys’ fees, judgments, fines, ERISA
excise taxes or penalties and amounts paid in settlement)
reasonably incurred or suffered by such Indemnitee in connection
therewith (“Indemnifiable Losses”);
provided, however, that, except as provided in Section 4 of this
Article IX with respect to Proceedings to enforce rights to
indemnification, the Company shall indemnify any such Indemnitee
pursuant to this Section 1 in connection with a Proceeding (or part
thereof) initiated by such Indemnitee only if such Proceeding (or
part thereof) was authorized by the Board.
Right to Advancement of
Expenses. The right to indemnification conferred in Section
1 of this Article IX shall include the right to advancement by the
Company of any and all expenses (including, without limitation,
attorneys’ fees and expenses) incurred in defending any such
Proceeding in advance of its final disposition (an
“Advancement of
Expenses”); provided, however, that, if the Delaware
General Corporation Law so requires, an Advancement of Expenses
incurred by an Indemnitee in his or her capacity as a director or
officer (and not in any other capacity in which service was or is
rendered by such Indemnitee, including without limitation service
to an employee benefit plan) shall be made pursuant to this Section
2 only upon delivery to the Company of an undertaking (an
“Undertaking”), by or on
behalf of such Indemnitee, to repay, without interest, all amounts
so advanced if it shall ultimately be determined by final judicial
decision from which there is no further right to appeal (a
“Final
Adjudication”) that such Indemnitee is not entitled to
be indemnified for such expenses under this Section 2. An
Indemnitee’s right to an Advancement of Expenses pursuant to
this Section 2 is not subject to the satisfaction of any standard
of conduct and is not conditioned upon any prior determination that
Indemnitee is entitled to indemnification under Section 1 of
this Article IX with respect to the related Proceeding or the
absence of any prior determination to the contrary.
Contract Rights. The rights to
indemnification and to the Advancement of Expenses conferred in
Sections 1 and 2 of this Article IX shall be contract rights and
such rights shall continue as to an Indemnitee who has ceased to be
a director, officer, employee or agent and shall inure to the
benefit of the Indemnitee’s heirs, executors and
administrators.
Right of Indemnitee to Bring
Suit. If a claim under Section 1 or 2 of this Article IX is
not paid in full by the Company within 60 calendar days after a
written claim has been received by the Company, except in the case
of a claim for an Advancement of Expenses, in which case the
applicable period shall be 20 calendar days, the Indemnitee
may at any time thereafter bring suit against the Company to
recover the unpaid amount of the claim. If successful in whole or
in part in any such suit, or in a suit brought by the Company to
recover an Advancement of Expenses pursuant to the terms of an
Undertaking, the Indemnitee shall be entitled to the fullest extent
permitted or required by the Delaware General Corporation Law, as
the same exists or may hereafter be amended (but, in the case of
any such amendment, only to the extent that such amendment permits
the Company to provide broader reimbursements of prosecution or
defense expenses than such law permitted the Company to provide
prior to such amendment), to be paid also the expense of
prosecuting or defending such suit. In (i) any suit brought by the
Indemnitee to enforce a right to indemnification hereunder (but not
in a suit brought by the Indemnitee to enforce a right to an
Advancement of Expenses) it shall be a defense that, and (ii) any
suit brought by the Company to recover an Advancement of Expenses
pursuant to the terms of an Undertaking, the Company shall be
entitled to recover such expenses, without interest, upon a Final
Adjudication that, the Indemnitee has not met any applicable
standard for indemnification set forth in the Delaware General
Corporation Law. Neither the failure of the Company (including its
Board of Directors or a committee thereof, its stockholders or
independent legal counsel) to have made a determination prior to
the commencement of such suit that indemnification of the
Indemnitee is proper in the circumstances because the Indemnitee
has met the applicable standard of conduct set forth in the
Delaware General Corporation Law, nor an actual determination by
the Company (including its Board of Directors or a committee
thereof, its stockholders or independent legal counsel) that the
Indemnitee has not met such applicable standard of conduct, shall
create a presumption that the Indemnitee has not met the applicable
standard of conduct or, in the case of such a suit brought by the
Indemnitee, be a defense to such suit. In any suit brought by an
Indemnitee to enforce a right to indemnification or to an
Advancement of Expenses hereunder, or brought by the Company to
recover an Advancement of Expenses hereunder pursuant to the terms
of an Undertaking, the burden of proving that the Indemnitee is not
entitled to be indemnified, or to such Advancement of Expenses,
shall be on the Company.
Non-Exclusivity of Rights. The
rights to indemnification and to the Advancement of Expenses
conferred in this Article IX shall not be exclusive of any other
right which any person may have or hereafter acquire under any
statute, the Company’s Certificate of Incorporation, By-laws,
agreement, vote of stockholders or disinterested directors or
otherwise. Nothing contained in this Article IX shall limit or
otherwise affect any such other right or the Company’s power
to confer any such other right.
Insurance. The Company may
maintain insurance, at its expense, to protect itself and any
director, officer, employee or agent of the Company or another
corporation, partnership, joint venture, trust or other enterprise
against any expense, liability or loss, whether or not the Company
would have the power to indemnify such person against such expense,
liability or loss under the Delaware General Corporation
Law.
No Duplication of Payments. The
Company shall not be liable under this Article IX to make any
payment to an Indemnitee in respect of any Indemnifiable Losses to
the extent that the Indemnitee has otherwise actually received
payment (net of any expenses incurred in connection therewith and
any repayment by the Indemnitee made with respect thereto) under
any insurance policy or from any other source in respect of such
Indemnifiable Losses.
IN
WITNESS WHEREOF, the undersigned has executed this Second Amended
and Restated Certificate of Incorporation this [__ day of
__________,] 2017.
[FUSION
TELECOMMUNICATIONS INTERNATIONAL, INC.]
Name:
Title:
ANNEX D
August
26, 2017
The
Board of Directors
Fusion
Telecommunications International, Inc.
420
Lexington Avenue, Suite 1718
New
York, NY 10170
Ladies
and Gentlemen:
We
understand that Fusion Telecommunications International, Inc. (the
“Company”) intends to
enter into a transaction with Birch Communications Holding, Inc.
(“BCHI”) pursuant to which
(i) BCHI will merge with and into Fusion BCHI Acquisition LLC, a
Delaware limited liability company (“Merger Sub”), a wholly
owned subsidiary of the Company, with the corporate existence of
BCHI terminating and Merger Sub being the surviving corporation,
and (ii) at the effective time of the merger, all of the shares of
BCHI common stock, par value $0.01 per share, issued and
outstanding immediately prior to the effective time of the merger
(other than shares of BCHI common stock held in the treasury of
BCHI or owned of record by any BCHI subsidiary which will be
cancelled) will be converted into the right to receive, in the
aggregate, in accordance with the Agreement and Plan of Merger by
and among the Company, Merger Sub and BCHI, dated as of August 26,
2017 (the “Agreement”), a number of
fully paid and non-assessable shares of Company common stock equal
to three times the Fully-Diluted Company Share Total (as such term
is defined in the Agreement) (the “Merger Consideration”).
The terms and conditions of the merger are set forth in more detail
in the Agreement.
We
further understand that:
(i)
As a condition to
the merger, the Company will either (i) divest its ownership
interest in Fusion Global Services LLC, a Delaware limited
liability company (“Fusion Global”) and
maintain the economic benefits of Fusion Global through a profit
share engagement with Fusion Global or (ii) dissolve Fusion Global
((i) or (ii), the “Fusion Global
Arrangement”);
(ii)
As a condition to
the merger, BCHI will divest itself of its consumer customers and
single line business customers in the United States and Canada
(collectively, the “Consumer
Business”);
(iii)
The Company will
refinance existing BCHI and Company indebtedness of approximately
$458 million; and
(iv)
Prior to the
merger, the holders of the Company Preferred Stock (as defined in
the Agreement) will be notified that they may convert their Company
Preferred Stock into Common Stock. At the effective time of the
merger, all of the Company Preferred Stock issued and outstanding
immediately prior to the effective time and that its holder has not
converted will terminate and such shares of Company Preferred Stock
will be cancelled.
For
purposes of this opinion, we have assumed, with your consent, that:
(a) the Fusion Global Arrangement will be consummated on or prior
to the effective time of the merger, (b) the Consumer Business will
be divested by BCHI on or prior to the effective time of the
merger, (c) all shares of Company Preferred Stock will be converted
into Common Stock on or prior to the effective time of the merger
and (d) the Fully Diluted Company Share Total immediately prior to
the effective time of the merger will be in the range of 24,000,000
to 25,000,000 shares of Company Common Stock and the Merger
Consideration will be in the range of 72,000,000 to 75,000,000
shares of Company Common Stock.
The
summary of the merger and the other transactions contemplated by
the Agreement set forth above is qualified in its entirety by the
terms of the Agreement.
We have
been requested by the Board of Directors of the Company to render
our opinion to it as to whether the aggregate Merger Consideration
to be paid by the Company in the merger is fair, from a financial
point of view, to the Company and to the holders of the
Company’s Common Stock (other than the Company and its
affiliates).
In
arriving at our opinion we reviewed and analyzed, among other
things:
(i)
the Agreement and
the specific terms of the merger and the other transactions
contemplated by the Agreement (including the Fusion Global
Arrangement and the divestiture of the Consumer
Business);
(ii)
recent historical
financial information of the Company, BCHI and Birch
Communications, Inc. (“BCI”), including (i) the
Company’s Annual Reports on Form 10-K for the fiscal years
ended December 31, 2012 through December 31, 2016 (which included
audited financial statements), and the Company’s Quarterly
Report on Form 10-Q for the quarter ending June 30, 2017 (which
included unaudited financial statements), filed with the Securities
and Exchange Commission, (ii) financial statements of BCHI for the
fiscal years ended December 31, 2014 through December 31, 2016 and
the six months ended June 30, 2017 (unaudited); consolidated
financial statements of BCI, a wholly-owned, direct subsidiary of
BCHI, and its subsidiaries for the fiscal years ended December 31,
2014 through December 31, 2016 (audited) and the six months ended
June 30, 2017 (unaudited);
(iii)
pro forma
historical financial information of the surviving company
(including the Consumer Business), including unaudited pro forma
financial statements of the surviving Company for the calendar year
ended December 31, 2016 and the latest twelve month
(“LTM”) period ended June 30, 2017, which the Company
has identified as the most current financial information
available;
(iv)
pro forma
historical financial information of the surviving company
(excluding the Consumer Business), including unaudited pro forma
financial statements of the surviving company for the calendar year
ended 2016 and the LTM period ended June 30, 2017, which the
Company has identified as the most current financial information
available;
(v)
certain internal
financial analysis and forecasts for BCHI (excluding the Consumer
Business) prepared by BCHI management, approved for our use by the
Company;
(vi)
certain internal
financial analyses and forecasts for the Company and the surviving
company prepared by management of the Company, in each case
approved for our use by the Company, including the cost savings
projected by the Company to result from the merger and the other
transactions contemplated by the Agreement (the
“Forecasts”);
(vii)
the trading history
of the Company’s common stock from August 26, 2014 to August
25, 2017 and a comparison of that trading history with those of
other companies that we deemed relevant;
(viii)
a comparison of the
historical financial results and present financial condition of the
Company with those of other companies that we deemed relevant;
and
(ix)
published estimates
of independent research analysts with respect to the future
financial performance and price targets for the
Company.
In
addition, we have had discussions with the management of the
Company concerning its and the surviving company’s business,
operations, assets, liabilities, financial condition and prospects
and undertaken such other studies, financial analyses and
investigations as we deemed appropriate.
In
arriving at our opinion, we have relied upon and assumed, without
independent verification, the accuracy and completeness of the
financial and other information and data furnished to or disclosed
to us by the Company or that were reviewed by us, and we have not
assumed and we do not assume any responsibility or liability for
independently verifying such information. We have further relied
upon the assurances of the management of the Company that they are
not aware of any facts or circumstances that would make such
information inaccurate or misleading. We have assumed, with your
consent, that the Forecasts have been reasonably prepared on a
basis reflecting the best currently available estimates and
judgments of the management of the Company. Our opinion is based on
the Forecasts provided to us by the Company. We assume no
responsibility for, and we express no view as to, any such
Forecasts or estimates or the assumptions on which they are based.
In arriving at our opinion, we have not conducted a physical
inspection of the properties and facilities of the Company, BCHI or
any of their respective subsidiaries and have not made or obtained
any valuations or appraisals of the assets or liabilities of the
Company, BCHI or any of their respective subsidiaries. Our opinion
necessarily is based upon market, economic and other conditions as
they exist on, and can be evaluated as of, the date of this letter.
We assume no responsibility for updating or revising our opinion
based on events or circumstances that may occur after the date of
this opinion. Furthermore, we have not evaluated, and are not
opining on, the solvency of the Company and its subsidiaries, BCHI
and its subsidiaries or the surviving company, under any state or
federal laws relating to bankruptcy, insolvency or similar
matters.
We have
assumed the accuracy of the representations and warranties
contained in the Agreement and that the merger and the other
transactions contemplated by the Agreement will be consummated
without waiver, modification or amendment of any material terms or
conditions set forth in the Agreement. We have also assumed that
all material governmental, regulatory and third party approvals,
consents and authorizations and releases necessary for the
consummation of the merger and the other transactions contemplated
by the Agreement will be obtained prior to completion of the
various parts of the merger and the other transactions contemplated
by the Agreement. We do not express any opinion as to legal,
regulatory, tax or accounting matters, as to which we understand
the Company has obtained such advice as it deemed necessary from
qualified professionals.
We
express no view as to, and our opinion does not address, any terms
or other aspects or implications of the merger or the other
transactions contemplated by the Agreement (other than the fairness
of the Merger Consideration from a financial point of view to be
paid by the Company in the merger to the extent expressly provided
herein) or any aspect or implication of any other agreement,
arrangement or understanding entered into in connection with the
merger or the other transactions contemplated by the Agreement,
including, without limitation, the fairness of the amount or nature
of the compensation resulting from the merger or the other
transactions contemplated by the Agreement to any officers,
directors or employees of the Company, or any class of such
persons. In addition, we express no view as to, and our opinion
does not address, the underlying business decision of the Company
to proceed with or effect the merger or the other transactions
contemplated by the Agreement nor does our opinion address the
relative merits of the merger or the other transactions
contemplated by the Agreement as compared to any alternative
business strategies that might exist for the Company or the effect
of any other transaction in which the Company may
engage.
Based
upon and subject to the foregoing, we are of the opinion that the
aggregate Merger Consideration to be paid to the stockholders of
BCHI in the merger is fair, from a financial point of view, to the
Company and to the holders of the Common Stock of the Company
(other than the Company and its affiliates).
We will
receive a fee for our services in connection with this opinion, a
portion of which is payable upon rendering this opinion. In
addition, we have acted as financial advisor to the Company in
connection with the merger and will be separately compensated for
those services, a substantial portion of which will be conditioned
upon the closing of the merger. The Company has agreed to reimburse
our expenses and indemnify us for certain liabilities that may
arise out of our engagements. FTICA is a wholly-owned subsidiary of
FTI Consulting, Inc. (“FTI”). Neither FTICA nor FTI
have performed any services to the Company or its affiliates during
the past two years. FTI has provided various services to BCHI and
its affiliates in the past, and we expect to perform such services
to the Company in the future, and have received, and expect to
receive, customary fees for such services. Specifically, in the
past two years, we have performed business and operational advisory
services for BCHI. Neither FTI nor FTICA has provided any services
to BCHI in connection with the merger or the transactions
contemplated by the Agreement.
FTI,
its subsidiaries and its affiliates engage in a wide range of
businesses from investment banking, asset management and other
financial and non-financial advisory services. In the ordinary
course of our business, we and our affiliates may actively advise
our customers with respect to trades or other transactions in
equity, debt and/or other securities (and any derivatives thereof)
and financial instruments (including loans and other obligations)
of the Company and BCHI and certain of its affiliates for the
accounts of our customers.
This
opinion, the issuance of which has been approved by our Fairness
Committee, is for the use and benefit of the Board of Directors of
the Company and is rendered to the Board of Directors in connection
with its consideration of the merger and the other transactions
contemplated by the Agreement. This opinion is not intended to be
and does not constitute a recommendation to any stockholder of the
Company as to how such stockholder should vote with respect to the
merger and the other transactions contemplated by the
Agreement.
Very
truly yours,
/s/ FTI Capital Advisors, LLC
FTI
Capital Advisors, LLC