As filed with the Securities and Exchange Commission on
December 22 , 2008.
Registration No. 333-154482
UNITED STATES SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C. 20549
FORM S-4
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF
1933
RENAISSANCE ACQUISITION CORP.
(Exact Name of Each Registrant as Specified in Its
Charter)
Delaware
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6770
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20-4720414
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(State or Other
Jurisdiction
of Incorporation or Organization)
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(Primary Standard Industrial Classification Code Number)
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(I.R.S. Employer
Identification Number)
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50 East Sample Road, Suite 400
Pompano Beach,
Florida 33064
(954) 784-3031
(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrants Principal
Executive Offices)
Barry W. Florescue
Chairman and Chief Executive
Officer
50 East Sample Road, Suite 400
Pompano Beach, Florida 33064
(954) 784-3031
(Name, Address, Including Zip Code, and
Telephone Number, Including Area Code, of Agent for Service)
Charles I.
Weissman
Geraldine A. Sinatra
Dechert LLP
1095 Avenue of the Americas
New York, NY 10036-6797
(212) 698-3500
Fax: (212)
698-3599
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John J. Concannon
Laurie A. Cerveny
Bingham McCutchen LLP
One Federal Street
Boston, MA 02110-1726
(617) 951-8000
Fax: (617) 951-8736
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Approximate
date of commencement of proposed sale of the securities to the public:
As soon as practicable after this Registration Statement becomes effective
and all other conditions to the merger contemplated by the agreement and plan of merger and Amendment No. 1 to the agreement and plan of merger
included as Annex A and Annex A-1 to the proxy statement/prospectus forming part of this registration statement have been satisfied or
waived.
If the securities being
registered on this form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G,
check the following box: [ ]
If this form is filed to register
additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement for the same offering. [ ]
If this form is a post effective
amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of
the earlier effective registration statement for the same offering. [ ]
Indicate by check mark whether
the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated
filer [ ]
Non-accelerated filer [X]
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Accelerated Filer [ ]
Smaller reporting company [ ]
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(Do not
check if a smaller reporting company)
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CALCULATION OF REGISTRATION FEE
Title of Each Class of Security
Being Registered
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Amount Being
Registered
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Proposed Maximum
Offering Price
Per Security
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Proposed Maximum
Aggregate Offering
Price
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Amount of Registration
Fee
(4)
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Shares of Common Stock
(1)
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1 4 ,460,000
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$
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5.57
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(2)
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$
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8 0, 542 ,200
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(2)
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$
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3 , 165 . 3 0
(8
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Shares of Common Stock
(3)
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13 ,950,000
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$
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5.57
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(2)
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$
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77 , 70 1,500
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(2)
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$
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3 , 053 . 7 0
(8
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Shares of Common Stock
(5)
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8,500,000
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$
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5.57
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(2)
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$
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47,345,000
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(2)
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$
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1,860.66
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(8)
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Shares of Common Stock
(6)
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2,500,000
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$
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5.57
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(2)
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$
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13,925,000
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(2)
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$
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547.25
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(8)
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Shares of Common Stock
(7)
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1,000,000
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$
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5.57
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(2)
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$
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5,570,00
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(2)
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$
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218.90
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(8)
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Total Fee Due
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$
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8,845. 81
(8
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(1)
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Represents shares of common stock to be released to the First
Communications, Inc. stockholders upon consummation of the transaction with Renaissance Acquisition Corp.
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(2)
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Based on the market price on October 13, 2008 of the common
stock of Renaissance Acquisition Corp. pursuant to Rule 457(f)(1).
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(3)
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Represents shares of common stock issuable to the First
Communications, Inc. stockholders if certain EBITDA milestones are achieved.
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(4)
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Determined in accordance with Section 6(b) of the Securities Act
at a rate equal to $39.30 per $1,000,000 of the proposed maximum aggregate offering price.
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(5)
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Represents shares of common stock to be released to the First
Communications, Inc. stockholders if Renaissance Acquisition Corp.s warrant redemption right is triggered.
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(6)
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Represents shares of common stock issuable to certain First
Communications, Inc. warrant holders upon exercise of the warrants.
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(7)
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Represents shares of common stock issuable to certain First
Communications, Inc. warrant holders if the warrants are exercised and certain EBITDA milestones are achieved.
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The
registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933, as amended, or until the registration statement shall become effective on such date as the SEC, acting pursuant to said
Section 8(a), may determine.
RENAISSANCE ACQUISITION CORP.
50 EAST SAMPLE ROAD,
SUITE 400
POMPANO BEACH, FL 33064
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
OF
RENAISSANCE ACQUISITION CORP.
TO BE HELD ON
To the Stockholders of Renaissance Acquisition
Corp.:
NOTICE IS HEREBY GIVEN that the
special meeting of stockholders of Renaissance Acquisition Corp. (Renaissance), a Delaware corporation, will be held at 8:30 a.m. Eastern
time, on
, at 50 East
Sample Road, Suite 400, Pompano Beach, FL 33064. You are cordially invited to attend the meeting, which will be held for the following
purposes:
(1)
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to consider and vote upon a proposal to approve the
a greement and p lan of m erger, dated as of September 13, 2008, as amended on December 22, 2008, (collectively, the
Merger Agreement), among Renaissance, Renaissances wholly-owned subsidiaries formed for the purposes of consummating the merger,
FCI Merger Sub I, Inc. (Merger Sub I) and FCI Merger Sub II, LLC (Merger Sub II), First Communications, Inc. (First
Communications) and The Gores Group, LLC, solely in its capacity as Stockholders Representative (Stockholders
Representative), which, among other things, provides for the merger of Merger Sub I with and into First Communications, with First Communications
continuing as the surviving corporation (First Merger) and First Communications immediately thereafter merging with and into Merger Sub II,
with Merger Sub II continuing as the surviving limited liability company (Second Merger, and together with the First Merger, the
Merger) we refer to this proposal as the merger proposal;
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(2)
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to consider and vote upon a proposal to amend and restate
Renaissances charter to (i) change Renaissances corporate name to First Communications, Inc., (ii) increase the number of
authorized shares of capital stock, (iii) provide for the companys perpetual existence, (iv) provide for the classification of the board of
directors into three classes, (v) delete Article Sixth of Renaissances current amended and restated certificate of incorporation and (vi) make
certain other changes in tense and number that Renaissances board of directors believes are immaterial we refer to this proposal as the
charter amendment proposal;
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(3)
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to consider and vote upon a proposal to approve the 2008 Equity
Incentive Plan (the 2008 Plan), which is an equity-based incentive compensation plan for directors, officers, employees and certain
consultants, pursuant to which Renaissance will reserve up to 3,000,000 shares of common stock for issuance under the 2008 Plan we refer to this
proposal as the incentive compensation plan proposal;
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(4)
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to consider and vote upon election of nine directors to
Renaissances board of directors, effective immediately following and contingent upon closing of the Merger, of whom Barry W. Florescue, Theodore
V. Boyd and Joseph R. Morris will serve until the annual meeting to be held in 2009, Raymond Hexamer, Marshall B. Belden Jr. and Mark R. Stone will
serve until the annual meeting to be held in 2010 and Richard Bloom, Scott M. Honour and Mark T. Clark will serve until the annual meeting to be held
in 2011 and, in each case, until their successors are elected and qualified we refer to this proposal as the director election proposal;
and
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(5)
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to consider and vote upon a proposal to adjourn the special
meeting to a later date or dates, if necessary, to permit further solicitation and vote of proxies if, based upon the tabulated vote at the time of the
special meeting, Renaissance is not authorized to consummate the Merger we refer to this proposal as the adjournment proposal.
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These items of business are
described in the attached proxy statement/prospectus, which we encourage you to read in its entirety before voting. Only holders of record of
Renaissance common stock at the close of business
on
are entitled to notice
of the special meeting and to vote and have their votes counted at the special meeting and any adjournments or postponements of the special
meeting.
Renaissances board of
directors has determined that the merger proposal and the other proposals are fair to and in the best interests of Renaissance and its stockholders and
unanimously recommends that you vote or give instruction to vote FOR the approval of all of the proposals and all of the persons nominated
by Renaissances management for election as directors.
All Renaissance stockholders are
cordially invited to attend the special meeting in person. To ensure your representation at the special meeting, however, you are urged to complete,
sign, date and return the enclosed proxy card as soon as possible. If you are a stockholder of record of Renaissance common stock, you may also cast
your vote in person at the special meeting. If your shares are held in an account at a brokerage firm or bank, you must instruct your broker or bank on
how to vote your shares or, if you wish to attend the meeting and vote in person, obtain a proxy from your broker or bank. If you do not vote or do not
instruct your broker or bank how to vote, it will have the same effect as voting against the charter amendment proposal but will have no effect on the
merger proposal, the incentive compensation plan proposal, the director election proposal or the adjournment proposal.
A complete list of Renaissance
stockholders of record entitled to vote at the special meeting will be available for ten days before the special meeting at the principal executive
offices of Renaissance for inspection by stockholders during ordinary business hours for any purpose germane to the special meeting.
Your vote is important regardless
of the number of shares you own. Whether you plan to attend the special meeting or not, please sign, date and return the enclosed proxy card as soon as
possible in the envelope provided. If your shares are held in street name or are in a margin or similar account, you should contact your
broker to ensure that votes related to the shares you beneficially own are properly counted.
Thank you for your participation.
We look forward to your continued support.
By Order of the Board of Directors
Barry W. Florescue
Chairman and Chief Executive Officer
IF YOU RETURN YOUR PROXY CARD
WITHOUT AN INDICATION OF HOW YOU WISH TO VOTE, YOUR SHARES WILL BE VOTED IN FAVOR OF EACH OF THE PROPOSALS AND YOU WILL NOT BE ELIGIBLE TO HAVE YOUR
SHARES CONVERTED INTO A PRO RATA PORTION OF THE TRUST ACCOUNT IN WHICH A SUBSTANTIAL PORTION OF THE NET PROCEEDS OF RENAISSANCES IPO ARE HELD.
YOU MUST AFFIRMATIVELY VOTE AGAINST THE MERGER PROPOSAL AND DEMAND THAT RENAISSANCE CONVERT YOUR SHARES INTO CASH NO LATER THAN THE CLOSE OF THE VOTE
ON THE MERGER PROPOSAL TO EXERCISE YOUR CONVERSION RIGHTS. IN ORDER TO CONVERT YOUR SHARES, YOU MUST CONTINUE TO HOLD YOUR SHARES THROUGH THE CLOSING
DATE OF THE MERGER AND THEN TENDER YOUR STOCK TO RENAISSANCES STOCK TRANSFER AGENT WITHIN THE TIME PERIOD SPECIFIED IN A NOTICE YOU WILL RECEIVE
FROM OR ON BEHALF OF RENAISSANCE, WHICH PERIOD WILL NOT BE LESS THAN 20 DAYS. YOU MAY TENDER YOUR STOCK BY EITHER DELIVERING YOUR STOCK CERTIFICATE TO
THE TRANSFER AGENT OR BY DELIVERING YOUR SHARES ELECTRONICALLY USING DEPOSITORY TRUST COMPANYS DWAC (DEPOSIT WITHDRAWAL AT CUSTODIAN) SYSTEM. IF
THE MERGER IS NOT COMPLETED, THEN THESE SHARES WILL NOT BE CONVERTED INTO CASH. IF YOU HOLD THE SHARES IN STREET NAME, YOU WILL NEED TO INSTRUCT THE
ACCOUNT EXECUTIVE AT YOUR BANK OR BROKER TO WITHDRAW THE SHARES FROM YOUR ACCOUNT IN ORDER TO EXERCISE YOUR CONVERSION RIGHTS. SEE SPECIAL
MEETING OF RENAISSANCE STOCKHOLDERS CONVERSION RIGHTS FOR MORE SPECIFIC INSTRUCTIONS.
The information in this proxy statement/prospectus is not
complete and may be changed. Renaissance may not issue these securities until the registration statement filed with the Securities and Exchange
Commission is effective. This proxy statement/prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
SUBJECT TO AMENDMENT AND COMPLETION,
DATED
PROXY STATEMENT FOR SPECIAL MEETING OF
STOCKHOLDERS OF
RENAISSANCE ACQUISITION CORP.
PROSPECTUS FOR UP TO 40,410,000 SHARES
OF COMMON STOCK
Renaissance Acquisition Corp.
(Renaissance) is pleased to report that its board of directors and the board of directors and stockholders of First Communications, Inc.
(First Communications) have approved an agreement and plan of merger and Amendment No. 1 to the agreement and plan of merger . The
agreement , as amended, (the Merger Agreement) provides for a merger of FCI Merger Sub I, Inc. (Merger Sub I) with and
into First Communications, with First Communications continuing as the surviving corporation (First Merger) and First Communications
immediately thereafter merging with and into FCI Merger Sub II, LLC (Merger Sub II), with Merger Sub II continuing as the surviving limited
liability company (Second Merger, and together with the First Merger, the Merger). The proposal to approve the Merger Agreement
(referred to herein as the merger proposal) and the other proposals discussed in this proxy statement/prospectus will be presented at the special
meeting of stockholders of Renaissance scheduled to be held on
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If the Merger is completed, First
Communications stockholders, including certain warrant holders who make an irrevocable cashless exercise of their warrants immediately prior to
and contingent upon the consummation of the Merger (the T1 Warrant Holders), will receive an aggregate of 1 4 ,460,000 shares of
Renaissance common stock (the Initial Shares) and the right to receive up to an aggregate of an additional (i) 13 ,950,000 shares of
Renaissance common stock if a performance milestone is achieved before December 3 1 , 2011 (EBITDA Condition) and (ii)
8,500,000 shares of Renaissance common stock if the last sales price of Renaissance common stock has been at least $8.50 per share on 20 trading days
within any 30 trading day period ending on January 28, 2011 (Warrant Condition). Based on the closing market price of $5.80 per share on
September 12, 2008, the last trading day prior to the announcement of the Merger Agreement, the Initial Shares had an aggregate value of
$ 83 , 8 68,000. Based on the closing market price of $5. 81 per share on December 1 5 , 2008, the Initial Shares had an aggregate
value of $ 84 , 01 2,600. In addition, holders of First Communications Series A Preferred Stock will receive an aggregate of $15.0 million in
cash consideration, together with an accrued dividend of 12% per annum, pro rated and calculated from September 28, 2008 in exchange for their shares
of Series A Preferred Stock.
Renaissances units, common
stock and warrants are currently quoted on the American Stock Exchange under the symbols RAK.U, RAK and RAK.WS, respectively. Renaissance intends to
apply for listing of its securities on the Nasdaq Stock Market (Nasdaq). If Renaissances securities are listed on Nasdaq, the symbols
will change to symbols that are reasonably representative of the post-merger combined companys corporate name.
Renaissance is providing this
proxy statement/prospectus and accompanying proxy card to its stockholders in connection with the solicitation of proxies to be voted at the special
meeting of stockholders of Renaissance and at any adjournments or postponements of the special meeting. Unless the context requires otherwise,
references to you are references to Renaissance stockholders, and references to we, us and our are to
Renaissance. This proxy statement/prospectus also constitutes a prospectus of Renaissance for the securities of Renaissance to be issued to
stockholders of First Communications pursuant to the Merger.
This proxy statement/prospectus
provides you with detailed information about the Merger and other matters to be considered by the Renaissance stockholders. Renaissance encourages you
to carefully read the entire document
and the documents
incorporated by reference.
IN PARTICULAR, YOU SHOULD CAREFULLY CONSIDER THE MATTERS DISCUSSED UNDER
RISK FACTORS
BEGINNING ON
PAGE 27 .
Renaissance Stockholders
Your vote is very important.
Whether or not you expect to attend the special meeting, the details of which are described on the following
pages, please complete, date, sign and promptly return the accompanying proxy in the enclosed envelope.
Neither the Securities and
Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this
proxy statement/prospectus. Any representation to the contrary is a criminal offense.
This proxy statement/prospectus
is dated
, and is first
being mailed on or about
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This proxy
statement/prospectus incorporates important business and financial information about Renaissance and First Communications that is not included in or
delivered with this document. This information is available without charge to security holders upon written or oral request. To make this request, or
if you would like additional copies of this proxy statement/prospectus or have questions about the Merger, you should contact Mark Seigel, Secretary,
Renaissance Acquisition Corp., 50 East Sample Road, Pompano Beach, FL 33064, Telephone (954) 784-3031.
To obtain timely delivery of
requested materials, security holders must request the information no later than five business days before the date they submit their proxies or attend
the special meeting. The latest date to request the information to be received timely is
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TABLE OF CONTENTS
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Page
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SUMMARY OF
THE MATERIAL TERMS OF THE MERGER
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1
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QUESTIONS AND
ANSWERS FOR RENAISSANCE STOCKHOLDERS ABOUT THE PROPOSALS
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4
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SUMMARY OF
THE PROXY STATEMENT/PROSPECTUS
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9
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SELECTED
HISTORICAL FINANCIAL INFORMATION
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23
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SELECTED
UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS
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25
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RISK FACTORS
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27
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FORWARD-LOOKING STATEMENTS
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50
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SPECIAL
MEETING OF RENAISSANCE STOCKHOLDERS
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52
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THE MERGER
PROPOSAL
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58
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THE MERGER
AGREEMENT
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8 6
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UNAUDITED PRO
FORMA CONDENSED COMBINED FINANCIAL INFORMATION
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9 6
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THE CHARTER
AMENDMENT PROPOSAL
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10 8
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THE INCENTIVE
COMPENSATION PLAN PROPOSAL
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1 10
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THE DIRECTOR
ELECTION PROPOSAL
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11 7
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THE
ADJOURNMENT PROPOSAL
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12 3
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OTHER
INFORMATION RELATED TO RENAISSANCE
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12 4
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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF RENAISSANCE
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1 30
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BUSINESS OF
FIRST COMMUNICATIONS
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13 4
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FIRST
COMMUNICATIONS MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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1 52
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EXECUTIVE
COMPENSATION
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16 4
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REGULATION
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17 3
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COMPARISON OF
RIGHTS OF RENAISSANCE AND FIRST COMMUNICATIONS STOCKHOLDERS
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1 81
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BENEFICIAL
OWNERSHIP OF SECURITIES
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1 91
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TRANSACTIONS
WITH RELATED PERSONS
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19 5
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DESCRIPTION
OF RENAISSANCE COMMON STOCK AND OTHER SECURITIES
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19 8
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PRICE RANGE
OF FIRST COMMUNICATIONS SECURITIES AND DIVIDENDS
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202
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PRICE RANGE
OF RENAISSANCE SECURITIES AND DIVIDENDS
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20 3
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APPRAISAL
RIGHTS
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20 4
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STOCKHOLDER
PROPOSALS
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20 5
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LEGAL MATTERS
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20 5
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EXPERTS
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20 5
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DELIVERY OF
DOCUMENTS TO STOCKHOLDERS
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20 6
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WHERE YOU CAN
FIND MORE INFORMATION
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20 7
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INDEX TO
FINANCIAL STATEMENTS
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F-1
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ANNEXES
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AGREEMENT AND
PLAN OF MERGER
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A-1
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AMENDMENT
NO. 1 TO THE AGREEMENT AND PLAN OF MERGER
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A-1-1
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AMENDED AND
RESTATED CERTIFICATE OF INCORPORATION
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B-1
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2008 EQUITY
INCENTIVE PLAN
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C-1
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OPINION OF
HOULIHAN SMITH & COMPANY, INC.
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D-1
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FORM OF
ESCROW AGREEMENT
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E-1
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i
SUMMARY OF THE MATERIAL TERMS OF THE
MERGER
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The parties to the Merger are Renaissance, Merger Sub I, Merger
Sub II, First Communications and The Gores Group, LLC, solely in its capacity as Stockholders Representative (Stockholders
Representative). Pursuant to the Merger Agreement, Merger Sub I will merge with and into First Communications, with First Communications
continuing as the surviving corporation and First Communications will immediately thereafter merge with and into Merger Sub II, with Merger Sub II
continuing as the surviving limited liability company. See the section entitled
The Merger Proposal
.
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First Communications is a leading facilities-based competitive
communications and wireless communication tower operator providing services throughout the Midwest and Mid-Atlantic United States. See the section
entitled
Business of First Communications
.
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The First Communications stockholders including certain warrant
holders who make an irrevocable cashless exercise of their warrants immediately prior to and contingent upon the consummation of the Merger (each a
First Communications Holder and collectively, the First Communications Holders) will receive an aggregate of 1 4 ,460,000
shares of Renaissance common stock (the Initial Shares) and the right to receive up to an aggregate of an additional (i)
13 ,950,000 shares of Renaissance common stock if a performance milestone is achieved before December 3 1 , 2011 and (ii) 8,500,000
shares of Renaissance common stock if the last sales price of Renaissance common stock has been at least $8.50 per share, on 20 trading days within any
30 trading day period ending on January 28, 2011. Based on the closing market price of $5.80 per share on September 12, 2008, the last trading day
prior to the announcement of the Merger Agreement, the Initial Shares had an aggregate value of $ 83 , 8 68,000. Based on the closing market
price of $5. 81 per share on December 1 5 , 2008, the Initial Shares had an aggregate value of $ 84 , 01 2,600. In addition,
holders of First Communications Series A Preferred Stock will receive an aggregate of $15.0 million in cash consideration, together with an accrued
dividend of 12% per annum, pro rated and calculated from September 28, 2008 in exchange for their shares of Series A Preferred Stock. If a fractional
share is required to be issued to a First Communications Holder, Renaissance will issue such First Communications Holder an amount of cash (rounded to
the nearest whole cent), without interest, equal to the product of such fraction multiplied by $6.00. Upon completion of the Merger, assuming that none
of the shares Renaissance issued in its initial public offering (the Public Shares) are converted into cash, the First Communications
Holders will own approximately 4 2 . 6 % of the shares of Renaissance common stock outstanding immediately after the closing of the Merger
and the other Renaissance stockholders will own approximately 5 7 . 4 % of Renaissances outstanding common stock. If 19.99% of the
Public Shares are converted into cash, such percentages would be 47 . 6 % and 52 . 4 %, respectively. The foregoing does not take
into account shares that would be released to First Communications Holders upon achievement of the EBITDA Condition or the Warrant Condition or the
shares that would be released from escrow to RAC Partners, LLC (RAC Partners) upon achievement of the EBITDA Condition as described
below . If none of the Public Shares are converted and thereafter the EBITDA Condition and Warrant Condition are satisfied, the current Renaissance
stockholders and the First Communications Holders would own 36.4% and 63.6%, respectively, assuming that no other shares are issued. If 19.99% of the
Public Shares are converted, such percentages would be 32.3% and 67.7%, respectively. See the section entitled
Summary of the Proxy
Statement/Prospectus The Merger.
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In addition to the consideration to be issued to First
Communications stockholders described above, pursuant to an amended and restated stock escrow agreement (the Amended and Restated Stock
Escrow Agreement) to be delivered to First Communications at closing, RAC Partners, an entity controlled by Barry W. Florescue,
Renaissances chairman and chief executive officer and of which Richard Bloom and Logan D. Delany, Jr., Renaissance directors and/or
executive officers, are members, has agreed that 2,000,000 of the shares of Renaissance common stock that it acquired prior to
Renaissances initial public offering (IPO), which are being held in an escrow account in connection with Renaissances
IPO, will be released to RAC Partners only in the event that the EBITDA Condition is satisfied. In the event the EBITDA Condition is not
satisfied, such shares will be released to the post-merger combined company and cancelled.
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The Merger Agreement provides that either Renaissance or First
Communications may terminate the agreement if the business combination is not consummated by January 29, 2009. The Merger Agreement may also be
terminated, among other reasons, upon material breach of a party. See the section entitled
The Merger Agreement
Termination.
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The Renaissance stockholders must approve certain amendments to
the amended and restated certificate of incorporation of Renaissance, which include (i) changing Renaissances corporate name to First
Communications, Inc., (ii) increasing the number of authorized shares of capital stock, (iii) providing for the companys perpetual
existence, (iv) providing for the classification of the board of directors into three classes, (v) deletion of Article Sixth of Renaissances
current amended and restated certificate of incorporation and (vi) making certain other changes in tense and number that Renaissances board of
directors believes are immaterial (referred to herein as the charter amendment proposal). The stockholders of Renaissance will also vote on proposals
to approve the 2008 Equity Incentive Plan (the 2008 Plan) (referred to herein as the incentive compensation plan proposal), to elect nine
directors to Renaissances board of directors (referred to herein as the director election proposal) and, if necessary, to approve an adjournment
of the meeting (referred to herein as the adjournment proposal). See the sections entitled
The Charter Amendment Proposal, The
Incentive Compensation Plan Proposal,
The Director Election Proposal
and
The Adjournment
Proposal.
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After the Merger, if managements nominees are elected, the
directors of Renaissance following the Merger will be Theodore V. Boyd, Raymond Hexamer, Joseph R. Morris, Marshall B. Belden Jr., Mark T. Clark, Scott
M. Honour and Mark R. Stone, who are designees of certain of the First Communications stockholders, and Barry W. Florescue and Richard A. Bloom, who
are designees of Renaissance. Barry W. Florescue is the chairman of the board, chief executive officer and a current director of Renaissance and
Richard A. Bloom is Renaissances chief operating officer.
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Following closing of the Merger, certain officers of First
Communications will become officers of Renaissance, holding positions similar to the positions such officers held with First Communications. These
officers are Raymond Hexamer, who will become chief executive officer of Renaissance, Joseph R. Morris, who will become chief operating and chief
financial officer of Renaissance, Richard J. Buyens, who will become president of Renaissance and David Johnson, II who will become senior vice
president of sales and marketing of Renaissance. Each of these persons is currently an executive officer of First Communications and has an employment
agreement with First Communications which will be assumed by Renaissance as a result of the Merger. See the section entitled
Executive
Compensation Post-Merger Employment Agreements
.
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After the Merger, Renaissance anticipates having approximately
$
million in cash available from the trust account (Trust Account) it
established in connection with its IPO completed on February 1, 2007. If you are a holder of Public Shares, you have the right to vote against the
merger proposal and demand that Renaissance convert your shares into a pro rata portion of the Trust Account. Renaissance sometimes refers to these
rights to vote against the Merger and demand conversion of the Public Shares into a pro rata portion of the Trust Account as conversion rights. If you
are a holder of Public Shares and wish to exercise your conversion rights, you must (i) vote against the merger proposal, (ii) demand that Renaissance
convert your shares into cash, (iii) continue to hold your shares through the closing of the Merger and (iv) deliver your stock to Renaissances
transfer agent physically or electronically using Depository Trust Companys DWAC System within the period specified in a notice you will receive
from or on behalf of Renaissance, which period will be not less than 20 days. Any action that does not include an affirmative vote against the Merger
will prevent you from exercising your conversion rights. Your vote on any proposal other than the merger proposal will have no impact on your right to
seek conversion. For more information about exercising your conversion rights see the section entitled,
Questions and Answers for Renaissance
Stockholders about the ProposalsHow do I exercise my conversion rights?
If the maximum number of shares issued in its IPO are converted
(3,587,999 shares), Renaissance may still consummate the Merger. Such payments would total approximately
$
million based on a conversion price of
$
per share.
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When you consider the recommendation of Renaissances board
of directors in favor of approval of the merger proposal, you should keep in mind that Renaissances executive officers and members of
Renaissances board have interests in the Merger that are different from, or in addition to, your interests as a stockholder. Amongst others,
these interests include: (i) the 3,900,000 shares of common stock held by Renaissances directors and officers that were acquired before the IPO
will be worthless if the Merger is not consummated because Renaissances directors and officers are not entitled to receive any of the proceeds
with respect to such shares in the event of a liquidation; (ii) the 4,666,667 warrants issued by Renaissance to RAC Partners, an entity controlled by
Barry W. Florescue, Renaissances chairman and chief executive officer, and Charles Miersch and Morton Farber, two of Renaissances
directors, will become worthless if the Merger is not consummated by January 29, 2009; (iii) Barry W. Florescue and Richard A. Bloom will be directors
of Renaissance if the Merger is consummated and will receive any cash fees, stock options or stock awards that the Renaissance board of directors
determines to pay to its non-executive directors; (iv) if Renaissance liquidates, Barry W. Florescue will be personally liable to ensure that the
proceeds in the Trust Account are not reduced by the claims of target businesses or vendors or other entities that are owed money by Renaissance for
services rendered or contracted for or products sold to Renaissance; and (v) as of December 1 5 , 2008, RAC Partners had purchased 8 1 1,269
shares of Renaissance common stock for an aggregate purchase price of $4,5 95,532 and at an average purchase price per share of $5.66 pursuant to
a share purchase plan entered into prior to Renaissances IPO, under which RAC Partners placed a limit order for $12 million of Renaissance common
stock commencing ten business days after Renaissance filed its Current Report on Form 8-K announcing its execution of the Merger Agreement, and RAC
Partners may vote these shares on the Merger any way it chooses, which may result in RAC Partners being able to influence the outcome of the merger
proposal and the other proposals under consideration For more information see the section entitled,
The Merger Proposal Interests of
Renaissances Directors and Officers in the Merger.
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QUESTIONS AND ANSWERS
FOR RENAISSANCE STOCKHOLDERS
ABOUT THE PROPOSALS
Why am I receiving this proxy
statement/prospectus?
Renaissance and First
Communications have agreed to a business combination under the terms of the a greement and p lan of m erger and Amendment No. 1 to
the agreement and plan of merger that are described in this proxy statement/prospectus. This agreement , as amended, is referred to as
the Merger Agreement. A copy of the a greement and plan of merger and Amendment No. 1 to the agreement and plan of merger , which
are hereby incorporated by reference, are attached to this proxy statement/prospectus as Annex A and Anne x A-1,
respectively , which Renaissance encourages you to read.
You are being asked to
consider and vote upon a proposal to approve the Merger Agreement, which, among other things, provides for the merger of Merger Sub I with and into
First Communications, with First Communications continuing as the surviving corporation and First Communications immediately thereafter merging with
and into Merger Sub II, with Merger Sub II continuing as the surviving limited liability company. You are also being requested to vote to approve (i)
the amendment and restatement of Renaissances amended and restated certificate of incorporation to (a) change Renaissances corporate name
to First Communications, Inc., (b) increase the number of authorized shares of capital stock, (c) provide for the companys perpetual
existence, (d) provide for the classification of the board of directors into three classes, (e) delete Article Sixth of Renaissances current
amended and restated certificate of incorporation and (f) make certain other changes in tense and number that Renaissances board of directors
believes are immaterial; (ii) the 2008 Plan, (iii) the election of nine directors and (iv) the adjournment proposal. With respect to the charter
amendment proposal, Article Sixth and its preamble relate to the operation of Renaissance as a blank check company prior to the consummation of a
business combination and will not be applicable after consummation of the merger. Section 6.1 requires that the business combination be submitted to
Renaissances stockholders for approval under the Delaware General Corporation Law (DGCL) and be authorized by the vote of a majority
of the Public Shares present in person or by proxy and eligible to vote thereon, provided that the business combination shall not be consummated if the
holders of 20% or more of the Public Shares exercise their conversion rights. Section 6.2 specifies the procedures for exercising conversion rights.
Section 6.3 provides that holders of Public Shares are entitled to receive distributions from the Renaissances Trust Account only if a business
combination is not consummated by the Termination Date (January 29, 2009) or by demanding conversion in accordance with Section 6.2.
Section 6.4 provides that Renaissance must consummate the business combination, as defined in the preamble of Article Sixth, before Renaissance can
consummate any other type of business combination. Section 6.5 permits Renaissance to have a classified board of directors prior to the business
combination. Accordingly, Article Sixth and its preamble will serve no further purpose. See the section entitled
The Charter Amendment
Proposal.
The approval of the merger
proposal and the charter amendment proposal is a condition to the consummation of the Merger. If the merger proposal is not approved, the other
proposals will not be presented to the stockholders for a vote. If the charter amendment proposal is not approved, the other proposals will not be
presented to the stockholders for a vote and the Merger will not be consummated. Renaissances amended and restated certificate of incorporation,
as it will appear if the charter amendment proposal is approved, is attached to this proxy statement/prospectus as Annex B and you are encourage to
read it in its entirety. The 2008 Plan is attached to this proxy statement/prospectus as Annex C and you are encouraged to read it in its entirety. In
addition to the foregoing proposals, the stockholders will also be asked to consider and vote upon the election of nine directors of Renaissance, which
proposal will not be presented for a vote if either the merger proposal or the charter amendment proposal is not approved. The stockholders will also
be asked to consider and vote upon a proposal to adjourn the meeting to a later date or dates to permit further solicitation and vote of proxies if,
based upon the tabulated vote at the time of the special meeting, Renaissance would not have been authorized to consummate the Merger. Renaissance will
hold the special meeting of its stockholders to consider and vote upon these proposals. This proxy statement/prospectus contains important information
about the proposed Merger and the other matters to be acted upon at the special meeting. You should read it carefully.
Your vote is important.
Renaissance encourages you to vote as soon as possible after carefully reviewing this proxy statement/prospectus.
4
Why is Renaissance proposing the
Merger?
Renaissance was organized to
effect an acquisition, capital stock exchange, asset acquisition or other similar business combination with an operating business.
On February 1, 2007, Renaissance
issued and sold 15,600,000 units (Units) in its IPO and on February 16, 2007, Renaissance issued and sold an additional 2,340,000 Units
that were subject to the underwriters over-allotment option, raising gross proceeds of $107,640,000 (including proceeds from the exercise of the
over-allotment option). Of the gross proceeds: (i) $102,047,840 was deposited into the Trust Account which amount included $3,051,240 of deferred
underwriting fees; (ii) the underwriters received $4,811,160 as underwriting fees (excluding the deferred underwriting fees); and (iii) Renaissance
retained $781,000 for offering expenses. In addition, Renaissance deposited into the Trust Account $2,100,000 that it received from the issuance and
sale of 4,666,667 warrants (exercisable at $6.00 per share) to RAC Partners and Charles Miersch and Morton Farber, two of Renaissances directors.
As of September 30, 2008, approximately $106,407,992 was held in deposit in the Trust Account, including $3,051,240 of deferred underwriting
compensation. Renaissance intends to use the funds held in the Trust Account to pay Renaissance stockholders who exercise conversion rights, to redeem
First Communications Series A Preferred Stock, to pay (i) expenses related to the business combination, (ii) deferred underwriting compensation and
(iii) investment bankers fees and to use the Trust Account funds for working capital and general corporate purposes.
First Communications is a leading
facilities-based competitive communications and wireless communication tower operator providing services throughout the Midwest and Mid-Atlantic United
States. Based on its due diligence investigations of First Communications and the industry in which it operates, including the financial and other
information provided by First Communications, Renaissance believes that First Communications management has successful experience in First
Communications business and that First Communications has in place the infrastructure for strong business operations and to achieve growth both
organically and through accretive strategic acquisitions. As a result, Renaissance also believes that a business combination with First Communications
will provide Renaissance stockholders with an opportunity to participate in a company with significant growth potential. See the section entitled
The Merger Proposal Renaissances Board of Directors Reasons for the Approval of the Merger.
In accordance with
Renaissances certificate of incorporation, if Renaissance is unable to complete the business combination with First Communications by January 29,
2009, its corporate existence will terminate and it will be required to liquidate.
Do I have conversion rights?
If you are a holder of Public
Shares, you have the right to vote against the merger proposal and demand that Renaissance convert your shares into a pro rata portion of the Trust
Account in which a substantial portion of the net proceeds of the IPO are held.
How do I exercise my conversion
rights?
If you are a holder of Public
Shares and wish to exercise your conversion rights, you must (i) vote against the merger proposal, (ii) demand that Renaissance convert your shares
into cash, (iii) continue to hold your shares through the closing of the Merger and (iv) deliver your stock to Renaissances transfer agent
physically or electronically using Depository Trust Companys DWAC System within the period specified in a notice you will receive from or on
behalf of Renaissance, which period will be not less than 20 days.
Any action that does not include
an affirmative vote against the Merger will prevent you from exercising your conversion rights. Your vote on any proposal other than the merger
proposal will have no impact on your right to seek conversion.
You may exercise your conversion
rights either by checking the box on the proxy card or by submitting your request in writing to Renaissances secretary at the address listed at
the end of this section. If you (i) initially vote for the merger proposal but then wish to vote against it and exercise your conversion rights or (ii)
initially vote
5
against the merger proposal
and wish to exercise your conversion rights but do not check the box on the proxy card providing for the exercise of your conversion rights or do not
send a written request to Renaissance to exercise your conversion rights or (iii) initially vote against the Merger but later wish to vote for it, you
may request that Renaissance send you another proxy card on which you may indicate your intended vote. You may make such request by contacting
Renaissance at the phone number or address listed at the end of this section.
Any corrected or changed proxy
card or written demand of conversion rights must be received by Renaissances secretary prior to the special meeting. No demand for conversion
will be honored unless the holders stock has been delivered (either physically or electronically) to the transfer agent after the meeting within
the time period (at least 20 days) specified in a letter that will be sent to all Renaissance stockholders who have voted against the merger proposal
and demanded to convert their Public Shares into cash promptly after the meeting.
If, notwithstanding your negative
vote, the Merger is completed, then, if you have also properly exercised your conversion rights, you will be entitled to receive a pro rata portion of
the Trust Account, including any interest earned thereon, calculated as of two business days prior to the date of the consummation of the Merger. As of
September 30, 2008, there was approximately $106,407,992 in the Trust Account, or approximately $5.93 per Public Share. If you exercise your conversion
rights, then you will be exchanging your shares of Renaissance common stock for cash and will no longer own these shares. Exercise of your conversion
rights does not result in either the exercise or loss of any Renaissance warrants that you may hold. Your warrants will continue to be outstanding
following a conversion of your common stock and will become exercisable upon consummation of the Merger. A registration statement must be in effect to
allow you to exercise any warrants you may hold or to allow Renaissance to call the warrants for redemption if the redemption conditions are satisfied.
If the Merger is not consummated and Renaissance does not consummate an acquisition by January 29, 2009, the warrants will not become exercisable and
will be worthless.
Do I have appraisal rights if I object to the proposed
acquisition?
No. Renaissance stockholders do
not have appraisal rights in connection with the Merger under the DGCL.
Do First Communications stockholders have appraisal
rights if they object to the proposed acquisition?
Yes. First Communications
stockholders have appraisal rights under the DGCL. Any shares held by a First Communications stockholder who has not voted in favor of the Merger and
who has demanded appraisal for such shares in accordance with the DGCL will not be converted into a right to receive the merger consideration, unless
such holder fails to perfect, withdraws or otherwise loses such holders right to appraisal under the DGCL. If, after the consummation of the
Merger, such holder fails to perfect, withdraws or otherwise loses such holders right to appraisal, each such share will be treated as if it had
been converted as of the consummation of the Merger into a right to receive the merger consideration.
Renaissance may terminate the
Merger Agreement in the event that holders of more than 10% of the outstanding shares of First Communications exercise their appraisal rights. See the
section entitled
Merger Proposal Appraisal Rights.
What happens to the funds deposited in the Trust Account
after consummation of the Merger?
Upon consummation of the Merger,
the funds in the Trust Account will be released to Renaissance and used by Renaissance to pay stockholders who properly exercise their conversion
rights, for expenses it incurred in pursuing its business combination, to redeem First Communications Series A Preferred Stock and for working capital
and general corporate purposes. Such expenses include $3,051,240 that will be paid to the underwriters of Renaissances IPO for deferred
underwriting compensation and $55,000 that will be paid to Houlihan Smith & Company, Inc. for the balance it is owed for the fairness opinion it
issued in connection with the Merger. Jefferies & Company, Inc. (Jefferies) will also receive a fee of $2,500,000 for acting as
Renaissances investment banker in connection with the business combination.
6
What happens to Renaissance units, common stock and
warrants after consummation of the Merger?
Renaissance expects that assuming
its listing application is approved, its units, common stock and warrants will trade on Nasdaq instead of the NYSE Alternext U.S. (formerly known as
the American Stock Exchange) (American Stock Exchange), upon consummation of the Merger. In addition, the warrants will become exercisable
upon consummation of the Merger in accordance with their terms.
What happens if the Merger is not
consummated?
Renaissance must liquidate if it
does not consummate the Merger by January 29, 2009. In any liquidation of Renaissance, the funds deposited in the Trust Account, plus any interest
earned thereon, less claims requiring payment from the Trust Account by creditors who have not waived their rights against the Trust Account, if any,
will be distributed pro rata to the holders of the Public Shares. Holders of Renaissance common stock issued prior to the IPO, including all of
Renaissances officers and directors, have waived any right to any liquidation distribution with respect to the pre-IPO shares. Barry W. Florescue
has personally agreed, pursuant to an agreement with Renaissance and Ladenburg Thalmann & Co., Inc. (Ladenburg Thalmann), the
representative of the underwriters of the IPO, that if Renaissance liquidates prior to the consummation of a business combination, he will be
personally liable to ensure that the proceeds in the Trust Account are not reduced by the claims of target businesses or vendors or other entities that
are owed money by Renaissance for services rendered or contracted for or products sold to Renaissance. Renaissance cannot assure you that he would be
able to satisfy those obligations. Pursuant to the underwriting agreement between Renaissance and Ladenburg Thalmann, Renaissance agreed not to
commence its due diligence investigation of any operating business which it sought to acquire or obtain the services of any vendor without obtaining an
agreement pursuant to which such party would waive any claims against the Trust Account. As of the date of this proxy statement/prospectus, Renaissance
has received waiver agreements from each of its vendors other than its independent registered accounting firm. There is currently an outstanding
balance to Renaissances independent registered accounting firm of approximately $52,000 and Renaissance intends to pay such fees in full in
accordance with its past practices. See the section entitled
Other Information Related to Renaissance Liquidation If No Business
Combination
for additional information.
When do you expect the Merger to be
completed?
Assuming that all regulatory
approvals have been obtained, it is currently anticipated that the Merger will be completed on
, one day after the
Renaissance special meeting on
. For a description of
the conditions for the completion of the Merger, see the section entitled
The Merger Agreement Conditions to Closing of the
Merger.
What do I need to do now?
Renaissance urges you to read
carefully and consider the information contained in this proxy statement/prospectus, including the annexes, and to consider how the Merger will affect
you as a stockholder of Renaissance. You should then vote as soon as possible in accordance with the instructions provided in this proxy
statement/prospectus and on the enclosed proxy card.
How do I vote?
If you are a holder of record of
Renaissance common stock, you may vote in person at the special meeting or by submitting a proxy for the special meeting. You may submit your proxy by
completing, signing, dating and returning the enclosed proxy card in the accompanying pre-addressed postage paid envelope. If you hold your shares in
street name, which means your shares are held of record by a broker, bank or nominee, you should contact your broker to ensure that votes
related to the shares you beneficially own are properly counted. In this regard, you must provide the record holder of your shares with instructions on
how to vote your shares or, if you wish to attend the meeting and vote in person, obtain a proxy from your broker, bank or nominee.
7
If my shares are held in street name, will my
broker, bank or nominee automatically vote my shares for me?
No. Your broker, bank or nominee
cannot vote your shares unless you provide instructions on how to vote in accordance with the information and procedures provided to you by your
broker, bank or nominee.
May I change my vote after I have mailed my signed proxy
card?
Yes. Send a later-dated, signed
proxy card to Renaissances secretary at the address set forth below so that it is received by Renaissances secretary prior to the special
meeting or attend the special meeting in person and vote. You also may revoke your proxy by sending a notice of revocation to Renaissances
secretary, which must be received by Renaissances secretary prior to the special meeting.
What should I do with my stock
certificates?
Renaissance stockholders who do
not elect to have their shares converted into the pro rata share of the Trust Account should not submit their stock certificates now or after the
Merger, because their shares will not be converted or exchanged in the Merger. Renaissance stockholders who vote against the Merger and exercise their
conversion rights must deliver their stock to Renaissances transfer agent (either physically or electronically) as instructed by Renaissance or
Renaissances transfer agent after the meeting.
What should I do if I receive more than one set of voting
materials?
You may receive more than one set
of voting materials, including multiple copies of this proxy statement/prospectus and multiple proxy cards or voting instruction cards. For example, if
you hold your shares in more than one brokerage account, you will receive a separate voting instruction card for each brokerage account in which you
hold shares. If you are a holder of record and your shares are registered in more than one name, you will receive more than one proxy card. Please
complete, sign, date and return each proxy card and voting instruction card that you receive in order to cast a vote with respect to all of your
Renaissance shares.
Who can help answer my questions?
If you have questions about the
Merger or if you need additional copies of the proxy statement/prospectus or the enclosed proxy card you should contact:
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Renaissance Acquisition Corp.
50 East Sample Road, Suite
400
Pompano Beach, FL 33064
Tel: (954) 784-3031
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You may also obtain additional
information about Renaissance from documents filed with the U.S. Securities and Exchange Commission (SEC) by following the instructions in
the section entitled
Where You Can Find More Information.
If you intend to vote against the Merger and seek conversion of your
shares, you will need to deliver your stock (either physically or electronically) to Renaissances transfer agent at the address below after the
meeting and after receiving delivery instructions from or on behalf of Renaissance. If you have questions regarding the certification of your position
or delivery of your stock, please contact:
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Mark Z imkind
Continental Stock Transfer
& Trust Company
17 Battery Place
New York, New York 10004
(212) 84 5- 3287
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SUMMARY OF THE PROXY
STATEMENT/PROSPECTUS
This summary highlights selected
information from this proxy statement/prospectus and does not contain all of the information that is important to you. To better understand the Merger,
you should read this entire document carefully, including the a greement and plan of merger and Amendment No. 1 to the agreement and plan of
merger attached as Annex A and Annex A-1, respectively, to this proxy statement/prospectus. The agreement and plan of m erger and
Amendment No. 1 to the agreement and plan of merger are the legal document s that governs the Merger and the other transactions that
will be undertaken in connection with the Merger. They are also described in detail elsewhere in this proxy
statement/prospectus.
The Parties
Renaissance Acquisition Corp. is
a blank check company formed on April 17, 2006 as a vehicle to effect a merger, capital stock exchange, asset acquisition or other similar business
combination with an operating business.
The funds deposited in the Trust
Account, with the interest earned thereon, will be released to Renaissance upon consummation of the Merger, and used to pay any amounts payable to
Renaissance stockholders who vote against the Merger and exercise their conversion rights, to redeem First Communications Series A Preferred Stock and
to pay for expenses incurred in connection with the business combination, including deferred underwriting compensation of $3,051,240, a fee to
Jefferies of $2,500,000 for acting as Renaissances investment banker in connection with the business combination and $55,000 that will be paid to
Houlihan Smith & Company, Inc. for the balance it is owed for the fairness opinion it issued in connection with the Merger. Remaining proceeds will
be used for working capital, including funding for organic growth and acquisitions.
If Renaissance does not complete
the Merger by January 29, 2009, its corporate existence will terminate and it will liquidate and promptly distribute to its public stockholders the
amount in the Trust Account plus any remaining non-Trust Account funds after payment of its liabilities.
The Renaissance common stock,
warrants to purchase common stock and Units are quoted on the American Stock Exchange under the symbols RAK for the common stock, RAK.WS for the
warrants and RAK.U for the Units. Renaissance intends to apply for listing of its securities on Nasdaq in connection with the Merger.
The mailing address of
Renaissances principal executive office is 50 East Sample Road, Suite 400, Pompano Beach, FL 33064. Its telephone number is (954) 784-3031. After
the consummation of the Merger, its principal executive office will be located at 3340 West Market Street, Akron, OH 44333 and its telephone number
will be (800) 860-1261.
First Communications
First Communications is a leading
facilities-based competitive communications provider offering voice and data solutions to small- and medium-sized businesses and residential customers
throughout the Midwest and Mid-Atlantic United States. In addition to its competitive communications business, First Communications operates wireless
communications towers on which it leases capacity to wireless carriers such as AT&T, Sprint Nextel, T-Mobile and Verizon Wireless under long-term
lease contracts.
First Communications targets
small- and medium- sized business customers with four to twenty four access lines (or access line equivalents), or lines, physically located within the
footprint of its switching centers. First Communications focuses its sales efforts on communications intensive business customers who purchase multiple
products that can be cost effectively serviced on First Communications network.
First Communications offers
dedicated data and dynamic integrated services, local service, switched and dedicated long-distance service, Internet access service, as well as
value-added products and services, such as collocation and hosting services. The network architecture leverages a traditional time division
multiplexing (TDM) infrastructure with an Internet Protocol (IP) platform, which First Communications has deployed
to
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support its dynamic data and
integrated product offerings and other next generation technologies. First Communications business strategy is focused on providing services
delivered on high-speed digital transmission connections (T-1 or greater capacity), which, it believes, offer greater value to customers, increase
customer retention and provide revenue growth opportunities to First Communications.
As of September 30, 2008, First
Communications operated 327 towers that were occupied by 391 wireless tenants. In addition, First Communications has an exclusive agreement with
FirstEnergy Corporation (FirstEnergy Corp.) which gives it access to 36,000 square miles of land and over 12,000 miles of transmission
lines and radio towers, monopoles, distribution poles, property and rights of way which comprise the energy distribution infrastructure of FirstEnergy
Corp. The agreement gives First Communications the right to develop additional towers and collocation capacity to meet the current and future
collocation demands of its wireless carrier customers and the geographic and structural diversity of the infrastructure to attract new wireless
carriers.
First Communications believes
that the following strengths will help to execute its strategy:
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significant growth potential;
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unique network infrastructure;
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diverse revenue base and end markets;
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successful history of acquiring and integrating complementary
assets; and
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experienced and proven senior management team.
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First Communications
principal executive offices are located at 3340 West Market Street, Akron, OH 44333 and its telephone number is (800) 860-1261. First
Communications website is www.firstcomm.com. The information contained in, or that can be accessed through, its website is not part of this proxy
statement/prospectus and should not be relied upon in determining whether to vote in favor of the proposals.
The Merger
The Merger Agreement provides for
a business combination transaction by means of the merger of Merger Sub I with and into First Communications, with First Communications continuing as
the surviving corporation and First Communications immediately thereafter merging with and into Merger Sub II, with Merger Sub II continuing as the
surviving limited liability company. At the closing, the First Communications Holders will receive an aggregate of 1 4 ,460,000 shares of
Renaissance common stock and the right to receive up to an aggregate of an additional (i) 13 ,950,000 shares of Renaissance common stock if the
EBITDA Condition is satisfied and (ii) 8,500,000 shares of Renaissance common stock if the Warrant Condition is satisfied. Based on the closing market
price of $5.80 per share on September 12, 2008, the last trading day prior to the announcement of the Merger Agreement, the Initial Shares had an
aggregate value of $ 83 , 8 68,000. Based on the closing market price of $5. 81 per share on December 1 5 , 2008, the Initial
Shares had an aggregate value of $ 84 , 01 2,600. In addition, holders of First Communications Series A Preferred Stock will receive an
aggregate of $15.0 million in cash consideration, together with an accrued dividend of 12% per annum, pro rated and calculated from September 28, 2008
in exchange for their shares of Series A Preferred Stock. If a fractional share is required to be issued to a First Communications Holder, Renaissance
will issue such First Communications Holder an amount of cash (rounded to the nearest whole cent), without interest, equal to the product of such
fraction multiplied by $6.00.
In addition,
pursuant to the Amended and Restated Stock Escrow Agreement to be delivered to First Communications at closing, RAC Partners, an entity
controlled by Barry W. Florescue and of which Richard Bloom and Logan D. Delany, Jr., Renaissance directors and/or executive officers, are
members, has agreed that 2,000,000 of the shares of Renaissance common stock that it acquired prior to Renaissances IPO, which are
being held in an escrow account in connection with Renaissances IPO, will be released to RAC Partners only in the event that the EBITDA
Condition is satisfied. In the event the EBITDA Condition is not satisfied, such shares will be released to the post-merger combined company and
cancelled.
10
Renaissance and First
Communications plan to complete the Merger promptly after the Renaissance special meeting, so long as, among other things:
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holders of a majority of Renaissances Public Shares
present and eligible to vote thereon have approved the merger proposal;
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holders of fewer than 20% of Renaissances Public Shares
have voted against the merger proposal and demanded conversion of their shares into cash;
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all necessary governmental approvals or waiting periods,
including those of the Federal Communications Commission (the FCC) and of certain public utility commissions (each, a State PUC
and collectively the State PUCs), have been obtained or expired, as applicable;
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First Communications stockholders holding not more than
10% of the outstanding shares of First Communications have exercised dissenters rights under the DGCL with respect to the transactions contemplated by
the Merger Agreement; and
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the other conditions specified in the Merger Agreement have been
satisfied or waived.
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After consideration of the
factors identified and discussed in the section entitled
The Merger Proposal Renaissances Board of Directors Reasons for
the Approval of the Merger,
Renaissances board of directors concluded that the Merger met all of the requirements disclosed in
Renaissances Registration Statement on Form S-1 (Reg. No. 333134444), that became effective on January 29, 2007, including that First
Communications has a fair market value of at least 80% of Renaissances net assets at the time of the Merger.
Upon completion of the Merger,
assuming that none of the holders of the Renaissances Public Shares elects to convert such shares into cash, the First Communications Holders
will own approximately 4 2 . 6 % of the shares of Renaissance common stock outstanding immediately after the closing of the Merger and the
other Renaissance stockholders will own approximately 5 7 . 4 % of Renaissances outstanding common stock. If 19.99% of the holders of
Public Shares elect to convert their shares into cash, such percentages would be 47 . 6 % and 52 . 4 %, respectively. The
foregoing does not take into account shares that would be released to First Communications Holders and RAC Partners upon achievement of the
EBITDA Condition or the Warrant Condition. However, if 19.99% of the Public Shares are converted and thereafter the EBITDA Condition and Warrant
Condition are satisfied, the current Renaissance stockholders would own 32.3% of the total outstanding stock and the First Communications Holders would
own 67.7%, assuming that no other shares are issued. The following table illustrates the relative ownership of Renaissance shares if none, either or
both of the EBITDA Condition or the Warrant Condition are met:
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Post Merger Ownership Percentage
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First Communications Holders
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Renaissance Stockholders
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Neither
EBITDA
nor
Warrant
Condition
Satisfied
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EBITDA
Condition
Satisfied
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Warrant
Condition
Satisfied
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EBITDA
and
Warrant
Condition
Satisfied
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Neither
EBITDA
nor
Warrant
Condition
Satisfied
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EBITDA
Condition
Satisfied
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Warrant
Condition
Satisfied
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EBITDA
and
Warrant
Condition
Satisfied
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No Public
Shares Elect Cash Conversion
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4 2 . 6
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%
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56.8
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%
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5 5 . 0
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%
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63.6
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%
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5 7 . 4
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%
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43.2
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%
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4 5 . 0
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%
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36.4
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%
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19.99% of
Public Shares Elect Cash Conversion
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46 .7
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%
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61.1
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%
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59 . 9
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%
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67.7
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%
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52 . 4
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%
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38.9
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%
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40 . 1
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%
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32.3
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%
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Renaissance engaged Houlihan
Smith & Company, Inc. (Houlihan Smith) to render an opinion that the consideration to be paid by Renaissance in connection with the
Merger with First Communications on the terms and conditions set forth in the Merger Agreement is fair to Renaissance stockholders from a financial
point of view and that the fair market value of First Communications is at least 80% of Renaissances net assets at the time of the Merger.
Houlihan Smith is an investment banking firm that regularly is engaged in the evaluation of businesses
11
and their securities in
connection with acquisitions, corporate restructurings, private placements and for other purposes. Renaissances board of directors decided to use
the services of Houlihan Smith because it is a recognized investment banking firm that has substantial experience in similar matters. The engagement
letter provides that Renaissance will pay Houlihan Smith a fee of $100,000 ($50,000 of which will be due upon the closing of the Merger) and will
reimburse Houlihan Smith for its reasonable out-of-pocket expenses, which will not exceed $5,000. As a result of certain changes to the financial
statements of First Communications after the rendering of this opinion, Houlihan Smith reaffirmed its opinion in a letter to Renaissance dated
September 30, 2008, for which Renaissance agreed to pay a fee of $5,000 which will be due upon the closing of the Merger.
Houlihan Smith delivered its
written opinion to Renaissances board of directors on September 8, 2008, which opinion stated that, as of such date, and based upon and subject
to the assumptions made, matters considered and limitations on its review as set forth in the opinion, (i) the consideration then agreed to be paid by
Renaissance in the Merger was fair to its stockholders from a financial point of view, and (ii) the fair market value of First Communications was at
least equal to 80% of Renaissances net assets at the time of the Merger.
The amount of the consideration
to be paid by Renaissance to First Communications stockholders was determined pursuant to negotiations between Renaissance and First
Communications and not pursuant to recommendations of Houlihan Smith. The full text of Houlihan Smiths written opinion, attached hereto as Annex
D, is incorporated by reference into this proxy statement/prospectus. You are encouraged to read the Houlihan Smith opinion carefully and in its
entirety for descriptions of the assumptions made, matters considered, procedures followed and limitations on the review undertaken by Houlihan Smith
in rendering them. The summary of the Houlihan Smith opinion set forth in this proxy statement/prospectus is qualified in its entirety by reference to
the full text of the opinion. See the section entitled
The Merger Proposal Fairness Opinion.
The Charter Amendment Proposal
The proposed amendments to
Renaissances amended and restated certificate of incorporation addressed by the charter amendment proposal would, upon consummation of the
Merger, (i) change Renaissances corporate name to First Communications, Inc., (ii) increase the number of authorized shares of
capital stock, (iii) provide for the Renaissances perpetual existence, (iv) provide for the classification of the board of directors into three
classes, (v) delete Article Sixth of Renaissances current amended and restated certificate of incorporation and (vi) make certain other changes
in tense and number that Renaissances board of directors believes are immaterial. Renaissances certificate of incorporation, as it is
proposed to be amended and restated, is attached as Exhibit B to this proxy statement/prospectus. Renaissance encourages you to read it in its
entirety. See the section entitled
The Charter Amendment Proposal.
The Incentive Compensation Plan Proposal
The 2008 Plan would reserve
3,000,000 shares of Renaissance common stock for issuance to executive officers (including executive officers who are also directors), employees,
directors and consultants in accordance with the 2008 Plans terms. The purpose of the 2008 Plan is to provide Renaissances directors,
executive officers and other employees as well as consultants who, by their position, ability and diligence are able to make important contributions to
Renaissances growth and profitability, with an incentive to assist Renaissance in achieving its long-term corporate objectives, to attract and
retain executive officers and other employees of outstanding competence and to provide such persons with an opportunity to acquire an equity interest
in Renaissance. The 2008 Plan is attached as Annex C to this proxy statement/prospectus. Renaissance encourages you to read the 2008 Plan in its
entirety. See the section entitled
The Incentive Compensation Plan Proposal.
The Director Election Proposal; Management of
Renaissance
At the special meeting, you will
be asked to vote to elect nine directors to Renaissances board of directors, effective immediately following and contingent upon closing of the
Merger, of whom three will serve until the annual meeting of stockholders to be held in 2009, three will serve until the annual meeting to be held in
2010
12
and three will serve until
the annual meeting to be held in 2011 and, in each case, until their successors are elected and qualified.
Following the consummation of the
Merger, if managements nominees are elected, the directors of Renaissance will be classified as follows:
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Barry W. Florescue, Theodore V. Boyd and Joseph R. Morris in the
class to stand for reelection in 2009;
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Raymond Hexamer, Marshall B. Belden Jr. and Mark R. Stone in the
class to stand for reelection in 2010; and
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Richard A. Bloom, Mark T. Clark and Scott M. Honour in the class
to stand for reelection in 2011.
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Following the consummation of the
Merger, the executive officers of Renaissance will be Raymond Hexamer, chief executive officer, Joseph R. Morris, chief operating and chief financial
officer, Richard J. Buyens, president and David Johnson, II, senior vice present of sales and marketing. Each of such persons is currently an executive
officer of First Communications.
If either the merger proposal or
the charter amendment proposal is not approved by Renaissances stockholders at the special meeting, the director election proposal and the other
proposals (except an adjournment proposal, as discussed below) will not be presented to the meeting for a vote and Renaissances current directors
and executive officers will continue in office.
The Adjournment Proposal
If, based on the tabulated vote,
there are not sufficient votes at the time of the special meeting to authorize Renaissance to consummate the Merger (because either the merger proposal
or the charter amendment proposal is not approved or if holders of 20% or more of the Public Shares vote against the merger proposal and elect to
convert their Public Shares into cash), Renaissances board of directors may submit a proposal to adjourn the special meeting to a later date or
dates, if necessary, to permit further solicitation of proxies. See the section entitled
The Adjournment Proposal.
Vote of Renaissance Inside Stockholders
As of
, the record date for
the Renaissance special meeting, RAC Partners, an entity controlled by Barry W. Florescue and of which Richard Bloom and Logan D. Delany, Jr. are
members, Barry W. Florescue in his personal capacity, Logan D. Delany, Jr. in his personal capacity, Charles Miersch, Morton Farber and Stanley
Kreitman, (collectively, the Renaissance Inside Stockholders), beneficially owned and were entitled to vote 3,900,000 shares which were
issued to them prior to the IPO (Original Shares). The Original Shares issued to the Renaissance Inside Stockholders constituted
approximately 17.9% of the outstanding shares of Renaissance common stock immediately after the IPO.
In connection with the IPO,
Renaissance and Ladenburg Thalmann entered into agreements with each of the Renaissance Inside Stockholders pursuant to which each Renaissance Inside
Stockholder agreed to vote his or its Original Shares on the merger proposal in accordance with the majority of the votes cast by the holders of Public
Shares. The Renaissance Inside Stockholders have also indicated that they intend to vote their Original Shares in favor of all other proposals being
presented at the meeting. The Original Shares have no liquidation rights and will be worthless if no business combination is effected by Renaissance.
In connection with the IPO, the Renaissance Inside Stockholders entered into lock-up agreements with Ladenburg Thalmann restricting the sale of their
Original Shares until the earlier of twelve months after a business combination or Renaissances liquidation.
Pursuant to a share purchase plan
entered into prior to Renaissances IPO, RAC Partners, an entity controlled by Barry W. Florescue, Renaissances chairman and chief executive
officer, placed a limit order for $12 million of Renaissance common stock, which commenced ten business days after Renaissance filed its Current Report
on Form 8-K announcing its execution of a definitive agreement for the Merger and will end on the business day immediately preceding the record date
for the meeting of stockholders at which this Merger is to be voted upon.
13
Under the terms of the share
purchase plan, the purchases must be made in compliance with Rules 10b5-1 and 10b-18 under the Exchange Act. Since the placement of the limit order, as
of December 1 5 , 2008, RAC Partners had purchased 8 1 1,269 shares of Renaissance common stock for an aggregate purchase price of
$4,5 95,532 and at an average purchase price per share of $5.66. RAC Partners may vote these shares on a proposed business combination any way it
chooses. As a result, RAC Partners may be able to influence the outcome of the merger proposal and the other proposals under
consideration.
As of the record date, the
percentage of outstanding shares of Renaissance common stock held by directors, executive officers and their affiliates was
%. Of these shares, 3,900,000 (17.9% of the outstanding shares of common stock) are
Original Shares which must be voted in accordance with the majority of the votes case by the holders of Public Shares.
shares (
% of the outstanding
shares of common stock), of which
and
shares are beneficially owned by Barry Florescue and Charles Miersch, respectively, are
Public Shares which may be voted as such holder chooses.
Date, Time and Place of Special Meeting of Renaissances
Stockholders
The special meeting of the
stockholders of Renaissance will be held at 8:30 a.m., Eastern time, on
,
at 50 East Sample Road, Suite 400, Pompano Beach, FL 33064 to consider and vote upon the merger proposal, the charter amendment proposal, the incentive
compensation plan proposal and the director election proposal. A proposal to adjourn the meeting to a later date or dates may be presented if, based
upon the tabulated vote at the time of the special meeting, Renaissance is not authorized to consummate the Merger.
Voting Power; Record Date
You will be entitled to vote or
direct votes to be cast at the special meeting if you owned shares of Renaissance common stock at the close of business on
which is the record date for the special meeting. You will have one vote for each share of Renaissance common stock you owned at the close of business
on the record date. If your shares are held in street name or are in a margin or similar account, you should contact your broker to ensure
that votes related to the shares you beneficially own are properly counted. Renaissance warrants do not have voting rights. On the record date, there
were 21,840,000 shares of Renaissance common stock outstanding, of which 17,940,000 were Public Shares and 3,900,000 were shares held by the
Renaissance Inside Stockholders that were acquired prior to the IPO.
Quorum and Vote of Renaissance
Stockholders
A quorum of Renaissance
stockholders is necessary to hold a valid meeting. A quorum will be present at the Renaissance special meeting if a majority of the outstanding shares
entitled to vote at the meeting are represented in person or by proxy. Abstentions and broker non-votes will count as present for purposes of
establishing a quorum. As of the record date, the Renaissance Inside Stockholders hold approximately
% of the outstanding shares of Renaissance common stock, of which 3,900,000 are
Original Shares and
are Public Shares. The Original Shares will be voted on the merger
proposal in accordance with the majority of the votes cast by the holders of Public Shares and in favor of all of the other proposals and for the
election as directors of managements nominees.
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Pursuant to Renaissances charter, the approval of the
merger proposal will require the affirmative vote of the holders of a majority of the Public Shares present at the meeting in person or by proxy and
entitled to vote thereon. There are 21,840,000 shares of Renaissance common stock outstanding as of the record date for the special meeting, of which
17,940,000 are Public Shares. The Merger will not be consummated if the holders of 20% or more of the Public Shares (3,588,000 shares or more) properly
demand conversion of their Public Shares into cash.
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The approval of the charter amendment proposal will require the
affirmative vote of the holders of a majority of the outstanding shares of Renaissance common stock on the record date.
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The approval of the incentive compensation plan proposal will
require the affirmative vote of the holders of a majority of the shares of Renaissance common stock represented in person or by proxy and entitled to
vote thereon at the meeting.
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The election of directors requires a plurality vote of the
shares of common stock present in person or represented by proxy and entitled to vote at the special meeting. Plurality means that the
individuals who receive the largest number of votes cast FOR are elected as directors. Consequently, any shares not voted FOR a
particular nominee (whether as a result of abstentions or a direction to withhold authority) will not be counted in the nominees
favor.
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The approval of the adjournment proposal will require the
affirmative vote of the holders of a majority of the shares of Renaissance common stock represented in person or by proxy and entitled to vote thereon
at the meeting.
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Abstentions will have the same
effect as a vote AGAINST the merger proposal, charter amendment proposal, the incentive compensation plan proposal and the adjournment
proposal, if the latter is presented. Broker non-votes, while considered present for the purposes of establishing a quorum, will have the effect of
votes against the charter amendment proposal to which they apply, but will have no effect on the merger proposal, the incentive compensation plan
proposal or the adjournment proposal. Please note that you cannot seek conversion of your shares unless you affirmatively vote against the merger
proposal.
The Merger is conditioned upon
approval of the merger proposal and the charter amendment proposal but not upon the approval of the incentive compensation plan proposal or the
director election proposal. However, the incentive compensation plan and director election proposals will not be presented for a vote at the special
meeting unless both the merger proposal and the charter amendment proposal are approved.
Conversion Rights
Pursuant to Renaissances
amended and restated certificate of incorporation, a holder of Public Shares may, if the stockholder affirmatively votes against the Merger, demand
that Renaissance convert its shares into cash if the Merger is consummated. See the section entitled
Special Meeting of Renaissance
Stockholders Conversion Rights
for the procedures to be followed if you wish to convert your shares into cash. If properly demanded,
Renaissance will convert each Public Share into a pro rata portion of the Trust Account, calculated as of two business days prior to the anticipated
consummation of the Merger. As of September 30, 2008, this would amount to approximately $5.93 per share. If you exercise your conversion rights, then
you will be exchanging your shares of Renaissance common stock for cash and will no longer own the shares. You will be entitled to receive cash for
these shares only if you affirmatively vote against the Merger, properly demand conversion and, after the meeting, tender your stock (either physically
or electronically) to Renaissances transfer agent within the time period specified in a notice you will receive from or on behalf of Renaissance,
which period will be not less than 20 days from the date of such notice. If the Merger is not completed, these shares will not be converted into
cash.
If Renaissance is unable to
complete the Merger by January 29, 2009, its corporate existence will terminate and, upon its resulting liquidation, the holders of shares issued in
the IPO will receive an amount equal to the amount of funds in the Trust Account at the time of the liquidation distribution divided by the number of
Public Shares. Although both the per share liquidation price and the per share conversion price are equal to the amount of funds in the Trust Account
divided by the number of Public Shares, the amount a holder of Public Shares would receive at liquidation may be more or less than the amount such a
holder would have received had it sought conversion of its shares in connection with the Merger because (i) there may be greater earned interest in the
Trust Account at the time of a liquidation distribution since it may occur at a later date than a conversion and (ii) Renaissance may incur expenses it
otherwise would not incur if Renaissance consummates the Merger, including, potentially, claims requiring payment from the Trust Account by creditors
who have not waived their rights against the Trust Account. Barry W. Florescue has personally agreed, pursuant to an agreement with Renaissance and
Ladenburg Thalmann, the representative of the underwriters of the IPO, that if Renaissance liquidates prior to the consummation of a business
combination, he will be personally liable to ensure that the proceeds in the Trust Account are not
15
reduced by the claims of
target businesses or vendors or other entities that are owed money by Renaissance for services rendered or contracted for or products sold to
Renaissance. Renaissance cannot assure you that he would be able to satisfy those obligations. Pursuant to the underwriting agreement between
Renaissance and Ladenburg Thalmann, Renaissance agreed not to commence its due diligence investigation of any operating business which it sought to
acquire or obtain the services of any vendor without obtaining an agreement pursuant to which such party would waive any claims against the Trust
Account. As of the date of this proxy statement/prospectus, Renaissance has received waiver agreements from each of its vendors other than its
independent registered accounting firm. There is currently an outstanding balance to Renaissances independent registered accounting firm of
approximately $52,000 and Renaissance intends to pay such fees in full in accordance with its past practices. See the section entitled
Other
Information Related to Renaissance Liquidation If No Business Combination
for additional information.
The Merger will not be
consummated if the holders of 20% or more of the Public Shares (3,588,000 shares or more) properly demand conversion of their shares into
cash.
Appraisal Rights
Renaissance stockholders do not
have appraisal rights in connection with the Merger under the DGCL.
Holders of record of First
Communications common stock who do not vote in favor of adopting the Merger, and who otherwise comply with the applicable provisions of Section 262 of
DGCL will be entitled to exercise appraisal rights under Section 262 of the DGCL. Under the Merger Agreement, if more than 10% of the outstanding
shares of First Communications common stock exercise appraisal rights, Renaissance may terminate the Merger Agreement.
Proxies
Proxies may be solicited by mail,
telephone or in person. If you grant a proxy, you may still vote your shares in person if you revoke your proxy before the special meeting. You may
also change your vote by submitting a later-dated proxy as described in the section entitled
Special Meeting of Renaissance Stockholders
Revoking Your Proxy.
Interests of Renaissances Directors and Officers in the
Merger
When you consider the
recommendation of Renaissances board of directors in favor of approval of the merger proposal, you should keep in mind that Renaissances
executive officers and members of Renaissances board have interests in the Merger that are different from, or in addition to, your interests as a
stockholder. These interests include, among other things:
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If the Merger is not consummated by January 29, 2009,
Renaissance will be liquidated. In such event, the 3,900,000 shares of common stock held by Renaissances directors and officers that were
acquired before the IPO, for an aggregate purchase price of $25,000, will be worthless because Renaissances directors and officers are not
entitled to receive any of the liquidation proceeds with respect to such shares. Such shares had an aggregate market value of
$
based upon the closing price of $
on the
American Stock Exchange on
, the record date for the Renaissance special meeting.
Furthermore, proceeding the IPO, Barry Florescue and Charles Miersch each bought 5,000 Public Shares on the open market which each may vote as they
choose at the special meeting.
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The Company issued and sold 4,666,667 warrants (exercisable at
$6.00 per share) to RAC Partners and Charles Miersch and Morton Farber, two of Renaissances directors, on February 1, 2007 for an aggregate
purchase price of $2,100,000 (the Insider Warrants). All of the proceeds Renaissance received from these purchases were placed in the Trust
Account. The Insider Warrants are identical to the warrants underlying the Units sold in Renaissances IPO except that (i) they have an exercise
price of $6.00 per share, (ii) Renaissance did not register the sale of the warrants to the public and (iii) the Insider Warrants
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will be exercisable on a cashless basis at the holders
option so long as such warrants are held by such directors, RAC Partners or its affiliates. Renaissance has agreed to register the transfer of the
Insider Warrants by RAC Partners to its members in a liquidation or distribution and the resale of the shares underlying the Insider Warrants by RAC
Partners and the directors at any time after Renaissance has executed a definitive agreement for a business combination, but the purchasers of the
Insider Warrants have agreed that the Insider Warrants will not be sold or, subject to certain limited exceptions (including in a distribution upon
liquidation at RAC Partners), transferred by them and they may not exercise the Insider Warrants until 30 days after Renaissance has completed a
business combination. Accordingly, the Insider Warrants have been placed in escrow and will not be released until 30 days after the completion of a
business combination. Such warrants are not publicly traded and have an exercise price of $6.00 per warrant. All of the warrants will become worthless
if the Merger is not consummated by January 29, 2009 (as will the remainder of the public warrants).
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The transactions contemplated by the Merger Agreement provide
that Barry W. Florescue and Richard A. Bloom, appointees of Renaissance, will be directors of Renaissance after the closing of the Merger. As such, in
the future each will receive any cash fees, stock options or stock awards that the Renaissance board of directors determines to pay to its
non-executive directors.
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If Renaissance liquidates prior to the consummation of a
business combination, Barry W. Florescue will be personally liable to ensure that the proceeds in the Trust Account are not reduced by the claims of
target businesses or vendors or other entities that are owed money by Renaissance for services rendered or contracted for or products sold to
Renaissance. Renaissance cannot assure you that he would be able to satisfy those obligations. As of September 30, 2008, Renaissance had accounts
payable of approximately $855,375. It estimates that it will incur additional expenses of approximately $50,000 that would be required to be paid if
the Merger is not consummated. Of such total of $855,375, creditors to whom approximately $802,572 is or would be owed have waived their rights to make
claims for payment from amounts in the Trust Account. Mr. Florescue would be obligated to indemnify Renaissance for the balance of approximately
$52,803 that would be owed to creditors who have not waived their rights against the Trust Account. However, Renaissance believes that Mr. Florescue
does not have any risk of being required to provide indemnification since all persons who have had contractual obligations with Renaissance but have
not waived their rights against the Trust Account have been paid in full (or will be paid in accordance with Renaissances past
practices).
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Pursuant to a share purchase plan
entered into prior to Renaissances IPO, RAC Partners, an entity controlled by Barry W. Florescue, Renaissances chairman and chief executive
officer, placed a limit order for $12 million of Renaissance common stock, which commenced ten business days after Renaissance filed its Current Report
on Form 8-K announcing its execution of a definitive agreement for the Merger and will end on the business day immediately preceding the record date
for the meeting of stockholders at which this Merger is to be voted upon. Under the terms of the share purchase plan, the purchases must be made in
compliance with Rules 10b5-1 and 10b-18 under the Exchange Act. Since the placement of the limit order, as of December 1 5 , 2008, RAC Partners
had purchased 8 1 1,269 shares of Renaissance common stock for an aggregate purchase price of $4,5 95,532 and at an average purchase price
per share of $5.66. RAC Partners may vote these shares on a proposed business combination any way it chooses. As a result, RAC Partners may be able to
influence the outcome of the merger proposal and the other proposals under consideration.
In addition, at any time prior to
the special meeting, during a period when they are not then aware of any material nonpublic information regarding Renaissance or its securities, the
Renaissance Inside Stockholders, First Communications or First Communications Holders and/or their respective affiliates may purchase shares from
institutional and other investors, or execute agreements to purchase such shares from them in the future, or they may enter into transactions with such
persons and others to provide them with incentives to acquire shares of Renaissance common stock or vote their shares in favor of the merger proposal.
The purpose of such share purchases and other transactions would be to increase the likelihood of satisfaction of the requirements that the holders of
a majority of the Public Shares present in person or by proxy and eligible to vote at the special meeting vote in
17
favor of, and that holders of
fewer than 20% of the Public Shares vote against, the merger proposal and demand conversion of their Public Shares into cash where it appears that such
requirements would otherwise not be met.
While the exact nature of any
incentives that would be provided by the Renaissance Inside Stockholders, First Communications or First Communications stockholders and/or their
respective affiliates has not been determined as of the date of this proxy statement/prospectus, they might include, without limitation, arrangements
to protect such investors or holders against potential loss in value of their shares, including the granting of put options and the transfer to such
investors or holders of shares or warrants owned by the Renaissance Inside Stockholders for nominal value. Renaissance will not enter into any such
arrangement, either prior to or after the consummation of the Merger, and no funds in its Trust Account will be used to make such purchases or to fund
other such arrangements.
Entering into any such
arrangements may have a depressive effect on Renaissances stock. For example, as a result of these arrangements, an investor or holder may have
the ability to effectively purchase shares at a price lower than market and may therefore be more likely to sell the shares he owns, either prior to or
immediately after the special meeting.
If such transactions are
effected, the consequence could be to cause the Merger to be approved in circumstances where such approval could not otherwise be obtained. Purchases
of shares by the persons described above would allow them to exert more influence over the approval of the merger proposal and other proposals and
would likely increase the chances that such proposals would be approved. Moreover, any such purchases may make it less likely that the holders of 20%
or more of the Public Shares will vote against the acquisition proposal and exercise their conversion shares.
As of the date of this proxy
statement/prospectus, there have been no such discussions and no agreements to such effect have been entered into with any such investor or holder.
Renaissance will file a Current Report on Form 8-K to disclose any arrangements entered into or significant purchases made by any of the aforementioned
persons that would affect the vote on the merger proposal and charter amendment proposal or the conversion threshold.
Recommendation to Stockholders
Renaissances board of
directors believes that the merger proposal and the other proposals to be presented at the special meeting are fair to and in the best interest of
Renaissances stockholders and unanimously recommends that its stockholders vote FOR each of the proposals.
Conditions to the Closing of the
Merger
Consummation of the Merger is
conditioned on (i) the holders of the Public Shares, at a meeting called for this and other related purposes, approving the merger proposal and the
charter amendment proposal, (ii) the holders of fewer than 20% of the Public Shares voting against the Merger and exercising their right to convert
their Public Shares into a pro-rata portion of the Trust Account, calculated as of two business days prior to the anticipated consummation of the
Merger and (iii) stockholders holding not more than 10% of the outstanding shares of First Communications common stock having exercised appraisal
rights under the DGCL with respect to the transactions contemplated by the Merger Agreement.
In addition, the consummation of
the transactions contemplated by the Merger Agreement is conditioned upon, among other things, (i) at the closing, Renaissance common stock being
listed for trading on Nasdaq, (ii) no order, stay, judgment or decree being issued by any governmental authority preventing, restraining or prohibiting
in whole or in part, the consummation of such transactions, (iii) the receipt of certain governmental approvals and (iv) the Renaissance stockholders
voting for the directors nominated by management.
18
First Communications Conditions to
Closing
The obligations of First
Communications to consummate the transactions contemplated by the Merger Agreement also are conditioned upon, among other things:
|
|
Renaissance and each Merger Subs representations and
warranties set forth in the Merger Agreement being true and correct in all material respects (except representations which, as written, are already
qualified by materiality or material adverse effect, in which case such representations and warranties will be true and correct in all such respects)
as of the date of the Merger Agreement, and, except to the extent such representations and warranties speak as of an earlier date, as of the effective
time of the First Merger;
|
|
|
Renaissance and each Merger Sub having duly performed in all
material respects all obligations, covenants and agreements undertaken by them in the Merger Agreement and having complied in all material respects
with all terms and conditions applicable to them under the Merger Agreement to be performed or complied with on or before the closing date;
|
|
|
all necessary third party approvals or consents having been
obtained from any person or entity whose approval or consent is necessary to consummate the Merger including, without limitation, the approval of the
board of directors of Renaissance and each Merger Sub and the consents of the State PUCs and the FCC;
|
|
|
Renaissance having received approval from its stockholders in a
manner consistent with Renaissances final prospectus dated January 29, 2007 and having delivered evidence of such approval to First
Communications; and
|
|
|
since the date of the Merger Agreement there having been no
occurrence, event, change, effect or development that, individually or in the aggregate, has had or is reasonably expected to have a material adverse
effect on Renaissance.
|
Renaissances Conditions to Closing
The obligations of Renaissance to
consummate the transactions contemplated by the Merger Agreement also are conditioned upon each of the following, among other things:
|
|
First Communications representations and warranties set
forth in the Merger Agreement being true and correct in all material respects (except representations which, as written, are already qualified by
materiality or material adverse effect, in which case such representations and warranties shall be true and correct in all such respects) as of the
Merger Agreement and, except to the extent such representations and warranties speak as of an earlier date, as of the effective time of the First
Merger;
|
|
|
all necessary third party approvals or consents, having been
obtained from any person or entity whose approval or consent is necessary to consummate the Merger including, without limitation, the consents of the
State PUCs and the FCC;
|
|
|
First Communications having performed in all material respects
all obligations, covenants and agreements undertaken by First Communications in the Merger Agreement and having complied in all material respects with
all terms and conditions applicable to it under the Merger Agreement to be performed and complied with on or before the closing date;
|
|
|
First Communications stockholders holding not more than
10% of the outstanding shares of First Communications common stock having exercised or having continuing rights to exercise appraisal rights under the
DGCL with respect to the transactions contemplated by the Merger Agreement;
|
|
|
since the date of the Merger Agreement there not having been any
occurrence, event, change, effect or development that, individually or in the aggregate, has had or is reasonably expected to have a material adverse
effect on First Communications; and
|
19
|
|
First Communications having obtained an amendment to its
existing credit facility waiving the change of control provision therein.
|
Termination
The Merger Agreement may be
terminated, among other reasons, at any time prior to closing:
|
|
by mutual written consent of Renaissance and First
Communications;
|
|
|
by either Renaissance or First Communications if the Merger is
not consummated on or before January 29, 2009;
|
|
|
by either Renaissance or First Communications if a governmental
authority has enacted, issued, promulgated, enforced or entered any statute, rule, regulation, executive order, decree, injunction or other order, in
each case which has become final and non-appealable, and which permanently restrains, enjoins or otherwise prohibits the Merger;
|
|
|
by either Renaissance or First Communications if, at
Renaissances special meeting (including any adjournments thereof), the Merger shall fail to be approved and adopted by the affirmative vote of
the holders of Renaissance common stock required under its amended and restated certificate of incorporation, or the holders of 20% or more of the
Public Shares outstanding as of the record date of Renaissances special meeting exercise their rights to convert the shares of Renaissance common
stock held by them into cash in accordance with Renaissances amended and restated certificate of incorporation; or
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|
|
by either Renaissance or First Communications, if such party is
not in material breach of its obligations under the Merger Agreement and there has been a material breach of the representations and warranties,
covenants, or agreements by the other party and such breach has not been cured within 30 days after written notice to the breaching party, if
curable.
|
Effect of Termination
Except as otherwise provided in
the Merger Agreement, in the event of proper termination by either Renaissance or First Communications, the Merger Agreement will have no further force
and effect, without any liability or obligation on the part of Renaissance or First Communications; provided, however, that those provisions which
survive the termination of the Merger Agreement shall not be void and that such termination will not terminate the rights or remedies of any party
against another party that has violated or breached the Merger Agreement prior to such termination.
Waiver
Any provision of the Merger
Agreement may be waived in writing at any time by the party which is entitled to the benefit of such provision. Neither any failure nor any delay by
any party in exercising any right, power, or privilege under the Merger Agreement or any of the documents referred to in the Merger Agreement will
operate as a waiver of such right, power or privilege, and no single or partial exercise of such right, power or privilege will preclude any other or
further exercise of such right, power or privilege or the exercise of any other right, power or privilege. The condition requiring that the holders of
fewer than 20% of the Public Shares affirmatively vote against the merger proposal and demand conversion of their shares into cash may not be waived.
Renaissance cannot assure you that all of the conditions will be satisfied or waived.
The existence of the financial
and personal interests of the directors may result in a conflict of interest on the part of one or more of them between what he may believe is best for
Renaissance and what he may believe is best for himself in determining whether or not to grant a waiver in a specific situation.
20
Fees and Expenses
All fees and expenses incurred in
connection with the Merger Agreement and the transactions contemplated thereby will be paid by the party incurring such expenses; provided, however,
that if Renaissance fails to obtain stockholder approval and certain conditions to closing have been satisfied, then Renaissance will pay First
Communications all of its excess working capital funds available outside of the Trust Account which remain after Renaissances expenses are paid
or accrued for and reasonable liquidation reserves are established.
Tax Consequences of the Merger
Renaissance believes that, for
United States federal income tax purposes:
|
|
No gain or loss will be recognized by non-converting
stockholders of Renaissance; and
|
|
|
A stockholder of Renaissance who exercises conversion rights and
effects a termination of the stockholders interest in Renaissance will be required to recognize capital gain or loss upon the exchange of that
stockholders shares of common stock of Renaissance for cash, if such shares were held as a capital asset on the date of the Merger. Such gain or
loss will be measured by the difference between the amount of cash received and the tax basis of that stockholders shares of Renaissance common
stock.
|
Furthermore, the Merger is
intended to qualify as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the
IRC).
A First Communications common
stockholders receipt of Renaissance common stock in the Merger should be tax-free for United States federal income tax purposes. However,
a First Communications stockholder who exercises his or her appraisal rights and who receives cash in exchange for his or her shares of First
Communications common stock generally will recognize gain or loss measured by the difference between the amount of cash received and the tax basis of
that stockholders shares of First Communications common stock. A First Communications holder of Series A Preferred Stock will receive cash in the
Merger and generally will recognize gain or loss measured by the difference between the amount of cash received and the tax basis of that
stockholders shares of First Communications Series A Preferred Stock.
For a description of the material
United States federal income tax consequences of the Merger, please see the information set forth in
The Merger Proposal Material
United States Income Tax Consequences of the Merger.
Anticipated Accounting Treatment
The Merger will be accounted for
as a reverse acquisition in accordance with U.S. generally accepted accounting principles (GAAP). Under this method of accounting,
Renaissance will be treated as the acquired company for financial reporting purposes. This determination was primarily based on First
Communications comprising the ongoing operations of the post-merger combined company and senior management of the post-merger combined company. In
accordance with guidance applicable to these circumstances, the Merger will be considered to be a capital transaction in substance. Accordingly, for
accounting purposes, the Merger will be treated as the equivalent of First Communications issuing stock for the net assets of Renaissance, accompanied
by a recapitalization. The net assets of Renaissance will be stated at historical cost which approximates fair value, with no goodwill or other
intangible assets recorded. Historical operating information prior to the Merger will be that of First Communications.
Regulatory Matters
Completion of the Merger and the
transactions contemplated by the Merger Agreement require that Renaissance and First Communications submit filings under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976 (HSR Act) and satisfy certain waiting periods. Furthermore, Renaissance and First Communications will
need to obtain the approvals of the FCC and certain State PUCs for the transfer of control of First Communications
21
operating subsidiaries. All
of the required applications and notices seeking such approvals have been submitted to the FCC and the applicable State PUCs.
Risk Factors
In evaluating the merger
proposal, the charter amendment proposal, the incentive compensation plan proposal, the director election proposal and the adjournment proposal, you
should carefully read this proxy statement/prospectus and especially consider the factors discussed in the section entitled
Risk
Factors.
22
SELECTED HISTORICAL FINANCIAL
INFORMATION
The following financial
information is being provided to assist you in your analysis of the financial aspects of the Merger. The information is only a summary and should be
read in conjunction with each companys audited historical consolidated financial statements and related notes contained elsewhere herein. The
historical results included below and elsewhere in this proxy statement/prospectus are not indicative of the future performance of First Communications
or Renaissance.
First Communications Selected Financial
Data
The following table sets forth
selected historical financial data of First Communications and its predecessor company, First Communications, LLC. The information presented below was
derived from First Communications, Inc. audited financial statements for the period July 2, 2007 (date of inception) through December 31, 2007 and the
unaudited financial statements for First Communications for the nine months ended September 30, 2008 and from First Communications, LLC audited
financial statements for the period January 1, 2007 through July 1, 2007 and for each of the years ended December 31, 2006, 2005, 2004 and 2003. This
information is only a summary. You should read this information together with First Communications and First Communications, LLCs
historical financial statements and accompanying notes contained elsewhere in this proxy statement/prospectus.
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|
|
First Communications
(successor)
|
|
First Communications, LLC
(predecessor)
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended or as of December 31,
|
|
|
|
|
|
For the
Nine
Months
Ended
and as
of
September 30,
2008
|
|
For the
Period
July 2,
2007
(date
of
inception)
through
and as of
December 31,
2007
|
|
For the
Period
January
1,
2007
through
July 1,
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
(in thousands, except per share data)
|
|
Net sales
|
|
|
|
$
|
113,485
|
|
|
$
|
65,553
|
|
|
$
|
67,152
|
|
|
$
|
107,076
|
|
|
$
|
77,278
|
|
|
$
|
56,194
|
|
|
$
|
47,361
|
|
Net income
|
|
|
|
|
3,950
|
|
|
|
929
|
|
|
|
3,797
|
|
|
|
7,206
|
|
|
|
3,495
|
|
|
|
5,205
|
|
|
|
6,058
|
|
Basic earnings
per share
|
|
|
|
|
0.15
|
|
|
|
(0.43
|
)
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Diluted
earnings per share
|
|
|
|
|
0.12
|
|
|
|
(0.43
|
)
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Total assets
|
|
|
|
|
326,093
|
|
|
|
184,936
|
|
|
|
55,159
|
|
|
|
35,607
|
|
|
|
33,691
|
|
|
|
23,426
|
|
|
|
19,750
|
|
Long-term debt
|
|
|
|
|
104,500
|
|
|
|
|
|
|
|
|
|
|
|
4,035
|
|
|
|
8,204
|
|
|
|
5,000
|
|
|
|
5,000
|
|
Redeemable
preferred stock
|
|
|
|
|
15,000
|
|
|
|
40,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Renaissance Selected Financial Data
The following table sets forth
selected historical financial data of Renaissance. The information presented below was derived from Renaissances audited financial statements for
the year ended and as of December 31, 2007 and 2006 and from its unaudited financial statements for the nine months ended September 30, 2008 and 2007
and as of September 30, 2008. This information is only a summary. You should read this information together with Renaissances historical
financial statements and accompanying notes contained elsewhere in this proxy statement/prospectus.
23
Consolidated Statement of Operations
Data:
|
|
|
|
Nine Months
Ended
September 30,
2008
|
|
Nine Months
Ended
September 30,
2007
|
|
Twelve Months
Ended
December 31,
2007
|
|
April 17, 2006
(inception) to
December 31,
2006
|
|
April 17, 2006
(inception) to
September 30,
2008
|
|
|
|
|
(unaudited)
|
|
(unaudited)
|
|
|
|
|
|
(unaudited)
|
General and
administrative expenses
|
|
|
|
$
|
1,323,749
|
|
|
$
|
761,264
|
|
|
$
|
847,558
|
|
|
$
|
1,998
|
|
|
$
|
2,173,305
|
|
Operating
loss
|
|
|
|
|
(1,323,749
|
)
|
|
|
(761,264
|
)
|
|
|
(847,558
|
)
|
|
|
(1,998
|
)
|
|
|
(2,173,305
|
)
|
Income (loss)
before provision for income taxes
|
|
|
|
|
380,657
|
|
|
|
2,056,253
|
|
|
|
3,314,220
|
|
|
|
(1,518
|
)
|
|
|
3,693,359
|
|
Net income
(loss) attributable to common stock not subject to possible conversion
|
|
|
|
$
|
(442,144
|
)
|
|
$
|
1,374,825
|
|
|
$
|
2,056,175
|
|
|
$
|
(1,518
|
)
|
|
$
|
1,612,513
|
|
Net income
(loss) per share attributable to common stock not subject to conversion:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and
diluted
|
|
|
|
|
($0.02
|
)
|
|
$
|
0.08
|
|
|
$
|
0.12
|
|
|
|
($0.00
|
)
|
|
|
|
|
Pro forma
diluted
|
|
|
|
|
($0.02
|
)
|
|
$
|
0.07
|
|
|
$
|
0.11
|
|
|
|
($0.00
|
)
|
|
|
|
|
Maximum
number of shares subject to possible conversion:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding not subject to possible conversion:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and
diluted
|
|
|
|
|
18,253,794
|
|
|
|
16,521,006
|
|
|
|
16,957,763
|
|
|
|
3,900,000
|
|
|
|
|
|
Pro forma
diluted
|
|
|
|
|
22,601,153
|
|
|
|
19,468,103
|
|
|
|
19,417,922
|
|
|
|
3,900,000
|
|
|
|
|
|
Consolidated Balance Sheet Data:
|
|
|
|
As of
September 30,
2008
|
|
As of
December 31,
2007
|
|
As of
December 31,
2006
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
Cash
|
|
|
|
$
|
870,793
|
|
|
$
|
1,410,028
|
|
|
$
|
60,165
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
|
|
|
107,372,039
|
|
|
|
106,803,634
|
|
|
|
387,892
|
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
|
|
|
3,975,615
|
|
|
|
3,173,568
|
|
|
|
364,410
|
|
|
|
|
|
|
|
|
|
Common
Equity
|
|
|
|
$
|
82,123,566
|
|
|
$
|
82,565,710
|
|
|
$
|
23,482
|
|
|
|
|
|
|
|
|
|
Common stock
issued and outstanding
|
|
|
|
|
21,840,000
|
|
|
|
21,840,000
|
|
|
|
3,900,000
|
|
|
|
|
|
|
|
|
|
Book value
per common share
|
|
|
|
$
|
3.76
|
|
|
$
|
3.78
|
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
24
SELECTED UNAUDITED PRO FORMA CONDENSED
FINANCIAL
STATEMENTS
The selected unaudited pro forma
condensed financial statements are pro forma for First Communications after giving effect to the acquisitions of Globalcom on September 30, 2008, First
Energy Telecom Services, Inc. (FE Telecom) on March 6, 2008, First Communications, LLC and Xtension Services, Inc. (Xtension)
on July 2, 2007 and the reverse merger with Renaissance (together known as the Transactions).
The selected unaudited pro forma
condensed balance sheet as of September 30, 2008 is based on the unaudited historical consolidated balance sheets as of September 30, 2008 for
Renaissance and First Communications and gives effect to the Transactions and the related financing as if they had occurred on September 30, 2008. The
selected unaudited pro forma condensed statement of operations for the year ended December 31, 2007 has been derived from audited consolidated
financial statements for the year ended December 31, 2007. The selected unaudited pro forma condensed consolidated statement of operations for the nine
months ended September 30, 2008 has been derived from the selected unaudited consolidated financial statements of Renaissance and First Communications
for the nine month period ended September 30, 2008. The selected unaudited pro forma condensed statements of operations give effect to the Transactions
and borrowings as if they occurred on January 1, 2007.
The following selected unaudited
pro forma combined financial information has been derived from, and should be read in conjunction with, the unaudited pro forma condensed combined
financial statements and related notes thereto included elsewhere in this proxy statement/prospectus, each of Renaissances and First
Communications historical consolidated financial statements and related notes, each of Renaissances and First Communications
Managements Discussion and Analysis of Financial Condition and Results of Operations section and other financial information
contained in this proxy statement/prospectus. The selected unaudited pro forma information presented herein does not intend to represent or be
indicative of the financial position or results of operations that would have actually occurred had the Transactions occurred on the dates indicated
and should not be taken as representative of the future consolidated financial position or results operations.
Selected Unaudited Pro Forma Combined Statement of
Operations Data
|
|
|
|
For the Nine Months Ended
September 30, 2008
|
|
For the Twelve Months Ended
December 31, 2007
|
|
|
|
|
|
Pro Forma
Consolidated
Assuming
No
Conversions
|
|
Pro Forma
Consolidated
Assuming
Maximum
Conversions
|
|
Pro Forma
Consolidated
Assuming
No
Conversions
|
|
Pro Forma
Consolidated
Assuming
Maximum
Conversions
|
|
|
|
|
(In thousands)
|
|
(In thousands)
|
|
Total
Revenues, Net
|
|
|
|
$
|
158,982
|
|
|
$
|
158,982
|
|
|
$
|
217,293
|
|
|
$
|
217,293
|
|
Operating
Income
|
|
|
|
|
9,647
|
|
|
|
9,647
|
|
|
|
16,080
|
|
|
|
16,080
|
|
Interest
Expense
|
|
|
|
|
(5,346
|
)
|
|
|
(5,346
|
)
|
|
|
(7,813
|
)
|
|
|
(7,813
|
)
|
Net Income
|
|
|
|
|
3,542
|
|
|
|
3,329
|
|
|
|
7,018
|
|
|
|
6,484
|
|
Earnings per
share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
$
|
0.09
|
|
|
$
|
0.09
|
|
|
$
|
0.18
|
|
|
$
|
0.18
|
|
Diluted
|
|
|
|
$
|
0.08
|
|
|
$
|
0.08
|
|
|
$
|
0.17
|
|
|
$
|
0.17
|
|
Weighted
average shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
40,300
|
|
|
|
36,714
|
|
|
|
38,680
|
|
|
|
35,418
|
|
Diluted
|
|
|
|
|
44,646
|
|
|
|
41,060
|
|
|
|
41,755
|
|
|
|
38,493
|
|
25
Selected Unaudited Pro Forma Condensed Consolidated
Balance Sheet Data
|
|
|
|
As of
September 30, 2008
|
|
|
|
|
|
Pro Forma
Consolidated
Assuming
No
Conversions
|
|
Pro Forma
Consolidated
Assuming
Maximum
Conversions
|
|
|
|
|
(In thousands)
|
|
Cash and cash
equivalents
|
|
|
|
$
|
75,499
|
|
|
$
|
54,226
|
|
Working
capital
|
|
|
|
|
63,046
|
|
|
|
41,773
|
|
Total assets
|
|
|
|
|
398,914
|
|
|
|
377,641
|
|
Long-term
debt, less current portion
|
|
|
|
|
104,500
|
|
|
|
104,500
|
|
Total
liabilities
|
|
|
|
|
177,629
|
|
|
|
177,629
|
|
Stockholders equity
|
|
|
|
|
221,285
|
|
|
|
200,012
|
|
26
RISK FACTORS
You should carefully consider the
following risk factors, together with all of the other information included in this proxy statement/prospectus, before you decide whether to vote or
instruct your vote to be cast to approve the proposals described in this proxy statement/prospectus.
Risks Related to Renaissances Business and
Operations Following the Merger
with First Communications
First Communications indebtedness may restrict operating flexibility, could adversely affect its financial health and could prevent
it from fulfilling certain financial obligations.
As of September 30, 2008, First
Communications had approximately $126,500,000 of total outstanding indebtedness. The indebtedness could significantly affect its financial health and
its ability to fulfill certain financial obligations. For example, a high level of indebtedness could:
|
|
make it more difficult to satisfy current and future debt
obligations;
|
|
|
make it more difficult to obtain additional financing for
working capital, capital expenditures, acquisitions or general corporate purposes;
|
|
|
require First Communications to dedicate a substantial portion
of cash flows from operating activities to the payment of principal and interest on the indebtedness, thereby reducing the funds available for
operations and other purposes, including investments in service development, capital spending and acquisitions;
|
|
|
place First Communications at a competitive disadvantage to
competitors who are not as highly leveraged;
|
|
|
make First Communications vulnerable to interest rate
fluctuations, if any indebtedness that bears interest at variable rates is incurred;
|
|
|
impair First Communications ability to adjust to changing
industry and market conditions; and
|
|
|
make First Communications more vulnerable in the event of a
downturn in general economic conditions or in business or changing market conditions and regulations.
|
The credit agreement governing First Communications
credit facility contains restrictive and operating covenants that limit First Communications operating flexibility, and it may obtain a credit
facility in the future that may include similar or additional restrictions.
The First Communications credit
agreement contains covenants that, among other things, restrict First Communications ability to take specific actions, even if First
Communications believes them to be in its best interest, including restrictions on its ability to:
|
|
incur or guarantee additional indebtedness or issue preferred
stock;
|
|
|
pay dividends or distributions on, or redeem or repurchase,
capital stock;
|
|
|
create liens with respect to its assets;
|
|
|
make investments, loans or advances;
|
|
|
prepay subordinated indebtedness;
|
|
|
enter into transactions with affiliates;
|
|
|
merge, consolidate, reorganize or sell its assets;
and
|
|
|
engage in any business other than activities related or
complementary to communications.
|
27
In addition, any future credit
facility may impose financial covenants that will require First Communications to comply with specified financial ratios and tests, including minimum
quarterly earnings before interest, taxes, depreciation and amoritization (EBITDA), senior debt to total capitalization, maximum capital
expenditures, maximum leverage ratios and minimum interest coverage ratios. First Communications cannot assure you that it will be able to meet these
requirements or satisfy these covenants in the future. If First Communications fails to do so, its indebtedness could accelerate and become payable at
a time when First Communications is unable to pay it. This could adversely affect its ability to carry out its business plan and would have a negative
effect on its financial condition.
To service indebtedness, First Communications will require a
significant amount of cash. Its ability to generate cash depends on many factors beyond its control.
First Communications
ability to repay or to refinance its indebtedness and to fund planned capital expenditures will depend on future financial and operating performance.
This, to a certain extent, is subject to general economic, financial, competitive, business, legislative, regulatory and other factors that are beyond
the control of First Communications. These factors could include operating difficulties, diminished access to necessary network facilities, increased
operating costs, significant customer churn, pricing pressures, the response of competitors, regulatory developments and delays in implementing
strategic initiatives.
First Communications cannot
assure you that its business activities will generate sufficient cash flow from operations or that future borrowings will be available in an amount
sufficient to enable the payment of indebtedness or to fund other liquidity needs. First Communications may need to refinance all or a portion of its
indebtedness at or before maturity. First Communications cannot assure you that it will be able to refinance any indebtedness, nor credit facility, on
commercially reasonable terms or at all. Upon completion of the Merger, a portion of the cash held in the Trust Account will be used to repay First
Communications outstanding indebtedness, including $15 million to redeem First Communications Series A Preferred Stock and $10 million to
repay amounts owed under First Communications revolving line of credit. First Communications anticipates that, following the completion of the
Merger, the principal amount of the post-merger combined companys outstanding bank indebtedness will be approximately $113.5 million. However,
the post-merger combined company may also choose to use the funds released from the Trust Account to make additional payments on outstanding
indebtedness.
Declining prices for communications services could reduce
First Communications revenues and profitability.
First Communications may fail to
achieve acceptable profits due to pricing. Prices in telecommunications services have declined substantially in recent years, a trend which may
continue. Accordingly, First Communications cannot predict to what extent reductions in prices may be needed to remain competitive or whether First
Communications will be able to sustain future pricing levels as competitors introduce competing services or similar services at lower prices. First
Communications ability to meet price competition may depend on its ability to operate at costs equal to or lower than competitors or potential
competitors.
Certain commercial customers are entitled to terminate their
contracts on short notice.
Under the terms of their
contracts, certain commercial customers who have been customers for more than 12 months may be entitled to terminate their contracts on short notice.
If a significant number of customers were to terminate their contracts or terminate their relationships with First Communications, it could have an
adverse effect on First Communications business, results of operations and financial condition.
For example, First Communications
derived 5.6% of its revenues for the year ended December 31, 2007 from FirstEnergy Corp. If FirstEnergy Corp. were to terminate its agreement with
First Communications, it could affect First Communications revenues.
28
In addition, relationships with
its top five customers accounted for 54.6% of First Communications wholesale division revenues for the year ended December 31, 2007. Although
they are commercial customers, 99.1% of wholesale customers are currently on a monthly rolling contract basis, which allows these customers to
terminate their agreement with only one months notice. Given its concentrated customer base, the loss of any key wholesale customers could have
an adverse effect on First Communications revenues.
The communications market in which First Communications
operates is highly competitive, and First Communications may not be able to compete effectively against companies that have significantly greater
resources, which could cause it to lose customers and impede its ability to attract new customers.
The communications industry is
highly competitive and is affected by the introduction of new services and systems by, and the market activities of, major industry participants. First
Communications has not achieved, and does not expect to achieve, a major share of the local access lines for any of the communications services
currently offered. In each of its markets, First Communications competes with the incumbent local exchange carrier (each an ILEC and
collectively the ILECs) serving that area. Large competitors have the following advantages compared to First
Communications:
|
|
long-standing relationships and strong reputation with
customers;
|
|
|
substantially greater financial, technical, marketing, personnel
and other resources;
|
|
|
more funds to deploy communications services and systems that
compete with First Communications;
|
|
|
the potential to subsidize competitive services with revenue
from a variety of businesses;
|
|
|
anticipated increased pricing flexibility and relaxed regulatory
oversight;
|
|
|
benefits from existing regulations that favor the
ILECs.
|
First Communications also faces,
and expects to continue to face, competition from other current and potential market entrants, such as other competitive local exchange carriers, cable
television companies and wireless service providers. While many competitive local exchange carriers have historically targeted small- and medium sized
enterprises and multi-location customers, cable television companies are now increasingly also targeting these customers. First Communications is also
increasingly subject to competition from providers using voice over Internet protocol (VoIP) over the public Internet or private networks.
VoIP providers are currently subject to substantially less regulation than traditional local telephone companies and do not pay certain taxes and
regulatory charges that First Communications is required to pay. In addition, the development of new technologies could give rise to significant new
competitors in the local market.
In the long distance
communications market, First Communications faces competition from the ILECs, large and small interexchange carriers, wireless carriers and IP based
service providers. Long distance prices have decreased substantially in recent years and may continue to decline in the future as a result of increased
competition. If this trend continues, First Communications anticipates that revenues from network services and other service offerings will likely be
subject to significant price pressure.
Continued industry consolidation could further strengthen
First Communications competitors and could adversely affect the business prospects of First Communications.
Consolidation in the
telecommunications industry is occurring at a rapid pace. In addition to the ILEC/interexchange carrier combinations of Verizon/MCI and SBC/AT&T
and the ILEC combinations such as AT&T/BellSouth, numerous competitive local exchange carrier combinations have occurred, including several which
directly impact First Communications markets, such as Paetec/US LEC/McLeod, Cavalier/Talk America and Choice One/CTC/Conversent. This
consolidation strengthens First Communications competitors and poses
29
increased competitive
challenges for First Communications. The ILEC/interexchange carrier combinations not only provide the ILECs with national and international long
distance networks and subscribers, but eliminate the two most effective and well financed opponents of the ILECs in federal and state legislative and
regulatory forums and potentially reduce the availability of non-ILEC network facilities. The competitive local exchange carrier combinations will
provide direct competitors with greater financial, network and marketing assets.
Any slowdown in demand for wireless communications services or
for tower space could adversely affect future growth and revenues.
Demand for antenna space on First
Communications towers and for site development services depends on demand for wireless services. In 2001 through 2003, economic downturns in the
U.S. economy, including the wireless telecommunications industry, negatively influenced demand for tower space and site development services. Similar
slowdowns in the future may adversely affect:
|
|
consumer demand for wireless services;
|
|
|
the financial condition of the wireless service
providers;
|
|
|
the ability and willingness of wireless service providers to
maintain or increase capital expenditures;
|
|
|
the availability and cost of capital, including interest
rates;
|
|
|
volatility in the equity and debt markets; and
|
|
|
the willingness of tenants to renew their leases for additional
terms.
|
As a result of these factors,
wireless service providers may delay or abandon implementation of new systems and technologies, including third generation (3G), fourth
generation (4G) or other wireless services or may elect not to renew existing antenna leases in order to reduce operating
expenses.
First Communications may not secure as many site leasing
tenants as planned or lease rates for new tenant leases may decline.
If tenant demand for tower space
or lease rates on new leases decrease, First Communications may not be able to successfully grow its site leasing business as expected. This may have a
material adverse effect on First Communications strategy, revenue growth and ability to satisfy financial and other contractual
obligations.
As wireless service provider customers continue to combine
their operations, First Communications growth, revenue and ability to service indebtedness could be adversely affected.
Demand for services may decline
with consolidation among wireless service provider customers as they may then reduce capital expenditures in the aggregate or fail to renew existing
leases for tower space because many of their existing networks and expansion plans may overlap. Furthermore, to the extent that other wireless service
providers consolidate in the future, they may not renew any duplicative leases that they have on First Communications towers and/or may not lease as
much space on towers in the future. This would adversely affect growth, revenue and ability to service indebtedness.
Similar consequences may occur if
wireless service providers engage in extensive sharing, roaming or resale arrangements as an alternative to leasing First Communications antenna
space. Wireless voice service providers frequently enter into roaming agreements with competitors allowing them to use one anothers wireless
communications facilities to accommodate customers who are out of range of their home providers services. Wireless voice service providers may
view these roaming agreements as a superior alternative to leasing antenna space on communication sites owned or controlled by First Communications or
others. The proliferation of these roaming agreements could have a material adverse effect on revenue.
30
The financial difficulties faced by others in the
telecommunication industry could adversely affect First Communications public image and financial results.
Certain competitive
communications services providers, long distance carriers and other communications providers have experienced substantial financial difficulties over
the past few years. To the extent that carriers in financial difficulty purchase services from First Communications, payment may not come in full or at
all for services that have been rendered. Further, the perception of instability of companies in the telecommunications industry may diminish First
Communications ability to obtain further capital and may adversely affect the willingness of potential customers to purchase their communications
services from First Communications.
Certain of First Communications services are dependent
upon contracts with third party suppliers and carriers and any amendment to the terms of such contracts (including as to price and rates) could have an
adverse effect on First Communications results of operations or financial condition.
In order to provide its customers
with certain services, First Communications needs to enter into wholesale agreements with third party suppliers and carriers. First Communications has
currently entered into several such agreements, a number of which contain rate change clauses that allow the relevant suppliers or carriers to
unilaterally increase rates on 30 to 60 days notice for domestic traffic and five 5 to 30 days notice for international traffic. Suppliers
and carriers have raised rates pursuant to these clauses in the past and there can be no assurance that existing and future suppliers and carriers will
not exercise their rights to increase rates in the future, thereby negatively affecting First Communications results of operations. If First
Communications is unable to pass on such increases to customers or if the price increases result in a loss of customers, this could have an adverse
effect on its results of operations and financial condition.
Carriers periodically issue substantial bills related to
services provided during past periods.
Periodically, carriers issue
bills that relate to services provided during past periods. Such bills may be for services for which the carrier has failed to bill or billed at the
wrong rate or may contain charges that the carrier had the right to access, but failed to do so. While First Communications generally disputes these
bills, resolution could adversely impact its cash flow and finances.
Difficulties First Communications may experience with ILECs,
interexchange carriers and wholesale customers over payment issues may harm its financial performance.
First Communications has at times
experienced difficulties collecting amounts due for services that were provided to ILECs and interexchange carriers. These balances due to First
Communications can be material. Generally, First Communications has been able to reach mutually acceptable settlements to collect overdue and disputed
payments, but it cannot assure you that it will be able to do so in the future.
In addition, First
Communications interconnection agreements allow ILECs to decrease order processing, disconnect customers and increase security deposit
obligations for delinquent payments. If an ILEC makes an enforceable demand for an increased security deposit, First Communications could have less
cash available for other expenses. If an ILEC were to cease order processing or disconnect customers, First Communications business and
operations would be materially and adversely affected.
Further, periodically, First
Communications wholesale customers experience financial difficulties. To the extent that the credit quality of its wholesale customers
deteriorates or they seek bankruptcy protection, First Communications may have difficulty collecting amounts due for services that it has provided to
them. While First Communications maintains security deposits and often retains the right to solicit end-user customers, First Communications cannot
assure you that such mechanisms will provide adequate protection.
Finally, First Communications
sometimes has disagreements with ILECs and interexchange carriers regarding the interpretation and application of laws, rules, regulations, tariffs and
agreements. Adverse resolution of these disagreements could impact First Communications revenues and costs of service, both prospectively
and
31
retroactively. The resolution
of some of these disputes will depend upon public policy determinations not yet made by the FCC and state regulators.
Ongoing billing disputes with other carriers may cause First
Communications to have to pay the carriers money which could materially adversely affect its business, financial condition, results of operations and
cash flows.
First Communications is currently
involved in a variety of disputes with carriers relating to billings of approximately $1.4 million as of September 30, 2008. When it identifies an
error in a carriers bill, First Communications disputes the amount that it believes to be incorrect and often withholds payment for that portion
of the invoice. Errors it routinely identifies on bills include, but are not limited to, carriers billing for services which were not consumed,
carriers billing for services First Communications did not order, carriers billing for services that should have been billed to another carrier,
carriers billing for services using incorrect rates or incorrect tariffs, and carriers failing to provide the necessary supporting detail to allow
First Communications to bill its customers or verify the accuracy of the bill. These problems are exacerbated because carriers periodically bill for
services months or sometimes years after the services are provided. While First Communications hopes to resolve these disputes through negotiation, it
may be compelled to arbitrate these matters. The resolution of these disputes may require First Communications to pay an amount that is greater than
the amount for which it has planned or even the amount the carrier claimed if late payment charges are assessed, which could materially adversely
affect First Communications business, financial condition, results of operations and cash flows. In the event that disputes are not resolved in
favor of First Communications and it is unable to pay charges in a timely manner, the carrier may deny First Communications access to the network
facilities that are required to serve its customers. If a carrier notifies First Communications of an impending embargo of this nature,
First Communications may be required to notify its customers of a potential loss of service which may cause a substantial loss of customers. It is not
possible at this time to predict the outcome of these disputes.
First Communications depends on a limited number of third
party service providers for long distance and other services, and if any one of these providers were to experience significant interruptions in its
business operations, or were to otherwise cease to provide such services, First Communications ability to provide services to its customers could
be materially and adversely affected.
First Communications depends on a
limited number of third party service providers for long distance, data and other services. If any one of these third party providers were to
experience significant interruptions in its business operations, terminate its agreements or fail to perform the services or meet the standards of
quality required under the terms of agreements with it, First Communications ability to provide these services to its customers could be
materially and adversely affected for a period of time that cannot be predicted. If First Communications had to migrate the provision of these services
to an alternative provider, it cannot assure that First Communications would be able to timely locate alternative providers of such services, that such
services could be migrated in a short period of time without significant customer disruption so as to avoid a material loss of customers or business,
or that the migration could occur at economical rates.
System disruptions or the failure of First
Communications information systems to perform as expected could result in increased capital expenditures, customer and vendor dissatisfaction,
loss of business or the inability to add new customers or additional services.
First Communications
success ultimately depends on providing reliable service. Although its network has been designed to minimize the possibility of service disruptions or
other outages, it may be disrupted by problems in the network, such as equipment failures and problems with a competitors or vendors
system, such as physical damage to telephone lines or power surges and outages. In addition, First Communications engineering and operations
organizations continually monitor and analyze the utilization of its network. As a result, First Communications may develop projects to modify or
eliminate network circuits that are underutilized. This ongoing
32
process may result in limited
network outages for a subset of customers. Any disruption in First Communications network could cause the loss of customers and result in
additional expenses.
Likewise, disruptions caused by
security breaches, terrorism or by other factors could harm First Communications future operating results. The day-to-day operation of First
Communications business is highly dependent on the ability to protect communications and information technology systems from damage or
interruptions by events beyond its control. Sabotage, computer viruses or other infiltration by third parties could damage or disrupt service, damage
facilities, damage its reputation and cause First Communications to lose customers, among other things. A catastrophic event could materially harm
operating results and financial condition. Catastrophic events could include a terrorist attack in markets of operation or a major earthquake, fire, or
similar event that would affect First Communications central offices, corporate headquarters, network operations center or network
equipment.
Finally, First Communications
relies on complex information systems to support business functions. If systems, individually or collectively, fail or do not perform as expected,
First Communications ability to process and provision orders, to make timely payments to vendors and to ensure that it collects revenue owed to
it would be adversely affected. Such failures could result in increased capital expenditures, customer and vendor dissatisfaction, loss of business or
the inability to add new customers or additional services.
Towers are subject to damage from natural
disasters.
Towers are subject to risks
associated with natural disasters such as tornadoes, hurricanes and earthquakes. First Communications maintains insurance to cover the estimated cost
of replacing damaged towers, but these insurance policies are subject to loss limits and deductibles. First Communications also maintains third party
liability insurance, subject to loss limits and deductibles, to protect in the event of an accident involving a tower. A tower accident for which First
Communications is uninsured or underinsured, or damage to a significant number of towers, could lead to the incurrence of significant expenditures and
may have a material adverse effect on operations or financial condition.
Certain real estate leases and agreements are important to the
business of First Communications, and failure to maintain such leases and agreements could have an adverse effect.
First Communications
switches are housed in facilities owned by third parties. Its use of these facilities is subject to multiple real estate leases. If First
Communications were to lose one or more of these leases, the resulting relocation of one or more of these switches would be costly and disruptive to
its business and customers. First Communications cannot assure you that it will be able to maintain all of the real estate leases governing its
multiple switch sites.
Failure to obtain and maintain necessary permits and
rights-of-way could interfere with First Communications network infrastructure and operations.
To obtain and maintain
rights-of-way and similar rights and easements needed to install, operate and maintain fiber optic cable and other network elements, First
Communications must negotiate and manage agreements with state highway authorities, local governments, transit authorities, local telephone companies
and other utilities, railroads, long distance carriers and other parties. The failure to obtain or maintain any rights-of-way could interfere with
First Communications operations, interfere with network infrastructure and use of that infrastructure and adversely affect the business. For
example, if First Communications loses access to a right-of-way, there may be a need to spend significant sums to remove and relocate
facilities.
33
The communications industry is undergoing rapid technological
changes, and new technologies may be superior to the technologies that First Communications uses. First Communications may fail to anticipate and keep
up with such changes.
The communications industry is
subject to rapid and significant changes in technology and in customer requirements and preferences. If First Communications fails to anticipate and
keep up with such changes, it could lose market share, which could reduce revenue. The business of First Communications has been developed based, in
part, on traditional telephone technology. Subsequent technological developments may reduce the competitiveness of First Communications network
and require expensive unanticipated upgrades or additional communications products that could be time consuming to integrate into the business and
could cause the loss of customers and impede success in attracting new customers. First Communications may be required to select one technology over
another at a time when it might be impossible to predict with any certainty which technology will prove to be more economic, efficient or capable of
attracting customers. In addition, even though First Communications utilizes new technologies in its network, such as VoIP, First Communications may
not be able to implement them as effectively as other companies with more experience with those new technologies. In addition, while First
Communications has recently purchased and deployed new technology, including VoIP soft switches, Ethernet in the First Mile and Multiprotocol Label
Switching core and edge routers, all of which provide networks with a more efficient way to manage applications and move information between locations,
First Communications may not be able to implement new technology as effectively as other companies with more experience with new
technology.
First Communications may be unable to identify suitable
acquisition candidates or may engage in future acquisitions that are not successful or fail to integrate acquired businesses into its operations, which
may adversely affect its competitive position and growth prospects.
Part of First
Communications business strategy is to expand through the acquisition of other businesses that are believed to be complementary to its current
business. First Communications may be unable to identify suitable acquisition candidates, or if suitable acquisition candidates are identified, First
Communications may not complete those transactions commercially favorable to internal metrics, which may adversely affect its competitive position and
potential growth prospects.
If First Communications acquires
another business, difficulties that may be faced are:
|
|
integrating that business personnel, services, products or
technologies into existing operations;
|
|
|
retaining key personnel of the acquired business;
|
|
|
failing to adequately identify or assess liabilities of that
business;
|
|
|
failing to achieve the forecasts used to determine the purchase
price of that business; and
|
|
|
diverting First Communications managements attention
from the normal daily operation of the existing business.
|
These difficulties could disrupt
First Communications ongoing business and increase expenses.
First Communications may have difficulty obtaining financing
for future acquisitions, and even if it is able to obtain financing it may not be able to service such indebtedness.
First Communications
ability to complete acquisitions will depend, in part, on its ability to finance these acquisitions, including the costs of acquisition and
integration. First Communications ability to finance these acquisitions may be constrained by its cash flow, the level of indebtedness at the
time, restrictive covenants in its agreements governing indebtedness, conditions in the securities markets and other factors, many of which are beyond
its control. If First Communications proceeds with one or more acquisitions in which the consideration consists of cash, it may use a substantial
portion of its available cash to complete the acquisition. If it finances one or more acquisitions with the proceeds of indebtedness, its interest
expense and debt service requirements could
34
increase materially. The
financial impact of acquisitions could materially affect First Communications business and could cause substantial fluctuations in its quarterly
and yearly operating results.
Limits exist on First Communications ability to seek
indemnification for losses from individuals and entities from whom it has acquired assets and operations.
When First Communications
acquires a company or a companys assets, it generally secures from the sellers indemnity protection against certain types of liabilities. Such
indemnity protection is generally subject to a deductible and a cap as well as a time limit. If undisclosed or unknown liabilities fall below the
deductible or over the cap or such liabilities are not discovered until after the time limit, the indemnity will not protect First Communications.
Moreover, a seller may contest First Communications indemnity claims or be unable to fund such claims.
Misappropriation of First Communications intellectual
property and proprietary rights could impair its competitive position, and defending against intellectual property infringement and misappropriation
claims could be time consuming and expensive and, if it is not successful, could cause substantial expense and disrupt First Communications
business.
First Communications relies on a
combination of copyright, trademark and trade secret laws, as well as licensing agreements, third party non-disclosure agreements and other contractual
provisions and technical measures to protect its existing intellectual property rights. There can be no assurance that these protections will be
adequate to prevent competitors from copying or reverse-engineering hardware or software products, or that competitors will not independently develop
technologies that are substantially equivalent or superior to First Communications technology.
In addition, First Communications
cannot be sure that the products, services, technologies and advertising currently employed in its business do not or will not infringe valid patents,
trademarks, copyrights or other intellectual property rights held by third parties. First Communications may be subject to legal proceedings and claims
from time to time relating to the intellectual property of others in the ordinary course of its business. Defending against intellectual property
infringement or misappropriation claims could be time consuming and expensive regardless of whether First Communications is successful, and could
disrupt its business.
Several providers of VoIP service have been the target of
recent intellectual property infringement litigation that may materially and adversely affect the ability of First Communications and/or the ability of
other providers to sell or provide VoIP services.
A number of providers of VoIP
service have been and may in the future be targets of intellectual property infringement litigation with respect to the provision of VoIP service. If
it were found that First Communications use of VoIP connections infringes any third party intellectual property, its business could be adversely
impacted. First Communications could also be adversely impacted if any of its suppliers or wholesale customers that may be providing VoIP service were
to be unable to continue to provide such service as a result of infringement of intellectual property held by others.
As an Internet access provider, liability may be incurred by
First Communications for information disseminated through its network.
The law relating to the liability
of Internet access providers and on-line services companies for information carried on or disseminated through their networks is unsettled. As the law
in this area develops, the potential imposition of liability upon First Communications for information carried on and disseminated through its network
could require it to implement measures to reduce its exposure to such liability, which may require the expenditure of substantial resources or the
discontinuation of certain products or service offerings. Any costs that are incurred as a result of such measures or the imposition of liability could
harm its business.
35
Successful execution of First Communications business
plans may depend on its ability to retain and attract key personnel.
First Communications believes
that its success is due, in part, to its experienced management team. Losing the services of one or more members of this management team could
adversely affect First Communications business and expansion efforts, and possibly prevent further improvements to operational, financial and
information management systems and controls. First Communications does not maintain key man life insurance on any of its officers. As First
Communications continues to grow, it will need to retain and hire additional qualified sales, marketing, administrative, operating and technical
personnel and to train and manage new personnel.
First Communications
ability to implement its business plan is dependent on its ability to hire and retain a large number of qualified new employees each year. The
competition for qualified technical and sales personnel is intense in the telecommunications industry and in its current markets of operation. If First
Communications is unable to hire sufficient qualified personnel, customers could experience inadequate customer service and delays in the installation
and maintenance of access lines.
First Communications success depends on its ability to
manage and expand operations effectively.
First Communications
ability to manage and expand operations effectively will depend on its ability to:
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offer high-quality, reliable services at reasonable
costs;
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introduce new technologies;
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install and operate telecommunications switches and related
equipment;
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lease access to suitable transmission facilities at competitive
prices;
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obtain successful outcomes in disputes and in
litigation;
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successfully negotiate, adopt or arbitrate interconnection
agreements with other carriers;
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acquire necessary equipment, software and
facilities;
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integrate existing and newly acquired technology and facilities,
such as switches and related equipment;
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maintain effective quality controls;
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hire, train and retain qualified personnel;
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enhance operating and accounting systems;
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address operating challenges;
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adapt to market and regulatory developments; and
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obtain and maintain required governmental
authorizations.
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In order for First Communications
to succeed, these objectives must be achieved in a timely manner and on a cost-effective basis. If these objectives are not achieved, First
Communications may not be able to compete in existing markets or expand into new markets.
36
In addition, First Communications
has grown rapidly since inception and expects to continue to grow primarily by expanding product offerings, adding and retaining customers,
acquisitions and leveraging network and operational infrastructure. First Communications expects this growth to place a strain on its operational,
human and financial resources, particularly if the growth is through acquisitions. The ability to manage operations and expansion effectively depends
on the continued development of plans, systems and controls for operational, financial and management needs. First Communications cannot give any
assurance that these requirements can be satisfied or that operations and growth can be managed effectively. A failure to satisfy these requirements
could have a material adverse effect on First Communications financial condition and its ability to implement fully its growth and operating
plans.
Failure to successfully and efficiently integrate Globalcom
into First Communications operations may adversely affect First Communications ability to realize the expected benefits of the
merger.
On September 30, 2008, First
Communications acquired GCI Globalcom Holdings, Inc. (Globalcom). The integration of Globalcoms facilities into First
Communications operations is a significant undertaking and will require considerable attention from First Communications management team.
This integration is a complex, costly and time-consuming process and First Communications cannot assure you that this process will be successful. In
addition, First Communications has made several assumptions regarding synergies for the combined company, many of which are dependent upon the
successful integration of the operations of the combined company. In addition, the integration of Globalcom into First Communications operations
will require significant one-time costs for tasks such as site visits and audits and may be difficult to execute. Additional integration challenges
include, among other things:
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transitioning the branding of the acquired company to First
Communications;
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persuading employees of First Communications and the acquired
company that the business cultures are compatible, maintaining morale, and retaining and integrating key employees;
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incorporating new facilities into business
operations;
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coordinating sales and marketing functions;
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combining products and services;
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integrating systems; and
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maintaining standards, controls, procedures and
policies.
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If unable to successfully
overcome these integration challenges, First Communications may not achieve the benefits previously expected from its merger with
Globalcom.
Adverse rulings on Globalcoms disputes with AT&T and
other litigation risks could materially adversely affect First Communications business, financial condition and results of
operations.
Globalcom purchases certain
critical loop and transport circuits in the Chicago market from the ILEC, AT&T-Illinois and is in a dispute with AT&T over the pricing on
certain high capacity loops located in three Chicago central offices owned by AT&T. Globalcoms position is that, consistent with an order of
the Illinois Commerce Commission, until the interconnection agreement between Globalcom and AT&T is amended to change the pricing it sets forth,
the rates should be the ones ordered by the Illinois Commerce Commission for these circuits, plus 15%. AT&T-Illinois position is that as the
result of a federal court ruling favorable to AT&T-Illinois, the special access rates set forth in AT&T-Illinois tariff, which are
substantially higher, apply, effective January 28, 2008.
Globalcom and AT&T are in
preliminary negotiations to resolve this dispute, but if AT&T prevails in this dispute, the cost for these high capacity loops could increase
significantly on 15% of Globalcoms installed T1 circuits. Further, Globalcom could incur substantial legal costs to resolve this issue and
Globalcom management
37
could be required to devote a
substantial amount of time and efforts to reach resolution. An adverse ruling could materially adversely affect First Communications financial
condition.
Risks Related to Regulation of Renaissances Business
Following the Merger
with First Communications
First Communications is subject to substantial government regulation that may restrict its ability to provide local services and may
increase the costs it incurs to provide these services.
First Communications is subject
to varying degrees of federal, state and local regulation that impose restrictions on the way that First Communications operates its business and its
costs to do so. Pursuant to the Communications Act, the FCC exercises jurisdiction with respect to interstate and international telecommunications
services. First Communications must offer interstate services at just and reasonable rates in a manner that is not unreasonably discriminatory and must
maintain geographically averaged interstate rates as required by federal law. It must comply with various FCC consumer protection requirements
affecting the format and content of its bills, disclosure of rates and terms and conditions of service, and other matters, and is subject to various
FCC reporting requirements and mandatory monetary assessments for regulatory programs. The FCC has the authority to condition, modify, cancel,
terminate or revoke First Communications licenses and authorizations for failure to comply with federal laws or the rules, regulations and
policies of the FCC. The FCC may also impose fines or other penalties for such violations. Failure to comply with federal reporting and regulatory
requirements may result in the incurrence of fines or other penalties, including loss of First Communications authority to provide
services.
In addition, state regulatory
commissions also exercise jurisdiction over First Communications to the extent it provides intrastate telecommunications services. First Communications
is required to obtain regulatory authorization and/or file tariffs with regulators in most of the states in which it operates. State regulatory
commissions also often regulate the rates, terms and conditions at which First Communications offers service. First Communications has obtained the
necessary certifications to provide service, but each state commission retains the authority to revoke these certificates if that commission determines
that First Communications has violated any condition of the certification or if it finds that doing so would be in the public
interest.
Both federal and state regulators
also require First Communications to pay various fees and assessments, file periodic reports and comply with various rules regarding the contents of
its bills, protection of subscriber privacy, service quality and similar consumer protection matters on an ongoing basis. Failure to comply with these
requirements may cause First Communications to be subject to fines or potentially be asked to show cause as to why its certificate of authority to
provide service should not be revoked. While First Communications believes itself to be in compliance with regulatory requirements, interpretations of
these obligations may differ from those of regulatory authorities. See the section entitled
Regulation
for discussion of legal and
regulatory developments.
The communications industry faces significant regulatory
uncertainties and the adverse resolution of these uncertainties could harm First Communications business, results of operations and financial
condition.
If current or future regulations
change, First Communications cannot assure you that the FCC or state regulators will grant any required regulatory authorization or refrain from taking
action against it if First Communications is found to have provided services without obtaining the necessary authorizations or to have violated other
requirements of their rules and orders. Delays in receiving required regulatory approvals or the enactment of new adverse regulation or regulatory
requirements may slow the growth of First Communications and have a material adverse effect upon its business, results of operations and financial
condition. The Telecommunications Act remains subject to judicial review and ongoing proceedings before the FCC and state regulators, including
proceedings relating to interconnection pricing, access to and pricing for unbundled network elements and special access services and other issues that
could result in significant changes to First Communications business and business conditions in the communications industry generally. Recent
decisions by the FCC have eliminated or reduced access to certain elements of ILEC telecommunications platforms that First Communications uses to serve
its customers and
38
increased the rates it pays
for such elements. Other proceedings are pending before the FCC that could potentially further limit First Communications access to these network
elements or further increase the rates it pays for such elements. Likewise, proceedings before the FCC could impact the availability and price of
special access facilities. Other proceedings before the FCC could result in an increase in the amount First Communications will pay to other carriers
or a reduction in the revenues derived from other carriers in, or retroactive liability for, access charges and reciprocal compensation. Still other
proceedings before the FCC could result in increases in the cost of regulatory compliance. A number of states also have proceedings pending that could
impact First Communications access to and the rates it pays for network elements. Other state proceedings could limit First Communications
pricing and billing flexibility. First Communications business would be substantially impaired if the FCC, the courts, or state commissions were
to eliminate access to the facilities and services used to serve customers, substantially increase the rates to be paid for facilities and services or
adversely impact the revenues to be received from other carriers or customers. In addition, legislative efforts to rewrite the Telecommunications Act
or enact other telecommunications legislation, as well as various state legislative initiatives, may cause major industry and regulatory changes. First
Communications cannot predict the outcome of these proceedings or legislative initiatives or the effects, if any, that these proceedings or legislative
initiatives may have on business and operations. See the section entitled
Regulation
for a discussion of legal and regulatory
developments.
Elimination or relaxation of regulatory rights and protections
could harm First Communications business, results of operations and financial condition.
Section 10 of the Communications
Act of 1934 (the Communications Act) requires the FCC to forbear from applying individual provisions of the Communications Act or its
various enabling regulations upon a showing that a statutory provision or a regulation is unnecessary to ensure that rates and practices remain just,
reasonable and non-discriminatory and to otherwise protect consumers and that forbearance is generally in the public interest and would promote
competition. Pursuant to Section 10, the FCC has effectively deregulated the provision of certain broadband services to enterprise customers by most
major ILECs, including Verizon, AT&T, Qwest, Embarq Corporation and Frontier Communications Corporation. Exercising its forbearance authority, the
FCC has also relieved certain ILECs in certain markets (including Omaha, Nebraska, and Anchorage, Alaska) of their obligation to provide other
competitive local exchange carriers with unbundled access to network elements at rates mandated by state regulatory commissions. Although First
Communications does not provide service in any of the impacted markets and hence is not currently directly affected by these rulings, Verizon and Qwest
have petitioned for comparable relief in other markets, and ILECs could file similar petitions with the FCC in the future. First Communications cannot
predict the outcome of pending or future forbearance proceedings or the effects that these proceedings may have on its business or operations since
such facilities will no longer be available to First Communications as a means to connect its network to customer locations.
In addition, FCC rules currently
allow Verizon and other ILECs to unilaterally retire copper loop facilities that provide the last mile connection to certain customers with
limited regulatory oversight. Verizon has filed nearly 100 notices of copper plant retirement with the FCC. While some competitive local exchange
carriers have petitioned the FCC to strengthen the rules governing copper plant retirement, there are no assurances that the outcome will prove
successful. Because it would limit First Communications the availability of facilities necessary to provide certain services to First
Communications customers, wide scale retirement of copper loops by ILECs could have an adverse impact First Communications business and
operations. See
Regulation
for a discussion of legal and regulatory developments.
If the ILECs with which First Communications has
interconnection agreements engage in anticompetitive practices or it experiences difficulties in working with the ILECs, its ability to offer services
on a timely and cost-effective basis will be materially and adversely affected.
First Communications
telecommunications business depends on its ability to interconnect with ILEC networks and to lease from them certain essential network elements. First
Communications obtains access to these network elements and services under terms established in interconnection agreements that it has entered into
with ILECs.
39
Like many competitive
communications services providers, from time to time, First Communications has experienced difficulties in working with ILECs with respect to obtaining
information about network facilities, ordering and maintaining network elements and services, interconnecting with their networks and settling
financial disputes. These difficulties can impair First Communications ability to provide local service to customers on a timely and competitive
basis. If an ILEC refuses to cooperate or otherwise fails to support First Communications business needs for any reason, including labor
shortages, work stoppages, cost-cutting initiatives or disruption caused by mergers, other organizational changes, natural disasters, or terrorist
attacks, First Communications ability to offer services on a timely and cost-effective basis will be materially and adversely
affected.
First Communications ability to provide services and
systems at competitive prices is dependent on its ability to negotiate and enforce favorable interconnection and other agreements.
First Communications
ability to continue to obtain favorable interconnection, unbundling, service provisioning and pricing terms, and the time and expense involved in
negotiating interconnection agreements and amendments, can be adversely affected by ongoing legal and regulatory activity. A series of FCC rulings have
reduced First Communications ability to access certain elements of ILEC telecommunications platforms in several ways that have affected its
operations. First, First Communications no longer has the right to require ILECs to sell it unbundled network platforms. Second, in certain central
offices, First Communications no longer has the right to require ILECs to sell it unbundled network elements, or has limited access rights to unbundled
network element high capacity circuits that connect its central switching office locations to customers premises. Third, First Communications no
longer has the right to require ILECs to sell to it unbundled network element transport between its switches and ILEC switches. Fourth, First
Communications has only limited or no access to unbundled network element DS-1 or DS-3 transport on certain interoffice routes. Petitions currently
pending before the FCC could, if granted, further reduce First Communications access to unbundled network element loops and transport. In these
instances where First Communications loses unbundled access to high capacity circuits or interoffice transport, it must either find alternative
suppliers or purchase substitute circuits from the ILEC as special access, which increases costs. In the near term, First Communications does not
anticipate any significant increases in the pricing of ILEC special access or facilities provided by alternative vendors. Finally, First
Communications access to certain broadband elements of the ILEC network has been limited or eliminated in certain circumstances.
In addition, all of First
Communications interconnection agreements provide either (i) that a party is entitled to demand renegotiation of particular provisions or of the
entire agreement based on intervening changes in law resulting from ongoing legal and regulatory activity, or (ii) that a change of law is immediately
effective in the agreement, and then set out a dispute resolution process if the parties do not agree upon the change of law. The initial terms of all
First Communications interconnection agreements with ILECs have expired; however, each of the agreements contains an evergreen
provision that allows the agreement to continue in effect until terminated. If First Communications were to receive a termination notice from an ILEC,
it may be able to negotiate a new agreement or initiate an arbitration proceeding at the relevant state commission before the agreement actually
terminates. In addition, the Telecommunications Act of 1996 gives First Communications the right to opt into interconnection agreements which have been
entered into by other carriers, provided the agreement is still in effect and provided that the entire agreement is adopted. First Communications
cannot assure you that the terms of any renegotiated, arbitrated, or adopted agreement will be comparable to the terms of its existing
agreements.
Further, First Communications has
entered into commercial agreements with AT&T, Verizon and Qwest to purchase substitute product at rates based on the former unbundled network
platform rates plus a surcharge that has increased over time. It has converted substantially all of its unbundled network platform lines to these new
products. The commercial agreement with AT&T expires in September 2010, the commercial agreement with Verizon expires in February 2011, and the
commercial agreement with Qwest expires in January 2011. These agreements are subject to earlier termination in certain circumstances, including
termination if any regulatory authority asserts jurisdiction over an agreement. The expiration, or the early termination by AT&T, Verizon, or
Qwest, of the commercial agreements would require First Communications to convert all of the lines served under those agreements to resale at
substantially less favorable rates. First Communications cannot assure you that the
40
commercial agreements will be
renewed at the end of their terms or that they will not be terminated before the end of their terms.
The effects of increased regulation of IP-based service
providers are unknown.
While the FCC has to date
generally subjected Internet service providers to less stringent regulatory oversight than traditional common carriers, it has recently imposed certain
regulatory obligations on providers of Interconnected VoIP and/or facilities based broadband Internet access providers, including the obligations to
contribute to the Universal Service Fund, to provide emergency 911 services and/or to comply with the Communications Assistance for Law Enforcement Act
(CALEA). Some states have imposed taxes, fees and/or surcharges on VoIP telephony services. In addition, in September 2008, the FCC
indicated that it will actively enforce its network neutrality policies with respect to Internet service providers efforts to manage Internet
traffic flowing on their networks. The imposition of additional regulations on Internet service providers could have a material adverse effect on First
Communications business.
Uncertainty over future activity of Least Cost Routing
providers could adversely affect First Communications profitability.
First Communications uses a
variety of Least Cost Router entities (LCRs) to route long haul and interoffice traffic primarily to and from locations where it does not
have owned or leased network facilities and therefore relies upon the network facilities of third party telecommunication carriers to complete calls.
LCRs typically provide this service at a rate that is materially lower that the rate offered by other carriers. Some LCRs in the industry are suspected
of converting traditional long-distance traffic to IP format and terminating such traffic as local traffic to avoid access charges that would otherwise
apply to long-distance traffic. If it is determined by the FCC or a court that all traffic carried by LCRs is subject to terminating access charges,
then LCRs may exit the market and the prices charged to First Communications by the remaining carriers for transport and transiting services could
materially increase. First Communications is subject to a litigation risk as a provider of local termination services to LCRs to the extent that LCR
customers may misrepresent the nature of traffic that they contract with First Communications to terminate on their behalf. Identifying the originating
nature of traffic that has been converted to a digital signal is challenging, and thus it is difficult to know with absolute certainty the nature of
all traffic passed to First Communications by an LCR. There can be no assurance that First Communications will not be materially adversely affected in
the event an LCR improperly terminates long-distance traffic through it.
Risks Related to the Merger
If holders of 20% or more of the Public Shares vote against the proposed Merger, Renaissance will be forced to liquidate, stockholders may
receive less than $5.93 per share and the warrants will expire and be worthless.
Pursuant to Renaissances
amended and restated certificate of incorporation, if holders of 20% or more of the Public Shares vote against the proposed Merger and elect to convert
their shares to cash, Renaissance will not be able to close the Merger with First Communications and will be forced to liquidate in accordance with the
terms of its certificate of incorporation because it will not be able to consummate a business combination by January 29, 2009. In any liquidation, the
net proceeds of Renaissances IPO held in the Trust Account, plus any interest earned thereon, less up to $1,875,000 of interest which has been
drawn for working capital purposes and less taxes, will be distributed on a pro rata basis to the holders of Public Shares. As of September 30, 2008,
there was approximately $5.93 per share in the Trust Account after accounting for taxes owing and Renaissances working capital draw. Upon
liquidation there will be no distribution with respect to Renaissances outstanding warrants and, accordingly, the warrants will expire and be
worthless.
41
Working capital will be reduced if Renaissances holders
of Public Shares exercise their right to convert their common stock into cash and a reduction in working capital may adversely affect the post-merger
combined companys business and future operations.
Pursuant to Renaissances
amended and restated certificate of incorporation, holders of Public Shares may vote against the merger proposal and demand that Renaissance convert
their shares into a pro rata share of the Trust Account, calculated as of two business days prior to the anticipated consummation of the Merger.
Renaissance and First Communications will not consummate the Merger if holders of 20% or more of the Public Shares exercise these conversion rights. If
no holders elect to convert their Public Shares, the Trust Account will be approximately
$
million at closing. If the Merger is consummated and holders of Public Shares have
demanded to convert their shares, there will be a corresponding reduction in the amount of funds available to the post-merger combined companys
business and future operations. If conversion rights are exercised with respect to 3,587,999 shares, the maximum potential conversion cost would be
approximately $
million.
Renaissances outstanding warrants may be exercised in
the future, which would increase the number of shares eligible for future resale in the public market and result in dilution to Renaissances
stockholders.
Outstanding redeemable warrants
to purchase an aggregate of 35,880,000 shares of common stock issued in Renaissances IPO, and warrants to purchase an aggregate of 4,666,667
shares of common stock issued to Renaissances Inside Stockholders in a private placement concurrent with the IPO will become exercisable upon the
consummation of the Merger, assuming it is completed. These warrants likely will be exercised only if the exercise price is below the market price of
Renaissance common stock. To the extent such warrants are exercised, additional shares of Renaissance common stock will be issued, which will result in
dilution to Renaissances stockholders and increase the number of shares of common stock eligible for resale in the public market. Sales of such
shares of common stock, as well as the sale of common stock issued pursuant to the 2008 Plan, in the public market could adversely affect the market
price of Renaissance common stock.
If you do not vote your Public Shares at the special meeting
AGAINST the Merger or give instructions to your broker to vote AGAINST the Merger and demand that Renaissance convert your shares into cash you will
NOT be eligible to exercise your conversion rights and receive a portion of the Trust Account upon consummation of the Merger.
Pursuant to Renaissances
amended and restated certificate of incorporation, to exercise your conversion rights as a holder of Public Shares, you must (i) vote AGAINST the
merger proposal, (ii) demand that Renaissance convert your common stock into cash, (iii) continue to hold your common stock through the closing of the
Merger and (iv) deliver your common stock to Renaissances transfer agent physically or electronically using Depository Trust Companys DWAC
System within the period specified in a notice you will receive from or on behalf of Renaissance, which period will be not less than 20 days.
Any
action that does not include an affirmative vote AGAINST the Merger will prevent you from exercising your conversion rights.
You may exercise your
conversion rights either by checking the box on the proxy card or by submitting your request in writing to Mark Seigel, Renaissances secretary,
at the address listed in this proxy statement/prospectus.
If, notwithstanding your negative
vote, the Merger is completed, then, if you have properly exercised your conversion rights, you will be entitled to receive a pro rata portion of the
Trust Account, including any interest earned thereon, calculated as of two business days prior to the date of the consummation of the Merger. If you
exercise your conversion rights, then you will be exchanging your shares of Renaissance common stock for cash and you will no longer own these shares.
However, if the Merger is not completed and you have not properly exercised your conversion rights, your shares will not be converted into cash. If
Renaissance does not consummate a business combination by January 29, 2009, Renaissance will liquidate and stockholders will receive their per-share
distribution from the Trust Account.
42
Upon the consummation of the Merger, the post-merger combined
companys directors and officers and their affiliates will be significant stockholders, which will make it possible for them to have significant
influence over the outcome of all matters submitted to stockholders for approval and which influence may be alleged to conflict with the post-merger
combined companys interests and the interests of its other stockholders.
Upon the consummation of the
Merger, the post-merger combined companys directors and executive officers and their respective affiliates will own an aggregate of approximately
% of the outstanding shares of Renaissance common stock assuming no shares of
Renaissance common stock are issued pursuant to the EBITDA Condition and Warrant Condition and no Public Shares are converted upon consummation of the
Merger. These stockholders will have significant influence over the outcome of all matters submitted for stockholder approval, including the election
of the post-merger combined companys directors and other corporate actions. In addition, such influence by one or more of these affiliates could
have the effect of discouraging others from attempting to purchase or take over the post-merger combined company and/or reducing the market price
offered for Renaissance common stock in such an event.
Renaissances current directors, executive officers
and/or affiliates beneficially own shares of common stock and warrants that will be worthless if the Merger is not approved and consummated by January
29, 2009. Such interests may have influenced their decision to approve the business combination with First Communications.
Certain Renaissance directors,
executive officers and/or their affiliates beneficially own common stock in Renaissance that they purchased prior to Renaissances IPO.
Additionally, some of Renaissances Inside Stockholders, who also serve as Renaissances directors and executive officers, purchased
4,666,667 warrants in a private placement that occurred simultaneously with Renaissances IPO. Renaissances directors, executive officers
and their affiliates are not entitled to receive any of the cash proceeds that will be distributed upon Renaissances liquidation with respect to
common stock these individuals acquired prior to Renaissances IPO. Therefore, if the Merger is not consummated prior to January 29, 2009 and
Renaissance is forced to liquidate, such shares held by such persons will be worthless. This will also be true with respect to their warrants. As of
September 30, 2008, Renaissances directors, executive officers and their affiliates held $21,645,000 in common stock (based on a market price of
$5.55) and 4,666,667 warrants which are not publicly traded and have an exercise price of $6.00 per warrant.
These financial interests of
Renaissances directors, executive officers and their affiliates may have influenced their decision to approve the business combination with First
Communications and to continue to pursue such business combination. In considering the recommendations of Renaissances board of directors to vote
for the merger proposal and other proposals, you should consider these interests.
Renaissances chairman and chief executive officer is
liable to ensure that proceeds of the trust are not reduced by vendor claims in the event the business combination is not consummated. Such liability
may have influenced his decision to approve the business combination with First Communications.
If Renaissance liquidates prior
to the consummation of a business combination, Barry W. Florescue, Renaissances chairman and chief executive officer, will be personally liable
under certain circumstances (for example, if a vendor does not waive any rights or claims to the Trust Account) to ensure that the proceeds in the
Trust Account are not reduced by the claims of certain prospective target businesses and vendors or other entities that are owed money by Renaissance
for services rendered or products sold to Renaissance. Pursuant to the underwriting agreement between Renaissance and Ladenburg Thalmann, Renaissance
agreed not to commence its due diligence investigation of any operating business which it sought to acquire or obtain the services of any vendor
without obtaining an agreement pursuant to which such party would waive any claims against the Trust Account. As of the date of this proxy
statement/prospectus, Renaissance has received waiver agreements from each of its vendors other than its independent registered accounting firm. There
is currently an outstanding balance to Renaissances independent registered accounting firm of approximately $52,000 and Renaissance intends to
pay
43
such fees in full in
accordance with its past practices. If Renaissance consummates a business combination, on the other hand, Mr. Florescue will not be liable for all such
claims.
If Renaissance is unable to complete the business combination
with First Communications by January 29, 2009, Renaissances corporate existence will terminate and Renaissance will be forced to liquidate. In
such event, third parties may bring claims against Renaissance and, as a result, the proceeds held in trust could be reduced and the per-share
liquidation price received by stockholders could be less than $
per
share.
Renaissance must complete the
business combination with First Communications by January 29, 2009, when Renaissances corporate existence will terminate and Renaissance will be
required to liquidate. In such event, third parties may bring claims against Renaissance. Although Renaissance has obtained waiver agreements from
certain vendors and service providers Renaissance has engaged and owes money to, and the prospective target businesses Renaissance has negotiated with,
whereby such parties have waived any right, title, interest or claim of any kind they may have in or to any monies held in the Trust Account, there is
no guarantee that they or other vendors who did not execute such waivers will not seek recourse against the Trust Account notwithstanding such
agreements. Furthermore, there is no guarantee that a court will uphold the validity of such agreements. Accordingly, the proceeds held in the Trust
Account could be subject to claims that could take priority over those of Renaissances stockholders. Additionally, if Renaissance is forced to
file a bankruptcy case or an involuntary bankruptcy case is filed against Renaissance which is not dismissed, the proceeds held in the Trust Account
could be subject to applicable bankruptcy law, and may be included in Renaissances bankruptcy estate and subject to the claims of third parties
with priority over the claims of Renaissances stockholders. If any bankruptcy or other claims deplete the Trust Account, Renaissance cannot
assure you that Renaissance will be able to return to Renaissances stockholders at least
$
per share.
Renaissances stockholders may be held liable for claims
by third parties against Renaissance to the extent of distributions received by Renaissances stockholders.
If Renaissance is unable to
complete the business combination with First Communications by January 29, 2009, Renaissance will be liquidated. Under Sections 280 through 282 of the
DGCL, stockholders may be held liable for claims by third parties against a corporation to the extent of distributions received by them. Pursuant to
Section 280, if the corporation complies with certain procedures intended to ensure that it makes reasonable provisions for all claims against it,
including a 60-day notice period during which any third-party claims can be brought against the corporation, a 90-day period during which the
corporation may reject any claims brought, and an additional 150-day waiting period before any liquidating distributions are made to stockholders, any
liability of a stockholder with respect to a liquidating distribution is limited to the lesser of such stockholders pro rata share of the claim
or the amount distributed to the stockholder, and any liability of the stockholder would be barred after the third anniversary of the dissolution.
Renaissance will seek to conclude this process as soon as possible and as a result does not intend to comply with those procedures.
Because Renaissance will not be
complying with those procedures, Renaissance is required, pursuant to Section 281 of the DGCL, to adopt a plan that will provide for Renaissances
payment, based on facts known to Renaissance at such time, of (i) all existing claims, (ii) all pending claims and (iii) all claims that may be
potentially brought against Renaissance within the subsequent 10 years. Accordingly, Renaissance would be required to provide for any creditors known
to Renaissance at that time or those that Renaissance believes could be potentially brought against Renaissance within the subsequent 10 years prior to
distributing the funds held in the trust to Renaissances stockholders. All claims that may be potentially brought against Renaissance may not be
properly assessed. As such, Renaissances stockholders could potentially be liable for any claims to the extent of distributions received by them
in a dissolution and any liability of Renaissances stockholders may extend well beyond the third anniversary of such dissolution. Accordingly,
third parties may seek to recover from Renaissances stockholders amounts owed to them by Renaissance.
44
Additionally, if Renaissance is
forced to file a bankruptcy case or an involuntary bankruptcy case is filed against Renaissance that is not dismissed, any distributions received by
Renaissances stockholders in Renaissances dissolution might be viewed under applicable debtor/creditor and/or bankruptcy laws as either a
preferential transfer or a fraudulent conveyance. As a result, a bankruptcy court could seek to recover all amounts received by
Renaissances stockholders in Renaissances dissolution. Furthermore, because Renaissance intends to distribute the proceeds held in the
Trust Account to Renaissances stockholders as soon as possible after Renaissances dissolution, this may be viewed or interpreted as giving
preference to Renaissances stockholders over any potential creditors with respect to access to or distributions from Renaissances assets.
Furthermore, Renaissances board of directors may be viewed as having breached their fiduciary duties to Renaissances creditors and/or may
have acted in bad faith, thereby exposing Renaissances board of directors and the company to claims of punitive damages, by paying
Renaissances stockholders from the Trust Account prior to addressing the claims of creditors and/or complying with certain provisions of the DGCL
with respect to Renaissances dissolution and liquidation. Claims may be brought against Renaissance for these reasons.
Neither Renaissance nor its stockholders will have the
protection of any indemnification, escrow, price adjustment or other provisions that allow for a post-closing adjustment to be made to the merger
consideration in the event that any of the representations and warranties made by First Communications in the Merger Agreement ultimately proves to be
inaccurate or incorrect.
As is often the case in stock for
stock transactions, the representations and warranties made by Renaissance and First Communications to each other in the Merger Agreement will not
survive the completion of the Merger. As a result, Renaissance and its stockholders will not have the protection of any indemnification, escrow, price
adjustment or other provisions that allow for a post-closing adjustment to be made to the merger consideration if any representation or warranty made
by First Communications in the Merger Agreement proves to be inaccurate or incorrect. Accordingly, to the extent such representation or warranties are
incorrect, Renaissance would have no indemnification claim with respect thereto and its financial condition or results of operations could be adversely
affected.
Renaissance and First Communications expect to incur
significant costs associated with the Merger, whether or not the Merger is completed, which will reduce the amount of cash available for other
corporate purposes.
Both Renaissance and First
Communications expect to incur significant costs associated with the Merger, whether or not the Merger is completed. These costs will reduce the amount
of cash available for other corporate purposes. Renaissance estimates that it will incur direct transaction costs of approximately $5.0 million
associated with the Merger, which will be recorded as financing expense for accounting purposes if the Merger is completed. First Communications
estimates that it will incur direct transaction costs of approximately $1.5 million, which will also be recorded as share issuance costs for accounting
purposes if the Merger is completed. In addition, upon completion of the Merger, Renaissance will be required to pay $3,051,240 of previously accrued
deferred underwriting fees to the underwriters in its IPO. The actual costs may exceed these estimates. In addition, the post-merger combined company
may incur additional material charges reflecting additional costs associated with the arrangement in fiscal quarters subsequent to the quarter in which
the Merger is completed. There is no assurance that the significant costs associated with the Merger will prove to be justified in light of the
benefits ultimately realized.
The ownership interest of Renaissances current
stockholders will be substantially reduced, resulting in a dilution of Renaissances current stockholders voting power.
Upon completion of the Merger,
based on the current number of outstanding shares of First Communications common stock and assuming the cashless exercise of the T1 warrants
immediately prior to the Merger, 1 4 ,460,000 million shares will be issued by Renaissance in connection with the Merger. Additionally, if the
EBITDA Condition and the Warrant Condition are satisfied, an additional 22 ,450,000 shares of Renaissance common stock would be issued to First
Communications stockholders. The issuance of 1 4 ,460,000 shares of Renaissance common stock,
45
based on the number of shares
of Renaissance common stock outstanding as of the date of this proxy statement/prospectus will dilute Renaissances existing stockholders
voting interest from 100% to approximately 5 7 . 4 % of the post-merger combined companys voting interests (assuming none of
Renaissances stockholders exercise their conversion rights), and approximately 52 . 4 % of the post-merger combined companys
voting interests (assuming 19.9% of Renaissances stockholders exercise their conversion rights). Additionally, in the event both the Warrant
Condition and the EBITDA Condition are satisfied, such percentages would be 36.4% and 32.3%, respectively.
While Renaissance believes
that it will have a controlling interest in First Communications following the Merger based on the fact that First Communications is becoming a
subsidiary of Renaissance rather than Renaissance making a direct equity investment in First Communications, if the shares of Renaissance common
stock held in escrow are released upon satisfaction of the Warrant Condition or the EBITDA Condition, the former shareholders of First
Communications would own more than 50% of the voting interests in Renaissance after the Merger and the stockholders of First
Communications will have the ability to influence the post-merger combined companys affairs going forward.
While a majority of the
proposed members of the post-merger combined board of directors are considered independent under the listing standards of the Nasdaq
Stock Market, LLC, the post-merger combined companys board will contain seven members of First Communications existing board of
directors and only two members of Renaissances current board of directors. In addition, the officers of Renaissance after the Merger will be
First Communications current officers. The directors who were formerly directors of First Communications and the officers who were
formerly officers of First Communications may align their interests with those of the former stockholders of First Communications rather than
those of the stockholders of Renaissance prior to the business combination.
Furthermore, since they stand
to have the shares of Renaissance common stock held in escrow released to them upon the satisfaction of the Warrant Condition or the EBITDA
Condition, the former stockholders of First Communications may have interests that differ from the stockholders of Renaissance prior to the
business combination.
In addition, following the
Merger, Renaissances outstanding common stock will be subject to substantial potential dilution by outstanding First Communications and
Renaissance warrants and if the incentive compensation plan proposal is approved, from future awards granted under the 2008 Plan.
The post-merger combined company may issue additional equity
securities which may dilute your interest in the post-merger combined company.
In order to expand the
post-merger combined companys business, the post-merger combined company may consider offering and issuing additional equity-linked securities.
Holders of the post-merger combined companys securities may experience a dilution in the net tangible book value per share held by them if this
occurs. The number of shares that the post-merger combined company may issue for cash without stockholder approval will be limited by the rules of the
exchange on which the post-merger combined companys securities are listed. However, there are generally exceptions which allow companies to issue
a limited number of equity securities which would dilute your ownership.
If the Mergers benefits do not meet the expectations of
financial or industry analysts, the market price of Renaissance common stock may decline.
The market price of Renaissance
common stock may decline as a result of the Merger if:
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Renaissance does not achieve the perceived benefits of the
Merger as rapidly, or to the extent anticipated by, financial or industry analysts; or
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the effect of the Merger on Renaissances financial results
is not consistent with the expectations of financial or industry analysts.
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Accordingly, Renaissances
stockholders may experience a loss as a result of a decline in the market price of Renaissance common stock. In addition, a decline in the market price
of Renaissance common stock could adversely affect Renaissances ability to issue additional securities and Renaissances ability to obtain
additional financing in the future.
If Renaissance is unable to complete the Merger, its corporate
existence will terminate and it will be required to liquidate.
In accordance with
Renaissances certificate of incorporation, if Renaissance is unable to complete the business combination with First Communications by January 29,
2009, its corporate existence will terminate and it will be required to liquidate. In any liquidation, the net proceeds of Renaissances IPO held
in the Trust Account, plus any interest earned thereon, less up to $1,875,000 of interest which has been drawn for working capital purposes and less
taxes, will be distributed on a pro rata basis to the holders of Public Shares. As of September 30, 2008, there was approximately $5.93 per Public
Share in the Trust Account after accounting for taxes owing and such amounts drawn for Renaissances working capital draw. Upon liquidation there
will be no distribution with respect to Renaissances outstanding warrants and, accordingly, the warrants will expire and be
worthless.
Renaissance does not have any operations and the post-merger
combined company has never operated as a U.S. public company. Fulfilling the post-merger combined companys obligations as a U.S. public company
after the Merger will be expensive and time consuming.
The post-merger combined company
has never been listed on a U.S. stock exchange and has not been required to document and assess the effectiveness of its internal control procedures in
order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002. Although Renaissance has maintained disclosure controls and
procedures and internal control over financial reporting as required under the federal securities laws with respect to its activities, Renaissance has
not been required to establish and maintain such disclosure controls and procedures and internal controls over financial reporting as will be required
with respect to a public company with substantial operations. Under the Sarbanes-Oxley Act of 2002 and the related rules and regulations of the SEC,
the post-merger combined company will be required to implement additional corporate governance practices and to adhere to a variety of reporting
requirements and accounting rules. Compliance with these obligations will require significant time and resources from the post-merger combined
companys management, finance and accounting staff and will significantly increase the post-merger combined companys legal, insurance and
financial compliance costs. As a result of the increased costs associated with being a U.S. publicly listed company, the post-merger combined
companys operating income as a percentage of revenue is likely to be lower.
The completion of the Merger could result in disruptions in
business, loss of customers or contracts or other adverse effects.
The completion of the Merger may
cause disruptions, including potential loss of customers and other business partners, and have material adverse effects on the post-merger combined
companys business and operations. It is possible that First Communications pre-merger customers and other business partners, in response to
the completion of the Merger, may adversely change or terminate their relationships with the post-merger combined company, which could have a material
adverse effect on the business of the post-merger combined company.
The pro forma condensed combined financial statements are not
an indication of the post-merger combined companys financial condition or results of operations following the Merger.
The pro forma condensed combined
financial statements contained in this proxy statement/prospectus are not an indication of the post-merger combined companys financial condition
or results of operations following the Merger. The pro forma condensed combined financial statements have been derived from the historical financial
statements of Renaissance and First Communications and many adjustments and assumptions have been made regarding the post-merger combined company after
giving effect to the Merger. The information upon which these adjustments and assumptions have been made is preliminary, and these kinds of adjustments
and assumptions are
47
difficult to make with
complete accuracy. As a result, the actual financial condition and results of operations of the post-merger combined company following the arrangement
may not be consistent with, or evident from, these pro forma financial statements. In addition, the actual earnings per share (EPS), of the
post-merger combined company may decrease below that reflected in the pro forma condensed combined financial information for several reasons. The
assumptions used in preparing the pro forma financial information may not prove to be accurate and other factors may affect the post-merger combined
companys actual EPS following the Merger.
If listed, Nasdaq may delist Renaissances securities
from quotation on its exchange which could limit investors ability to make transactions in Renaissances securities and subject Renaissance
to additional trading restrictions.
In connection with the Merger,
Renaissance intends to apply for listing of its common stock on Nasdaq. Renaissance may not be able to meet Nasdaqs initial listing requirements.
Even if such application is accepted and the common stock is so listed, Renaissance may be unable to maintain the listing of its securities in the
future.
If Nasdaq delists
Renaissances securities from trading on its exchange, Renaissance could face significant material adverse consequences,
including:
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a limited availability of market quotations for
Renaissances securities;
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a limited amount of news and analyst coverage for the
post-merger combined company; and
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a decreased ability for Renaissance to issue additional
securities or obtain additional financing in the future.
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Activities taken by existing Renaissances stockholders
to increase the likelihood of approval of the acquisition proposal and other proposals could have a depressive effect on the value of Renaissance
common stock.
Pursuant to a share purchase plan
entered into prior to Renaissances IPO, RAC Partners, an entity controlled by Barry W. Florescue, Renaissances chairman and chief executive
officer, placed a limit order for $12 million of Renaissance common stock, which commenced ten business days after Renaissance filed its Current Report
on Form 8-K announcing its execution of a definitive agreement for the Merger and will end on the business day immediately preceding the record date
for the meeting of stockholders at which this Merger is to be voted upon. Under the terms of the share purchase plan, the purchases must be made in
compliance with Rules 10b5-1 and 10b-18 under the Exchange Act. Since the placement of the limit order, as of December 1 5 , 2008, RAC Partners
had purchased 8 1 1,269 shares of Renaissance common stock for an aggregate purchase price of $4,5 95,532 and at an average purchase price
per share of $5.66. RAC Partners may vote these shares on a proposed business combination any way it chooses. As a result, RAC Partners may be able to
influence the outcome of the merger proposal and the other proposals under consideration.
At any time prior to the special
meeting, during a period when they are not then aware of any material non-public information regarding Renaissance or its securities, the Renaissance
Inside Stockholders, First Communications and First Communications stockholders and/or their respective affiliates may purchase shares from
institutional and other investors, or execute agreements to purchase such shares from them in the future, or they may enter into transactions with such
persons and others to provide them with incentives to acquire shares of Renaissance common stock and vote the acquired shares in favor of the
acquisition proposal. The purpose of such share purchases and other transactions would be to increase the likelihood of satisfaction of the
requirements that holders of a majority of the Public Shares present at the special meeting in person or by proxy and eligible to vote thereon vote in
favor of the merger proposal and that holders of fewer than 20% of the Public Shares vote against the merger proposal and demand conversion of their
Public Shares into cash where it appears that such requirements would otherwise not be met. Entering into any such arrangements may have a depressive
effect on the value of Renaissance common stock. For example, as a result of these arrangements, an investor or stockholder may have the ability to
effectively purchase common stock of Renaissance at a price lower than market and may
48
therefore be more likely to
sell the shares he or she owns, either prior to or immediately after the special meeting. Renaissance will not enter into any such arrangement, either
prior to or after the consummation of the Merger, and no funds in its Trust Account will be used to make such purchases or to fund other such
arrangements.
Renaissances staggered board may entrench management and
discourage unsolicited stockholder proposals that may be in the best interests of stockholders.
Renaissances proposed
amended and restated certificate of incorporation provides that its board of directors will be divided into three classes, each of which will generally
serve for a term of three years with only one class of directors being elected in each year. As a result, at any annual meeting only a minority of the
board of directors will be considered for election. Since this staggered board would prevent its stockholders from replacing a majority of
its board of directors at any annual meeting, it may entrench management and discourage unsolicited stockholder proposals that may be in the best
interests of stockholders. Although its certificate of incorporation currently contemplates that Renaissance would not have a staggered board following
consummation of a business combination, in light of the significant number of shares of Renaissance common stock being issued to stockholders of First
Communications, the Board of Directors did not want to give those stockholders the ability to elect a significant number of directors at a single
annual meeting and thereby impact changes that could be detrimental to the current Renaissance stockholders and, accordingly, determined that it would
retain a staggered board.
The receipt of Renaissance common stock by a First
Communications stockholder may be taxable.
The receipt of Renaissance
common stock in the Merger should be tax-free for United States federal income tax purposes as a reorganization within the meaning of Section 368(a) of
the Internal Revenue Code of 1986, as amended (the Code). See
The Merger Proposal Material United States Income Tax
Consequences of the Merger.
This position is not binding on the IRS, or the courts, however. If the Merger does not qualify as a
reorganization within the meaning of Section 368(a) of the Code, the receipt of Renaissance common stock would be taxable to a First
Communications stockholder.
Risks If the Adjournment Proposal Is Not
Approved
If the adjournment proposal is not approved, and an insufficient number of votes is obtained to authorize the consummation of the Merger,
Renaissances board of directors will not have the ability to adjourn the special meeting to a later date in order to solicit further votes, and,
therefore, the Merger will not be approved and Renaissance will be required to liquidate.
Renaissances board of
directors is seeking approval to adjourn the special meeting to a later date or dates if, at the special meeting, based upon the tabulated votes, there
are insufficient votes to approve the consummation of the Merger. If the adjournment proposal is not approved, Renaissances board of directors
will not have the ability to adjourn the special meeting to a later date and, therefore, will not have more time to solicit additional votes to approve
the consummation of the Merger. In such event, the Merger would not be completed and Renaissance will be required to liquidate if Renaissance does not
consummate a business combination by January 29, 2009.
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FORWARD-LOOKING STATEMENTS
Renaissance believes that some of
the information in this proxy statement/prospectus constitutes forward-looking statements within the definition of the Private Securities Litigation
Reform Act of 1995. However, because Renaissance is a blank check company, the safe-harbor provisions of that act do not apply to
statements made in this proxy statement/prospectus. You can identify these statements by forward-looking words such as may,
expect, anticipate, contemplate, believe, estimate, intends, and
continue or similar words. You should read statements that contain these words carefully because they:
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discuss future expectations;
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contain projections of future results of operations or financial
condition; or
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state other forward-looking information.
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Renaissance believes it is
important to communicate its expectations to its stockholders. However, there may be events in the future that it is not able to predict accurately or
over which it has no control. The risk factors and cautionary language discussed in this proxy statement/prospectus provide examples of risks,
uncertainties and events that may cause actual results to differ materially from the expectations described by it or First Communications in such
forward-looking statements, including among other things:
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the number and percentage of Renaissance stockholders voting
against the merger proposal and seeking conversion;
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Renaissances expectations regarding consummation and
timing of the Merger and related transactions, including satisfaction of the closing conditions of the Merger;
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the receipt of necessary regulatory approvals;
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Renaissances ability to dissolve and liquidate in a timely
manner and as anticipated, if necessary;
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the post-merger combined companys expectations regarding
competition;
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difficulties encountered in integrating the merged
businesses;
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the amount of cash on hand available to the combined company
after the Merger;
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general economic conditions;
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changes adversely affecting the business in which First
Communications is engaged;
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legislation or regulatory requirements or changes affecting the
businesses in which First Communications is engaged;
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First Communications business strategy and
plans;
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fluctuations in customer demand;
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the result of future financing efforts; and
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outstanding litigation or vendor disputes.
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You are cautioned not to place
undue reliance on these forward-looking statements, which speak only as of the date of this proxy statement/prospectus.
All forward-looking statements
included herein attributable to any of Renaissance, First Communications or any person acting on either partys behalf are expressly qualified in
their entirety by the cautionary statements contained or referred to in this section. Except to the extent required by applicable laws and regulations,
Renaissance
50
and First Communications
undertake no obligations to update these forward-looking statements to reflect events or circumstances after the date of this proxy
statement/prospectus or to reflect the occurrence of unanticipated events.
Before you grant your proxy or
instruct how your vote should be cast or vote on the merger proposal or any of the other proposals, you should be aware that the occurrence of the
events described in the Risk Factors section and elsewhere in this proxy statement/prospectus may adversely affect Renaissance and/or First
Communications.
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SPECIAL MEETING OF RENAISSANCE
STOCKHOLDERS
General
Renaissance is furnishing this
proxy statement/prospectus to its stockholders as part of the solicitation of proxies by its board of directors for use at the special meeting of
Renaissance stockholders to be held on
, and at any adjournment
or postponement thereof. This proxy statement/prospectus is first being furnished to Renaissance stockholders on or about
, in connection with the vote on the merger proposal, the charter amendment
proposal, the incentive compensation plan proposal, the director election proposal and the adjournment proposal. This proxy statement/prospectus
provides you with information you need to know to be able to vote or instruct your vote to be cast at the special meeting.
Date, Time and Place
The special meeting of
stockholders will be held on
, at 8:30 a.m., Eastern
time, at 50 East Sample Road, Suite 400, Pompano Beach, FL 33064.
Purpose of the Renaissance Special
Meeting
At the special meeting,
Renaissance is asking holders of its common stock to:
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consider and vote upon a proposal to adopt and approve the
Merger Agreement and the transactions contemplated thereby;
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consider and vote upon a proposal to amend and restate
Renaissances certificate of incorporation to (i) change its name from Renaissance Acquisition Corp. to First Communications,
Inc.; (ii) increase the number of authorized shares of Renaissance common stock from 72 million to 200 million; (iii) change Renaissances
corporate existence to perpetual; (iv) incorporate the classification of directors that would result from the election of directors in the manner
described in the director election proposal; (v) delete the present Article Sixth and its preamble, as such provisions will no longer be applicable to
Renaissance after the Merger, and to renumber succeeding Articles accordingly; and (vi) make certain other changes that its board of directors believes
are immaterial;
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consider and vote upon a proposal to approve the adoption of the
2008 Plan;
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consider and vote upon a proposal to elect nine directors to
Renaissances board of directors effective immediately following and contingent upon the closing of the Merger, of whom three will serve until the
annual meeting to be held in 2009, three will serve until the annual meeting to be held in 2010 and three will serve until the annual meeting to be
held in 2011 and, in each case, until their successors are elected and qualified; and
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consider and vote upon a proposal to adjourn the special meeting
to a later date or dates, if necessary, to permit further solicitation and vote of proxies in the event that, based upon the tabulated votes at the
time of the special meeting, Renaissance would not have been authorized to consummate the Merger.
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Recommendation of Renaissance Board of
Directors
Renaissances board of
directors:
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has unanimously determined that each of the merger proposal, the
charter amendment proposal and the incentive compensation plan proposal is fair to and in the best interests of Renaissance and its
stockholders;
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has unanimously approved the merger proposal, the charter
amendment proposal and the incentive compensation plan proposal;
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unanimously recommends that Renaissance common stockholders vote
FOR the merger proposal;
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unanimously recommends that Renaissance common stockholders vote
FOR the charter amendment proposal;
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unanimously recommends that Renaissance common stockholders vote
FOR the incentive compensation plan proposal;
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unanimously recommends that Renaissance common stockholders vote
FOR the persons nominated by its management for election as directors; and
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unanimously recommends that Renaissances stockholders vote
FOR an adjournment proposal if one is presented to the meeting.
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Record Date; Who is Entitled to Vote
Renaissance has fixed the close
of business on
, as the
record date for determining Renaissance stockholders entitled to notice of and to attend and vote at the special meeting. As of the close
of business on
, there
were 21,840,000 shares of common stock outstanding and entitled to vote. Each share of common stock is entitled to one vote per share at the special
meeting.
Pursuant to agreements with
Renaissance, the 3,900,000 shares of common stock held by the Renaissance Inside Stockholders will be voted on the merger proposal in accordance with
the majority of the votes cast at the special meeting on such proposal by the holders of the Public Shares. The vote of such shares will not affect the
outcome of the vote on the merger proposal.
Quorum
The presence, in person or by
proxy, of a majority of all the outstanding shares of common stock entitled to vote constitutes a quorum at the special meeting.
Abstentions and Broker Non-Votes
Proxies that are marked
abstain and proxies relating to street name shares that are returned to Renaissance but marked by brokers as not
voted will be treated as shares present for purposes of determining the presence of a quorum on all matters. The latter will not be treated as
shares entitled to vote on the matter as to which authority to vote is withheld from the broker. If you do not give the broker voting instructions,
under applicable self-regulatory organization rules, your broker may not vote your shares on non-routine proposals, such as the merger
proposal, the charter amendment proposal and the incentive compensation plan proposal. Since a stockholder must affirmatively vote against the merger
proposal to have conversion rights, individuals who fail to vote or who abstain from voting may not exercise their conversion rights. See the
information set forth in
Special Meeting of Renaissance Stockholders Conversion Rights.
Vote of Renaissances Stockholders
Required
The approval of the merger
proposal, the incentive compensation plan proposal and the adjournment proposal, if presented, will require the affirmative vote of the holders of a
majority of Renaissance common stock present at the special meeting in person or by proxy and entitled to vote thereon. Abstentions are deemed entitled
to vote on such proposals. Therefore, they have the same effect as a vote against either proposal. Broker non-votes are not deemed entitled to vote on
such proposals and, therefore, they will have no effect on the vote on such proposals.
The charter amendment proposal
will require the affirmative vote of the holders of a majority of Renaissance common stock outstanding on the record date. Because this proposal
requires the affirmative vote of a majority of the shares of common stock outstanding for approval, abstentions and broker non-votes will have the same
effect as a vote against this proposal.
Directors are elected by a
plurality. Plurality means that the individuals who receive the largest number of votes cast FOR are elected as directors.
Consequently, any shares not voted FOR a particular nominee (whether
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as a result of abstentions, a
direction to withhold authority or a broker non-vote) will not be counted in the nominees favor.
Voting Your Shares
Each share of Renaissance common
stock that you own in your name entitles you to one vote. Your proxy card shows the number of shares of Renaissance common stock that you own. If your
shares are held in street name or are in a margin or similar account, you should contact your broker to ensure that votes related to the
shares you beneficially own are properly counted.
There are two ways to vote your
shares of Renaissance common stock at the special meeting:
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You Can Vote By Signing and Returning the Enclosed Proxy
Card.
If you vote by proxy card, your proxy, whose name is listed on the proxy card, will vote your shares as you instruct on the
proxy card. If you sign and return the proxy card but do not give instructions on how to vote your shares, your shares will be voted as recommended by
Renaissances board FOR the merger proposal, the charter amendment proposal, the incentive compensation plan proposal, the persons
nominated by Renaissances management for election as directors and, if necessary, an adjournment proposal. Votes received after a matter has been
voted upon at the special meeting will not be counted.
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You Can Attend the Special Meeting and Vote in
Person.
Renaissance will give you a ballot when you arrive. However, if your shares are held in the name of your broker, bank or another
nominee, you must get a proxy from the broker, bank or other nominee. That is the only way Renaissance can be sure that the broker, bank or nominee has
not already voted your shares.
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Revoking Your Proxy
If you give a proxy, you may
revoke it at any time before it is exercised by doing any one of the following:
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you may send another proxy card with a later date;
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you may notify Mark Seigel, Renaissances secretary, in
writing before the special meeting that you have revoked your proxy; or
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you may attend the special meeting, revoke your proxy, and vote
in person, as indicated above.
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Who Can Answer Your Questions About Voting Your
Shares
If you have any questions about
how to vote or direct a vote in respect of your shares of Renaissance common stock, you may call Mark Seigel, Renaissances secretary, at (954)
784-3031.
Conversion Rights
Any stockholders holding Public
Shares as of the record date who affirmatively vote their Public Shares against the merger proposal may also demand that Renaissance convert such
shares into a pro rata portion of the Trust Account, calculated as of two business days prior to the consummation of the Merger. If demand is properly
made and the Merger is consummated, Renaissance will convert these shares into a pro rata portion of funds deposited in the Trust Account plus
interest, calculated as of such date.
Renaissance stockholders who seek
to exercise this conversion right must affirmatively vote against the merger proposal. Abstentions and broker non-votes do not satisfy this
requirement. Additionally, holders demanding conversion must deliver their stock (either physically or electronically using Depository Trust
Companys DWAC System to Renaissances transfer agent promptly after the meeting, within the time period specified in a letter that will be
sent by or on behalf of Renaissance to holders who elect to convert, which will be not less than 20 days after the date of the letter.
54
If you hold the shares in street
name, you will have to coordinate with your broker to have your shares certificated or delivered electronically. Certificates that have not been
tendered (either physically or electronically) in accordance with these procedures will not be converted into cash.
The closing price of Renaissance
common stock on
(the record date for the Renaissance special meeting) was
$
. The cash held in the Trust Account on
was approximately $
($
per Public Share). Prior to exercising conversion rights, stockholders should verify
the market price of Renaissance common stock as they may receive higher proceeds from the sale of their common stock in the public market than from
exercising their conversion rights if the market price per share is higher than the conversion price. Renaissance cannot assure its stockholders that
they will be able to sell their shares of Renaissance common stock in the open market, even if the market price per share is higher than the conversion
price stated above, as there may not be sufficient liquidity in Renaissance securities when Renaissance stockholders wish to sell their
shares.
If the holders of at least
3,588,000 or more Public Shares (an amount equal to 20% or more of the Public Shares), vote against the merger proposal and properly demand conversion
of their shares, Renaissance will not be able to consummate the Merger.
If you exercise your conversion
rights, then you will be exchanging your shares of Renaissance common stock for cash and will no longer own those shares. You will be entitled to
receive cash for these shares only if you affirmatively vote against the merger proposal, properly demand conversion, and deliver your stock
certificate (either physically or electronically) to Renaissances transfer agent after the meeting within the time period specified in a notice
that you will receive from or on behalf of Renaissance, which period will be not less than 20 days after the date of the notice.
Appraisal Rights
Stockholders of Renaissance do
not have appraisal rights in connection with the Merger under the DGCL.
Holders of record of First
Communications common stock who do not vote in favor of adopting the Merger, and who otherwise comply with the applicable provisions of Section 262 of
DGCL will be entitled to exercise appraisal rights under Section 262 of the DGCL. Under the Merger Agreement, if more than 10% of the outstanding
shares of First Communications common stock exercise appraisal rights, Renaissance may terminate the Merger Agreement.
Proxy Solicitation Costs
Renaissance is soliciting proxies
on behalf of its board of directors and will pay the cost of this proxy solicitation. This solicitation is being made by mail but also may be made by
telephone or in person. Renaissance and its directors, officers and employees may also solicit proxies in person, by telephone or by other electronic
means.
Renaissance will ask banks,
brokers and other institutions, nominees and fiduciaries to forward proxy materials to their principals and to obtain their authority to execute
proxies and voting instructions. Renaissance will reimburse them for their reasonable expenses.
Renaissance Inside Stockholders
As of
, the record date, the Renaissance Inside Stockholders beneficially owned and were
entitled to vote 3,900,000 Original Shares. The Original Shares issued to the Renaissance Inside Stockholders constituted approximately 17.9% of the
outstanding shares of Renaissance common stock immediately after the IPO. In connection with the IPO, Renaissance and Ladenburg Thalmann entered into
agreements with each of the Renaissance Inside Stockholders pursuant to which each Renaissance Inside Stockholder agreed to vote his or its Original
Shares on the merger proposal in accordance with the majority of the votes cast by the holders of Public Shares. The Renaissance Inside Stockholders
have also indicated that they intend to vote their Original Shares in favor of all other proposals being presented at the meeting. The Original Shares
have no liquidation rights and will
55
be worthless if no business
combination is effected by Renaissance. In connection with the IPO, the Renaissance Inside Stockholders entered into an escrow agreement pursuant to
which their Original Shares w ould be held in escrow until the earlier of twelve months after a business combination or Renaissances
liquidation. As a condition to closing the Merger, RAC Partners agreed, pursuant to the Amended and Restated Stock Escrow Agreement to be
delivered to First Communications at the closing of the Merger, that 2,000,000 of its Original Shares, which are being held in escrow in
connection with Renaissances IPO, will be released only in the event that the EBITDA Condition is satisfied. In the event the EBITDA
Condition is not satisfied, the 2,000,000 Original Shares held by RAC Partners will be released to the post-merger combined company and
cancelled. The remaining 1,900,000 Original Shares held in this escrow account will be released upon the earlier of twelve months after a
business combination or Renaissances liquidation.
Pursuant to a share purchase plan
entered into prior to Renaissances IPO, RAC Partners, an entity controlled by Barry W. Florescue, Renaissances chairman and chief executive
officer, placed a limit order for $12 million of Renaissance common stock, which commenced ten business days after Renaissance filed its Current Report
on Form 8-K announcing its execution of a definitive agreement for the Merger and will end on the business day immediately preceding the record date
for the meeting of stockholders at which this Merger is to be voted upon. Under the terms of the share purchase plan, the purchases must be made in
compliance with Rules 10b5-1 and 10b-18 under the Exchange Act. Since the placement of the limit order, as of December 1 5 , 2008, RAC Partners
had purchased 8 1 1,269 shares of Renaissance common stock for an aggregate purchase price of $4,5 95,532 and at an average purchase price
per share of $5.66. RAC Partners may vote these shares on a proposed business combination any way it chooses. As a result, RAC Partners may be able to
influence the outcome of the merger proposal and the other proposals under consideration.
Additionally, at any time prior
to the special meeting, during a period when they are not then aware of any material nonpublic information regarding Renaissance or its securities, the
Renaissance Inside Stockholders, First Communications or First Communications stockholders and/or their respective affiliates may purchase shares
from institutional and other investors, or execute agreements to purchase such shares from them in the future, or they may enter into transactions with
such persons and others to provide them with incentives to acquire shares of Renaissance common stock or vote their shares in favor of the merger
proposal. The purpose of such share purchases and other transactions would be to increase the likelihood of satisfaction of the requirements that the
holders of a majority of the Public Shares cast on the merger proposal vote in its favor and that holders of fewer than 20% of the Public Shares vote
against the merger proposal and demand conversion of their Public Shares into cash where it appears that such requirements would otherwise not be met.
As of the record date, Mr. Florescue beneficially owned
Public Shares, and Charles
Miersch beneficially owned
Public Shares.
While the exact nature of any
incentives that would be provided by the Renaissance Inside Stockholders, First Communications or First Communications stockholders and/or their
respective affiliates has not been determined as of the date of this proxy statement/prospectus, they might include, without limitation, arrangements
to protect such investors or holders against potential loss in value of their shares, including the granting of put options and the transfer to such
investors or holders of shares or warrants owned by the Renaissance Inside Stockholders for nominal value. Renaissance will not enter into any such
arrangement, either prior to or after the consummation of the Merger, and no funds in its Trust Account will be used to make such purchases or to fund
other such arrangements.
Entering into any such
arrangements may have a depressive effect on Renaissances common stock. For example, as a result of these arrangements, an investor or holder may
have the ability to effectively purchase shares at a price lower than market and may therefore be more likely to sell the shares he owns, either prior
to or immediately after the special meeting.
If such transactions are
effected, the consequence could be to cause the Merger to be approved in circumstances where such approval could not otherwise be obtained. Purchases
of shares by the persons described above would allow them to exert more influence over the approval of the merger proposal and other proposals and
would likely increase the chances that such proposals would be approved. Moreover, any such purchases may make it less likely
56
that the holders of 20% or
more of the Public Shares will vote against the acquisition proposal and exercise their conversion shares.
Other than the arrangement with
Barry Florescue as described above, as of the date of this proxy statement/prospectus, there have been no such discussions and no agreements to such
effect have been entered into with any such investor or holder. Renaissance will file a Current Report on Form 8-K to disclose other arrangements
entered into or significant purchases made by any of the aforementioned persons that would affect the vote on the merger and charter amendment proposal
or the conversion threshold.
57
THE MERGER PROPOSAL
The discussion in this proxy
statement/prospectus of the Merger and the principal terms of the Merger Agreement by and among Renaissance, First Communications and certain of the
stockholders of First Communications is subject to, and is qualified in its entirety by reference to, agreement and plan of merger and Amendment No.
1 to the agreement and plan of merger . A copy of the agreement and plan of merger and Amendment No. 1 to the agreement and plan of merger
are attached as Annex A and Annex A-1, respectively, to this proxy statement/prospectus.
Structure of the Merger
The Merger Agreement provides for
the merger of Merger Sub I with and into First Communications, with First Communications continuing as the surviving corporation and First
Communications immediately thereafter merging with and into Merger Sub II, with Merger Sub II continuing as the surviving limited liability
company.
Merger Consideration
Under the terms of the Merger
Agreement, in exchange for all of the outstanding shares of First Communications capital stock and certain First Communications warrants which
will be irrevocably exercised on a cashless basis immediately prior to and contingent upon the consummation of the Merger, as further described below,
Renaissance will issue shares of Renaissance common stock comprised of:
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1 4 ,460,000 shares of Renaissance common stock, where each
share of outstanding First Communications common stock will be converted into the right to receive 0. 44 932 of a single validly issued,
fully paid and nonassessable share of Renaissance common stock;
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up to an additional 13 ,950,000 shares of Renaissance
common stock (less the number of shares that would have been issuable to First Communications stockholders who properly exercised their appraisal
rights) which will be placed into an escrow account and distributed proportionally to each stockholder based on its ownership interest if, for any
fiscal quarter from September 13, 2008 through December 3 1 , 2011, the surviving corporation has an annualized adjusted EBITDA equal to or
greater than the EBITDA target, which is more fully described below.
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up to an additional 8,500,000 shares of Renaissance common stock
(less the number of shares that would have been issuable to First Communications stockholders who properly exercised their appraisal rights) which will
be placed into an escrow account and distributed proportionately to each First Communications stockholder as of the closing based on its
ownership interest if Renaissance has the right to redeem the warrants it issued in connection with its IPO at any time prior to their exercise and at
any time after the warrants become exercisable if the last sale price of Renaissance common stock has been at least $8.50 per share, on each of 20
trading days within any 30 trading day period ending on January 28, 2011. If all warrants are exercised prior to the date the Warrant Condition is
satisfied, Renaissance remains obligated to pay such amount upon satisfaction of the Warrant Condition.
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Based on the closing market price
of $5.80 per share on September 12, 2008, the last trading day prior to the announcement of the Merger Agreement, the Initial Shares had an aggregate
value of $ 83 , 8 68,000. Based on the closing market price of $5. 81 per share on December 1 5 , 2008, the Initial Shares had an
aggregate value of $ 84 , 01 2,600.
In addition, holders of First
Communications Series A Preferred Stock will receive an aggregate of $15.0 million in cash consideration, together with an accrued dividend of 12% per
annum, pro rated and calculated from September 28, 2008 in exchange for their shares of Series A Preferred Stock.
In addition to the
consideration to be issued to First Communications stockholders described above, pursuant to the Amended and Restated Stock Escrow Agreement to
be delivered to First Communications at closing, RAC Partners has agreed that 2,000,000 of its Original Shares, which are being held in an
escrow account in connection
58
with Renaissances
IPO, will be released only in the event that the EBITDA Condition is satisfied. In the event the EBITDA Condition is not satisfied, such shares
will be released to the post-merger combined company and cancelled.
EBITDA Condition
13 ,950,000 shares of
Renaissance common stock will be distributed to First Communications stockholders and 2,000,000 of the Original Shares being held in escrow
pursuant to the Amended and Restated Escrow Agreement will be distributed to RAC Partners , if for any fiscal quarter from September 13, 2008
through December 3 1 , 2011, First Communications or the post-merger combined company has an annualized adjusted EBITDA equal to or greater
than the EBITDA target. EBITDA is defined as income before provision for income taxes, plus interest expense, less interest income, plus depreciation
and amortization, plus amortization of intangible assets, plus any expenses arising solely from the Merger charged to income in such fiscal quarter and
will be calculated for an applicable fiscal quarter based on the unaudited reviewed financial statements of First Communications or the post-merger
combined company. The EBITDA target is $50 million plus the sum of any target increases, which will be 1/7 of the aggregate consideration paid by First
Communications prior to the Merger or the post-merger combined company, as applicable, for any acquisition consummated between September 13, 2008 and
December 3 1 , 2011, other than the acquisition of Globalcom. In determining whether the EBITDA Condition has been satisfied for the fiscal
quarter during which such acquisition is consummated, the target increase will be 1/7 of such aggregate consideration multiplied by a fraction (A) the
numerator of which shall be the number of days beginning on the date of the consummation of such acquisition and ending on the last day of such fiscal
quarter and (B) the denominator of which shall be the total number of days in such fiscal quarter.
If the Merger closes after
December 31, 2008, Renaissance will file a Current Report on Form 8-K disclosing whether the EBITDA target was satisfied with respect to the quarter
then ended.
If the EBITDA Condition is not
satisfied by December 3 1 , 2011, then Renaissance and the Stockholders Representative will deliver joint written instructions to the
escrow agent to release the remaining shares held in escrow pursuant to the EBITDA Condition to Renaissance on February 28 , 201 2
and such securities will be cancelled.
First Communications Warrants
As of September 1, 2008, First
Communications had the following outstanding:
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warrants to purchase a total of 5,333,333 shares of First
Communications common stock at an exercise price of $0.05 per share expiring on July 2, 2012 (T1 Warrants);
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warrants to purchase a total of 8,000,000 shares of First
Communications common stock at an exercise price of $7.50 per share and an expiration date of three years following the redemption of all of the Series
A Preferred Stock held by the holder of such warrant (T2 Warrants); and
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warrants to purchase a total of 2,000,000 shares of First
Communications common stock at an exercise price of $7.50 per share and an expiration date of three years following the redemption of all of the Series
A Preferred Stock (T3 Warrants).
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Each of the holders of the T1
Warrants has agreed pursuant to a separate agreement irrevocably to make a cashless exercise of their T1 Warrants, immediately prior to and
conditionally upon, the closing of the Merger. First Communications common stock will have a fair market value of $5.00 for purposes of this cashless
exercise. Each share of First Communications common stock which a holder of a T1 warrant receives upon the exercise of the T1 Warrants will be
converted into the right to receive the same merger consideration as the First Communications stockholders. An aggregate of 3,028,661 shares of
Renaissance common stock will be issued to the holders of T1 Warrants. Additionally, they will be eligible to receive their proportionate share of any
shares issued pursuant to the satisfaction of the Warrant Condition and the EBITDA Condition, which are described above.
59
H olders of all of
the T2 Warrants and approximately 92% of the T3 Warrants entered into an exchange agreement concurrent with the signing of the Merger
Agreement pursuant to which they will receive a new warrant entitling them to receive with respect to each share of First Communications common
stock for which a T2 Warrant or T3 Warrant is exercisable (A) the right to acquire 0.25 shares of Renaissance common stock exercisable at $9.00 per
share expiring on January 28, 2011 for a total number of new warrants not to exceed 2,500,000 in the aggregate and (B) the right to receive 1/10
th
of a share of Renaissance common stock upon the satisfaction of the Warrant Condition for a
total number of shares of Renaissance common stock not to exceed 1,000,000 in the aggregate. Renaissance will deposit into the escrow account up to
1,000,000 shares of its common stock to satisfy the Warrant Condition obligation to the T2 and T3 Warrant Holders. In the event that Warrant Condition
is not satisfied by January 28, 2011, then on January 31, 2011, all the shares deposited into the escrow account to will be released to Renaissance and
cancelled.
The principal holders of the
T2 Warrants and T3 Warrants participated in negotiating the exchange agreement, and they, along with the other holders who have signed the
exchange agreement, satisfied themselves that the estimated value of the replacement warrants, including the potential to receive additional
incentive shares, approximated the estimated value of the existing T2 Warrants and T3 Warrants. Under the Merger Agreement, First
Communications is obligated to use its reasonable efforts to cause all remaining holders of the T3 Warrants who have not previously exercised their T3
Warrants, to exercise and exchange these warrants on the same terms and conditions as the exercising holders pursuant to the exchange agreement. To the
extent such holders still do not exercise their rights, such T3 Warrants will remain outstanding in accordance with their terms. As all of the shares
of Series A Preferred Stock are being redeemed upon consummation of the Merger, any T3 warrants remaining outstanding after the Merger will expire
three years from the date of the Merger.
Fractional Shares
No fractional shares of
Renaissance common stock will be issued in the Merger. In lieu thereof, Renaissance will pay each holder of First Communications common stock who would
otherwise be entitled to a fractional share in the Merger, an amount of cash (rounded to the nearest whole cent), without interest, equal to the
product of such fraction multiplied by $6.00.
Appraisal Rights
Any First Communications Holder
who did not vote in favor of the Merger or consent in writing and who has demanded appraisal for such shares in accordance with the DGCL will not
receive shares of Renaissance common stock, unless such holder fails to perfect, withdraws or otherwise loses such appraisal right under the DGCL.
First Communications is obligated to give Renaissance prompt notice of any demands for appraisal pursuant to the DGCL received by them and the
opportunity to participate in all negotiations and proceedings with respect to demands for appraisal under the DGCL prior to the consummation of the
Merger. First Communications will not, except with the prior written consent of Renaissance, which will not be unreasonably withheld, make any payment
with respect to any such demands for appraisal or offer to settle or settle any such demands.
Renaissance may terminate the
Merger Agreement in the event that holders of more than 10% of the outstanding shares of First Communications exercise their dissenters
rights.
Voting Agreement
As a condition to consummation of
the Merger, First Communications has agreed to delist its shares of common stock from AIM and to call a general meeting of its stockholders for the
purpose of voting upon the delisting. On September 13, 2008, Renaissance, First Communications and certain First Communications Holders, who in the
aggregate represented at least 75% of the voting power of First Communications, entered into a voting agreement pursuant to which each First
Communications Holder party to the agreement agreed to vote to delist First Communications from the AIM at any meeting of the stockholders called to
vote upon such delisting and granted
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Renaissance, or any nominee
of Renaissance, an irrevocable proxy to vote the shares held by them at any such meeting.
Escrow Agreement
Upon the closing of the Merger,
Renaissance, the Stockholders Representative and an escrow agent will enter into an escrow agreement, a form of which is attached to this proxy
statement/prospectus as Annex E, pursuant to which, upon consummation of the Merger, Renaissance will deposit with the escrow agent an amount of shares
of Renaissance common stock sufficient to satisfy its obligations with respect to the EBITDA Condition and the Warrant Condition. If the Warrant
Condition is not satisfied by January 28, 2011, then on or prior to January 31, 2011, Renaissance and the Stockholders Representative will
deliver joint written instructions to the escrow agent to release all the shares subject to the Warrant Condition deposited into the escrow account to
Renaissance and such shares will be cancelled. If the EBITDA Condition is not satisfied by December 3 1 , 2011, then Renaissance and the
Stockholders Representative will deliver joint written instructions to the escrow agent to release the remaining shares held in escrow pursuant
to the EBITDA Condition to Renaissance on February 28 , 201 2 and such shares will be cancelled.
Amended and Restated Stock Escrow
Agreement
In connection with the IPO,
Renaissance Inside Stockholders entered into a stock escrow agreement pursuant to which their Original Shares would be held in escrow until the
earlier of twelve months after a business combination or Renaissances liquidation. As a condition of closing the Merger, an Amended and
Restated Stock Escrow Agreement, a form of which is included in Annex A-1 of this proxy statement/prospectus, will be entered into by
Renaissance, the Renaissance Inside Stockholders, The Gores Group LLC, as stockholders representative and Continental Stock Transfer &
Trust Company, as escrow agent, pursuant to which 2,000,000 of RAC Partners Original Shares will be released from such escrow account only
in the event the EBITDA Condition is satisfied. In the event the EBITDA Condition is not satisfied, the 2,000,000 Original Shares held by RAC
Partners will be released to the post-merger combined company and cancelled. The remaining 1,900,000 Original Shares held in the escrow
account will be released upon the earlier of twelve months after a business combination or Renaissances liquidation.
Name; Headquarters; Stock Symbols
After completion of the
Merger:
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the name of Renaissance will be First Communications,
Inc.;
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the corporate headquarters and principal executive offices of
Renaissance will be located at 3340 West Market Street, Akron, OH 44333, which is First Communications corporate headquarters; and
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Renaissance common stock, warrants and Units, which are
currently quoted on the American Stock Exchange under the symbols RAK, RAK.WS and RAK.U, respectively, will be listed for trading on Nasdaq if an
application made by Renaissance to such effect is granted.
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Background of the Merger
The terms of the Merger Agreement
are the result of arms-length negotiations between representatives of Renaissance and First Communications. The following is a brief discussion
of the background of these negotiations, the Merger Agreement and related transactions.
Renaissance is a blank check
company incorporated in Delaware on April 17, 2006 in order to serve as a vehicle for the acquisition of an operating business. On February 1, 2007,
Renaissance completed its IPO of 15,600,000 Units, and on February 16, 2007, Renaissance completed the closing of an additional 2,340,000 Units that
were subject to the underwriters over-allotment option. Beginning February 15, 2007, Renaissance common stock and warrants began trading
separately on the American Stock Exchange. The public offering price of each Unit was
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$6.00, and Renaissance generated gross proceeds of $107,640,000 in the IPO
(including proceeds from the exercise of the over-allotment option). Of the gross proceeds: (i) Renaissance deposited $104,147,840 in the Trust Account
at JPMorgan Chase NY Bank, maintained by Continental Stock Transfer & Trust Company as trustee, which included $3,051,240 of deferred underwriting
fees; (ii) the underwriters received $4,811,160 as underwriting fees (excluding the deferred underwriting fees); and (iii) Renaissance retained
$781,000 for offering expenses. In addition, Renaissance deposited into the Trust Account $2,100,000 that it received from the issuance and sale of
4,666,667 warrants to RAC Partners and to its directors Charles Miersch and Morton Farber on February 1, 2007.
During the period from February
2007 through September 2008, Renaissance was involved in sourcing and evaluating prospective businesses in search of potential business combinations.
To minimize potential conflicts of interest which may have arisen from multiple corporate affiliations, each of Renaissances officers and
directors agreed, until the earliest of a business combination, liquidation or such time as he ceases to be an officer or director, to present to
Renaissance prior to any other entity, any business opportunity which may reasonably be required to be presented to Renaissance under Delaware law, in
accordance with his fiduciary obligations. In general, officers and directors of a corporation incorporated under Delaware law are required to present
business opportunities to a corporation if:
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the corporation could financially undertake the
opportunity;
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the opportunity is within the corporations line of
business; and
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it would not be fair to the corporation and its stockholders for
the opportunity not to be brought to the attention of the corporation.
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Renaissance was created to serve
as a vehicle to effect a merger, capital stock exchange, asset acquisition or other similar business combination with an operating business. As such,
its officers and directors are responsible for identifying, evaluating and selecting a target business and in their capacity as officers and directors
of Renaissance have focused their work on finding and analyzing potential acquisition targets, analyzing valuation work, negotiating potential
transaction terms with potential target companies and reviewing various business case scenarios. In addition, they have assisted Renaissance by
preparing investment materials, analyzing market and industry research, coordinating and reviewing due diligence work, providing technical financial
modeling, including pro forma financial statements, coordinating and analyzing business plans and assisting in the preparation of applicable SEC
financial information and documentation. Renaissance attempted to source opportunities both proactively and reactively, and given the mandate to find a
suitable business combination partner, did not limit itself to any one transaction structure (i.e. cash versus stock issued to seller, straight merger,
corporate spin-out or management buy-out). Proactive sourcing involved Renaissance management, among other things:
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initiating conversations, whether via phone, e-mail or other
means and whether directly or via their underwriters with third-party companies they believed may make attractive business combination
partners;
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contacting professional service providers (lawyers, accountants,
consultants and bankers);
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utilizing their own network of business associates and friends
for leads;
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working with third-party intermediaries, including investment
bankers;
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inquiring of business owners of their interest in selling their
business; and
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engaging consultants with whom Renaissance entered into success
fee based engagement letters.
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Reactive sourcing involved
fielding inquiries or responding to solicitations by either (i) companies looking for capital or investment alternatives or (ii) investment bankers or
other similar professionals who represented a company engaged in a sale or fundraising process.
The efforts of the officers and
directors of Renaissance included discussions with other board members that highlighted the particular industry, profiled companies which might be
attractive business combination candidates and provided valuation multiples for companies in the sector.
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Promptly following
Renaissances IPO, Renaissance contacted several hundred investment bankers, private equity firms, consulting firms, legal and accounting firms,
as well as numerous other business relationships. In addition, in February and March 2007, Renaissance directly solicited owners and executives of
privately owned businesses and publicized the fact that Renaissance was looking to merge with a private company. Through these efforts, Renaissance
identified and reviewed information with respect to more than 200 target companies.
Between March 2007 and September
2008, based on Renaissances screening efforts and criteria evaluation, several companies were determined as appropriate targets to advance to the
next phase of the selection process. Non-disclosure agreements (and trust waivers) were signed with these potential targets and preliminary discussions
were initiated. From this universe of potential targets, seven companies were further pursued to the extent that Renaissance held substantive
discussions regarding the type, timing and amount of consideration to be provided in a potential transaction, conducted extensive due diligence and
engaged the potential seller in a negotiation process. In each of these cases, Renaissance pursued the transaction because it believed the target
company represented a favorable opportunity for Renaissance stockholders. Furthermore, in the cases of the targets in the consumer products,
restaurants and finance industries, Renaissances management had experience in managing these businesses and it had been Renaissances
intention to focus on these businesses from its inception. However, except for First Communications, in each case, Renaissance was unable to reach a
mutually acceptable transaction value and structure with the target.
The following table highlights
the target businesses on which Renaissance advanced to the negotiation stage, but which were ultimately dismissed as a business combination
candidate:
Target Company Business
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Activity Period
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Reason not Pursued
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Plastic
Disposable Consumer Products
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March 2007
July 2008
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Executed letter
of intent; did not win auction process
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National
Casual
Restaurant Chain
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March 2007
June 2007
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Executed letter
of intent; did not win auction process
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National
Upscale
Restaurant Chain
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May 2007
August 2007
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Executed letter
of intent; seller decided not to sell after beginning definitive documentation
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Target Company Business
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Activity Period
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Reason not Pursued
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Specialty
Finance
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October 2007
February 2008
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Executed letter
of intent; did not agree on valuation and structure
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Networking
Hardware
Equipment
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November 2007
May 2008
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Executed letter
of intent; seller decided to pursue a different transaction
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Investment
Banking Firm
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November 2007
January 2008
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Could not agree
on valuation
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Dry Bulk
Shipping
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April 2008
August 2008
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Executed letter
of intent; could not agree on valuation and structure; tax issues
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On April 8, 2008, Rick Bloom,
president and chief operating officer of Renaissance, was contacted by Dan Esters and Jason Gredell of Jefferies. Messrs. Esters and Gredell explained
that First Communications was seeking to raise equity capital in connection with an acquisition opportunity, and that a special purpose acquisition
company, such as Renaissance, would address First Communications equity raising goals while also achieving another objective of moving to a
United States market exchange.
On April 10, 2008, Jefferies
provided Renaissance with certain non-confidential information regarding First Communications, as well as a confidentiality agreement. The Renaissance
team reviewed the materials and began gathering public valuation data and industry research with the assistance of Jefferies.
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During April and May 2008,
Renaissance continued to review and consider the First Communications opportunity with Jefferies, while also continuing to investigate various other
opportunities. Mr. Bloom maintained contact with Scott Honour of The Gores Group, LLC (Gores), which holds preferred and common equity in
First Communications, regarding the prospective transaction and why it represented a compelling opportunity for both Renaissance and First
Communications stockholders. The Renaissance team, led by Barry Florescue, Renaissances chairman and chief executive officer, analyzed precedent
merger and acquisition transaction valuations, as well as publicly comparable company valuations. It also considered First Communications
business plan, including the opportunity to integrate acquisitions, and what Renaissance believed to be a scalable platform due to the operational
leverage and ability to add capacity to existing fiber assets.
On June 17, 2008, Mr. Bloom spoke
with representatives of Jefferies further regarding a potential transaction, and Jefferies provided Renaissance the additional information requested.
At this time, Renaissance began to focus more closely on First Communications as a potential target because the business was well positioned to take
advantage of being a public company listed in the United States, and that the current owners goals were strongly aligned with the special purpose
acquisition company structure. Specifically, the existing owners were interested in retaining their existing equity interest, and using
Renaissances cash to take advantage of both organic and acquisition-based growth opportunities. Renaissances management found this type of
transaction structure to be very attractive because it aligned the interests of Renaissances shareholder base with the existing owners and also
because Renaissances initial due diligence reflected that the opportunities to invest capital into new projects and acquisitions could result in
significant shareholder returns. Additionally, Renaissance was encouraged by the fact that First Communications existing owners were willing to
take a substantial portion of their merger consideration in the form of contingent shares shares that would be earned both through
the achievement of increased operating performance as well as through attaining specific share price thresholds. Renaissance noted that this would
likely be an attractive form of consideration because it would protect its existing shareholders by effectively reducing total consideration if certain
operating projections or expected market valuations were not achieved in the future.
Over the next few days,
Renaissance reviewed the additional information in the proposal and submitted a preliminary proposal for a reverse merger transaction to Jefferies on
June 26, 2008. The proposal was based on both the valuation and analytical work that had been performed, and was also structured in a manner which
addressed Renaissances goal of providing a strong value to existing Renaissance stockholders while also giving existing First Communications
stockholders an ability to earn into an attractive valuation through contingent consideration based on executing First Communications business
plan. Specifically, Renaissances proposal contemplated that it would issue to First Communications shareholders a total of 28 million
shares of Renaissance common stock, with approximately 14 million of those shares issued at closing in the form of non-contingent consideration and the
remainder placed in escrow and released on a contingent basis to the extent certain stock price and performance-based targets were achieved after
closing. This proposal attributed a total value to First Communications shares of approximately $168 million assuming a future Renaissance stock
price of $6.00 (which amount includes the contingent shares).
On July 2, 2008, Mr. Bloom and
Mark Seigel, vice president and treasurer of Renaissance, spoke by phone with representatives of both Jefferies and Gores and the parties agreed that
Gores would respond formally to Renaissances preliminary proposal.
Over the course of the next few
weeks, Renaissance, Jefferies and Gores maintained frequent communication as they discussed and negotiated the timing of the transaction, the
performance criteria for the contingent consideration and the initial and contingent consideration amounts. Gores had responded to Renaissances
June 26, 2008 proposal by noting that its forecast 2008 operating performance was materially better than the assumptions Renaissance had made in that
proposal. Gores provided updated financial information in support of its claim and its desire to receive more shares than Renaissance had initially
offered. Based upon Renaissances analysis of the new financial data, as well as subsequent refined valuation work both internally generated and
based upon market research provided by Jefferies, Renaissance became comfortable with offering a greater number of shares as merger
consideration.
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On July 19, 2008, Renaissance
submitted a revised written proposal to First Communications. This proposal contemplated that Renaissance would issue to First Communications
existing shareholders a total of 37.8 million shares of Renaissance common stock, with approximately 18.8 million of those shares issued at closing in
the form of non-contingent consideration and the remaining shares placed in escrow and released on a contingent basis to the extent certain stock price
and performance-based targets were achieved after closing. This provided a total value to First Communications shares of approximately $227
million assuming a future Renaissance stock price of $6.00.
On July 30 and July 31, 2008,
Messrs. Bloom and Seigel met with First Communications management team and Jefferies at First Communications headquarters in Akron, OH and
further discussed the terms of a proposed transaction, focusing specifically on timing and the performance criteria for the two components of the
contingent consideration.
On August 5, 2008, the board of
directors of Renaissance held a telephonic board meeting to discuss Renaissances progress in the negotiations with First Communications. The
board reviewed the general terms of a proposed transaction. Renaissances board unanimously approved execution of a non-binding letter of intent
with First Communications.
On August 15, 2008, Renaissance,
First Communications and Gores, as Stockholders Representative, executed a non-binding letter of intent which outlined the terms under which both
sides agreed to work towards a definitive agreement and provided limitations on both Renaissances and First Communications ability to
pursue alternative transactions.
On August 16, 2008, Renaissance
provided a detailed business due diligence request list to First Communications. Over the next several weeks First Communications provided due
diligence information to Renaissance and its advisors, including Jefferies and Dechert LLP. Renaissance conducted business due diligence on First
Communications during this period.
On August 19, 2008, Dechert LLP,
on behalf of Renaissance, provided First Communications with a draft merger agreement which formed the basis for the negotiation of a definitive
agreement between Renaissance and First Communications. This initial draft included provisions for the indemnification of Renaissance by First
Communications stockholders with respect to the representations and warranties contained in the merger agreement, with shares of Renaissance common
stock to be held in escrow to satisfy any indemnification obligations. First Communications engaged its outside counsel, Bingham McCutchen LLP, to
assist it in the negotiation of the merger agreement with Renaissance. First Communications also received certain due diligence information from
Renaissance during this period and reviewed the information regarding Renaissance over the succeeding weeks.
On August 22, 2008, Renaissance
held a telephonic meeting of the board of directors, where it updated the board of directors on certain matters relating to the potential transaction
with First Communications including the status of due diligence, the Merger Agreement and other relevant matters. Messrs. Florescue, Bloom and Seigel
presented to the board of directors various findings relating to accounting and financial due diligence that would impact both the valuation ascribed
to the investment as well as the process through which First Communications would pursue an effective registration statement.
At this meeting, the board of
directors approved the managements engagement of financial and accounting advisors in connection with Renaissances evaluation of the
proposed transaction.
Renaissance engaged FTI
Consulting, Inc. (FTI) to conduct financial and accounting due diligence with respect to First Communications in connection with the
proposed transaction. Representatives from FTI spent several days with First Communications management at its headquarters in Akron, OH, reviewed
audited and interim financial statements and held discussions with management. During the period of its review, FTI provided updates regarding its
analysis to Renaissance on a regular basis.
Renaissance engaged Houlihan
Smith to render a fairness opinion to the board of directors as to whether, on the date of such opinion, the purchase price was fair, from a financial
point of view, to Renaissances stockholders, and to opine on whether the fair market value of First Communications was at least equal to 80% of
the net assets
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of Renaissance.
Representatives of Houlihan Smith held discussions with Renaissance, Jefferies and the management team of First Communications, reviewed materials
including, a draft of the Merger Agreement, dated September 7, 2008, financial statements of First Communications, Globalcom and companies acquired by
First Communications, internal financial statements and financial projections prepared by both First Communications and Renaissance, as well as other
due diligence materials concerning both First Communications and its industry provided by Renaissance.
Between August 19 and September
8, 2008, the Merger Agreement and related documentation were negotiated by Renaissance and First Communications along with their respective legal
representatives.
On August 29, 2008, Renaissance
and First Communications agreed to decrease the number of contingent shares to be released from escrow to First Communications existing
stockholders upon the achievement of the stock price and performance-based targets from 19,000,000 to 18,000,000, and to release 1,000,000 shares to
the holders of the T2 Warrants and the T3 Warrants who would exchange such warrants for warrants to purchase Renaissance common stock upon the
achievement of such targets.
In addition, on September 6,
2008, Renaissance and First Communications agreed that the representations and warranties of First Communications would not survive the consummation of
the Merger and Renaissance would not be indemnified for any breaches of such representations and warranties.
On September 8, 2008, Renaissance
convened a telephonic meeting of the board of directors to discuss the Merger Agreement and related agreements. Renaissances executive management
presented to the board of directors various aspects of the proposed merger and Houlihan Smith delivered a presentation in which it opined that the
purchase price was fair, from a financial point of view, to the stockholders of Renaissance, and that the transaction met the 80% net asset test. After
a detailed discussion and question and answer session, the board of directors approved the Merger Agreement and other related documents substantially
in the form presented to the board of directors and authorized and empowered certain Renaissance officers to execute and deliver the Merger Agreement
on behalf of Renaissance. The board of directors further resolved to recommend to the stockholders of Renaissance that they approve and adopt the
Merger Agreement.
Renaissance and First
Communications continued to negotiate the Merger Agreement and ancillary agreements through September 13, 2008. On September 13, 2008, the parties
executed the Merger Agreement and jointly announced their agreement by means of a press release on the morning of September 15, 2008.
On September 22, 2008,
Renaissance and First Communications filed a Form 8-K containing an investor presentation which provided further public disclosure on the Merger. A
joint public conference call was held that morning to present the Merger and take questions from the public regarding the Merger.
On September 30, 2008, as a
result of certain changes to the financial statements of First Communications after the rendering of Houlihan Smiths fairness opinion, Houlihan
Smith reaffirmed its opinion in a letter to Renaissance, for which Renaissance paid a fee of $5,000.
Due to certain changes in the
overall capital markets and the economic dislocations that have occurred since September 13, 2008, the date of execution of the original
agreement and plan of merger, beginning in October 2008, Renaissance, RAC Partners and First Communications began exploring the impact these
factors may have on Renaissance stockholders decision to vote in favor of the transaction.
On December 1, 2008,
Renaissance, RAC Partners and First Communications began discussions about deferring the release of additional shares of Renaissance common
stock that First Communications stockholders would have otherwise received upon the closing and deferring the release of shares of Renaissance
common stock currently owned by RAC Partners that would otherwise be released from escrow one year after the closing. These discussions
focused on releasing such shares only in the event the EBITDA Condition was satisfied.
On December 5, 2008, RAC
Partners proposed that the Merger be restructured so that a total of 6,000,000 fewer shares would be outstanding at closing than was provided
for under the original agreement and plan of merger. After a series of discussions that occurred between December 6, 2008 and December 12, 2008,
the parties agreed
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to split the deferral of
the shares of Renaissance common stock such that First Communications stockholders would defer 4,000,000 shares at closing and RAC Partners
would defer 2,000,000 shares. These additional shares would be escrowed and released to the former First Communications stockholders or to RAC
Partners only in the event the EBITDA Condition was satisfied. This would result in 4,000,000 fewer shares being available for sale in the
market at closing and an additional 2,000,000 shares out of the market past the one year anniversary of the closing. The parties also agreed
that the date by which the EBITDA Condition could be satisfied would be extended by six months from June 30, 2011 to December 31, 2011. In the
event the EBITDA Condition was not satisfied by such date, such shares would be released from escrow to the post-merger combined company and
cancelled.
On December 13, 2008, both
Renaissance and First Communications agreed to return to their respective boards of directors for approval and to recommend approval of the
amendment to their respective stockholders. On December 15, 2008, Dechert LLP and Bingham McCutchen LLP prepared Amendment No. 1 to the
agreement and plan of merger (the Amendment).
On December 15, 2008, First
Communications board of directors met and approved the Amendment. The stockholders of First Communications approved the Amendment on
December , 2008.
Between December 17, 2008 and December 21, 2008, the board of directors of Renaissance held several telephonic meetings to discuss the Amendment. On December 22, 2008,
Renaissance convened another telephonic meeting of its board of directors to further discuss the Amendment. The board of directors expressed its view that the
Amendment would provide for a transaction that would be more favorable to Renaissance stockholders and recognized that RAC Partners had also
agreed to give up some of its value in favor of Renaissance stockholders. After a detailed discussion and analysis, the board of
directors approved the Amendment substantially in the form presented to the board of directors and authorized and empowered certain
Renaissance officers to execute and deliver the Amendment on behalf of Renaissance. The board of directors also resolved to recommend that
Renaissance stockholders approve the agreement and plan of merger, as amended.
Renaissances Board of Directors Reasons for the
Approval of the Merger
The Renaissance board of
directors has concluded that the Merger with First Communications is in the best interests of Renaissances stockholders and unanimously
recommends that you vote FOR the merger proposal.
In arriving at its determination
to approve the Merger Agreement with First Communications, the board of directors of Renaissance relied on information (including financial
information) relating to First Communications, the regulatory environment, industry dynamics, the reports of outside due diligence consultants and its
own collective experience in investing in, managing and financing growth companies.
The Renaissance board of
directors also confirmed that the Merger with First Communications would satisfy the conditions for a merger candidate as set forth in the Renaissance
final prospectus dated January 29, 2007 for Renaissances IPO, including the requirement that First Communications fair market value as the
target business equal at least 80% of Renaissances net assets (excluding the amount held in the Trust Account representing a portion of the
underwriters discount). The fair market value of First Communications was determined by the board of directors based on a variety of factors
generally accepted by the financial community in valuing companies, including a comparative company analysis in which the board of directors analyzed
other telecommunications companies. The board of directors also considered the opinion of Houlihan Smith dated September 8, 2008 to the effect that, as
of such date, the fair market value of First Communications as indicated by Houlihan Smiths financial analyses was at least equal to $83 million.
A copy of Houlihan Smiths opinion, which sets forth the procedures followed, assumptions made, qualifications and limitations on the review
undertaken and other matters considered by Houlihan Smith in preparing its opinion is attached as Annex D and is discussed below under the section
entitled
Merger Proposal Fairness Opinion.
The Renaissance board of
directors considered financial data for selected telecommunications companies with publicly traded securities that it deemed similar to First
Communications in one or more financial, operating or other respects as part of its analysis, as well as similar analyses which Houlihan Smith reviewed
with the board of directors in connection with rendering its opinion.
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The Renaissance board of
directors considered a wide variety of factors in connection with its evaluation of the Merger. In light of the complexity of those factors, the
Renaissance board of directors did not consider it practicable to, nor did it attempt to, quantify or otherwise assign relative weights to the specific
factors it considered in reaching its decision. In addition, individual members of the Renaissance board may have given different weight to different
factors. Such factors included, among other things:
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First Communications financial condition and results of
operations;
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First Communications growth potential;
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the experience and skills of First Communications
management and the availability of additional personnel;
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First Communications competitive position;
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the regulatory environment for First Communications;
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the valuation of comparable companies;
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the valuation of comparable merger/acquisition
transactions;
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First Communications industry dynamics, including the
competitive landscape;
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favorable long-term growth prospects;
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the reports of outside due diligence consultants retained by
Renaissance;
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research reports published by third-parties on markets and/or
companies similar to First Communications;
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future capital requirements;
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costs associated with effecting the transaction;
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the oral opinion of Houlihan Smith to the board of directors of
Renaissance on September 8, 2008 (which was subsequently confirmed in writing by delivery of Houlihan Smiths written opinion dated September 8,
2008) with respect to whether the fair market value of First Communications as indicated by Houlihan Smiths financial analyses was at least equal
to $83 million;
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the underlying businesses and components of First
Communications; and
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Renaissances managements experience in building,
managing and financing growth companies, including various relationships or strategies that Renaissance could bring to bear with First Communications
to potentially accelerate growth, enter new markets, increase market share, improve profitability and trade at premium multiples relative to its peer
group going forward.
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The analysis of the
Renaissances board of directors in reaching this conclusion is described in more detail below. In considering the Merger, the Renaissances
board gave considerable weight to the following positive factors:
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First Communications record of revenue growth and high
potential for future growth, as well as its historical financial performance;
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First Communications diversified revenue stream in terms
of multiple business segments and geographic markets and a lack of customer concentration;
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First Communications prospective position as an
acquisition platform in a highly fragmented industry and compelling acquisition opportunities; and
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Renaissance board of directors belief that First
Communications has the ability to continue its growth because opportunities exist to:
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expand current business both organically and through
acquisitions;
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build wireless towers and attachments to existing towers;
and
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fund additional sales and marketing initiatives.
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The Experience of First
Communications Management
An important criterion to
Renaissances board of directors in identifying an acquisition target was that the target must have a seasoned management team with specialized
knowledge of the markets within which it operates and the ability to lead a growth company. First Communications management team is led by Ray
Hexamer, First Communications chief executive officer, who has more than 25 years of experience in the communications industry and participated
in the initial acquisitions that created First Communications. Ray Hexamer will be complemented by a management team with relevant experience which
includes Rick Buyens, president, who has held senior positions in the telecommunications industry for the past 20 years, Joseph R. Morris, chief
operating officer and chief financial officer, who has held various financial and executive positions with First Communications since its inception and
David Johnson, II who has served as First Communications senior vice president of sales and marketing, also since inception.
Comparable Company and Comparable
Transaction Valuation Metrics
The Renaissance board of
directors reviewed valuation metrics from managements analysis and that of third party investment banks for companies and transactions that it
believed were somewhat representative of both First Communications and the proposed merger. Comparable companies considered included:
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the competitive local exchange carrier and/or fiber companies of
Cbeyond, Inc., Global Crossing Ltd., Level 3 Communications Inc., PAETEC Holding Corp. and tw telecom inc.; and
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the wireless tower companies of American Tower Corp., Crown
Castle International Corp. and SBA Communications Corp.
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Comparable transactions included:
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the competitive local exchange carrier transactions of McLeodUSA
Inc., NEON Communications Group, Eschelon Telecom, Inc., United Communications, Inc., Broadwing Corporation, Cavalier Telephone & TV Talk America,
US LEC Corp., OneEighty Communications, Inc., Xspedius Communications, LLC, Mountain Telecommunications, Inc., Looking Glass Networks, Inc., OnFiber
Communications, Inc., Mpower Communications, TelCove, Inc., ICG Communications, Inc., Electric Lightwave, Inc. and Oregon Telecom, Inc.;
and
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the wireless tower transactions of Vodafone Australia-Tower
Divestiture, Sprint Nextel-Tower Divestiture, Light Tower LLC, Optasite, Global Tower, National Grid Wireless Infrastructure, Global Signal, Mountain
Union Telecom, SpectraSite, TrinTel Communications and Sprint Sites.
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The Terms of the Merger
Agreement
The terms of the Merger
Agreement, including the closing conditions, restrictions on Renaissances and First Communications ability to respond to competing
proposals and the termination provisions are customary and reasonable.
Additional
Factors
Renaissances board of
directors believes that the above factors strongly supported its determination and recommendation to approve the Merger. The Renaissance board of
directors did, however, consider potentially negative factors, among others, including the risk factors included in this proxy statement/prospectus, in
its deliberations concerning the Merger.
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Renaissances board of
directors also considered the risk that the current public stockholders of Renaissance would vote against the Merger and demand to redeem their shares
for cash upon consummation of the Merger, thereby depleting the amount of cash available to the combined company following the Merger. For the reasons
stated below, Renaissances board of directors deemed this risk to be less with regard to First Communications than it would be for other target
companies and believes that First Communications will still be able to implement its business plan even if the maximum number of public stockholders
exercise their conversion rights and the post-merger combined company receives only approximately 80% of the funds deposited in the Trust
Account.
Renaissances board of
directors also believes that a transaction with First Communications presents less risk than other investments based on the quantitative and
qualitative analysis conducted by Renaissances board. The quantitative analysis focused on First Communications balance sheet and past
results of operations and First Communications managements projections and expected operating leverage. The qualitative analysis of the
investment includes the potential value represented by First Communications strong management team and industry fundamentals that support First
Communications ability to grow market share organically and through acquisitions. It further includes the analysis that First Communications has
rights of way access along utility transmission lines which will allow it to add additional wireless towers and attachments at prices that give it a
strong competitive advantage against wireless tower owners who do not have such rights of ways. Given the early stage of these business prospects,
Renaissances directors did not ascribe specific quantitative value to these assets in their analysis of First Communications.
Renaissances board of
directors also considered the fact that certain officers and directors of Renaissance may have interests in the Merger that are different from, or are
in addition to, the interests of Renaissance stockholders generally, including the matters described below under the section entitled
Merger
Proposal Interests of Renaissances Directors and Officers in the Merger.
However, this fact would exist with respect to a merger
with any target company.
Renaissances board of
directors also considered the fact that there is no indemnification in the Merger Agreement, and the fact that First Communications
representations and warranties do not survive the Merger on a post-closing basis. The board of directors of Renaissance determined that First
Communications status as a public company listed on the AIM made such lack of indemnification customary when compared with other business
combinations involving a private company.
After deliberation, the
Renaissance board of directors determined that these potentially negative factors were outweighed by the potential benefits of the Merger, including
the opportunity for Renaissance stockholders to share in First Communications future possible growth prospects. Renaissance expects First
Communications to benefit from strong organic growth in performance as well as acquisitions at accretive purchase multiples as Renaissance believes
First Communications will be able to quickly lower overheard when combining with a competitor in an adjacent or overlapping
market.
Satisfaction of 80% Test
It is a requirement that any
business acquired by Renaissance have a fair market value equal to at least 80% of Renaissances net assets at the time of acquisition, which
assets shall include the amount in the Trust Account. Based on the financial analysis of First Communications generally used to approve the
transaction, including a comparison of comparable companies and a discounted cash flow analysis, the Renaissance board of directors determined that
this requirement was met. The board determined that the consideration being paid in the Merger, which amount was negotiated at arms-length, was fair to
and in the best interests of Renaissance and its stockholders and appropriately reflected First Communications value. In reaching this
determination, the board concluded that it was appropriate to base such valuation on qualitative factors such as management strength and depth,
competitive positioning, customer and labor relationships and technical skills as well as quantitative factors such as First Communications
historical growth rate and its potential for future growth in revenues and profits and its historical return on equity. The Renaissance board of
directors believes because of the financial skills and background of several of its members, it was qualified to conclude that the acquisition of First
Communications met
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this requirement. However,
Renaissance has also received an opinion from Houlihan Smith that the 80% test has been met.
Interests of Renaissances Directors and Officers in the
Merger
In considering the recommendation
of the board of directors of Renaissance to vote to approve the merger proposal, the charter amendment proposal and the incentive compensation plan
proposal, you should be aware that certain members of the Renaissance board and management have agreements or arrangements that provide them with
interests in the Merger that differ from, or are in addition to, those of Renaissance stockholders generally. In particular:
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If the Merger is not consummated by January 29, 2009,
Renaissance will be liquidated. In such event, the 3,900,000 shares held by the Renaissance Inside Stockholders that were acquired prior to the IPO,
for an aggregate purchase price of approximately $25,000, would be worthless because Renaissances directors and officers are not entitled to
receive any of the liquidation proceeds with respect to such shares. Such shares had an aggregate market value of
$
based upon the closing price of
$
on the American Stock Exchange on
, the record date for the Renaissance special meeting.
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The Company issued and sold 4,666,667 warrants (exercisable at
$6.00 per share) to RAC Partners and Charles Miersch and Morton Farber, two of Renaissances directors, on February 1, 2007. All of the proceeds
Renaissance received from these purchases were placed in the Trust Account. The Insider Warrants are identical to the warrants underlying the Units
sold in Renaissances IPO except that (i) they have an exercise price of $6.00 per share, (ii) Renaissance did not register the sale of the
warrants to the public and (iii) the Insider Warrants will be exercisable on a cashless basis at the holders option so long as such warrants are
held by such directors, RAC Partners or its affiliates. Renaissance has agreed to register the transfer of the Insider Warrants by RAC Partners to its
members in a liquidation or distribution and the resale of the shares underlying the Insider Warrants by RAC Partners and the directors at any time
after Renaissance executes a definitive agreement for a business combination, but the purchasers of the Insider Warrants have agreed that the Insider
Warrants will not be sold or, subject to certain limited exceptions (including in a distribution upon liquidation at RAC Partners), transferred by them
and they may not exercise the Insider Warrants until 30 days after Renaissance has completed a business combination. Accordingly, the Insider Warrants
have been placed in escrow and will not be released until 30 days after the completion of a business combination. Such warrants are not traded publicly
and have an exercise price of $6.00 per warrant. All of the warrants will become worthless if the Merger is not consummated (as will the remainder of
the public warrants).
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In addition, pursuant to a share purchase plan entered into
prior to Renaissances IPO, RAC Partners, an entity controlled by Barry W. Florescue, placed a limit order for $12 million of Renaissance common
stock which commenced ten business days after Renaissance filed its Current Report on Form 8-K announcing its execution of a definitive agreement for
the Merger and will end on the business day immediately preceding the record date for the meeting of stockholders at which this Merger is to be voted
upon. Since the placement of the limit order, as of December 1 5 , 2008, RAC Partners had purchased 8 1 1,269 shares of Renaissance common
stock for an aggregate purchase price of $4,5 95,532 and at an average purchase price per share of $5.66. RAC Partners may vote these shares on a
proposed business combination any way it chooses. As a result, RAC Partners may be able to influence the outcome of the merger proposal and the other
proposals under consideration. The purchases were at a price equal to the per share amount held in the Trust Account as reported in the Form 8-K filed
in connection with the execution of the Merger Agreement and were made by R.M. Stark & Co., Inc. in such amounts and at such times as R.M. Stark
& Co., Inc. determined, so long as the purchase price did not exceed the above-referenced per share purchase price. Mr. Florescue has agreed that
he will not sell or transfer any shares of common stock purchased by him pursuant to this agreement until one year after Renaissance has completed this
Merger. RAC Partners has purchased an aggregate of
shares pursuant to this
arrangement.
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Additionally, at any time prior to the special meeting, during a
period when they are not then aware of any material nonpublic information regarding Renaissance or its securities, the Renaissance Inside Stockholders,
First Communications or First Communications stockholders and/or their respective affiliates may purchase shares from institutional and other
investors, or execute agreements to purchase such shares from them in the future, or they may enter into transactions with such persons and others to
provide them with incentives to acquire shares of Renaissance common stock or vote their shares in favor of the merger proposal. The purpose of such
share purchases and other transactions would be to increase the likelihood of satisfaction of the requirements that the holders of a majority of the
Public Shares cast on the merger proposal vote in its favor and that holders of fewer than 20% of the Public Shares vote against the merger proposal
and demand conversion of their Public Shares into cash where it appears that such requirements would otherwise not be met. As of the record date, Mr.
Florescue beneficially owned
Public Shares, and Charles Miersch beneficially owned
Public Shares. While the exact nature of any incentives that would be provided by the
Renaissance Inside Stockholders, First Communications or First Communications stockholders and/or their respective affiliates has not been
determined as of the date of this proxy statement/prospectus, they might include, without limitation, arrangements to protect such investors or holders
against potential loss in value of their shares, including the granting of put options and the transfer to such investors or holders of shares or
warrants owned by the Renaissance Inside Stockholders for nominal value. Renaissance will not enter into any such arrangement, either prior to or after
the consummation of the Merger, and no funds in its Trust Account will be used to make such purchases or to fund other such arrangements.
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If Renaissance liquidates prior to the consummation of a
business combination, Barry W. Florescue will be personally liable to ensure that the proceeds in the Trust Account are not reduced by the claims of
target businesses or vendors or other entities that are owed money by Renaissance for services rendered or contracted for or products sold to
Renaissance. Renaissance cannot assure you that he would be able to satisfy those obligations. As of September 30, 2008, Renaissance had accounts
payable of approximately $855,375. It estimates that it will incur additional expenses of approximately $50,000 that would be required to be paid if
the Merger is not consummated. Of such total of $855,375, creditors to whom approximately $802,572 is or would be owed have waived their rights to make
claims for payment from amounts in the Trust Account. Mr. Florescue would be obligated to indemnify Renaissance for the balance of approximately
$52,803 that would be owed to creditors who have not waived their rights against the Trust Account. However, Renaissance believes that Mr. Florescue
does not have any risk of being required to provide indemnification since all persons who have had contractual obligations with Renaissance but have
not waived their rights against the Trust Account have been paid in full (or will be paid in accordance with Renaissances past
practices).
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Recommendation of Renaissances Board of
Directors
After careful consideration of
the matters described above, particularly First Communications record of growth, high return on equity, potential for growth and profitability,
the experience of First Communications management, its competitive positioning, its customer and employee relationships, and technical skills,
Renaissances board of directors determined unanimously that each of the merger proposal, the charter amendment proposal and the incentive
compensation plan proposal is fair to and in the best interests of Renaissance and its stockholders. Renaissances board of directors has approved
and declared advisable and unanimously recommends that you vote or give instructions to vote FOR each of these proposals.
The foregoing discussion of the
information and factors considered by the Renaissance board of directors is not meant to be exhaustive, but includes the material information and
factors considered by the Renaissance board of directors.
First Communications Board of Directors Reasons for
Approving the Merger
The board of directors of First
Communications has approved the Merger Agreement and the transactions contemplated thereunder, and believes that the terms of the Merger Agreement are
fair to, and in the best interests of, First Communications and its stockholders.
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The board of directors of First
Communications believes that the Merger will create a corporate structure that will allow First Communications to maintain and expand its business,
thus maximizing stockholder value. The Merger will combine First Communications telecommunications and tower operations with Renaissances
United States public market access, public market management experience and strong balance sheet, thereby enabling the post-merger combined company to
expand its business, while providing certain benefits of being a United States publicly traded company.
The board of First Communications
has considered various transactions in the past as steps toward achieving the continuity of First Communications and has explored alternatives for
enhancing its balance sheet and providing some liquidity opportunities to its stockholders, including its listing on the AIM. From time to time, First
Communications has studied the United States public markets as an alternative source of capital as well for other benefits that it may
provide.
In reaching its determination to
merge with Renaissance, the First Communications board considered a number of factors. A potential merger with Renaissance was considered to be
complementary with First Communications long-term objectives and was structured to provide an opportunity to attain the following potential
benefits to First Communications and its stockholders:
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A proposed merger with a special purpose acquisition company,
such as Renaissance, provides a mechanism to achieve a public market in the United States for First Communications without many of the costs,
management time expenditures and risks inherent in completing a traditional United States initial public offering. First Communications board
believes that the proposed approach of merging with Renaissance would be beneficial to First Communications and its stockholders, especially when
taking into account the various uncertainties in the public equity markets.
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First Communications board believes that becoming a
publicly traded company in the United States will provide certain benefits that are meaningful to First Communications. The board of First
Communications believes that the higher profile of being publicly traded in the United States and listed on Nasdaq, compared to its current status as a
listed company on AIM, may enhance First Communications recognition in the United States telecommunications and tower markets as it seeks to
obtain new customers and to expand its relationships with existing customers. The board also believes that the currency of a United States publicly
traded stock will provide First Communications with additional methods of financing and completing acquisitions without the added strain of depleting
First Communications balance sheet.
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The Merger will also enhance and diversify the composition of
First Communications board of directors. The Merger Agreement contemplates that the post-merger combined company will have two members nominated
by Renaissance on its board of directors Barry W. Florescue and Richard A. Bloom and First Communications believes these new members will
add their expertise in the financial markets to the continuing members of the First Communications board and management team.
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The board of directors believes that the value of the
consideration to be received by First Communications, compared to its book value and earnings per share, and the fact that the shares to be received as
consideration are being registered on this registration statement, maximize stockholder value and will provide a valuable form of liquidity for First
Communications stockholders.
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Maintaining a strong balance sheet is an important consideration
to the First Communications board and the First Communications management team. With the Renaissance transaction, the cash that Renaissance has raised
through its public offering will allow First Communications to maintain the strength of its balance sheet, and will provide a publicly traded currency
for acquisitions, thus allowing First Communications to retain some of that cash even as it explores additional strategic acquisitions.
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The Merger will also allow the post-merger combined company to
maintain the existing First Communications management team. The First Communications board believes that the continuity of management of the
post-merger combined company will allow for a continuation of the historically strong performance of First Communications, both with respect to its
ability to complete and integrate complementary acquisitions, and
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its ability to provide strong financial results. The First
Communications board also believes that the performance of the post-merger combined company will be enhanced by the added tools and benefits of being a
United States publicly traded company.
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The First Communications board of
directors considered a wide variety of factors in connection with its evaluation of the Merger. In light of the complexity of those factors, the First
Communications board of directors did not consider it practicable to, nor did it attempt to, quantify or otherwise assign relative weights to the
specific factors it considered in reaching its decision. In addition, individual members of the First Communications board may have given different
weight to different factors.
The board of First Communications
believes that becoming a United States publicly traded company is a benefit to the stockholders and business of First Communications. The Merger with
Renaissance reduces some of the risk associated with affecting the creation of a United States public market for First Communications common
stock.
Interests of First Communications Directors and
Executive Officers in the Merger
You should be aware that certain
members of the First Communications board and certain executive officers of First Communications have agreements or arrangements that provide them with
interests in the Merger. In particular:
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Marshall Belden, Mark Clark, Raymond Hexamer, Scott Honour,
Joseph R. Morris and Mark Stone have been nominated as directors of Renaissance effective upon consummation of the transaction contemplated by the
Merger Agreement, and Theodore Boyd has been nominated as the chairman of the board of directors of Renaissance. As employee directors, Messrs. Hexamer
and Morris will not receive any additional compensation for serving on the board of directors of Renaissance. The independent directors will, in the
future, receive any cash fees, stock options or stock awards that the Renaissance board of directors approves following a determination of fair
compensation for its directors.
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Pursuant to the transactions contemplated by the Merger
Agreement, Messrs. Hexamer and Morris and Richard Buyens and David Johnson, II are expected to become executive officers of Renaissance. Following the
consummation of the transactions contemplated by the Merger Agreement, these individuals will continue to serve pursuant to the terms of their existing
employment agreements with First Communications. Set forth below is information with respect to these individuals:
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Name
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Term of Employment
Agreement and
Position
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Annual
Base Salary
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Raymond
Hexamer
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Expires July 2009
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$265,000
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(automatic renewal)
Chief Executive Officer
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Joseph R.
Morris
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Expires July 2009
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$250,000
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(automatic renewal)
Chief Financial Officer and Chief Operating Officer
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Richard J.
Buyens
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Expires May 6, 2010
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$250,000
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(automatic renewal)
President
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David Johnson,
II
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Expires July 2009
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$125,000
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(automatic renewal)
Senior Vice President, Sales and Marketing
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Each of the First Communications executive officers listed above
will also receive as part of his employment arrangements:
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Bonus
. A discretionary bonus based on a policy to be
established by the board of directors or compensation committee of Renaissance. Currently bonus potential is as follows for each executive:
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Percentage of Base
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Raymond
Hexamer
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60
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%
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Joseph R.
Morris
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50
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%
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Richard J.
Buyens
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50
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%
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David
Johnson, II
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120
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%
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Termination Payment
. If Mr. Hexamers, Mr.
Morris or Mr. Johnsons employment is terminated without cause, Renaissance will continue to pay the executive his base salary for the 12
month period following the date of termination and pay the annual bonus earned as of the date of termination. If Mr. Buyens employment is
terminated by Renaissance without cause, or by Mr. Buyens for good reason, prior to November 6, 2008, Renaissance will pay him his annual base salary
for 60 days after such termination. If Mr. Buyens employment is terminated by Renaissance without cause or by Mr. Buyens for good reason, on or after
November 6, 2008 and before May 7, 2009, Renaissance will pay him his annual base salary for 90 days after such termination. If Mr. Buyens
employment is terminated by Renaissance without cause, or by Mr. Buyens for good reason, on or after May 7, 2009, Renaissance will pay him his annual
base salary for 12 months after such termination. If a termination without cause or for good reason occurs at any time within a 12 month period
following a change in control of First Communications, Mr. Buyens will be entitled to be paid his annual base salary for 12 months following such
termination and a pro rated portion of his annual bonus.
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Other Benefits
. Limited personal use of other
prerequisites as may be provided under the policies and practices then in place at the time of the closing date and/or by the compensation committee of
Renaissance, including club membership dues and expenses.
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Additionally, pursuant to the Merger Agreement, Renaissance has
agreed to approve the grant of options and restricted stock to certain First Communications employees contingent upon the consummation of the Merger
and approval by Renaissance stockholders of the 2008 Plan. Messrs Hexamer and Morris will each be entitled to options exercisable for 80,000 shares of
Renaissance stock and 40,500 restricted shares of Renaissance common stock, Mr. Buyens will be entitled to options exercisable for 413,850 shares of
Renaissance common stock and Mr. Johnson will be entitled to options exercisable for 60,000 shares of Renaissance common stock and 30,500 restricted
shares of Renaissance common stock.
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The transactions contemplated by the Merger Agreement provide
that each of the First Communications stockholders will receive shares of Renaissance common stock in exchange for their shares of First Communications
common stock and a cash payment in exchange for their shares of First Communications preferred stock. Those shares of First Communications common stock
and preferred stock held by the executive officers, by individual members of the board of directors of First Communications, or by entities with which
the individual members are affiliated, will be treated the same way and will be exchanged for the same consideration in the Merger as all other shares
of common stock or preferred stock of First Communications. In addition, holders of T2 Warrants and T3 Warrants who agree to exchange their warrants
will be entitled to receive warrants and, potentially, common stock (as further described herein) of Renaissance. Warrants held by entities with which
members of the board are affiliated will be treated the same way and such entities will be entitled to the same consideration for their warrants as any
T2 Warrant Holder or T3 Warrant Holder. Please see
Beneficial Ownership of Securities
for a discussion of the beneficial ownership
of First Communications and Renaissance shares of the key personnel and affiliates of First Communications, including those members of the board of
directors of First Communications who have been nominated to join the board of directors of Renaissance as part of the transactions contemplated by the
Merger Agreement.
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Fairness Opinion
In connection with its
determination to approve the Merger Agreement at its meeting on September 8, 2008, Renaissances board of directors engaged Houlihan Smith to
provide it with a fairness opinion as to whether the Merger with First Communications on the terms and conditions set forth in the Merger
Agreement is fair to Renaissance stockholders from a financial point of view and that the fair market value of First Communications is at least equal
to 80% of Renaissances net assets at the time of the Merger.
In selecting a valuation and
financial advisory firm to render a fairness opinion, Renaissances board of directors solicited referrals of firms experienced in rendering
opinions of similar size and scope to the proposed transaction with First Communications from its legal counsel and the underwriters of
Renaissances initial public offering. Subsequently, Renaissance interviewed three firms and determined that Houlihan Smith offered the most
appealing combination of experience, availability of personnel and cost. Renaissance requested references from Houlihan Smith to verify the firms
prior work product. After receiving favorable references from sponsors of two special purpose acquisition companies that had used Houlihan Smith
fairness opinions in connection with their transactions, Renaissances board of directors authorized hiring Houlihan Smith to render the fairness
opinion.
Houlihan Smith delivered a
presentation to Renaissances board of directors on September 8, 2008 and subsequently delivered its written opinion to Renaissance dated
September 8, 2008, which stated that, based upon and subject to the assumptions made, matters considered, and limitations on its review as set forth in
the opinion, (i) the purchase price is fair, from a financial point of view, to Renaissances stockholders, and (ii) the fair market value of
First Communications is at least equal to 80% of Renaissances net assets at the time of the Merger. As a result of certain changes to the
financial statements of First Communications after the rendering of this opinion, Houlihan Smith reaffirmed its opinion in a letter to Renaissance
dated September 30, 2008, for which it received a fee of $5,000. The amount of the purchase price was determined pursuant to negotiations between
Renaissance and First Communications and not pursuant to recommendations of Houlihan Smith. The full text of the written opinion of Houlihan Smith is
attached as Annex D and is incorporated by reference into this proxy statement/prospectus.
You are urged to read the
Houlihan Smith opinion carefully and in its entirety for a description of the assumptions made, matters considered, procedures followed and limitations
on the review undertaken by Houlihan Smith in rendering its opinion. Houlihan Smith has consented to the incorporation by reference of its opinion in
this proxy statement/prospectus. The summary of the Houlihan Smith opinion set forth in this proxy statement/prospectus is qualified in its entirety by
reference to the full text of the opinion. Houlihan Smith has no responsibility for updating or revising its opinion based on circumstances or events
occurring after the date of the rendering of the opinion. However, as noted above, as result of certain changes to the financial statements of First
Communications after the rendering of its original opinion, Houlihan Smith reaffirmed its opinion in a letter to Renaissance dated September 30,
2008.
In accordance with its engagement
letter, Houlihan Smiths opinions are addressed solely to Renaissances board of directors for the board of directors use in connection
with its review and evaluation of the acquisition. It is, therefore, Houlihan Smiths view that its duties in connection with its fairness opinion
extend solely to Renaissances board of directors and that it has no legal responsibilities in respect thereof to any other person or entity
(including a Renaissance stockholder) under the law of the State of Illinois, the laws which have been selected by Houlihan Smith and Renaissance as
governing the engagement letter. Houlihan Smith has consistently taken this view with respect to all of its fairness opinions, which Renaissance
believes is a generally accepted practice of issuers of such opinions. Renaissance acceded to Houlihan Smiths position because it was made a
condition to its engagement of Houlihan Smith. Houlihan Smith would likely assert the substance of this view and the disclaimer described above as a
defense to claims and allegations, if any, that might hypothetically be brought or asserted against it by any persons or entities other than
Renaissances board of directors with respect to the aforementioned opinion and the financial analyses thereunder. However, because no court has
definitively ruled to date on the availability of this defense to a financial advisor who furnished to its client for its exclusive use of a fairness
opinion, this issue necessarily would have to be judicially resolved on the merits in a final and non-
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appealable judgment of a
court of competent jurisdiction. Furthermore, there can be no assurances that such a court would apply the laws of the State of Illinois to the
analyses and ultimate resolution of this issue if it were to be properly briefed by the relevant litigants and presented to the court. In all cases,
the hypothetical assertion or availability of such a defense would have absolutely no effect on Houlihan Smiths rights and responsibilities under
U.S. federal securities laws, or the rights and responsibilities of Renaissances board of directors under applicable state law or under U.S.
federal securities laws.
The Houlihan Smith opinion is for
the use and benefit of Renaissances board of directors in connection with its consideration of the Merger and is not intended to be and does not
constitute a recommendation to you as to how you should vote or proceed with respect to the Merger. Houlihan Smith was not requested to opine as to,
and its opinion does not in any manner address, the relative merits of the Merger as compared to any alternative business strategy that might exist for
Renaissance, Renaissances underlying business decision to proceed with or effect the Merger, and other alternatives to the Merger that might
exist for Renaissance. Houlihan Smith does not express any opinion as to the future performance of Renaissance or First Communications or the price at
which either of Renaissances securities might trade at any time in the future. Renaissance did not provide any specific instructions or
limitations to Houlihan Smith regarding the fairness opinion.
In arriving at its opinion,
Houlihan Smith took into account an assessment of general economic, market and financial conditions, as well as its experience in connection with
similar transactions and securities valuations generally. In so doing, among other things, Houlihan Smith:
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reviewed a draft of the Merger Agreement, dated September 7,
2008;
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reviewed and analyzed First Communications audited Annual
Report for 2007;
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reviewed and analyzed First Communications audited
historical financial statements for the fiscal years ending 2004 through 2006;
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reviewed and analyzed financial projections (pro forma for the
completion of the Globalcom acquisition) for the years ending December 31, 2008 through December 31, 2012 for First Communications provided by
Renaissance management;
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reviewed Globalcoms audited financial statements for the
fiscal years ending 2004 through 2007;
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reviewed publicly available financial information and other data
with respect to Renaissance, including the Annual Report on Form 10-K for the year ended December 31, 2007 and Form 10-Q for the period ended June 30,
2008;
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reviewed a confidential information memorandum for private
investors regarding a term loan commitment increase prepared by JP Morgan, dated June 18, 2008;
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held discussions with Renaissance management and First
Communications management regarding, among other items, the telephone communications and communication services industries, generally, and the
competitive local exchange carrier (CLEC) and communication tower (Tower) industries, specifically; Renaissances decision
to form a business combination with First Communications;
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reviewed the financial terms of certain recent business
combinations in the telephone communications, communications services and wireless communication industries specifically, and in other industries
generally;
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reviewed certain Renaissance board of directors materials
regarding First Communications, dated August 5, 2008;
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reviewed financial and operating information with respect to
certain publicly-traded companies in the telecommunication services, wireless communications, information technology and infrastructure industries
which Houlihan Smith believes to be generally comparable to the business of First Communications, as well as other research related to the size and
growth of markets in which First Communications operates or may operate;
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reviewed a company overview presentation for First
Communications, dated July 2008;
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reviewed a confidential information memorandum prepared by
Jefferies regarding certain senior secured credit facilities, dated November 2007;
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reviewed a summary of the capital structures of First
Communications on both a pre-transaction and post-transaction basis regarding the Merger prepared by Jefferies;
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reviewed a current First Communications organizational chart;
and
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performed other financial studies, analyses and investigations,
and considered such other information, as Houlihan Smith deemed necessary or appropriate.
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In arriving at its opinion,
Houlihan Smith relied upon and assumed the accuracy and completeness of all of the financial and other information that was used without assuming any
responsibility for any independent verification of any such information. Further, Houlihan Smith relied upon the assurances of the managements of
Renaissance and First Communications that they were not aware of any facts or circumstances that would make any such information inaccurate or
misleading. With respect to the financial information and projections utilized, Houlihan Smith assumed that such information has been reasonably
prepared on a basis reflecting the best currently available estimates and judgments, and that such information provides a reasonable basis upon which
it could make an analysis and form an opinion. The projections were solely used in connection with the rendering of Houlihan Smiths fairness
opinion. Investors should not place undue reliance upon such projections, as they are not necessarily an indication of what Renaissances revenues
and profit margins will be in the future. The projections were prepared by First Communications management and were not meant to be interpreted as
projections of future performance (or guidance) by Renaissance management. Houlihan Smith did not evaluate the solvency or fair value of
First Communications under any foreign, state or federal laws relating to bankruptcy, insolvency or similar matters. Houlihan Smith did not make a
physical inspection of the properties and facilities of First Communications and did not make or obtain any evaluations or appraisals of First
Communications assets and liabilities (contingent or otherwise). In addition, Houlihan Smith did not attempt to confirm whether First
Communications had good title to its assets.
Houlihan Smith assumed that the
Merger will be consummated in a manner that complies in all respects with the applicable provisions of the Securities Act of 1933, as amended, the
Securities Exchange Act of 1934, as amended, and all other applicable foreign, federal and state statutes, rules and regulations. Houlihan Smith
assumed that the Merger will be consummated substantially in accordance with the terms set forth in the Merger Agreement, without any further
amendments thereto, and that any amendments, revisions or waivers thereto will not be detrimental to Renaissances stockholders.
Houlihan Smiths analysis
and opinion are necessarily based upon market, economic and other conditions, as they existed on, and could be evaluated as of, September 8, 2008.
Accordingly, although subsequent developments may affect its opinion, Houlihan Smith has not assumed any obligation to update, review or reaffirm its
opinion.
In connection with rendering its
opinion, Houlihan Smith performed certain financial, comparative and other analyses as summarized below. Each of the analyses conducted by Houlihan
Smith was carried out to provide a different perspective on the Merger, and to enhance the total mix of information available. Houlihan Smith did not
form a conclusion as to whether any individual analysis, considered in isolation, supported or failed to support an opinion as to the fairness, from a
financial point of view, of the purchase price to Renaissances stockholders and whether the fair market value of First Communications was at
least equal to 80% of Renaissances net assets at the time of the Merger. Further, the summary of Houlihan Smiths analyses described below
is not a complete description of the analyses underlying Houlihan Smiths opinion. The preparation of a fairness opinion is a complex process
involving various determinations as to the most appropriate and relevant methods of financial analysis and the application of those methods to the
particular circumstances and, therefore, a fairness opinion is not readily susceptible to partial analysis or summary description. In arriving at its
opinion, Houlihan Smith made qualitative judgments as to the relevance of each analysis and factors that it considered. In addition, Houlihan Smith may
have given various analyses more or less weight than other analyses, and may have deemed various assumptions more
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or less probable than other
assumptions, so that the range of valuations resulting from any particular analysis described above should not be taken to be Houlihan Smiths
view of the value of First Communications assets. The estimates contained in Houlihan Smiths analyses and the ranges of valuations
resulting from any particular analysis are not necessarily indicative of actual values or actual future results, which may be significantly more or
less favorable than suggested by such analyses. In addition, analyses relating to the value of businesses or assets neither purport to be appraisals
nor do they necessarily reflect the prices at which businesses or assets may actually be sold. Accordingly, Houlihan Smiths analyses and
estimates are inherently subject to substantial uncertainty. Houlihan Smith believes that its analyses must be considered as a whole and that selecting
portions of its analyses or the factors it considered, without considering all analyses and factors collectively, could create an incomplete and
misleading view of the process underlying the analyses performed by Houlihan Smith in connection with the preparation of its opinion.
The analyses performed were
prepared solely as part of Houlihan Smiths analysis of the fairness, from a financial point of view, of the purchase price to Renaissances
stockholders and whether the fair market value of First Communications was at least equal to 80% of Renaissances net assets at the time of the
Merger, and were provided to Renaissances board of directors in connection with the delivery of Houlihan Smiths opinion. The opinion of
Houlihan Smith was just one of the many factors taken into account by Renaissances board of directors in making its determination to approve the
Merger, including those described elsewhere in this proxy statement/prospectus.
As described in more detail
below, Houlihan Smith conducted three different types of financial analyses commonly used in the investing community: a guideline public company
analysis, a comparable transaction analysis and a discounted cash flow analysis.
Houlihan Smith determined that
the valuations derived from EBITDA (defined as earnings before interest, taxes, depreciation and amortization, as adjusted for add-backs for
owners compensation, management fees and one-time charges) and revenue multiples of the guideline companies would provide the most meaningful
indications of value. Given First Communications two main streams of revenue, Houlihan Smith found guideline public companies in both the CLEC
(six companies) and Tower (three companies) industries. Houlihan Smith determined the indicated enterprise values per each unit of the business, CLEC
and Tower, and summed the values to derive the minimum and maximum total indicated enterprise value for First Communications. The range of enterprise
values using the guideline public company analysis was $383.6 million to $417.3 million.
Houlihan Smith found comparable
transactions within the CLEC (twelve transactions) and Tower (five transactions) industries. Houlihan Smith applied the median enterprise value to
revenue and enterprise value to EBITDA multiples of the comparable transactions to First Communications respective latest twelve months ended
June 30, 2008 revenue and EBITDA for the CLEC and Tower businesses and summed these indicated values to conclude a range of indicated enterprise values
based upon the comparable transactions method. The range of enterprise values using the comparable transaction analysis was $431.0 million to $452.8
million.
First Communications
management provided Houlihan Smith with financial projections prepared by First Communications management, which Houlihan Smith used in its
discounted cash flow analysis. Houlihan Smith performed a discounted cash flow analysis and concluded a discounted cash flow method range of enterprise
values of $295.6 million to $411.8 million.
Houlihan Smith analyzed the value
of the merger consideration as part of its review of the Merger and its analysis of the fairness of the Merger. Specifically, Houlihan Smith considered
the payments made upon achievement of EBITDA milestones and the exercise or redemption of warrants. Houlihan Smith determined that the estimated value
of the total merger consideration will be within the range of approximately $251.4 million to $368.1 million. Houlihan Smith concluded the merger
consideration to be fair to the stockholders of Renaissance from a financial point of view. Houlihan Smith based its conclusion on the fact that
certain portions of the consideration are contingent upon the performance of First Communications. Houlihan Smith based the high end range of its fair
value analysis on the assumption that the full contingent payment (including warrant consideration)
79
is earned, while the low end
range of its fair value analysis was based on the assumption that none of the contingent payments are earned.
Discounted Cash Flow Method
A discounted cash flow analysis
estimates value based upon a companys projected future free cash flow discounted at a rate reflecting risks inherent in its business and capital
structure. Unlevered free cash flow represents the amount of cash generated and available for principal, interest and dividend payments after providing
for ongoing business operations.
Renaissances management
provided Houlihan Smith with financial information prepared by First Communications management, which Houlihan Smith used in its discounted cash
flow analysis. Houlihan Smith used the financial information to determine the enterprise net cash flows of First Communications over the projected
five-year period. In its calculation, Houlihan Smith added additional annual expenses to First Communications managements projections based
on its view that accounting and reporting costs would exceed managements estimates. Houlihan Smith used the enterprise net cash flows to
calculate a fair market enterprise value applying the discounted cash flow method.
The First Communications
projections are based upon organic growth expectations and expense assumptions derived from past performance as well as managements future
expectations. The projections do not include potential revenue and profitability growth from acquisitions. Revenue growth projections were derived from
past performance as well as data from new product and service sales. Projected costs of facilities and selling, general and administrative expenses
account for cost savings obtained as a result of the Globalcom integration plan, as well as the incurrence of additional corporate
overhead.
The projections were initially
compiled based on individual projections from each of First Communications business divisions where revenue backlog, performance run rates and
future margin assumptions are analyzed. First Communications corporate finance department aggregated these divisional projections and then
layered in corporate overhead expenses which took into account future staffing needs in the companys finance department as well as incremental
professional costs in connection with becoming a United States publicly traded company. The Globalcom integration plan, which has a material impact on
the projections, was created based on First Communications experience in integrating nine previous acquisitions. It consists of specifically
identifiable cost savings, principally headcount reductions and reduced telecommunications rates, achieved through leveraging First
Communications existing fiber network and superior purchasing power.
Houlihan Smith determined the
discount rate applied in the discounted cash flow method by applying a weighted average cost of capital build-up method. Houlihan Smith uses an equity
risk premium, industry risk premium and size premium based upon statistical studies performed (
Ibbotson Associates: Stocks, Bonds, Bills and
Inflation 2008
and Long-Run Stock Returns: Participating in the Real Economy, Ibbotson and Chen, 2007). The risk free rate used
is the 30 year long term U.S. Treasury yield near the date of the transaction and the average cost of debt is estimated via First Communications
interest rate.
The targeted capital structure is
based upon completion of the potential merger. Houlihan Smith determined the range of discounts by considering a range of plus one percent and minus
one percent of the weighted average cost of capital of 14.0% calculated. The range was applied to test the sensitivity of the discount rate in
determining the indicated enterprise value of First Communications.
Guideline Public Company
Method
The guideline public company
method applies the trading multiples of publicly traded companies to the subject company to derive an indication of value. The analyst searches for
guideline companies in industries similar to the subject company with operating structures and target customers as similar to the subject company as
possible.
Houlihan Smith searched the
universe of publicly traded companies on public exchanges and found companies that met its criteria for guideline companies. Houlihan Smith selected
comparable publicly-traded companies based
80
upon geographic location and
the industry in which the comparable companies operate. In addition, Houlihan Smith considered the size, growth, leverage, profitability, turnover and
liquidity of the comparable companies to that of First Communications. The six companies included in Houlihan Smiths guideline public company
analysis for the CLEC industries were: tw telecom inc., PAETEC Holding Corp., Level 3 Communications Inc., Global Crossing Ltd., Cbeyond, Inc. and
FiberNet Telecom Group Inc. The three companies included in Houlihan Smiths guideline public company analysis for the Towers industries were:
Crown Castle International Corp., American Tower Corp and SBA Communications Corp. These companies are in industries similar to First
Communications two main streams of revenue business units. The median multiples used for the guideline public company method were 1.5X for
enterprise value/revenue and 9.3X for enterprise value/EBITDA for the CLEC business and 12.8X for enterprise value/revenue and 20.5X for enterprise
value/EBITDA for the Tower business. Houlihan Smith used the latest twelve-month revenue and EBITDA for First Communications of $208.6 million and
$27.5 million for the CLEC business and $8.4 million and $6.2 million for the Tower business, respectively.
Comparable Transaction
Method
The comparable transactions
method is a market approach which analyzes transactions involving target companies operating in industries similar to First Communications. While it is
known that no two companies are exactly alike, nor are any two transactions structured exactly the same, consideration is given to the similarity in
capital structure, operations, size and profitability, as well as other operating characteristics of the target companies. Houlihan Smith selected
comparable transactions based upon transaction size, industry classification and the size of the targets of the transactions.
In its search for comparable
transactions for the CLEC business, Houlihan Smith considered target companies which were primarily U.S. public companies in the CLEC industry with
last twelve months revenue of less than $1.5 billion and last twelve months EBITDA of less than $1.0 billion and transactions which had closed during
the last five years.
In its search for comparable
transactions for the Towers business, Houlihan Smith considered target companies which were primarily U.S. public companies in the Tower industry with
last twelve months revenue of less than $1.5 billion and last twelve months EBITDA of less than $1.0 billion and transactions which had closed during
the last five years.
The comparable transactions for
the CLEC business used in this analysis are those involving acquisitions of Covad Communications Group Inc. in 2008, McLeodUSA Incorporated in 2008,
NEON Communications Group in 2008, Eschelon Telecom, Inc. in 2008, United Communications, Inc. in 2008, Broadwing Corporation in 2008, Talk America
Holdings, Inc. in 2006, US LEC Corp in 2008, OneEighty Communications, Inc. in 2006, Mountain Telecommunications Inc. in 2006, Looking Glass Networks,
Inc. in 2006 and OnFiber Communications, Inc. in 2006. The comparable transactions for the Tower business used in this analysis are those involving
acquisitions of Global Signal in 2007, Mountain Union Telecom in 2006, AAT in 2006, SpectraSite in 2005 and TrinTel Communications in 2005. Houlihan
Smith also considered the following transactions within the Tower industry; however, Houlihan Smith did not apply these multiples in its analysis
because the transactions were not closed as of the date of the opinion: Sprint Nextel Corp., Lighttower Wireless, LLC, and Optasite.
Houlihan Smith applied the median
enterprise value to revenue, and enterprise value to EBITDA multiples of the comparable transactions to First Communications respective latest
twelve months ended June 30, 2008 revenue and EBITDA for the CLEC and Tower business and summed these indicated values to conclude a range of indicated
enterprise values based upon the comparable transactions method. The median multiples used for the comparable transactions method were 1.6X for
enterprise value/revenue and 10.6X for enterprise value/EBITDA for the CLEC business and 11.6X for enterprise value/revenue and 26.0X for enterprise
value/EBITDA for the Towers business. Houlihan Smith used the latest twelve-month revenue and EBITDA for First Communications of $208.6 million and
$27.5 million, respectively, for the CLEC business and $8.4 million and $6.2 million, respectively, for the Tower business.
81
80% Test
Renaissances initial
business combination must be with a target business whose fair market value is at least equal to 80% of Renaissances net assets at the time of
such acquisition. Houlihan Smith reviewed the balance in the Trust Account as of June 30, 2008 and compared that to First Communications
indicated range of enterprise value. Houlihan Smith noted that the fair market value of First Communications exceeds 80% of Renaissances net
assets.
Based on the information and
analyses set forth above, Houlihan Smith delivered its written opinion to Renaissances board of directors on September 8, 2008, which stated
that, based upon and subject to the assumptions made, matters considered, and limitations on its review as set forth in the opinion, (i) the purchase
price is fair, from a financial point of view, to Renaissances stockholders, and (ii) the fair market value of First Communications is at least
equal to 80% of Renaissances net assets at the time of the Merger.
Engagement of Houlihan Smith
Houlihan Smith is an investment
banking firm that, as part of its investment banking business, regularly is engaged in the evaluation of businesses and their securities in connection
with mergers, acquisitions, corporate restructurings, private placements, and for other purposes. Renaissance determined to use the services of
Houlihan Smith because it is a recognized investment banking firm that has substantial experience in similar matters. Houlihan Smith has received a fee
in connection with the preparation and issuance of its opinion and will be reimbursed for its reasonable out-of-pocket expenses, including
attorneys fees. In addition, Renaissance has agreed to indemnify Houlihan Smith for certain liabilities that may arise out of the rendering of
its opinion. Houlihan Smith does not beneficially own any interest in either Renaissance or First Communications and has not provided either company
with any other services. The engagement letter provides that Renaissance will pay Houlihan Smith a fee of $100,000 ($50,000 of which will be due upon
the closing of the Merger) and will reimburse Houlihan Smith for its reasonable out-of-pocket expenses, which will not exceed $5,000. As a result of
certain changes to the financial statements of First Communications after the rendering of this opinion, Houlihan Smith reaffirmed its opinion in a
letter to Renaissance dated September 30, 2008, for which it received a fee of $5,000, which will be due upon the closing of the
Merger.
Material Federal United States Income Tax Consequences of the
Merger
The following section is a
summary description of the material United States federal income tax consequences of the Merger to Renaissance and to the United States Holders (as
that term is defined below) of First Communications common stock and Series A Preferred Stock and United States Holders of Renaissance common stock.
This discussion addresses only those United States Holders of First Communications common stock and Series A Preferred Stock and United States Holders
of Renaissance common stock that hold their stock as a capital asset within the meaning of Section 1221 of the Internal Revenue Code of 1986, as
amended (the IRC) and does not address all the United States federal income tax consequences that may be relevant to particular holders in
light of their individual circumstances or to holders that are subject to special rules, such as:
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financial institutions;
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investors in pass-through entities;
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a person that has a functional currency other than the U.S.
dollar;
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tax-exempt organizations;
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dealers in securities or currencies;
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traders in securities that elect to use a mark to market method
of accounting;
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persons that hold stock as part of a straddle, hedge,
constructive sale or conversion transaction; and
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persons who are not citizens or residents of the United
States.
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This summary is based upon the
IRC, applicable treasury regulations thereunder, published rulings and court decisions, all as currently in effect as of the date hereof, and all of
which are subject to change, possibly with retroactive effect. Tax considerations under state, local and foreign laws, or federal laws other than those
pertaining to the income tax, are not addressed.
For purposes of this discussion,
a United States Holder is:
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an individual who is a citizen or resident of the United States
for United States federal income tax purposes;
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a corporation, or any entity treated as a corporation for United
States federal income tax purposes, created or organized under the laws of the United States, any state thereof or the District of
Columbia;
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any estate that is subject to United States federal income tax
regardless of its source; or
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a trust if (i) a United States court is able to exercise primary
supervision over the administration of the trust and one or more United States persons have the authority to control all substantial decisions of the
trust, or (ii) the trust has a valid election in effect to be treated as a United States person for United States federal income tax
purposes.
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If a partnership holds
Renaissance common stock, First Communications common stock or First Communications Series A Preferred Stock, the tax treatment of a partner generally
depends upon the status of the partner and the activities of the partnership. A partner of a partnership holding such stock should consult their own
tax advisor.
Neither Renaissance nor First
Communications has requested, or intends to request any ruling from the Internal Revenue Service as to the United States federal income tax
consequences of the Merger , and no assurance can be given that the Internal Revenue Service or the courts will agree with the following summary
description .
Tax Consequences of the Merger to United States Holders of
First Communications Stock
It is intended that the Merger
will qualify as a reorganization within the meaning of Section 368(a) of the Code. As a consequence , Renaissance and First Communications believe
that :
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no gain or loss should be recognized by United States
Holders of First Communications common stock who receive solely shares of Renaissance common stock in exchange for shares of First Communications
common stock;
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the aggregate tax basis of the shares of Renaissance common
stock received in the Merger by the United States Holders of First Communications common stock (including the Renaissance common stock held in escrow
and held by the First Communications Company Representative) should be equal to the aggregate tax basis of the shares of First Communications
common stock exchanged therefore. Upon a return of any portion of the shares of Renaissance common stock held in escrow or by the stockholders
representative to Renaissance, the tax basis of the returned shares should be added to the tax basis of the remaining shares of Renaissance common
stock received by the United States Holders of First Communications common stock in the Merger. The United States Holders of First Communications
common stock should recognize no gain or loss with respect to returned shares;
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the holding period of the Renaissance common stock received in
the Merger by the United States Holders of First Communications common stock (including the Renaissance common stock held in escrow) should
include the holding period of the First Communications common stock exchanged therefore; and
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any United States Holders of First Communications common stock
who exercises his or her appraisal rights and who receives cash in exchange for his or her shares of First Communications common stock generally will
recognize gain or loss measured by the difference between the amount of cash received and the tax basis of such common stockholders shares of
First Communications common stock exchanged therefor. This gain or loss will generally be long-term capital gain or loss if the United
States
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Holders holding period with respect to the First
Communications common stock surrendered is more than one year at the effective time of the Merger. There are limitations on the extent to which
stockholders may deduct capital losses from ordinary income. If an United States Holder of First Communications common stock who receives cash in
exchange for all of the United States Holders shares of First Communications common stock actually or constructively owns Renaissance common
stock after the Merger (as the result of prior actual or constructive ownership of Renaissance common stock or otherwise), all or a portion of the cash
received by the United States Holders of common stock may be taxed as a dividend, and those United States Holders should consult their tax advisors to
determine the amount and character of the income recognized in connection with the Merger.
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any United States Holder of First Communications Series A
Preferred Stock who receives cash in exchange for his or her shares of First Communications Series A Preferred Stock generally will recognize gain or
loss measured by the difference between the amount of cash received and the tax basis of such stockholders shares of First Communications Series
A Preferred Stock exchanged therefore. This gain or loss will generally be long-term capital gain or loss if the United States Holders holding
period with respect to the First Communications Series A Preferred Stock surrendered is more than one year at the effective time of the Merger. There
are limitations on the extent to which stockholders may deduct capital losses from ordinary income. If an United States Holder of First Communications
Series A Preferred Stock actually or constructively owns Renaissance stock after the Merger (as the result of prior actual or constructive ownership of
Renaissance stock or otherwise), all or a portion of the cash received by the United States Holders of Series A Preferred Stock may be taxed as a
dividend, and those United States Holders should consult their tax advisors to determine the amount and character of the income recognized in
connection with the Merger.
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Tax Consequences of the Merger to United States Holders of
Renaissance Common Stock
Renaissance believes that no gain
or loss will be recognized by Renaissance or by the United States Holders of Renaissance common stock Renaissance as a result of the Merger if their
conversion rights are not exercised.
Renaissance also believes that a
United States Holder of Renaissance common stock who exercises conversion rights and effects a termination of such stockholders interest in
Renaissance will be required to recognize gain or loss upon the exchange of that stockholders shares of common stock of Renaissance for cash.
Such gain or loss will be measured by the difference between the amount of cash received and the tax basis of that stockholders shares of
Renaissance common stock. This gain or loss will be a capital gain or loss if such shares were held as a capital asset on the date of the Merger and
will be a long-term capital gain or loss if the holding period for the share of Renaissance common stock is more than one year. There are limitations
on the extent to which United States Holders may deduct capital losses from ordinary income.
This discussion is intended to
provide only a summary of the material United States federal income tax consequences of the Merger. It does not address tax consequences that may vary
with, or are contingent on, your individual circumstances. In addition, the discussion does not address any non-income tax or any foreign, state or
local tax consequences of the Merger. Accordingly, you are strongly urged to consult with your tax advisor to determine the particular United States
federal, state, local or foreign income or other tax consequences to you of the Merger.
If a United States Holder of
Renaissance common stock who receives cash in exchange for all of the United States Holders shares of Renaissance stock constructively or
otherwise owns Renaissance common stock after the conversion, all or a portion of the cash received by the United States Holder may be taxed as a
dividend, and those United States Holders should consult their tax advisors to determine the amount and character of the income recognized in
connection with the Merger.
84
Information Reporting and Backup
Withholding
A United States Holder of First
Communications common stock who exercises his or her appraisal rights, or a United States Holder of First Communications Series A Preferred Stock, in
each case who receives cash in exchange for his or her shares, may be subject to information reporting. In addition, such holder may be subject to
backup withholding on the proceeds from the exchange of shares for cash unless such holder is an exempt recipient (such as a corporation) or provides
to the paying agent such holders correct taxpayer identification number and certifies that such holder is exempt from or otherwise is not subject
to backup withholding. Backup withholding is not an additional tax. The amount of any backup withholding will be refunded (or allowed as a credit
against the U.S. federal income tax liability of the United States Holder) provided that the required information is furnished to the Internal Revenue
Service.
Anticipated Accounting Treatment
The Merger will be accounted for
as a reverse acquisition in accordance with GAAP. Under this method of accounting, Renaissance will be treated as the acquired company for
financial reporting purposes. This determination was primarily based on First Communications comprising the ongoing operations of the post-merger
combined company. In accordance with guidance applicable to these circumstances, the Merger will be considered to be a capital transaction in
substance. Accordingly, for accounting purposes, the Merger will be treated as the equivalent of First Communications issuing stock for the net assets
of Renaissance, accompanied by a recapitalization. The net assets of Renaissance will be stated at historical cost with no goodwill or other intangible
assets recorded. Operations prior to the Merger will be those of First Communications.
Regulatory Matters
Completion of the Merger and the
transactions contemplated by the Merger Agreement require that Renaissance and First Communications submit filings under the HSR Act and satisfy
certain waiting periods. Furthermore, Renaissance and First Communications will need to obtain the approvals of the FCC and certain State PUCs for the
transfer of control of First Communications operating subsidiaries.
Required Vote
The approval of the merger
proposal will require the affirmative vote of the holders of a majority of the Public Shares cast on the proposal at the Renaissance special
meeting.
RENAISSANCES BOARD OF
DIRECTORS UNANIMOUSLY RECOMMENDS THAT RENAISSANCES STOCKHOLDERS VOTE FOR THE MERGER PROPOSAL.
85
THE MERGER AGREEMENT
For a discussion of the Merger
structure and merger consideration, see the section entitled
The Merger Proposal.
Such discussion and the following summary of other
material provisions of the agreement and plan of merger and A mendment No. 1 to the agreement and plan of merger are qualified by
reference to the complete text of the agreement and plan of merger and Amendment No. 1 to the agreement and plan of merger , cop ies of
which are attached as Annex A and Annex A-1 to this proxy statement/prospectus. All stockholders are encouraged to read the Merger
Agreement in its entirety for a more complete description of the terms and conditions of the Merger.
Closing and Effective Time of the Merger
The closing of the Merger will
take place on the second business day following the satisfaction of the last of the conditions described below under the subsection entitled
Conditions to Closing of the Merger,
unless Renaissance and First Communications agree in writing to another time. The Merger is
expected to be consummated as soon as practicable after the special meeting of Renaissances stockholders described in this proxy
statement/prospectus.
Representations and Warranties
The Merger Agreement contains
representations and warranties of each of Renaissance and First Communications relating, among other things, to:
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proper organization, valid existence and good standing under the
laws of its respective state of incorporation;
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subsidiaries (First Communications only);
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capital structure of each company;
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the authorization, execution, delivery and enforceability of the
Merger Agreement;
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stockholder approval (First Communications only);
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real and tangible personal property;
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absence of conflicts or violations under organizational
documents, certain agreements and applicable laws or decrees as a result of the contemplated transaction;
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financial information (First Communications only);
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absence of undisclosed liabilities;
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insurance (First Communications only);
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employee matters and employee benefits (First Communications
only);
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environmental matters (First Communications only);
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accounts receivable (First Communications only);
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brokers and finders fees;
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warranties (First Communications only);
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absence of certain changes;
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suppliers and customers (First Communications only);
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permits and licenses (First Communications only);
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related party transactions;
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prohibited payments (First Communications only);
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books and records (First Communications only);
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information included in this proxy (First Communications
only);
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business activities (Renaissance only);
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SEC filings (Renaissance only);
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indebtedness (Renaissance only); and
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the Trust Account (Renaissance only).
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First Communications Financial
Statements
As of the date of the Merger
Agreement, First Communications was completing a re-audit of its financial statements as of and for the six month period ended December 31, 2007 which
resulted in the restatement of one or more items in the financial statements as of and for the fiscal year ended December 31, 2007. Upon completion of
this re-audit, First Communications had a right to deliver a replacement version of the financial statements as of and for the fiscal year ended
December 31, 2007 which would be deemed an amendment to the disclosure schedules of the Merger Agreement unless Renaissance exercised its right to
terminate the Merger Agreement within 48 hours of delivery if such statements contained restated items that adversely affected First
Communications financial results for such fiscal period. The replacement financial statements were delivered on September 29, 2008 and were
deemed to amend the disclosure schedules as Renaissance did not exercise its termination right.
Materiality and Material Adverse Effect
Certain of the representations
and warranties are qualified by the concept of material adverse effect. For purposes of the Merger Agreement, a material adverse
effect as to First Communications means a material adverse effect on the business, assets, results of operations or financial condition of First
Communications and its subsidiaries taken as a whole. A material adverse effect on Renaissance means a material adverse effect on the business, assets,
results of operations or financial condition of Renaissance.
None of the following will
constitute, either alone or in combination, or will be taken into account in determining whether there has been or would be, a material adverse effect
with respect to First Communications or Renaissance, respectively:
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any facts, changes, developments, events, occurrences, actions,
omissions or effects generally affecting (A) the economy, or financial or capital markets, in the United States or elsewhere in the world, to the
extent that they do not disproportionately affect First Communications or Renaissance, respectively, in relation to other companies in the industry in
which such company primarily operates or (B) the industry in which First Communications or Renaissance, respectively, operates to the extent that they
do not disproportionately affect First Communications or Renaissance in relation to other companies in the industry in which they respectively
primarily operate; or
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any facts, changes, developments, events, occurrences, actions,
omissions or effects arising out of, resulting from or attributable to (1) changes (after the date of the Merger Agreement) in law or in generally
accepted accounting principles or in accounting standards or (2) any decline in the market price, or change
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in trading volume, of the capital stock of First Communications
or Renaissance, respectively, or any failure to meet publicly announced revenue or earnings projections or internal projections.
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Mutual Covenants
The parties to the Merger
Agreement have agreed to various mutual covenants regarding general matters which include, but are not limited to:
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cooperating to obtain needed FCC and State PUC consents and
comply with the HSR Act;
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cooperating with respect to certain tax-related
matters;
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the use of reasonable good faith efforts to hold in confidence
and not use for their own benefit any proprietary and non-public information concerning the other parties obtained in connection with the Merger,
subject to certain exceptions;
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using commercially reasonable efforts to take all actions and to
do all things necessary, proper or advisable to consummate and make effective as promptly as practicable, the Merger;
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cooperating with respect to certain filings with the SEC and
other filings required under the Securities Act or any other federal, foreign or blue sky laws relating to the Merger; and
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cooperation with respect to obtaining approval of the Merger by
Renaissance stockholders.
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Covenants Relating to Interim Operations
Renaissance and First
Communications have agreed to continue to operate their respective businesses in the ordinary course prior to the closing of the Merger and not to take
the following actions, amongst others, without the prior written consent of the other party (except, in the case of First Communications, as
contemplated by the acquisition of Globalcom):
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make certain changes to accounting or tax practices;
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enter into any new line of business;
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fail to pay any taxes when they become due and payable, other
than taxes being contested in good faith through appropriate proceedings and, in the case of First Communications, for which adequate reserves are
reflected in its financial statements in accordance with GAAP;
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issue any additional shares of capital stock (other than shares
of stock issued in connection with existing warrants or upon exercise of outstanding options by persons who are stockholders of Renaissance or First
Communications, as applicable, as of the date of the Merger Agreement) or any options, warrants or other rights to purchase, or securities convertible
into or exchangeable for, shares of stock;
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declare, set aside or pay any dividends or other distribution in
respect of any stock;
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split, combine or reclassify any shares of its capital
stock;
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knowingly or intentionally take any action that results or is
reasonably likely to result in any of the representations and warranties of First Communications or Renaissance, as applicable, being untrue in any
material respect or certain conditions specified in the Merger Agreement not to be satisfied;
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take or omit to take any action, the taking or omission of which
could reasonably be expected to have a material adverse effect; or
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agree to do, or take any action in furtherance of, any of the
foregoing.
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In addition, First Communications
will not take any of the following actions without the prior written consent of Renaissance:
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amend or propose to amend its amended and restated certificate
of incorporation or bylaws;
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adopt a plan of or effect any complete or partial liquidation or
adopt resolutions providing for such liquidation or adopt a plan of or effect any dissolution, merger, consolidation, restructuring, recapitalization
or reorganization;
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create or make any changes to the terms or collateral of any
debt or receivables (other than trade payables and receivables in the ordinary course of business consistent in type and amount with prior practice),
or any employee or officer loans or advances, except incurrences that constitute a refinancing of existing obligations on terms that are no less
favorable to First Communications than the existing terms;
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assume, guarantee, endorse or otherwise become liable or
responsible for the obligations of any person or entity except to the extent permitted under the terms of First Communications current credit
facility;
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except in accordance with First Communications budgeted
capital expenditures and to the extent permitted under the terms of its current credit facility, make any capital expenditures;
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make any loans, advances or capital contributions to, or
investments in, any other person or entity (other than customary travel, relocation or business advances to employees consistent with past
practices);
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acquire stock or assets of, or merge or consolidate with, any
other entity;
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incur any material liability or obligation except to the extent
permitted under the terms of First Communications current credit facility;
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agree to sell, transfer, mortgage, pledge, lease, encumber or
otherwise dispose of, any assets or properties other than inventory held for sale or the disposition and replacement of obsolete personal property in
the ordinary course of business, or to secure permitted debt;
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incur any indebtedness other than under its existing credit
facility or other ordinary course of business indebtedness except to the extent permitted under the terms of First Communications current credit
facility;
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subject to certain limited exceptions, increase the compensation
or other benefits of any of its officers or employees or enter into, amend or terminate any employment or benefits arrangement with any officer,
director or employee other than as required by applicable law or pursuant to the terms of agreements in effect on the date of the Merger Agreement or
in the ordinary course of business with employees;
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hire any employees except in the ordinary course of
business;
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fail to make contributions to any employee benefit plan in
accordance with the terms thereof or with past practice;
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commence or settle any litigation or other proceedings with any
entity or person in excess of amounts reserved for such litigation on the most recent balance sheet or excess of $2 million;
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waive the benefits of, agree to modify in any manner, terminate,
release any person or entity from or knowingly fail to enforce any material confidentiality or similar agreement to which it is a party or of which it
is a beneficiary outside the ordinary course of business; or
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enter into any agreement or group of related agreements which
would be considered a material contract, modify, amend or terminate any material contract, or waive, release or assign any rights or claims thereunder,
or enter into any agreement that if entered into prior to the date hereof would be a material contract or in any such case outside the ordinary course
of business, or enter into or amend any contract or agreement with any affiliate of First Communications.
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Additional First Communications Covenants
The additional covenants that
First Communications has made in the Merger Agreement include, but are not limited to the following:
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First Communications will use its reasonable good faith efforts
to become compliant with all applicable provisions of and rules under the Securities Act, Exchange Act, Sarbanes-Oxley Act of 2002 within the time
frame and waiver periods permitted by the SEC with respect to all its SEC filings and system of internal accounting controls;
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First Communications, for itself and each of its subsidiaries,
affiliated entities, directors, officers, employees, stockholders, representatives, advisors and all other associates and affiliates, has waived all
rights, title, interest or claim of any kind against Renaissance to collect from the Trust Account any monies that may be owed to them by First
Communications for any reason whatsoever, including but not limited to a breach of the Merger Agreement by Renaissance or any negotiations, agreements
or understandings with Renaissance (whether in the past, present or future), and will not seek recourse against the Trust Account at any time for any
reason whatsoever; and
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First Communications will use reasonable best efforts to take,
or cause to be taken, all actions, and do or cause to be done all things, reasonably necessary, proper or advisable on its part under applicable rules
and policies of the AIM to enable the delisting from AIM by First Communications of its common stock.
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Additional Renaissance Covenants
The additional covenants that
Renaissance has made in the Merger Agreement include, but are not limited to:
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filing as soon as possible after the closing of the Merger, and
using its best efforts to become effective within 12 months after such closing, a registration statement under the Securities Act with respect to
shares of Renaissance common stock issued pursuant to the Merger Agreement to certain persons or entities who may be deemed affiliates
under Rule 144 of the Securities Act of 1933;
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advising First Communications, as reasonably requested, and on a
daily basis on each of the last 7 business days prior to the Renaissance stockholders meeting, as to the aggregate tally of proxies and votes received
in respect of such special meeting and the number of shares of Renaissance common stock for which notices of conversion have been delivered to
Renaissance; and
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as of and after the effective time of the Merger, Renaissance
(i) changing its name to First Communications, Inc. and (ii) causing the symbol under which Renaissance common stock and any warrants to
purchase Renaissance common stock are traded on the Nasdaq to be reasonably representative of the corporate name or business of First
Communications.
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Renaissance No Shop/Non-Solicit Provision
The Merger Agreement provides
that from September 13, 2008 until the earlier of the (x) termination of the Merger Agreement in accordance with its terms or (y) consummation of the
Merger, Renaissance:
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will not, and will cause its stockholders, officers, directors,
affiliates, representatives and advisors not to enter into any written agreement with any other person or entity regarding a Renaissance third party
acquisition (as defined below) other than the transactions contemplated by the Merger Agreement;
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will not and will cause its stockholders, officers, directors,
affiliates, representatives and advisors not to solicit, offer, initiate, knowingly encourage, conduct or engage in any discussions, investigations or
negotiations or enter into any agreement with any other person or entity regarding a Renaissance third party acquisition; and
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agrees it shall promptly, after obtaining knowledge thereof,
advise First Communications of any inquiry or proposal regarding a Renaissance third party acquisition that is received by them, including the terms of
the proposal and the identity of the inquirer or offeror.
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For purposes of the Merger
Agreement, a Renaissance third party acquisition means:
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any purchase of 15% or more of the consolidated assets of a
third party and its subsidiaries, or 15% or more of the equity or voting securities of a third party or a material subsidiary thereof;
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any tender offer or exchange offer that, if consummated, would
result in Renaissance beneficially owning 15% or more of a third partys equity or voting securities or any material subsidiary thereof;
or
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a merger, consolidation, business combination, share exchange,
purchase of substantially all the assets, reorganization, recapitalization, liquidation, dissolution or other similar transaction involving Renaissance
and any third party, in each such case in this clause that would result in Renaissance beneficially owning 15% or more of any class of equity or voting
securities of such third party or any material subsidiary thereof, or 15% or more of the consolidated assets of such third party.
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First Communications No Shop/Non-Solicit
Provision
The Merger Agreement provides
that from September 13, 2008 until the earlier of the (x) termination of the Merger Agreement in accordance with its terms or (y) consummation of the
Merger, First Communications:
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will not, and will cause its stockholders, officers, directors,
affiliates, representatives and advisors not to enter into any written agreement with any other person or entity regarding a First Communications third
party acquisition (as defined below) other than the transactions contemplated by the Merger Agreement;
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will not and will cause its stockholders, officers, directors,
affiliates, representatives and advisors not to solicit, offer, initiate, knowingly encourage, conduct or engage in any discussions, investigations or
negotiations or enter into any agreement or understanding with any other person or entity regarding a First Communications third party acquisition,
other than the transactions contemplated in the Merger Agreement; and
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after obtaining knowledge thereof, advise Renaissance of any
inquiry or proposal regarding a First Communications third party acquisition that is received by them, including the terms of the proposal and the
identity of the inquirer or offeror.
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For purposes of the Merger
Agreement, a First Communications third party acquisition means:
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any sale of 15% or more of the consolidated assets of First
Communications and its subsidiaries, or 15% or more of the equity or voting securities of First Communications or any subsidiary whose assets,
individually or in the aggregate, constitute 15% or more of the consolidated assets of First Communications (each referred to as a material
subsidiary);
|
|
|
any tender offer or exchange offer that, if consummated, would
result in a third party beneficially owning 15% or more of the equity or voting securities of First Communications or of any material subsidiary;
and
|
|
|
a merger, consolidation, business combination, share exchange,
sale of substantially all the assets, reorganization, recapitalization, liquidation, dissolution or other similar transaction involving the First
Communications or any material subsidiary, in each such case in this clause that would result in either (x) a third party beneficially owning 15% or
more of any class of equity or voting securities of First Communications or any material subsidiary, or 15% or more of the consolidated assets of First
Communications or (y) the stockholders of First Communications receiving securities traded in the U.S. on any nationally-recognized exchange or
over-the-counter market;
|
91
For purposes of the Merger
Agreement, a First Communications third party acquisition does
not
include the acquisition of Globalcom or any other transaction pursuant to
which First Communications or a material subsidiary is the acquiring party, provided that, except in the case of the acquisition of Globalcom, such
purchase shall not materially impede the consummation of the Merger between Renaissance and First Communications.
Conditions to Closing of the Merger
Consummation of the Merger by
Renaissance and First Communications is conditioned upon, among other things:
|
|
Renaissance receiving the approval of the Merger by its
stockholders in accordance with the DGCL and its amended and restated certificate of incorporation; and,
|
|
|
an executed copy of its amended and restated certificate of
incorporation having been filed with the Secretary of State of the State of Delaware to be effective as of the closing of the Merger;
|
|
|
the Trust Account containing at least $81,000,000 having been
disbursed to Renaissance;
|
|
|
holders of 20% or more of the Public Shares having not exercised
their rights to convert their shares into a pro rata share of the Trust Account in accordance with Renaissances amended and restated certificate
of incorporation;
|
|
|
the SEC having declared this proxy statement/prospectus
effective and no stop order suspending the effectiveness of this proxy statement/prospectus having been issued by the SEC and no proceeding for that
purpose having been initiated or, to the knowledge of Renaissance or First Communications, threatened by the SEC;
|
|
|
the shares of Renaissance common stock to be issued in the
Merger having been approved for listing on Nasdaq, subject to official notice of issuance;
|
|
|
no governmental authority of competent jurisdiction having
enacted, issued, enforced or entered any law, rule, injunction, judgment, order, decree, ruling or charge that is in effect and (a) restrains, enjoins
or otherwise prohibits or challenges the validity or legality of the Merger, (b) limits or otherwise adversely affects the right of Renaissance to own
and control First Communications, or to operate all or any material portion of either the business or the assets of First Communications or any
material portion of the business or the assets of Renaissance or (c) compels Renaissance or any of its affiliates to dispose of all or any material
portion of either the business or the assets of First Communications and no person having instituted or overtly threatened any action, suit or
proceeding that would be reasonably expected to, result in any of the foregoing;
|
|
|
all applicable waiting periods (and any extension thereof) under
the HSR Act having expired or otherwise been terminated and all notices, reports, registrations and other filings with, and all consents, approvals and
authorizations from the FCC and State PUCs having been made or obtained, as the case may be;
|
|
|
the stockholders of Renaissance having voted to elect to
Renaissances board of directors the seven First Communications recommended directors and the two Renaissance recommended directors, effective
immediately after the closing of the Merger, as specified in the Merger Agreement; and
|
|
|
Renaissance having appointed Raymond Hexamer, Joseph Morris and
Richard Buyens as executive officers of Renaissance, effective immediately after the closing of the Merger, as specified in the Merger
Agreement.
|
Either party may waive one or
more conditions to the consummation of the Merger. However, to the extent a material condition is waived by one of the parties, which waiver would
render any prior disclosure materially misleading, Renaissance intends to resolicit the approval of its stockholders of the Merger.
92
First Communications Conditions to
Closing
The obligations of First
Communications to consummate the transactions contemplated by the Merger Agreement also are conditioned upon, among other things:
|
|
Renaissance and each Merger Subs representations and
warranties set forth in Merger Agreement being true and correct in all material respects (except representations which, as written, are already
qualified by materiality or material adverse effect, in which case such representations and warranties will be true and correct in all such respects)
as of the date of the Merger Agreement, and, except to the extent such representations and warranties speak as of an earlier date, as of the effective
time of the First Merger;
|
|
|
Renaissance and each Merger Sub having duly performed in all
material respects all obligations, covenants and agreements undertaken by them in the Merger Agreement and having complied in all material respects
with all terms and conditions applicable to them under the Merger Agreement to be performed or complied with on or before the closing date;
|
|
|
all necessary third party approvals or consents, having been
obtained from any person or entity whose approval or consent is necessary to consummate the Merger including, without limitation, the approval of the
board of directors of Renaissance and each Merger Sub and the consents of the State PUCs and the FCC;
|
|
|
Renaissance having confirmed that it is prepared to deposit the
merger consideration;
|
|
|
Renaissance having received approval from its stockholders in a
manner consistent with Renaissances final prospectus dated January 29, 2007 and having delivered such approval to First
Communications;
|
|
|
immediately prior to the closing, Renaissance being in
compliance with the reporting requirements under the Exchange Act; and
|
|
|
since the date of the Merger Agreement there having been no
occurrence, event, change, effect or development that, individually or in the aggregate, has had or is reasonably expected to have a material adverse
effect on Renaissance.
|
Renaissances Conditions to Closing
The obligations of Renaissance to
consummate the transactions contemplated by the Merger Agreement also are conditioned upon each of the following, among other things:
|
|
First Communications representations and warranties set
forth in the Merger Agreement being true and correct in all material respects (except representations which, as written, are already qualified by
materiality or material adverse effect, in which case such representations and warranties shall be true and correct in all such respects) as of the
Merger Agreement and, except to the extent such representations and warranties speak as of an earlier date, as of the effective time of the First
Merger;
|
|
|
all necessary third party approvals or consents, having been
obtained from any person or entity whose approval or consent is necessary to consummate the Merger including, without limitation, the approval of the
board of directors and stockholders of First Communications and the consents of the State PUCs and the FCC;
|
|
|
First Communications having performed in all material respects
all obligations, covenants and agreements undertaken by First Communications in the Merger Agreement and having complied in all material respects with
all terms and conditions applicable to it under the Merger Agreement to be performed and complied with on or before the closing date;
|
|
|
First Communications stockholders holding not more than
10% of the outstanding shares of First Communications common stock having exercised or having continuing rights to exercise appraisal rights under the
DGCL with respect to the transactions contemplated by the Merger Agreement;
|
93
|
|
since the date of the Merger Agreement there not having been any
occurrence, event, change, effect or development that, individually or in the aggregate, has had or is reasonably expected to have a material adverse
effect on First Communications; and
|
|
|
First Communications having obtained an amendment to its
existing credit facility waiving the change of control provision therein.
|
Waiver
Any provision of the Merger
Agreement may be waived in writing at any time by the party which is entitled to the benefit of such provision. Neither any failure nor any delay by
any party in exercising any right, power, or privilege under the Merger Agreement or any of the documents referred to in the Merger Agreement will
operate as a waiver of such right, power or privilege, and no single or partial exercise of such right, power or privilege will preclude any other or
further exercise of such right, power or privilege or the exercise of any other right, power or privilege. The condition requiring that the holders of
fewer than 20% of the Public Shares affirmatively vote against the merger proposal and demand conversion of their shares into cash may not be waived.
Renaissance cannot assure you that all of the conditions will be satisfied or waived.
The existence of the financial
and personal interests of the directors may result in a conflict of interest on the part of one or more of them between what he may believe is best for
Renaissance and what he may believe is best for himself in determining whether or not to grant a waiver in a specific situation.
Termination
The Merger Agreement may be
terminated, among other reasons, at any time prior to Closing:
|
|
by mutual written consent of Renaissance and First
Communications;
|
|
|
by either Renaissance or First Communications if the Merger is
not consummated on or before January 29, 2009;
|
|
|
by either Renaissance or First Communications if a governmental
authority has enacted, issued, promulgated, enforced or entered any statute, rule, regulation, executive order, decree, injunction or other order, in
each case which has become final and non-appealable, and which permanently restrains, enjoins or otherwise prohibits the Merger;
|
|
|
by either Renaissance or First Communications if, at
Renaissances special meeting (including any adjournments thereof), the Merger shall fail to be approved and adopted by the affirmative vote of
the holders of Renaissance common stock required under its amended and restated certificate of incorporation, or the holders of 20% or more of the
Public Shares outstanding as of the record date of Renaissances special meeting exercise their rights to convert the shares of Renaissance common
stock held by them into cash in accordance with Renaissances amended and restated certificate of incorporation; or
|
|
|
by either Renaissance or First Communications, if such party is
not in material breach of its obligations under the Merger Agreement and there has been a material breach of the representations and warranties,
covenants, or agreements by the other party and such breach has not been cured within 30 days after written notice to the breaching party, if
curable.
|
Effect of Termination
Except as otherwise provided in
the Merger Agreement, in the event of proper termination by either Renaissance or First Communications, the Merger Agreement will have no further force
and effect, without any liability or obligation on the part of Renaissance or First Communications; provided, however, that those provisions which
survive the termination of the Merger Agreement shall not be void and that such termination will not terminate
94
the rights or remedies of any
party against another party that has violated or breached the Merger Agreement prior to such termination.
Indemnification of Directors and Officers
Renaissance has agreed that the
post-merger combined company will, for six years from the date of the closing of the Merger, indemnify and hold harmless First Communications and
Renaissances present and former officers, directors, employees and representatives for acts and omissions occurring prior to the Merger to the
fullest extent permitted by law or under their respective organizational documents in effect immediately prior to the Merger and provide
tail insurance for each individual currently covered by First Communications officers and directors liability insurance
policy on terms not materially less favorable than existing coverage.
Fees and Expenses
All fees and expenses incurred in
connection with the Merger Agreement and the transactions contemplated thereby will be paid by the party incurring such expenses; provided, however,
that if Renaissance fails to obtain stockholder approval and certain conditions to closing have been satisfied, then Renaissance will pay First
Communications all of its excess working capital funds available outside of the Trust Account which remain after Renaissances expenses are paid
or accrued for and reasonable liquidation reserves are established.
Confidentiality; Access to Information
Renaissance and First
Communications will afford to the other party and its financial advisors, accountants, counsel and other representatives prior to the completion of the
Merger reasonable access during normal business hours, upon reasonable notice, to all of their respective properties, books, records and personnel to
obtain all information concerning the business, including the status of product development efforts, properties, results of operations and personnel,
as each party may reasonably request. Renaissance and First Communications will maintain in confidence any non-public information received from the
other party, and use such non-public information only for purposes of consummating the transactions contemplated by the Merger
Agreement.
Amendments
The Merger Agreement may be
amended by the parties at any time by execution of an instrument in writing signed on behalf of each of the parties. Furthermore, from time to time
prior to the closing, under certain limited circumstances and subject to the reasonable approval of Renaissance, First Communications will be entitled
to update, amend or supplement the disclosure schedules to the Merger Agreement.
95
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
INFORMATION
The following tables set forth
certain of the pro forma financial information about First Communications after giving effect to the acquisitions of Globalcom on September 30, 2008,
FE Telecom on March 6, 2008, First Communications LLC and Xtension Services, Inc. on July 2, 2007 and the merger (the
Transactions).
The unaudited pro forma condensed
consolidated balance sheet as of September 30, 2008 is based on the unaudited historical consolidated balance sheets as of September 30, 2008 for
Renaissance and First Communications and gives effect to the Transactions and the related financing as if they had occurred on September 30, 2008. The
unaudited pro forma condensed consolidated statement of operations for the year ended December 31, 2007 has been derived from audited consolidated
financial statements for the year ended December 31, 2007. The unaudited pro forma condensed consolidated statement of operations for the nine months
ended September 30, 2008 has been derived from the unaudited consolidated financial statements of Renaissance and First Communications for the nine
month period ended September 30, 2008. The pro forma condensed consolidated statements of operations give effect to the Transactions and borrowings as
if they occurred on January 1, 2007.
The acquisition of Globalcom will
be accounted for using the purchase method of accounting. Accordingly, First Communications cost to acquire Globalcom will be allocated to the
assets acquired, including identifiable intangible assets, and liabilities assumed at their respective fair values as of the September 30, 2008
acquisition date.
The acquisition of FE Telecom
consisted of three significant components: fiber network or towers; customer lists and deferred revenue (i.e., future performance required under
existing contracts with these customers). Based on the guidance in section (d) of Rule 11-01,
Presentation Requirements
, and SFAS No.
141,
Business Combinations
, First Communications concluded that the acquisition did not constitute a business acquisition. The operating
and selling, general and administrative expenses included in the pro forma results of operations are based on the internal management reports prepared
by First Energy Corp., the parent of FE Telecom. Prior to the acquisition, FE Telecom did not have its own dedicated employees, business
processes or working capital. Thus, for internal management reporting purposes, First Energy Corp. derived the results of operations of FE
Telecom by allocating all of the direct operating costs attributed to the FE Telecom operations as well as its allocable share of other
corporate costs (e.g., corporate overhead, interest and taxes).
The Merger will be accounted for
as a reverse acquisition in accordance with GAAP. Under this method of accounting, Renaissance will be treated as the acquired company for
financial reporting purposes. The net assets of Renaissance will be stated at historical cost, with no goodwill or other intangible assets recorded.
Operations prior to the Merger will be those of First Communications.
The unaudited pro forma financial
statements should be read in conjunction with the accompanying notes to the unaudited pro forma financial statements, each of Renaissances and
First Communications historical consolidated financial statements and related notes, Managements Discussion and Analysis of Financial
Condition and Results of Operations and other financial information contained in this proxy statement/prospectus. The unaudited pro forma
information presented herein does not intend to represent or be indicative of the financial position or results of operations that would have actually
occurred had the Transactions occurred on the dates indicated and should not be taken as representative of the future consolidated financial position
or results operations.
The selected consolidated
unaudited pro forma financial information includes estimated adjustments to record assets acquired and liabilities assumed at their respective fair
values and represents managements estimates based on available information. The pro forma adjustments included herein may be revised as
additional information becomes available and as additional analyses are performed. The final allocation of the Globalcom purchase price will be
determined after the acquisition is completed and after completion of a final analysis to determine the fair values of the tangible, and identifiable
intangible, assets and liabilities as of the closing date. Accordingly, the final purchase accounting adjustments and integration charges may be
materially different from the pro forma adjustments presented in this proxy statement/prospectus. Increases or decreases in the fair value of the net
assets, commitments, contracts and other items of Globalcom compared to the information shown in this proxy statement/prospectus may change the amount
of the purchase price allocated to goodwill and other assets and liabilities and may impact the statement of operations.
96
FIRST COMMUNICATIONS, INC.
UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED BALANCE SHEET
September 30, 2008
(in thousands)
|
|
|
|
First
Communications
|
|
Renaissance
|
|
Pro Forma
Adjustments
|
|
Pro Forma
Consolidated
Assuming No
Conversions
|
|
Pro Forma
Adjustments
Assuming
Maximum
Conversions
|
|
Pro Forma
Consolidated
Assuming
Maximum
Conversions
|
CURRENT
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
|
|
$
|
2,771
|
|
|
$
|
871
|
|
|
$
|
106,408
|
(d)
|
|
$
|
75,499
|
|
|
$
|
(21,273
|
)(f)
|
|
$
|
54,226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15,000
|
)(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,000
|
)(d)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,051
|
)(e)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,500
|
)(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,000
|
)(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable, net
|
|
|
|
|
20,473
|
|
|
|
|
|
|
|
|
|
|
|
20,473
|
|
|
|
|
|
|
|
20,473
|
|
Accounts
receivable related party
|
|
|
|
|
1,675
|
|
|
|
|
|
|
|
|
|
|
|
1,675
|
|
|
|
|
|
|
|
1,675
|
|
Federal
income tax refund receivable
|
|
|
|
|
1,722
|
|
|
|
|
|
|
|
|
|
|
|
1,722
|
|
|
|
|
|
|
|
1,722
|
|
Inventory
|
|
|
|
|
2,888
|
|
|
|
|
|
|
|
|
|
|
|
2,888
|
|
|
|
|
|
|
|
2,888
|
|
Prepaid
expenses
|
|
|
|
|
5,915
|
|
|
|
90
|
|
|
|
|
|
|
|
6,005
|
|
|
|
|
|
|
|
6,005
|
|
TOTAL CURRENT
ASSETS
|
|
|
|
|
35,444
|
|
|
|
961
|
|
|
|
71,857
|
|
|
|
108,262
|
|
|
|
(21,273
|
)
|
|
|
86,989
|
|
|
NET PROPERTY
AND EQUIPMENT
|
|
|
|
|
62,632
|
|
|
|
3
|
|
|
|
|
|
|
|
62,635
|
|
|
|
|
|
|
|
62,635
|
|
|
OTHER
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
|
|
123,527
|
|
|
|
|
|
|
|
|
|
|
|
123,527
|
|
|
|
|
|
|
|
123,527
|
|
Other
intangibles net
|
|
|
|
|
96,383
|
|
|
|
|
|
|
|
|
|
|
|
96,383
|
|
|
|
|
|
|
|
96,383
|
|
Deposits and
other assets
|
|
|
|
|
8,107
|
|
|
|
106,408
|
|
|
|
(106,408
|
)(d)
|
|
|
8,107
|
|
|
|
|
|
|
|
8,107
|
|
TOTAL OTHER
ASSETS
|
|
|
|
|
228,017
|
|
|
|
106,408
|
|
|
|
(106,408
|
)
|
|
|
228,017
|
|
|
|
|
|
|
|
228,017
|
|
TOTAL
ASSETS
|
|
|
|
$
|
326,093
|
|
|
$
|
107,372
|
|
|
$
|
(34,551
|
)
|
|
$
|
398,914
|
|
|
$
|
(21,273
|
)
|
|
$
|
377,641
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolver and
line of credit
|
|
|
|
$
|
10,000
|
|
|
$
|
|
|
|
$
|
(10,000
|
)(d)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Current
portion of long-term debt
|
|
|
|
|
12,000
|
|
|
|
|
|
|
|
|
|
|
|
12,000
|
|
|
|
|
|
|
|
12,000
|
|
Accounts
payable trade
|
|
|
|
|
13,628
|
|
|
|
855
|
|
|
|
|
|
|
|
14,483
|
|
|
|
|
|
|
|
14,483
|
|
Accrued
expenses
|
|
|
|
|
10,742
|
|
|
|
3,120
|
|
|
|
(3,051
|
)(e)
|
|
|
10,811
|
|
|
|
|
|
|
|
10,811
|
|
Deferred
revenue current
|
|
|
|
|
7,277
|
|
|
|
|
|
|
|
|
|
|
|
7,277
|
|
|
|
|
|
|
|
7,277
|
|
Deferred
federal taxes
|
|
|
|
|
645
|
|
|
|
|
|
|
|
|
|
|
|
645
|
|
|
|
|
|
|
|
645
|
|
TOTAL CURRENT
LIABILITIES
|
|
|
|
|
54,292
|
|
|
|
3,975
|
|
|
|
(13,051
|
)
|
|
|
45,216
|
|
|
|
|
|
|
|
45,216
|
|
|
NON-CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt, less current portion
|
|
|
|
|
104,500
|
|
|
|
|
|
|
|
|
|
|
|
104,500
|
|
|
|
|
|
|
|
104,500
|
|
Deferred tax
liability long term
|
|
|
|
|
12,948
|
|
|
|
|
|
|
|
|
|
|
|
12,948
|
|
|
|
|
|
|
|
12,948
|
|
Deferred
revenue long term
|
|
|
|
|
14,965
|
|
|
|
|
|
|
|
|
|
|
|
14,965
|
|
|
|
|
|
|
|
14,965
|
|
TOTAL
NON-CURRENT LIABILITIES
|
|
|
|
|
132,413
|
|
|
|
|
|
|
|
|
|
|
|
132,413
|
|
|
|
|
|
|
|
132,413
|
|
TOTAL
LIABILITIES
|
|
|
|
|
186,705
|
|
|
|
3,975
|
|
|
|
(13,051
|
)
|
|
|
177,629
|
|
|
|
|
|
|
|
177,629
|
|
Common stock
subject to conversion (plus attributable interest)
|
|
|
|
|
|
|
|
|
21,273
|
|
|
|
(21,273
|
)(c)
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable
preferred stock
|
|
|
|
|
15,000
|
|
|
|
|
|
|
|
(15,000
|
)(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
SHAREHOLDERS EQUITY
|
|
|
|
|
124,388
|
|
|
|
82,124
|
|
|
|
21,273
|
(c)
|
|
|
221,285
|
|
|
|
(21,273
|
)(f)
|
|
|
200,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,500
|
)(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,000
|
)(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND SHAREHOLDERS EQUITY
|
|
|
|
$
|
326,093
|
|
|
$
|
107,372
|
|
|
$
|
(34,551
|
)
|
|
$
|
398,914
|
|
|
$
|
(21,273
|
)
|
|
$
|
377,641
|
|
97
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED
BALANCE SHEET
Basis of Preliminary Purchase Price and
Allocation
The preliminary allocation of the
purchase price used in the unaudited pro forma condensed combined financial statements is based upon First Communications managements
preliminary estimates of the fair value of the tangible and intangible assets of Globalcom. The final purchase price is subject to certain working
capital adjustments which are still to be determined. Accordingly First Communications has not finalized the allocation of purchase price and it is at
least reasonably possible that allocated values will change in the near term. The preliminary purchase price allocation has been recorded in First
Communications September 30, 2008 consolidated balance sheet. Beginning on October 1, 2008, First Communications began consolidating
Globalcoms results of operations in its financial statements.
On September 30, 2008, First
Communications acquired Globalcom, a fiber and wireless infrastructure provider, for $59 million in cash including $0.5 million in transaction costs.
The pro forma adjustments represent a preliminary estimate of the fair value of assets acquired and liabilities assumed or paid and the related
funding. Concurrently, First Communications entered into a $50 million incremental term loan syndicated by JP Morgan Securities Inc. The proceeds from
the new debt along with an additional $10 million of borrowings on the existing line of credit were used to pay for the acquisition and the associated
debt financing costs.
The Globalcom preliminary
purchase price was estimated at $59 million and is comprised of:
Purchase
Price Calculation:
|
|
|
|
|
|
|
Cash
|
|
|
|
$
|
58,500
|
|
Acquisition
related transaction costs
|
|
|
|
|
500
|
|
Total
Preliminary Purchase Price
|
|
|
|
$
|
59,000
|
|
|
Preliminary
Allocation of Purchase Price
|
|
|
|
|
|
|
Cash
|
|
|
|
$
|
1,070
|
|
Goodwill
|
|
|
|
|
33,549
|
|
Identifiable
intangible assets
|
|
|
|
|
20,000
|
|
Accounts
receivable
|
|
|
|
|
5,615
|
|
Property and
equipment
|
|
|
|
|
13,343
|
|
Prepaid and
other assets
|
|
|
|
|
1,422
|
|
Tangible
liabilities assumed
|
|
|
|
|
(9,324
|
)
|
Net deferred
tax liabilities
|
|
|
|
|
(6,675
|
)
|
Total
Preliminary Purchase Price Allocation
|
|
|
|
$
|
59,000
|
|
Cash and net tangible
liabilities.
Cash, accounts receivable, property and equipment, prepaid expenses and other assets and liabilities were valued at their
respective carrying amounts as First Communications management believes that these amounts approximate their current fair values or the fair
values are not yet determinable as the acquisition has not been completed.
Identifiable intangible
asset
. The identifiable intangible asset identified relates to acquired customer relationships.
|
|
The fair value of intangible assets was based on First
Communications managements estimate utilizing rates to discount net cash flows to their present values.
|
|
|
The estimated useful life of the customer list was eight years.
Estimated useful lives for the intangible assets was based on historical experience with historical and projected customer renewal rates, historical
treatment of First Communcations acquisition-related intangible assets and its intended future use of the intangible
|
98
|
|
assets. Intangible assets are being amortized using the
straight-line method, considering the pattern in which the economic benefits of the intangible assets are consumed.
|
|
|
First Communications believes the changes that may affect
Globalcoms purchase price allocation will relate to the valuation of the intangible assets. First Communications also believes that additional
purchase price adjustments may affect the allocation. However, First Communications is unable to quantify the effect of these adjustments until the
purchase price adjustment is completed.
|
On September 1 3 , 2008,
First Communications entered into a definitive agreement , which was amended on December 22, 2008, to transact a reverse merger
with Renaissance under which First Communications will be the surviving company. The purchase price would be up to approximately $369 million.
Renaissance is listed on the American Stock Exchange and was organized as a special purpose acquisition company. Renaissance will issue approximately
1 4 , 460 , 016 shares of common stock to First Communications current equity holders at closing, assume First
Communications debt and $1.9 million of cash and retire $15 million of First Communications Series A Preferred Stock. First
Communications equity holders may also receive up to 22 ,450,000 shares of additional Renaissance common stock upon satisfaction of the
Warrant Condition and the EBITDA Condition.
In addition to the
consideration to be issued to First Communications stockholders described above, pursuant to the Amended and Restated Stock Escrow Agreement to
be delivered to First Communications at closing, RAC Partners has agreed that 2,000,000 of its Original Shares, which are being held in an
escrow account in connection with Renaissances IPO, will be released only in the event that the EBITDA Condition is satisfied. The
attainment of the EBITDA Condition cannot be assured and such shares are therefore considered contingent shares. As a result, these shares are
not included in the per share calculations.
In the event the EBITDA
Condition is satisfied and such shares are released from escrow, the post-merger combined company may be required to recognize a charge based on
the fair value of the shares at the time the shares are released from the escrow. The amount of such charge would be equal to the number of
shares times the market value at such date. The current value of the shares to be held in escrow and subject to the performance condition is
approximately $11,580,000 based upon a market price of $5.79 per share.
The following pro forma
adjustments are included in the unaudited pro forma condensed combined balance sheet as of September 30, 2008 assuming the Merger was completed on
September 30, 2008:
(a)
|
|
To record payment and related expense of the estimated
acquisition transaction costs and associated reduction to shareholders equity in accordance with FAS 141R.
|
(b)
|
|
To record the retirement of the remaining $15 million of First
Communications Series A Preferred Stock.
|
(c)
|
|
To record the assumed termination of the redemption provision
and related reclassification Renaissances common stock subject to conversion into shareholders equity. The Merger must be submitted to
Renaissances stockholders for approval and be authorized by the vote of a majority of the shares. The Merger will not be consummated if the
holders of 20% or more of the shares exercise their conversion rights.
|
(d)
|
|
To reclassify Renaissances cash held in the Trust Account
to cash and record the repayment of First Communications line of credit balance.
|
(e)
|
|
To record cash settlement of deferred underwriting fees which
are payable in full upon consummation of the acquisition.
|
(f)
|
|
To adjust for the maximum conversion percentage (19.99% or
3,586,206 shares) of Renaissance common stock and the decreased cash balance outstanding.
|
99
FIRST COMMUNICATIONS, INC.
UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
Nine Months Ended September 30, 2008
(in thousands)
|
|
|
|
First
Communications
|
|
FE Telecom
(1)
|
|
Globalcom
(2)
|
|
Pro Forma
Adjustments
|
|
First
Communications
Pro Forma
|
REVENUES
NET
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
net
|
|
|
|
$
|
107,538
|
|
|
$
|
3,667
|
|
|
$
|
41,830
|
|
|
$
|
|
|
|
$
|
153,035
|
|
Revenues, net
related parties
|
|
|
|
|
5,947
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,947
|
|
TOTAL
REVENUES, NET
|
|
|
|
|
113,485
|
|
|
|
3,667
|
|
|
|
41,830
|
|
|
|
|
|
|
|
158,982
|
|
|
COST OF
FACILITIES, exclusive of depreciation and amortization
|
|
|
|
|
69,838
|
|
|
|
2,007
|
|
|
|
24,679
|
|
|
|
(441
|
)(b)
|
|
|
96,083
|
|
|
SELLING,
GENERAL AND ADMINISTRATIVE
|
|
|
|
|
26,169
|
|
|
|
157
|
|
|
|
16,275
|
|
|
|
(3,824
|
)(b)
|
|
|
38,777
|
|
|
DEPRECIATION
AND AMORTIZATION
|
|
|
|
|
8,475
|
|
|
|
243
|
|
|
|
2,394
|
|
|
|
2,039
|
(d)
|
|
|
13,151
|
|
|
OPERATING
INCOME (LOSS)
|
|
|
|
|
9,003
|
|
|
|
1,260
|
|
|
|
(1,518
|
)
|
|
|
2,226
|
|
|
|
10,971
|
|
|
OTHER INCOME
(EXPENSES)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
|
|
(2,552
|
)
|
|
|
(67
|
)
|
|
|
(530
|
)
|
|
|
(1,970
|
)(a)
|
|
|
(5,344
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(225
|
)(c)
|
|
|
|
|
Other
|
|
|
|
|
156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
156
|
|
|
|
|
|
|
(2,396
|
)
|
|
|
(67
|
)
|
|
|
(530
|
)
|
|
|
(2,195
|
)
|
|
|
(5,188
|
)
|
|
INCOME(LOSS)
BEFORE INCOME TAXES
|
|
|
|
|
6,607
|
|
|
|
1,193
|
|
|
|
(2,048
|
)
|
|
|
31
|
|
|
|
5,783
|
|
|
INCOME TAXES
|
|
|
|
|
2,657
|
|
|
|
495
|
|
|
|
(754
|
)
|
|
|
(229
|
)(e)
|
|
|
2,169
|
|
|
NET INCOME
(LOSS)
|
|
|
|
$
|
3,950
|
|
|
$
|
698
|
|
|
$
|
(1,294
|
)
|
|
$
|
260
|
|
|
$
|
3,614
|
|
(1)
|
|
For the pre-acquisition period January 1, 2008 through March 6,
2008.
|
(2)
|
|
For the pre-acquisition period January 1, 2008 through September
30, 2008.
|
100
FIRST COMMUNICATIONS, INC.
UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
Nine Months Ended September 30, 2008
(in thousands)
|
|
|
|
Renaissance
|
|
Pro Forma
Adjustments
|
|
Pro Forma
Consolidated
Assuming No
Conversions
|
|
Pro Forma
Adjustments
Assuming
Maximum
Conversions
|
|
Pro Forma
Consolidated
Assuming
Maximum
Conversions
|
REVENUES
NET
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
net
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
153,035
|
|
|
$
|
|
|
|
$
|
153,035
|
|
Revenues, net
related parties
|
|
|
|
|
|
|
|
|
|
|
|
|
5,947
|
|
|
|
|
|
|
|
5,947
|
|
TOTAL
REVENUES, NET
|
|
|
|
|
|
|
|
|
|
|
|
|
158,982
|
|
|
|
|
|
|
|
158,982
|
|
|
COST OF
FACILITIES, exclusive of depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
96,083
|
|
|
|
|
|
|
|
96,083
|
|
|
SELLING,
GENERAL AND ADMINISTRATIVE
|
|
|
|
|
1,324
|
|
|
|
|
|
|
|
40,101
|
|
|
|
|
|
|
|
40,101
|
|
|
DEPRECIATION
AND AMORTIZATION
|
|
|
|
|
|
|
|
|
|
|
|
|
13,151
|
|
|
|
|
|
|
|
13,151
|
|
|
OPERATING
INCOME
|
|
|
|
|
(1,324
|
)
|
|
|
|
|
|
|
9,647
|
|
|
|
|
|
|
|
9,647
|
|
|
OTHER INCOME
(EXPENSES)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
(5,346
|
)
|
|
|
|
|
|
|
(5,346
|
)
|
|
Other
|
|
|
|
|
1,706
|
|
|
|
(496
|
)(f)
|
|
|
1,366
|
|
|
|
(341
|
)(h)
|
|
|
1,025
|
|
|
|
|
|
|
1,704
|
|
|
|
(496
|
)
|
|
|
(3,980
|
)
|
|
|
(341
|
)
|
|
|
(4,321
|
)
|
|
INCOME BEFORE
INCOME TAXES
|
|
|
|
|
380
|
|
|
|
(496
|
)
|
|
|
5,667
|
|
|
|
(341
|
)
|
|
|
5,326
|
|
|
INCOME
TAXES
|
|
|
|
|
614
|
|
|
|
(658
|
)(g)
|
|
|
2,125
|
|
|
|
(128
|
)(g)
|
|
|
1,997
|
|
|
NET
INCOME
|
|
|
|
$
|
(234
|
)
|
|
$
|
162
|
|
|
$
|
3,542
|
|
|
$
|
(213
|
)
|
|
$
|
3,329
|
|
|
Earnings per
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
$
|
0. 10
|
|
|
|
|
|
|
$
|
0. 11
|
|
Diluted
|
|
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
$
|
0.0 9
|
|
|
|
|
|
|
$
|
0.0 9
|
|
|
Weighted
average shares outstanding (including shares subject to conversion):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
21,840
|
|
|
|
1 2 ,460
|
(j)
|
|
|
34 ,300
|
|
|
|
(3,586
|
)(i)(j)
|
|
|
3 0 ,714
|
|
Diluted
|
|
|
|
|
21,840
|
|
|
|
16 ,806
|
(k)
|
|
|
38 ,646
|
|
|
|
(3,586
|
)(i)(k)
|
|
|
35 ,060
|
|
101
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED
STATEMENT OF OPERATIONS
Nine Months ended September 30, 2008
The pro forma statement of
operations for the nine months ended September 30, 2008 include the financial results of FE Telecom and Globalcom which were acquired by First
Communications on March 6, 2008 and September 30, 2008, respectively. Also, the pro forma statement of operations for the nine months ended September
30, 2008 include the financial results of Renaissance assuming the reverse merger with First Communications was completed on January 1,
2007.
The following pro forma
adjustments are included in the unaudited pro forma condensed combined statement of operations for the nine months ended September 30, 2008 assuming
the Globalcom acquisition was completed on January 1, 2007:
(a)
|
|
Represents the adjustment to historical interest expense on debt
to be retired and interest expense on debt assumed and incurred in connection with the Globalcom acquisition. The estimated average outstanding balance
and interest rate under the new long term debt incurred was $105 million and 6.5%, respectively, for the nine months ended September 30, 2008. The
annual impact on interest expense of a 1/8% change in interest rates is approximately $131,000.
|
(b)
|
|
Cost reductions realized from (i) the release of certain
executives as specified in the Globalcom merger agreement of approximately $3.2 million; (ii) the release of personnel provided notice on the date of
closing as specified in the Globalcom merger agreement of approximately $639,000; and (iii) rate reduction from a major telecommunication service
provider based on expected higher volumes pursuant to an agreement executed in connection with the acquisition of Globalcom in the amount of
approximately $441,000.
|
(c)
|
|
To record the amortization of $1.5 million debt financing costs
related to the Globalcom acquisition over the five year term of the loan.
|
(d)
|
|
To record amortization expense of $1.9 million for the $20
million in customer relationships intangible asset resulting from the Globalcom acquisition which has an estimated useful life of eight years. As the
fair value assigned to the intangible assets acquired from Globalcom are preliminary in nature, actual amortization expense in future periods may
differ materially from the amortization expense presented. To record pre-acquisition amortization expense of $0.2 million for the $17.2 million in
customer relationships intangible asset resulting from the FE Telecom acquisition which has an estimated useful life of 16 years. The estimated useful
lives for the Globalcom and FE Telecom customer relationships intangible assets differ primarily based on past experience with historical and projected
customer renewal rates. Additionally, the nature of FE Telecoms business, as a fiber and wireless infrastructure provider, results in longer term
customer contracts in comparison to Globalcoms business as a local, long-distance, data and internet access provider. The determination of
estimated useful lives also incorporates assumptions that a market participant would use in making fair value estimates in a discounted cash flow
model.
|
(e)
|
|
To adjust the provision for income taxes to First
Communications effective tax rate of 37.5%. The pro forma combined provision for income taxes does not reflect the amounts that would have
resulted had Renaissance and First Communications filed consolidated income tax returns for 2008.
|
The following pro forma
adjustments are included in the unaudited pro forma condensed combined statement of operations for the nine months ended September 30, 2008 assuming
the Merger was completed on January 1, 2007:
(f)
|
|
To adjust interest income to reflect the $30.9 million (30%)
reduction in the average outstanding cash balance invested in marketable securities for the period.
|
102
(g)
|
|
To adjust the provision for income taxes to the First
Communications effective tax rate of 37.5%. The pro forma combined provision for income taxes does not reflect the amounts that would have resulted had
Renaissance and First Communications filed consolidated income tax returns for 2008.
|
(h)
|
|
To adjust interest income to reflect the $21.3 million (28%)
reduction in the average outstanding cash balance invested in marketable securities for the period resulting from maximum permitted conversions of
shares of Renaissance common stock.
|
(i)
|
|
To adjust for the weighted average maximum permitted conversions
of shares of Renaissance common stock.
|
(j)
|
|
The pro forma basic earnings per share are based on the weighted
average number of shares of Renaissance common stock outstanding and are adjusted for additional common stock issued, or assumed issued to First
Communications stockholders as part of the merger as follows (in thousands):
|
Basic shares
(including shares subject to conversion), as reported
|
|
|
|
|
21,840
|
|
Recharacterization of shares of Renaissance common stock issued to RAC Partners prior to Renaissances initial public
offering to contingently issuable based on the satisfaction of the EBITDA milestones described in the Merger Agreement
|
|
|
|
|
(2,000
|
)
|
|
|
Issuance of
Renaissance common stock to First Communications common stock and T1 warrant holders based on an exchange of one First Communications common share for
0. 44932 shares of Renaissance common stock
|
|
|
|
|
1 4 ,460
|
|
Basic shares,
pro forma assuming no conversions
|
|
|
|
|
34 , 30 0
|
|
Maximum
conversion of Renaissance common stock into cash
|
|
|
|
|
(3,586
|
)
|
Basic shares,
pro forma assuming maximum conversions
|
|
|
|
|
3 0 , 714
|
|
(k)
|
|
The pro forma diluted earnings per share are based on the
weighted average number of shares of Renaissance common stock outstanding and are adjusted for warrants which became exercisable upon the business
combination and additional common stock issued to First Communications stockholders as part of the acquisition as follows (in thousands):
|
Diluted
shares (including shares subject to conversion), as reported
|
|
|
|
|
21,840
|
|
Recharacterization of shares of Renaissance common stock issued to RAC Partners prior to Renaissances initial
public offering to contingently issuable based on the satisfaction of the EBITDA milestones described in the Merger
Agreement
|
|
|
|
|
(2,000
|
)
|
|
|
Issuance of
Renaissance common stock to First Communications common stock and T1 warrant holders based on an exchange of one First Communications common share for
0. 44932 shares of Renaissance common stock
|
|
|
|
|
1 4 ,460
|
|
Warrants to
purchase 35,880 shares of Renaissance common stock at $5 per share issued in conjunction with Renaissances initial public offering, the exercise
of which was contingent upon the consummation of a qualifying business combination
|
|
|
|
|
4,346
|
|
Diluted
shares, pro forma assuming no conversions
|
|
|
|
|
38 ,646
|
|
Maximum
conversion of Renaissance common stock into cash
|
|
|
|
|
(3,586
|
)
|
Diluted
shares, pro forma assuming maximum conversions
|
|
|
|
|
35,0 60
|
|
103
FIRST COMMUNICATIONS, INC.
UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
Year Ended December 31, 2007
(in thousands)
|
|
|
|
First
Communications
|
|
FC LLC
|
|
Xtension
|
|
FE
Telecom
|
|
Globalcom
|
|
Other(1)
|
|
|
|
|
7/212/31/07
|
|
1/17/1/07
|
|
|
|
|
|
1/13/6/07
|
|
REVENUES
NET
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
net
|
|
|
|
$
|
61,200
|
|
|
$
|
48,154
|
|
|
$
|
15,723
|
|
|
$
|
20,415
|
|
|
$
|
55,918
|
|
|
$
|
8,255
|
|
Revenues, net
related parties
|
|
|
|
|
4,353
|
|
|
|
3,275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
REVENUES, NET
|
|
|
|
|
65,553
|
|
|
|
51,429
|
|
|
|
15,723
|
|
|
|
20,415
|
|
|
|
55,918
|
|
|
|
8,255
|
|
|
COST OF
FACILITIES, exclusive of depreciation and amortization
|
|
|
|
|
44,560
|
|
|
|
33,798
|
|
|
|
12,629
|
|
|
|
10,954
|
|
|
|
31,584
|
|
|
|
4,510
|
|
|
SELLING,
GENERAL AND ADMINISTRATIVE
|
|
|
|
|
15,706
|
|
|
|
12,328
|
|
|
|
1,931
|
|
|
|
2,154
|
|
|
|
19,475
|
|
|
|
1,900
|
|
|
DEPRECIATION
AND AMORTIZATION
|
|
|
|
|
3,712
|
|
|
|
2,269
|
|
|
|
9
|
|
|
|
1,852
|
|
|
|
2,630
|
|
|
|
594
|
|
|
OPERATING
INCOME (LOSS)
|
|
|
|
|
1,575
|
|
|
|
3,034
|
|
|
|
1,154
|
|
|
|
5,455
|
|
|
|
2,229
|
|
|
|
1,251
|
|
|
OTHER INCOME
(EXPENSES)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
|
|
(134
|
)
|
|
|
(725
|
)
|
|
|
|
|
|
|
(807
|
)
|
|
|
(815
|
)
|
|
|
(14
|
)
|
|
Other
|
|
|
|
|
76
|
|
|
|
275
|
|
|
|
58
|
|
|
|
(118
|
)
|
|
|
|
|
|
|
(198
|
)
|
|
|
|
|
|
(58
|
)
|
|
|
(450
|
)
|
|
|
58
|
|
|
|
(925
|
)
|
|
|
(815
|
)
|
|
|
(212
|
)
|
|
INCOME (LOSS)
BEFORE INCOME TAXES
|
|
|
|
|
1,517
|
|
|
|
2,584
|
|
|
|
1,212
|
|
|
|
4,530
|
|
|
|
1,414
|
|
|
|
1,039
|
|
|
INCOME TAXES
|
|
|
|
|
588
|
|
|
|
|
|
|
|
|
|
|
|
1,699
|
|
|
|
546
|
|
|
|
|
|
|
NET INCOME
(LOSS)
|
|
|
|
$
|
929
|
|
|
$
|
2,584
|
|
|
$
|
1,212
|
|
|
$
|
2,831
|
|
|
$
|
868
|
|
|
$
|
1,039
|
|
(1)
|
|
Includes the financial results of certain assets acquired and
certain liabilities assumed of Acceris Management and Acquisition LLC, and NAC, providers of long distance and local telecommunications, data and other
communications services, which were acquired by FC LLC on March 6, 2007 as if the acquisitions had occurred on January 1, 2007.
|
104
FIRST COMMUNICATIONS, INC.
UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
Twelve Months Ended December 31, 2007
|
|
|
|
Pro Forma
Adjustments
|
|
First
Communications
Pro Forma
|
|
Renaissance
|
|
Pro Forma
Adjustments
|
|
Pro Forma
Consolidated
Assuming
No
Conversions
|
|
Pro
Forma
Adjustments
Assuming
Maximum
Conversions
|
|
Pro Forma
Consolidated
Assuming
Maximum
Conversions
|
REVENUES
NET
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
net
|
|
|
|
$
|
|
|
|
$
|
209,665
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
209,665
|
|
|
$
|
|
|
|
$
|
209,665
|
|
Revenues, net
related parties
|
|
|
|
|
|
|
|
|
7,628
|
|
|
|
|
|
|
|
|
|
|
|
7,628
|
|
|
|
|
|
|
|
7,628
|
|
TOTAL REVENUES,
NET
|
|
|
|
|
|
|
|
|
217,293
|
|
|
|
|
|
|
|
|
|
|
|
217,293
|
|
|
|
|
|
|
|
217,293
|
|
|
COST OF
FACILITIES, exclusive of depreciation and amortization
|
|
|
|
|
(588
|
)(b)
|
|
|
137,447
|
|
|
|
|
|
|
|
|
|
|
|
137,447
|
|
|
|
|
|
|
|
137,447
|
|
|
SELLING,
GENERAL AND ADMINISTRATIVE
|
|
|
|
|
(5,099
|
)(b)
|
|
|
48,395
|
|
|
|
848
|
|
|
|
|
|
|
|
49,243
|
|
|
|
|
|
|
|
49,243
|
|
|
DEPRECIATION
AND AMORTIZATION
|
|
|
|
|
3,457
|
(d)
|
|
|
14,523
|
|
|
|
|
|
|
|
|
|
|
|
14,523
|
|
|
|
|
|
|
|
14,523
|
|
|
OPERATING
INCOME
|
|
|
|
|
2,230
|
|
|
|
16,928
|
|
|
|
(848
|
)
|
|
|
|
|
|
|
16,080
|
|
|
|
|
|
|
|
16,080
|
|
|
OTHER INCOME
(EXPENSES)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
|
|
(5,013
|
)(a)
|
|
|
(7,808
|
)
|
|
|
(5
|
)
|
|
|
|
|
|
|
(7,813
|
)
|
|
|
|
|
|
|
(7,813
|
)
|
|
|
|
|
|
(300
|
)(c)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
(58
|
)(b)
|
|
|
35
|
|
|
|
4,167
|
|
|
|
(1,240
|
)(f)
|
|
|
2,962
|
|
|
|
(854
|
)(h)
|
|
|
2,108
|
|
|
|
|
|
|
(5,371
|
)
|
|
|
(7,773
|
)
|
|
|
4,162
|
|
|
|
(1,240
|
)
|
|
|
(4,851
|
)
|
|
|
(854
|
)
|
|
|
(5,705
|
)
|
|
INCOME BEFORE
INCOME TAXES
|
|
|
|
|
(3,141
|
)
|
|
|
9,155
|
|
|
|
3,314
|
|
|
|
(1,240
|
)
|
|
|
11,229
|
|
|
|
(854
|
)
|
|
|
10,375
|
|
|
INCOME TAXES
|
|
|
|
|
600
|
(e)
|
|
|
3,433
|
|
|
|
1,013
|
|
|
|
(235
|
)(g)
|
|
|
4,211
|
|
|
|
(320
|
)(g)
|
|
|
3,891
|
|
|
NET INCOME
|
|
|
|
$
|
(3,741
|
)
|
|
$
|
5,722
|
|
|
$
|
2,301
|
|
|
$
|
(1,005
|
)
|
|
$
|
7,018
|
|
|
$
|
(534
|
)
|
|
$
|
6,484
|
|
|
Earnings per
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.11
|
|
|
|
|
|
|
$
|
0. 21
|
|
|
|
|
|
|
$
|
0. 22
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.10
|
|
|
|
|
|
|
$
|
0. 20
|
|
|
|
|
|
|
$
|
0 .20
|
|
|
Weighted average shares outstanding
(including shares subject to conversion):
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
20,220
|
|
|
|
1 2 ,460
|
(j)
|
|
|
3 2 ,680
|
|
|
|
(3,262
|
)(i)(j)
|
|
|
29 ,418
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
23,295
|
|
|
|
1 2 ,460
|
(k)
|
|
|
35 ,755
|
|
|
|
(3,262
|
)(i)(k)
|
|
|
3 2 ,493
|
|
105
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS
Year Ended December 31, 2007
First Communications began
operations on July 2, 2007 in conjunction with the acquisition of FC LLC and Xtension. As such, the pro forma statement of operations for the year
ended December 31, 2007 includes the financial results of FC LLC and Xtension for the period January 1, 2007 through July 1, 2007 and the financial
results of First Communications for the period July 2, 2007 through December 31, 2007. Also, the pro forma statement of operations for the year ended
December 31, 2007 include the financial results of FE Telecom and Globalcom which were acquired by First Communications on March 6, 2008 and September
30, 2008, respectively, as if the acquisitions had occurred on January 1, 2007. In addition, the other column in the pro forma statement of operations
for the year ended December 31, 2007 include the financial results of Acceris Management and Acquisition LLC (Acceris) and NAC, the assets
of which were acquired by FC LLC on March 6, 2007, as if the acquisitions had occurred on January 1, 2007. Further, the pro forma statement of
operations for the year ended December 31, 2007 include the financial results of Renaissance assuming the Merger was completed on January 1,
2007.
The following pro forma
adjustments are included in the unaudited pro forma condensed combined statement of operations for the year ended December 31, 2007 assuming all of the
acquisitions were completed on January 1, 2007:
(a)
|
|
To eliminate the historical interest expense on outstanding debt
to be retired and record interest expense on the debt assumed and incurred in connection with the Globalcom acquisition and the Merger. The estimated
average outstanding balance and interest rate under the new long term debt was $120 million and 6.5%, respectively, for the six months ended June 30,
2008. The annual impact on interest expense of a 1/8% change in interest rates is approximately $150,000.
|
(b)
|
|
Cost reductions realized from (i) the release of certain
executives as specified in the Globalcom merger agreement of approximately $4.2 million; (ii) the release of personnel provided notice on the date of
closing as specified in the Globalcom merger agreement of approximately $852,000; and (iii) rate reduction from a major telecommunication service
provider based on expected higher volumes pursuant to an agreement executed in connection with the acquisition of Globalcom in the amount of
approximately $588,000.
|
(c)
|
|
To record the amortization of $1.5 million in debt financing
costs related to the Globalcom acquisition over the 5 year term of the loan.
|
(d)
|
|
To record amortization expense of $2.5 million for the $20
million in customer relationships intangible asset resulting from the Globalcom acquisition which has an estimated useful life of eight years. As the
fair value assigned to the intangible assets acquired from Globalcom are preliminary in nature, actual amortization expense in future periods may
differ materially from the amortization expense presented. To record amortization expense of $1.1 million for the $17.2 million in customer
relationships intangible asset resulting from the FE Telecom acquisition which has an estimated useful life of 16 years. The estimated useful lives for
the Globalcom and FE Telecom customer relationships intangible assets differ primarily based on past experience with historical and projected customer
renewal rates. Additionally, the nature of FE Telecoms business, as a fiber and wireless infrastructure provider, results in longer term customer
contracts in comparison to Globalcoms business as a local, long-distance, data and internet access provider. The determination of estimated
useful lives also incorporates assumptions that a market participant would use in making fair value estimates in a discounted cash flow
model.
|
(e)
|
|
To adjust the provision for income taxes to the First
Communications effective tax rate of 37.5%. The pro forma combined provision does not reflect that amounts that would have resulted had Renaissance and
First Communications filed consolidated tax returns for 2008.
|
106
The following pro forma
adjustments are included in the unaudited pro forma condensed combined statement of operations for the year ended December 31, 2007 assuming the Merger
was completed on January 1, 2007:
(f)
|
|
To adjust interest income to reflect the $30.9 million (30%)
reduction in the average outstanding cash balance invested in marketable securities for the period.
|
(g)
|
|
To adjust the provision for income taxes to the First
Communications effective tax rate of 37.5%. The pro forma combined provision does not reflect that amounts that would have resulted had Renaissance and
First Communications filed consolidated tax returns for 2008.
|
(h)
|
|
To adjust interest income to reflect the $21.3 million (28%)
reduction in the average outstanding cash balance invested in marketable securities for the period resulting from maximum permitted conversions of
shares of Renaissance common stock.
|
(i)
|
|
To adjust for the weighted average maximum permitted conversion
of shares of Renaissance common stock.
|
(j)
|
|
The pro forma basic earnings per share are based on the weighted
average number of shares of Renaissance common stock outstanding and are adjusted for additional common stock issued, or assumed issued to First
Communications stockholders as part of the Merger as follows (in thousands):
|
Basic shares
(including shares subject to conversion), as reported
|
|
|
|
|
20,220
|
|
Recharacterization of shares of Renaissance common stock issued to RAC Partners prior to Renaissances initial
public offering to contingently issuable based on the satisfaction of the EBITDA milestones described in the Merger
Agreement
|
|
|
|
|
(2,000
|
)
|
Issuance of
Renaissance common stock to First Communications common stock and T1 warrant holders based on an exchange of one First Communications common share for
0. 44932 shares of Renaissance common stock
|
|
|
|
|
1 4 ,460
|
|
Basic shares,
pro forma assuming no conversions
|
|
|
|
|
3 2 ,680
|
|
Maximum
conversion of Renaissance common stock into cash
|
|
|
|
|
(3,262
|
)
|
Basic shares,
pro forma assuming maximum conversions
|
|
|
|
|
29 ,418
|
|
(k)
|
|
The pro forma diluted earnings per share are based on the
weighted average number of shares of Renaissance common stock outstanding and are adjusted for additional common stock issued to First Communications
stockholders as part of the acquisition as follows (in thousands):
|
Diluted
shares (including shares subject to conversion), as reported which includes warrants to purchase 35,880 shares of Renaissance common stock at $5 per
share issued in conjunction with Renaissances initial public offering, the exercise of which was contingent upon the consummation of a qualifying
business combination
|
|
|
|
|
23,295
|
|
Recharacterization of shares of Renaissance common stock issued to RAC Partners prior to Renaissances initial
public offering to contingently issuable based on the satisfaction of the EBITDA milestones described in the Merger
Agreement
|
|
|
|
|
(2,000
|
)
|
Issuance of
Renaissance common stock to First Communications common stock and T1 warrant holders based on an exchange of one First Communications common share for
0. 44932 shares of Renaissance common stock
|
|
|
|
|
1 4 ,460
|
|
Diluted
shares, pro forma assuming no conversions
|
|
|
|
|
35 ,755
|
|
Maximum
conversion of Renaissance common stock into cash
|
|
|
|
|
(3,262
|
)
|
Diluted
shares, pro forma assuming maximum conversions
|
|
|
|
|
3 2 ,493
|
|
107
THE CHARTER AMENDMENT PROPOSAL
The charter amendment proposal,
if approved, will provide for the amendment of Renaissances present amended and restated certificate of incorporation to:
(i)change Renaissances
corporate name to First Communications, Inc.;
(ii)increase the number of
authorized shares of its common stock from 72,000,000 shares to 200,000,000 (and the total number of shares of authorized capital stock from 73,000,000
shares to 201,000,000);
(iii)change the period of its
corporate existence to perpetual;
(iv)specify that the Class I
directors will be elected for a term expiring at the annual meeting of stockholders to be held in 2009, the Class II directors will be elected for a
term expiring at the annual meeting of stockholders to be held in 2010 and the Class III directors will be elected for a term expiring at the annual
meeting of stockholders to be held in 2011, and that, beginning with the 2009 annual meeting, each class of directors will be elected for a term of
office to expire at the third succeeding annual meeting of stockholders after its election;
(v)delete the present Article
Sixth and its preamble, as such provisions will no longer be applicable to Renaissance after the Merger, and to renumber succeeding Articles
accordingly; and
(vi)make certain other changes in
tense and number that Renaissances board of directors believes are immaterial.
The increase in the number of
authorized shares of capital stock, the name change, the provision for Renaissances perpetual existence, the classification of the board of
directors into three classes and the deletion of Article Sixth of Renaissances current amended and restated certificate of incorporation are
being undertaken as a result of and in conjunction with the Merger. Accordingly, the proposal to approve the amended and restated certificate of
incorporation is conditioned upon and subject to the approval of the merger proposal.
In the judgment of
Renaissances board of directors, the charter amendment proposal is desirable for the following reasons:
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The change of Renaissance corporate name is desirable to reflect
its merger with First Communications. The First Communications name has been used for almost ten years in connection with its provision of voice and
data telecommunications services.
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The number of authorized shares should be increased because, as
a result of the issuance of shares in the Merger and the assumption of warrants and the adoption of the 2008 Plan as described in the incentive
compensation plan proposal, Renaissance requires additional shares of common stock to be reserved in its amended and restated certificate of
incorporation in order to effect the Merger and execute on the business plan of the post-merger combined company.
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The present amended and restated certificate of incorporation
provides that Renaissances corporate existence will terminate on January 29, 2009. In order to continue in existence after the consummation of
the Merger subsequent to such date, this provision must be amended. Perpetual existence is the usual period of existence for corporations and
Renaissances board of directors believes it is the most appropriate period for Renaissance as the surviving company in the Merger.
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As no meetings of stockholders have been held since
Renaissances IPO, the present directors are the same persons who were appointed at the time of Renaissances organization. Pursuant to the
Merger Agreement, the directors to be elected at the special meeting of stockholders to which this proxy statement/prospectus relates will serve for
terms that expire in 2009 (Class I directors), 2010 (Class II directors) and 2011 (Class III directors). The proposed amendment to the present Article
Seventh incorporates these classifications.
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Article Sixth and its preamble relate to the operation of
Renaissance as a blank check company prior to the consummation of a business combination and will not be applicable after consummation of the
Merger.
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Section 6.1 requires that the business combination be submitted
to Renaissances stockholders for approval under the DGCL and is authorized by the vote of a majority of the Public Shares present at the Special
Meeting in person or by proxy and eligible to vote thereon, provided that the business combination shall not be consummated if the holders of 20% or
more of the Public Shares exercise their conversion rights. Section 6.2 specifies the procedures for exercising conversion rights. Section 6.3 provides
that holders of Public Shares are entitled to receive distributions from the Trust Account only if a business combination is not consummated by the
Termination Date (January 29, 2009) or by demanding conversion in accordance with Section 6.2. Section 6.4 provides that Renaissance must
consummate the business combination, as defined in the preamble of Article Sixth, before Renaissance can consummate any other type of business
combination. Section 6.5 permits Renaissance to have a classified board of directors prior to the business combination. Accordingly, Article Sixth and
it preamble will serve no further purpose.
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The other changes include certain other changes in tense and
number that Renaissances board of directors believes are immaterial.
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Pursuant to the Merger Agreement,
approval of the charter amendment proposal is a condition to the consummation of the Merger. If the merger proposal is not approved, the charter
amendment proposal will not be presented at the meeting. If the charter amendment proposal is not approved, the Merger will not be consummated even if
the merger proposal is approved and the holders of fewer than 20% of the Public Shares vote against the merger proposal and properly demand that their
Public Shares be converted into cash.
The approval of each charter
amendment proposal will require the affirmative vote of the holders of a majority of the outstanding shares of Renaissance common stock on the record
date.
A copy of Renaissances
amended and restated certificate of incorporation, as it will be in effect, assuming approval of the charter amendment proposal and the filing of the
charter in the office of the Secretary of State of the State of Delaware, is attached to this proxy statement/prospectus as Annex B.
RENAISSANCES BOARD OF
DIRECTORS UNANIMOUSLY RECOMMENDS THAT ITS STOCKHOLDERS VOTE FOR THE APPROVAL OF THE CHARTER AMENDMENT PROPOSAL.
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THE INCENTIVE COMPENSATION PLAN
PROPOSAL
Renaissance is requesting that
the stockholders vote in favor of approving Renaissances 2008 Equity Incentive Plan (the 2008 Plan), which was adopted by the board
on October 20, 2008.
Purpose
. The
purpose of the 2008 Plan is to encourage ownership of Renaissance common stock by employees, consultants and directors of Renaissance and its
affiliates and to provide them with additional incentives to promote the success of Renaissances business through the grants of awards of or
pertaining to shares of Renaissance common stock.
Administration
. The 2008 Plan will be administered by the compensation committee of the board (the Compensation
Committee) which will be formed upon consummation of the Merger. Subject to the provisions of the 2008 Plan, the Compensation Committee has
discretion to determine the employees, consultants and directors who will receive awards, the form of award and any acceleration or extension of an
award. Further, the Compensation Committee has complete authority to interpret the 2008 Plan, to prescribe, amend and rescind rules and regulations
relating to it, to determine the terms and provisions of the respective award agreements (which need not be identical), and to make all other
determinations necessary or advisable for the administration of the 2008 Plan.
Eligibility
. Awards may be granted to any employee of or consultant to one or more of Renaissance and its affiliates or to
non-employee members of the Board or of any board of directors (or similar governing authority) of any affiliate.
Shares Subject to the 2008
Plan
. The shares issued or to be issued under the 2008 Plan are authorized but unissued shares of Renaissance common stock. The maximum
number of shares of common stock which may be issued or made subject to awards under the 2008 Plan is 3,000,000, all of which may be issued through the
exercise of incentive stock options. No more than 500,000 shares of Renaissance common stock may be covered by awards issued to any one person in any
one calendar year. If any incentive stock option, nonstatutory stock option or stock appreciation right expires, terminates or is cancelled for any
reason without having been exercised in full, or if any other award is forfeited by the recipient or repurchased at less than market value, the shares
not purchased by the award holder or which are repurchased by Renaissance or are forfeited by the award holder will be again available for awards under
the 2008 Plan.
Types of
Awards
. Awards under the 2008 Plan may include incentive stock options, nonstatutory stock options, stock appreciation rights,
restricted stock, restricted stock units, performance units and qualified performance-based awards. Each award will be evidenced by an instrument in
such form as the Compensation Committee may prescribe, setting forth applicable terms such as the exercise price and term of any option or applicable
forfeiture conditions or performance requirements. Except as noted below, all relevant terms of any award will be set by the Compensation Committee in
its discretion.
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Nonstatutory stock options and incentive stock options
(individually a Stock Option and collectively, the Stock Options) are rights to purchase common stock of Renaissance. A Stock
Option may be immediately exercisable or may become exercisable in such installments, cumulative or non-cumulative, as the Compensation Committee may
determine. A Stock Option may be exercised by the recipient giving written notice to Renaissance, specifying the number of shares with respect to which
the Stock Option is then being exercised, and accompanied by payment of an amount equal to the exercise price of the shares to be purchased. The
purchase price may be paid by cash, check, by delivery to Renaissance, through the withholding of shares of Renaissance common stock that would have
otherwise been received upon the exercise of the Stock Option, or through and under the terms and conditions of any formal cashless exercise program
authorized by Renaissance.
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Incentive stock options may be granted only to eligible
employees of Renaissance or any parent or subsidiary corporation of Renaissance and must have an exercise price of not less than 100% of the fair
market value of Renaissance common stock on the date of grant (110% for incentive stock options granted to any 10% stockholder of Renaissance). In
addition, the term of an incentive stock option may not exceed 10 years (five years, if granted to any 10% stockholder of Renaissance). Nonstatutory
stock options must
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have an exercise price of not less than 100% of the fair market
value of Renaissance common stock on the date of grant. In the case of an incentive stock option, the amount of the aggregate fair market value of
Renaissance common stock (determined at the time of grant) with respect to which incentive stock options are exercisable for the first time by an
employee during any calendar year (under all such plans of his or her employer corporation and its parent and subsidiary corporations) may not exceed
$100,000. Any Stock Options granted in excess of this limit will be nonstatutory stock options.
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Stock appreciation rights (individually a SAR and
collectively SARs) are rights to receive (without payment to Renaissance) cash, property or other forms of payment, or any combination
thereof, as determined by the Compensation Committee, based on the increase in the value of the number of shares of Renaissance common stock specified
in the SAR. The base price (above which any appreciation is measured) of a SAR may in no event be less than 100% of the fair market value of
Renaissance common stock on the date of grant.
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Awards of restricted stock are grants or sales of Renaissance
common stock which are subject to a risk of forfeiture, such as a requirement of the continued performance of services for a stated term or the
achievement of individual or company performance goals. A holder of restricted stock will have all of the rights of a stockholder of Renaissance,
including the right to vote, and the right to receive dividends with respect to, shares of restricted stock. The Compensation Committee may elect to
require deferral of payment of cash dividends with respect to shares of restricted stock or to require dividends to be reinvested in additional shares
of restricted stock pending vesting (or forfeiture) of the underlying shares of restricted stock.
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Awards of restricted stock units and performance units are
grants of rights to receive either shares of Renaissance common stock (in the case of restricted stock units) or the appreciation over a base value (as
specified by the Compensation Committee) of a number of shares of Renaissance common stock (in the case of performance units) subject to satisfaction
of service or performance requirements established by the Compensation Committee in connection with the award. Such awards may include the right to the
equivalent to any dividends on the shares covered by the award, which amount may in the discretion of the Compensation Committee be deferred and paid
if and when the award vests. The Compensation Committee may permit (or, if provided at the date of grant, require) a recipient of performance units to
defer receipt of payment of cash or delivery of stock that would otherwise be due by virtue of the satisfaction of any requirements or goals with
respect to the performance units.
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Qualified performance-based awards are awards which include
performance criteria intended to satisfy Section 162(m) of the IRC. Section 162(m) of the IRC limits Renaissances federal income tax deduction
for compensation to certain specified senior executives to $1 million dollars, but excludes from that limit performance-based compensation.
Qualified performance-based awards may be in the form of Stock Options, SARs, restricted stock, restricted stock units or performance units, but in
each case will be subject to satisfaction of one of the following criteria, either individually, alternatively or in any combination, applied to either
Renaissance as a whole or to a business unit or affiliate, either individually, alternatively, or in any combination, and measured either annually or
cumulatively over a period of years, on an absolute basis or relative to a pre-established target, to previous years results or to a designated
comparison group, in each case as specified by the Compensation Committee in the award:
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cash flow (before
or after dividends)
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earnings per share (including, without limitation, earnings before interest, taxes, depreciation and amortization)
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stock
price
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return on equity
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stockholder
return or total stockholder return
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return on capital (including without limitation return on total capital or return on invested capital)
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return on
investment
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return on assets or net assets
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market
capitalization
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economic value added
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debt leverage
(debt to capital)
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revenue
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sales or net
sales
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backlog
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income, pre-tax
income or net income
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operating income or pre-tax profit
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operating profit,
net operating profit or economic profit
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gross
margin, operating margin or profit margin
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return on
operating revenue or return on operating assets
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cash
from operations
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operating
ratio
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operating revenue
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market share
improvement
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general and administrative expenses
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customer
service
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new
production introductions
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product line
enhancements
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strategic acquisitions
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No payment or other amount will be available to a recipient of a
qualified performance-based award except upon the Compensation Committees determination that a particular goal or goals established by the
Compensation Committee for the criteria (from among those specified above) selected by the Compensation Committee has been satisfied.
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Effect of Termination of
Employment or Association
. Unless the Compensation Committee determines otherwise in connection with any particular award under the 2008
Plan, Stock Options and SARs will terminate immediately upon the recipients termination of employment or other association for cause and 90 days
following the recipients termination of employment or other association in other circumstances. Upon termination for any reason, all other awards
immediately will be forfeited or otherwise subject to return to or repurchase by Renaissance, unless the Compensation Committee otherwise provides in
the applicable award agreement.
Transferability
. In general, no award under the 2008 Plan may be transferred by the recipient and during the life of the
recipient all rights under an award may be exercised only by the recipient or his or her legal representative. However, the Compensation Committee may
approve the transfer, without consideration, of an award of a nonstatutory stock option or restricted stock to a family member.
Effect of Significant
Corporate Event
. In the event of any change in the outstanding shares of Renaissance common stock through merger, consolidation, sale of
all or substantially all the property of Renaissance, reorganization, recapitalization, reclassification, stock dividend, stock split, reverse stock
split, or other distribution with respect to such shares of Renaissance common stock, an appropriate and proportionate adjustment will be made in (i)
the maximum numbers and kinds of shares subject to the 2008 Plan and the 2008 Plan limits, (ii) the numbers and kinds of shares or other securities
subject to the then outstanding awards, (iii) the exercise price for each share or other unit of any other securities subject to then outstanding Stock
Options or SARs (without change in the aggregate purchase price as to which Stock Options or SARs remain exercisable), and (iv) the repurchase price of
each share of restricted stock then subject to a risk of forfeiture in the form of a Renaissance repurchase right. In addition, the Compensation
Committee may make adjustments to outstanding awards upon the occurrence of unusual or non-recurring events not described in the preceding sentence to
prevent dilution or the enlargement of the benefits intended to be made available under the 2008 Plan.
In the event of (i) any merger or
consolidation of Renaissance with or into another entity as a result of which the Renaissance common stock is converted into or exchanged for the right
to receive cash, securities or other property or is cancelled, (ii) any sale or exchange of all of the Renaissance common stock for cash, securities or
other property, (iii) any sale, transfer or other disposition of all or substantially all of Renaissances assets to one
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or more other persons in a
single transaction or series of related transactions or (iv) any liquidation or dissolution of Renaissance (any such event, a Transaction),
the Compensation Committee may take any one or more of the following actions with respect to Stock Options or SARs:
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provide that the awards be assumed, or substantially equivalent
awards be substituted, by the successor company;
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upon written notice to holders, provide that unexercised awards
terminate immediately prior to consummation of the Transaction unless exercised within a specific period of time following the date of the
notice;
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provide that awards become exercisable in whole or in part upon
the Transaction;
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provide for cash payments equal to the proceeds the holders
would have received if they had exercised prior to the Transaction, net of the exercise price and applicable tax withholding; or
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in the event of a liquidation or dissolution, provide that
awards convert into the right to receive liquidation proceeds net of the exercise price and applicable tax withholding.
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In the event of a Transaction
other than a liquidation or dissolution which is not part of another form of Transaction, restrictions on awards other than Stock Options or SARs will
inure to the benefit of Renaissances successor and, unless the Compensation Committee determines otherwise or except as provided in the agreement
between Renaissance and the award recipient, will apply to the cash, securities or other property into which the Renaissance common stock was
converted. Upon the occurrence of a Transaction involving a liquidation or dissolution that is not part of another form of Transaction, unless the
applicable award agreement provides otherwise, all risks of forfeiture and performance goals with respect to awards other than Stock Options or SARs
will automatically be deemed terminated or satisfied.
Except as provided in an
applicable award agreement or as prohibited by applicable laws or by the rules or regulations of a governing governmental agency or securities
exchange, upon the occurrence of a change of control:
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all Stock Options and SARs not already exercisable in full will
accelerate with respect to 100% of the shares for which such Stock Options and SARs are not then exercisable;
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any risk or forfeiture applicable to restricted stock and
restricted stock units which is not based on achievement of performance goals will lapse with respect to 100% of the restricted stock and restricted
stock units still subject to such risk of forfeiture; and
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all outstanding awards of restricted stock and restricted stock
units conditioned on the achievement of performance goals and the target payout opportunities attainable under outstanding performance units will be
deemed to have been satisfied as of the effective date of the change of control as to a pro rata number of share based on the assumed achievement of
all relevant performance goals and the length of time within the performance period which has elapsed prior to the change of control.
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A change of control
as used above means the occurrence of any of the following: (i) a Transaction, unless securities possessing more than 50% of the total combined voting
power of the survivor or acquirors outstanding securities (or the securities of any parent thereof) are held by persons who held securities
possessing more than 50% of the total combined voting power of Renaissances outstanding securities immediately prior to the Transaction; (ii) any
person or group of persons directly or indirectly acquires beneficial ownership of securities possessing more than 20% of the total combined voting
power of Renaissances outstanding securities pursuant to a tender or exchange offer made directly to Renaissances stockholders that the
board of directors does not recommend the stockholders accept; or (iii) over a period of 36 consecutive months or less, there is a change in the
composition of the board such that a majority of the board members cease, by reason of one or more proxy contests for the election of board members, to
be composed of individuals who either (1) have been board members continuously since the beginning of that period, or (2) have been elected or
nominated for election during that period
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by at least a majority of the
board members described in the preceding clause (1) who were still in office at the time that election or nomination was approved by the
board.
Amendments to the 2008
Plan
. The board of directors or Compensation Committee may amend or modify the 2008 Plan at any time subject to applicable law, the
rules of any exchange on which the Renaissance common stock is listed and the rights of holders of outstanding awards on the date of amendment or
modification. No amendment or modification of the 2008 Plan or any award may increase the number of shares subject to the 2008 Plan or result in the
repricing of any Stock Option or SAR, in either case, without stockholder approval.
Summary of Income Tax
Consequences
. The following is a brief and general discussion of the United States federal income tax consequences to recipients of
awards granted under the 2008 Plan. This summary is not comprehensive and is based upon laws and regulations in effect on January 1, 2008. Such laws
and regulations are subject to change. This summary is intended for the information of stockholders considering how to vote and not as tax guidance to
participants in the 2008 Plan. Participants in the 2008 Plan should consult their own tax advisors as to the tax consequences of
participation.
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Nonstatutory Stock Options
. Generally, there
are no federal income tax consequences to the participants upon grant of nonstatutory stock options. Upon the exercise of such a nonstatutory stock
option, the participant will recognize ordinary income in an amount equal to the amount by which the fair market value of the Renaissance common stock
acquired upon the exercise of such Stock Option exceeds the exercise price, if any. The participants tax basis in such shares of Renaissance
common stock will equal their fair market value on the date of exercise. A sale of Renaissance common stock so acquired will give rise to short-term or
long-term capital gain or loss, depending on whether the Renaissance common stock was held for more than 12 months, equal to the difference between the
amount received by the participant for such shares of Renaissance common stock and his or her tax basis in such shares of Renaissance common stock.
Under the 2008 Plan, nonstatutory stock options may, if permitted by the Compensation Committee, be exercised in whole or in part with shares of
Renaissance common stock held by the participant. Such an exercise will be treated as a tax-free exchange of the shares of Renaissance common stock
surrendered for an equivalent number of shares of Renaissance common stock received, and the equivalent number of shares will have a tax basis equal to
the tax basis of the surrendered shares. Shares of Renaissance common stock received in excess of the number of shares surrendered will have a tax
basis of zero.
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Incentive Stock Options
. Except as noted at
the end of this paragraph, there are no federal income tax consequences to the participant upon grant or exercise of an incentive stock option. If the
participant holds shares of Renaissance common stock purchased pursuant to the exercise of an incentive stock option for at least two years after the
date the Stock Option was granted and at least one year after the exercise of the Stock Option, the subsequent sale of Renaissance common stock will
give rise to a long-term capital gain or loss to the participant equal to the difference between the amount received for such shares of Renaissance
common stock and the participants tax basis in such shares of Renaissance common stock and no deduction will be available to Renaissance (or any
of its affiliates). If the participant sells the shares of Renaissance common stock within two years after the date an incentive stock option is
granted or within one year after the exercise of such incentive stock option (a disqualifying disposition), the participant will recognize
ordinary income in an amount equal to the lesser of (i) the difference between the fair market value at the exercise date and the exercise price or
(ii) the excess of the amount realized upon disposition of the shares of Renaissance common stock over the exercise price. Any additional gain or loss
recognized by a participant in such circumstances will be short-term or long-term capital gain or loss, depending on whether the Renaissance common
stock was held for more than 12 months. Some participants may have to pay alternative minimum tax in connection with the exercise of an incentive stock
option, however. Under the 2008 Plan, incentive stock options may, if permitted by the Compensation Committee, be exercised in whole or in part with
shares of Renaissance common stock held by the Participant. Such an exercise will be treated as a tax-free exchange of the shares of Renaissance common
stock surrendered (assuming the surrender of the previously-owned shares does not constitute
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a disqualifying disposition of those shares) for an equivalent
number of shares of Renaissance common stock received, and the equivalent number of shares will have a tax basis equal to the tax basis of the
surrendered shares. Shares of Renaissance common stock received in excess of the number of shares surrendered will have a tax basis of
zero.
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Restricted Stock
. A participant will generally
not recognize ordinary income with respect to an award of restricted stock until his or her rights in that award become substantially vested. When a
participants rights with respect to an award of restricted stock become substantially vested, he or she will recognize ordinary income in an
amount equal to the amount by which the then fair market value of the Renaissance common stock acquired exceeds the price he or she has paid for it, if
any. Upon the sale of such shares of restricted stock, the participant will recognize short-term or long-term capital gain or loss, depending on
whether the shares were held for more than 12 months, in an amount equal to the difference between the amount received for such shares and the
participants tax basis in such shares. Recipients of restricted stock may, however, within 30 days after receiving an award of restricted stock,
choose to have any applicable risk of forfeiture disregarded for tax purposes by making an 83(b) election. If the participant makes an
83(b) election, he or she will have to report compensation income equal to the difference between the value of the shares and the price paid for the
shares, if any, at the time of the transfer of the restricted stock. Any gain or loss recognized upon the sale of shares of restricted stock for which
an 83(b) election was made will be short-term or long-term capital gain or loss, depending on whether the shares were held for more than 12 months. In
general, during the period in which restricted stock is not substantially vested, dividends and distributions paid with respect to restricted stock
will be treated as compensation income (not dividend income) received by the participant. Dividend payments received with respect to shares of
restricted stock for which an 83(b) election has been made generally will be treated as dividend income.
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Stock Appreciation Rights
. A participant will
generally recognize no taxable income upon the grant of a Stock Appreciation Right. A participant will generally recognize ordinary income on the
receipt of cash or other property pursuant to the exercise of an award of stock appreciation rights equal to the amount of such cash or the fair market
value of such Renaissance common stock or other property received.
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Restricted Stock Units and Performance
Units
. A participant will generally recognize no taxable income upon the grant of restricted stock units or performance units. A
participant will generally recognize ordinary income on the receipt of any shares of Renaissance common stock, cash or other property in satisfaction
of an award of restricted stock units or performance units equal to the amount of such cash or the fair market value of such Renaissance common stock
or other property received.
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Potential Deferred Compensation
. The foregoing
summary of federal income tax consequences assumes that no award under the 2008 Plan will be considered deferred compensation as that term
is defined for purposes of Section 409A of the IRC, or that if any award were considered to any extent to constitute deferred compensation, its terms
would comply with the requirements of that legislation (in general, by limiting any flexibility in the time of payment). If an award includes deferred
compensation, and its terms do not comply with the requirements of Section 409A of the IRC, then any deferred compensation component of an award under
the 2008 Plan will be taxable when it is earned and vested (even if not then payable) and the recipient will be subject to a 20% additional tax, and
possibly also interest penalties.
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Section 162(m) Limitations on Renaissances Tax
Deduction
. In general, whenever a recipient is required to recognize ordinary income in connection with an award, Renaissance (or its
affiliate employing the recipient) will be entitled to a corresponding tax deduction. However, Renaissance (or its affiliate employing the recipient)
will not be entitled to deductions in connection with awards under the 2008 Plan to certain senior executive officers to the extent that the amount of
deductible income in a year to any such officer, together with his or her other compensation from Renaissance (or such affiliate) exceeds the $1
million dollar limitation of Section 162(m) of the IRC. Compensation which qualifies as performance-based is not subject to this
limitation, however.
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Withholding
. The Compensation Committee is
entitled to deduct from the payment of any award all applicable taxes required by federal, state or local law to be withheld, or to take such other
action as the Compensation Committee may deem advisable to enable Renaissance or any affiliate and participants to satisfy tax obligations relating to
any award.
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Awards to Particular Officers,
Etc.
Pursuant to the Merger Agreement, Renaissance has agreed to make grants of restricted stock and Stock Options under the 2008 Plan
to certain employees of First Communications effective upon consummation of the Merger and stockholder approval of the 2008 Plan. These grants are
reflected in the following table:
2008 Equity Incentive Plan
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Name and Position
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Dollar Value ($)
(1)
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Number of Restricted Shares or Options
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Raymond Hexamer
Chief Executive Officer
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$
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243,000
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40,500 restricted shares
80,000 options to purchase common stock
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Joseph R. Morris
Chief Financial Officer and Chief Operating Officer
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$
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243,000
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40,500 restricted shares
80,000 options to purchase common stock
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Richard J. Buyens
President
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413,850 options to purchase common stock
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David Johnson, II
Senior Vice President, Sales
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$
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183,000
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30,500 restricted shares
60,000 options to purchase common stock
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Executive
Group
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$
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669,000
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111,500 restricted shares
633,850 options to purchase common stock
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Non-Executive
Director Group
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Non-Executive
Officer Employee Group
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$
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975,000
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162,500 restricted shares
520,000 options to purchase common stock
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(1)
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With respect to grants of restricted shares, assumes a per share
value of $6.00 at the time of grant. Pursuant to SEC guidance, no dollar value is provided for Stock Options.
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Recommendation and Vote Required
Approval of the 2008 Plan will
require the affirmative vote of the holders of a majority of the outstanding shares of Renaissance common stock represented in person or by proxy at
the meeting and entitled to vote thereon.
RENAISSANCES BOARD OF
DIRECTORS UNANIMOUSLY RECOMMENDS THAT RENAISSANCES STOCKHOLDERS VOTE FOR THE APPROVAL OF THE INCENTIVE COMPENSATION PLAN
PROPOSAL.
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THE DIRECTOR ELECTION PROPOSAL
Election of Directors
At the special meeting,
Renaissance stockholders will be asked to elect nine directors to Renaissances board of directors, effective immediately following and contingent
upon closing of the Merger, of whom three will serve until the annual meeting to be held in 2009, three will serve until the annual meeting to be held
in 2010 and three will serve until the annual meeting to be held in 2011, and, in each case, until their successors are elected and
qualified.
Following consummation of the
Merger, if the nominees are elected, the directors of Renaissance will be classified as follows:
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Barry W. Florescue, Theodore V. Boyd and Joseph R. Morris in the
class to stand for reelection in 2009;
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Raymond Hexamer, Marshall B. Belden Jr. and Mark R. Stone in the
class to stand for reelection in 2010; and
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Richard A. Bloom, Mark T. Clark and Scott M. Honour in the class
to stand for reelection in 2011.
|
The election of directors
requires the vote of a plurality of the shares of common stock present in person or represented by proxy and entitled to vote at the special meeting.
Plurality means that the individuals who receive the largest number of votes cast FOR are elected as directors. Consequently,
any shares not voted FOR a particular nominee (whether as a result of abstentions or a direction to withhold authority) will not be counted
in the nominees favor.
Unless authority is withheld, the
proxies solicited by the board of directors will be voted FOR the election of these nominees. In case any of the nominees becomes
unavailable for election to the board of directors, an event that is not anticipated, the persons named as proxies, or their substitutes, will have
full discretion and authority to vote or refrain from voting for any other candidate in accordance with their judgment.
If either the merger proposal or
the charter amendment proposal is not approved, or holders of 20% or more of the Public Shares elect to convert their Public Shares into cash, the
director election proposal will not be submitted to the stockholders for a vote and Renaissances current directors will continue in office until
Renaissance is liquidated.
Following the effective time of
the First Communications acquisition and assuming the election of the individuals set forth above, the board of directors and executive officers of
Renaissance will be as follows:
Name
|
|
|
|
Age
|
|
Position
|
Raymond Hexamer
|
|
|
|
|
47
|
|
|
Chief
Executive Officer and Director
|
Joseph R. Morris
|
|
|
|
|
38
|
|
|
Chief
Operating and Financial Officer and Director
|
Richard J. Buyens
|
|
|
|
|
52
|
|
|
President
|
Theodore V. Boyd
|
|
|
|
|
66
|
|
|
Chairman
of the Board
|
David Johnson, II
|
|
|
|
|
47
|
|
|
Senior
Vice President Sales and Marketing
|
Marshall B.
Belden Jr.
|
|
|
|
|
60
|
|
|
Director
|
Mark T. Clark
|
|
|
|
|
58
|
|
|
Director
|
Scott M. Honour
|
|
|
|
|
42
|
|
|
Director
|
Mark R. Stone
|
|
|
|
|
44
|
|
|
Director
|
Barry W.
Florescue
|
|
|
|
|
64
|
|
|
Director
|
Richard A. Bloom
|
|
|
|
|
41
|
|
|
Director
|
Raymond Hexamer
has served
as Chief Executive Officer of First Communications since he joined in January 2005 and has been a director since July 2007. He was previously President
and General Manager of WHBC Radio from 1994 to 2004 and was involved in all aspects of the radio business from on-air and sales, to finance and
management. From 2003 to 2004, Mr. Hexamer was part of the investment group and CEO of SkyLAN, a wireless
117
Internet provider, whose
assets were acquired by First Communications in 2004. Mr. Hexamer received a Bachelor of Arts in Business Administration from the University of
Akron.
Joseph R. Morris
has
served as Chief Operating Officer of First Communications since 1998, was recently named Chief Financial Officer, and has served as a director since
July 2007. He has held leadership positions in every department of First Communications since he joined in 1998 and has also been the lead participant
for First Communications in the identification, negotiation and integration of its nine acquisitions since 2004. Mr. Morris is responsible for all
legal affairs and setting regulatory strategy and direction for First Communications. Prior to joining the Company, Mr. Morris was an attorney with
Roetzel & Andress, L.P.A., with a practice focused on public, corporate and international law. Mr. Morris studied Economics at Queens University of
Belfast and received a Bachelor of Arts from Franciscan University and a Juris Doctorate from the University of Akron.
Richard J. Buyens
has
served as President of First Communications since he joined in May 2008. Prior to joining First Communications, Mr. Buyens served as Executive Vice
President of Sales for McLeodUSA from October 2003 until its sale to PAETEC Communications in February 2008. From 2001 to 2003, Mr. Buyens served as
President of Global Services at Premiere Global Services, a worldwide provider of multimedia conferencing, collaboration, and advanced messaging
services. From 1999 through 2001, he served as Senior Vice President of Sales and President of Shared Technology Fairchild at Intermedia
Communications, an integrated data and voice communications services provider. From 1980 to 1998, he held various sales, marketing and finance
positions at AT&T, including Sales Vice President for AT&Ts Mid Market Segment and Chief Financial Officer of AT&Ts Commercial
Market Division. Mr. Buyens received his Bachelor of Science in Business Marketing and an MBA in Finance from Northern Illinois
University.
Theodore V. Boyd
has
served as the Chairman of the Board of First Communications since July 2007. Mr. Boyd was an investor in McKinley Communications, LLC, the majority
investor in FC LLC for the two years prior to the sale of its ownership interest in FC LLC to First Communications, Inc. in 2007. Since 2003, Mr. Boyd
has served as General Partner of Rockledge T. Ltd., a private investment holding company and current investor in First Communications, and since 1973
as a General Partner in Willmoll Development Company, a developer and owner of commercial, industrial, multi-tenant residential and single family
residential real estate. Mr. Boyd served as a director of Belden and Blake Corporation, an oil and gas exploration and production company, formerly
quoted on Nasdaq, for 14 years prior to its sale to Texas Pacific Group Partners and in 1992, and Chairman of SKYLan, Ltd., a wireless Internet service
provider, for 14 years prior to its acquisition by First Communications in 2004, and as Chairman of Beaverkettle Company Inc., a radio broadcasting
company, for 30 years until its sale to Next Media, Inc. in 2000. Mr. Boyd is a Director of the Professional Football Hall of Fame and the Northeastern
Ohio Council on Higher Education. He received a Bachelor of Arts in History from Bethany College and a Juris Doctorate from Cleveland State
University.
David Johnson, II
has
served as Senior Vice President of Sales and Marketing since he joined First Communications in 1998, and served in such capacity for eight years prior
with BN1 Telecommunications. Prior to his employment with BN1 Telecommunications, Mr. Johnson worked at The Timken Bearing and Steel Company for five
years. Mr. Johnson holds a B.A. in Finance and a B.A. in Management, magna cum laude from Walsh University.
Marshall B. Belden Jr.
has
served as a Director of First Communications since May 2008. He has been employed by McBel Trust, overseeing family investments including McKinley
Communications LLC, since June 1998. He was associated with MB Operating Co., Inc, a family owned oil & gas exploration and development company
beginning in 1970. He was elected President of MB Operating Co. Inc. in 1978 and elected Chairman of the Board in 1995. He also served as Chairman of
the Board of Marbel Energy Corporation from its inception in 1995 until June 1998. Mr. Belden is a 1969 graduate of the Colorado School of Mines and is
a petroleum engineer.
Mark T. Clark
has served
as a Director of First Communications since 1998. Mr. Clark has also served as Executive Vice President of Strategic Planning & Operations from
March 2008, and is member of the Executive Council of, FirstEnergy Corp., the fifth largest electric utility in the United States. Mr. Clark is
responsible for FirstEnergy Corp.s Business Development and Performance Group, Rates and Regulatory Affairs, Information
118
Technology, Supply Chains,
Security, Marketing and Sales and Strategic Planning. Mr. Clark previously served as Chairman of First Communications from September 2003 to March
2005. Mr. Clark received a Bachelor of Science from The Ohio State University and an MBA from The University of Akron. Mr. Clark also completed the
Program for Management Development at the Harvard Business School.
Scott M. Honour
has served
as a Director of First Communications since July 2007. Mr. Honour has been responsible for originating and structuring transactions and pursuing
strategic initiatives at The Gores Group, LLC (Gores) since he joined in 2002. From 2001 to 2002, Mr. Honour served as a Managing Director
at UBS AG Warburg, where he was responsible for relationships with technology-focused financial sponsors, including Gores, and created the firms
Transaction Development Group, which brought transaction ideas to financial sponsors, including Gores. Prior to joining UBS Warburg, Mr. Honour worked
for 10 years as an investment banker at Donaldson, Lufkin & Jenrette, Inc. where he executed a variety of mergers and acquisitions, high yield
financings, equity offerings and restructuring assignments. Mr. Honour also served as a Vice President in DLJs Merchant Banking Group from 1995
to 1997. Prior to joining DLJ, Mr. Honour served for 1 year as an analyst at Trammell Crow Company. Mr. Honour received a Bachelor of Science in
Business Administration and Bachelor of Arts in Economics, cum laude, from Pepperdine University, and an MBA from the Wharton School of the University
of Pennsylvania with an emphasis in finance and marketing.
Mark R. Stone
has served
as a Director of First Communications since July 2007. Since 2005, Mr. Stone has also served as Senior Managing Director, President Operations at
Gores, where he is responsible for the worldwide operations group, oversight of all Gores portfolio companies and operational due diligence efforts.
Mr. Stone joined Gores from Sentient Jet, Inc., a provider of private jet memberships, where he served as CEO from 2002 to 2004. Prior to Sentient Jet,
Mr. Stone served as CEO of Narus, Inc., a global telecommunication software company from 1998 to 2002. He also served as CEO of Sentex Systems, Ltd.,
an international security and access control manufacturing company, from 1997 to 1998. Mr. Stone was Corporate General Manager of Citysearch, Inc. (now
an operating business of IAC/InterActiveCorp, Nasdaq: IACI), a multi-billion dollar news media organization, from 1996 to 1997, prior to which Mr.
Stone spent five years with the Boston Consulting Group, a global strategy and operations consulting firm, as a member of its high technology and
industrial goods practices group. Also, since June 2008, Mr. Stone has served as a director of Westwood One, Inc. (NYSE). Mr. Stone received an MBA in
Finance and Multinational Management from The Wharton School and a Bachelors of Science in Finance with Computer Science and Mathematics concentrations
from the University of Maine.
For the biographies for Barry W.
Florescue and Richard A. Bloom, current directors and/or executive officers of Renaissance, see
Other Information Related to Renaissance
Current Directors and Executive Officers.
Independence of Directors
Assuming Renaissances
securities are approved for listing on Nasdaq following the consummation of the Merger, it will adhere to the rules of Nasdaq in determining whether a
director is independent. The Nasdaq listing standards define an independent director as a person, other than an executive officer of a
company or any other individual having a relationship which, in the opinion of the issuers board of directors, would interfere with the exercise
of independent judgment in carrying out the responsibilities of a director. Under the Nasdaq listing standards, the following persons shall not be
considered independent: (i) a director who is, or at any time during the past three years was, employed by the company; (ii) a director who accepted or
who has a family member who accepted any compensation from the company in excess of $120,000 during any period of twelve consecutive months within the
three years preceding the determination of independence (other than compensation for board or board committee service, compensation paid to a family
member who is an employee (other than an executive officer) of the company); or benefits under a tax-qualified retirement plan, or non-discretionary
compensation; a director who is a Family Member of an individual who is, or at any time during the past three years was, employed by the company as an
executive officer; (iii) a director who is, or has a family member who is, a partner in, or a controlling shareholder or an executive officer of, any
organization to which the company made, or from which the company received, payments for property or services in the current or any of the past three
fiscal years that exceed 5% of the recipients consolidated gross revenues for that year, or $200,000, whichever is more (other
than
119
payments arising solely from
investments in the companys securities; or payments under non-discretionary charitable contribution matching programs); (iv) a director of the
issuer who is, or has a family member who is, employed as an executive officer of another entity where at any time during the past three years any of
the executive officers of the issuer serve on the compensation committee of such other entity; or (v) a director who is, or has a family member who is,
a current partner of the companys outside auditor, or was a partner or employee of the companys outside auditor who worked on the
companys audit at any time during any of the past three years.
Consistent with these
considerations, the board of directors of Renaissance has affirmatively determined that, upon election to the board of directors of Renaissance upon
the consummation of the Merger, Messrs. Belden, Boyd, Honour, Stone, Florescue and Bloom will be the post-merger combined companys independent
directors.
Audit Committee
Upon consummation of the Merger,
the audit committee will consist of Mr. Boyd, as chairman, and Messrs. Bloom and Honour, each of whom is an independent director and financially
literate under Nasdaq listing standards. The audit committees duties, which are specified in Renaissances audit committee charter,
include, but are not limited to:
|
|
reviewing and discussing with management and the independent
auditor the annual audited financial statements, and recommending to the board whether the audited financial statements should be included in the Form
10-K;
|
|
|
discussing with management and the independent auditor
significant financial reporting issues and judgments made in connection with the preparation of financial statements;
|
|
|
discussing with management major risk assessment and risk
management policies;
|
|
|
monitoring the independence of the independent
auditor;
|
|
|
verifying the rotation of the lead (or coordinating) audit
partner having primary responsibility for the audit and the audit partner responsible for reviewing the audit as required by law;
|
|
|
reviewing and approving all related-party
transactions;
|
|
|
inquiring and discussing with management Renaissances
compliance with applicable laws and regulations;
|
|
|
pre-approving all audit services and permitted non-audit
services to be performed by the independent auditor, including the fees and terms of the services to be performed;
|
|
|
appointing or replacing the independent auditor;
|
|
|
determining the compensation and oversight of the work of the
independent auditor (including resolution of disagreements between management and the independent auditor regarding financial reporting) for the
purpose of preparing or issuing an audit report or related work; and
|
|
|
establishing procedures for the receipt, retention and treatment
of complaints regarding accounting, internal accounting controls or reports which raise material issues regarding Renaissances financial
statements or accounting policies.
|
Financial Experts on Audit
Committee
The audit committee will at all
times be composed exclusively of independent directors who are financially literate as defined under Nasdaqs listing
standards. Nasdaqs listing standards define financially literate as being able to read and understand fundamental financial
statements, including a companys balance sheet, income statement and cash flow statement. In addition, the post-merger combined company will be
required to certify to Nasdaq that the audit committee has, and will continue to have, at least one member who has past employment experience in
finance or accounting, requisite professional certification in accounting, or other comparable
120
experience or background that
results in the individuals financial sophistication. The board of directors has determined that Mr. Bloom satisfies Nasdaqs definition of
financial sophistication and also qualifies as an audit committee financial expert, as defined under rules and regulations of the
SEC.
Nominating Committee
Upon consummation of the Merger,
the nominating committee will consist of Mr. Florescue, as chairman, and Mr. Belden, each of whom is an independent director under Nasdaq listing
standards. The nominating committee is responsible for overseeing the selection of persons to be nominated to serve on the board of directors. The
nominating committee considers persons identified by board members, management, stockholders, investment bankers and others.
Guidelines for Selecting Director
Nominees
The guidelines for selecting
nominees, which are specified in the nominating committee charter, generally provide that persons to be nominated:
|
|
should have demonstrated notable or significant achievements in
business, education or public service;
|
|
|
should possess the requisite intelligence, education and
experience to make a significant contribution to the board of directors and bring a range of skills, diverse perspectives and backgrounds to board
deliberations; and
|
|
|
should have the highest ethical standards, a strong sense of
professionalism and intense dedication to serving the interests of the stockholders.
|
The nominating committee will
consider a number of qualifications relating to management and leadership experience, background and integrity and professionalism in evaluating a
persons candidacy for membership on the board of directors. The nominating committee may require certain skills or attributes, such as financial
or accounting experience, to meet specific board needs that arise from time to time. The nominating committee does not distinguish among nominees
recommended by stockholders and other persons.
Compensation Committee
Upon consummation of the Merger,
Renaissance will establish a compensation committee, which will consist of Mr. Stone, as chairman, and Messrs. Bloom and Belden, all of whom are
independent directors under Nasdaq listing requirements. The purpose of the compensation committee will be to discharge the boards
responsibilities in respect of compensation of the post-merger combined companys executive officers, including approving individual executive
officer compensation, oversight of the post-merger combined companys overall compensation and benefit philosophies, production of an annual
report on executive compensation for inclusion in the post-merger combined companys proxy statement and administration of the post-merger
combined companys incentive compensation plans, including authority to make and modify awards under such plans.
The compensation committees
duties, which will be specified in the compensation committee charter, will include, but will not be limited to:
|
|
reviewing, from time to time, the post-merger combined
companys philosophy regarding executive compensation;
|
|
|
recommending to the board of directors for approval annual
performance criteria, including long-term and short-term goals, for the chief executive officer and reviewing the chief executive officers
performance against such established criteria;
|
|
|
determining and approving all compensation arrangements of the
executive officers of the post-merger combined company (other than the chief executive officer);
|
121
|
|
reviewing and recommending to the board of directors for
approval all compensation arrangements of the chief executive officer;
|
|
|
determining which employees are executive officers
whose compensation is subject to the review and approval of the committee, and reviewing, in its discretion, the compensation of employees who are not
executive officers;
|
|
|
making recommendations to the board of directors concerning
adopting and amending incentive compensation plans applicable to executive officers generally and equity compensation plans, benefit plans and
retirement plans for all employees;
|
|
|
fixing and determining awards to officers and employees of
stock, stock options, stock appreciation rights and other equity interests pursuant to any equity compensation plans from time to time in effect and
exercising such other power and authority as may be permitted or required under such plans;
|
|
|
reviewing, at least annually, the competitiveness of the
post-merger combined companys executive compensation programs, including a review of the compensation practices in the markets where the
post-merger combined company competes for executive talent, to ensure (i) the attraction and retention of corporate officers, (ii) the motivation of
corporate officers to achieve the post-merger combined companys business objectives and (iii) the alignment of the interests of key leadership
with the long-term interests of the post-merger combined companys stockholders;
|
|
|
establishing and periodically reviewing policies concerning
perquisite benefits;
|
|
|
managing and reviewing executive officer and director
indemnification and insurance matters; and
|
|
|
reviewing and discussing with the post-merger combined
companys chief executive officer and chief financial officer the Compensation Discussion and Analysis (CD&A) required to be
included in the post-merger combined companys annual report or proxy statement filed with the SEC and recommending to the board of directors that
the CD&A be included in the annual report or proxy statement.
|
Compensation Committee Interlocks
and Insider Participation
Renaissance has no current
compensation committee. None the persons designated as director nominees currently serve on the compensation committee of any other company on which
any other director designee of Renaissance or any officer or director of Renaissance or First Communications is currently a member.
Code of Ethics
The Renaissance board of
directors adopted a code of ethics that applies to Renaissances directors, officers and employees as well as those of its subsidiaries. A copy of
the code of ethics was filed with Renaissances Registration Statement on Form S-1 (Reg. No. 333-134444) that became effective on January 29,
2007.
RENAISSANCES BOARD OF
DIRECTORS UNANIMOUSLY RECOMMENDS THAT RENAISSANCES STOCKHOLDERS VOTE FOR THE NOMINEES.
122
THE ADJOURNMENT PROPOSAL
The adjournment proposal allows
Renaissances board of directors to submit a proposal to adjourn the special meeting to a later date or dates, if necessary, to permit further
solicitation of proxies in the event, based on the tabulated votes, there are not sufficient votes at the time of the special meeting to approve the
consummation of the Merger. In no event will Renaissance solicit proxies to adjourn the special meeting or consummate the Merger beyond the date by
which it may properly do so under its amended and restated certificate of incorporation and Delaware law. The purpose of the adjournment proposal is to
provide more time for Renaissance, the Renaissance Inside Stockholders, First Communications and the First Communications stockholders to make
purchases of Public Shares or other arrangements that would increase the likelihood of obtaining a favorable vote on the merger proposal and the
charter amendment proposal and to meet the requirement that the holders of fewer than 20% of the Public Shares vote against the merger proposal and
demand that their Public Shares be converted into cash. See the section entitled
Merger Proposal Interests of Renaissances
Directors and Officers in the Merger.
In addition to an adjournment of
the special meeting upon approval of an adjournment proposal, the board of directors of Renaissance is empowered under Delaware law to postpone the
meeting at any time prior to the meeting being called to order. In such event, Renaissance will issue a press release and take such other steps as it
believes are necessary and practical in the circumstances to inform its stockholders of the postponement.
Consequences if the Adjournment Proposal is not
Approved
If an adjournment proposal is
presented to the meeting and is not approved by the stockholders, Renaissances board of directors may not be able to adjourn the special meeting
to a later date in the event, based on the tabulated votes, there are not sufficient votes at the time of the special meeting to approve the
consummation of the Merger (because either the merger proposal or the charter amendment proposal is not approved or because the holders of 20% or more
of the Public Shares vote against the merger proposal and demand conversion of their Public Shares into cash). In such event, the Merger would not be
completed and Renaissance will be required to liquidate.
Required Vote
Adoption of the adjournment
proposal requires the affirmative vote of a majority of the issued and outstanding shares of Renaissance common stock represented in person or by proxy
at the meeting and entitled to vote thereon. Adoption of the adjournment proposal is not conditioned upon the adoption of any of the other
proposals.
RENAISSANCES BOARD OF
DIRECTORS UNANIMOUSLY RECOMMENDS THAT ITS STOCKHOLDERS VOTE FOR THE APPROVAL OF THE ADJOURNMENT PROPOSAL.
123
OTHER INFORMATION RELATED TO
RENAISSANCE
Renaissance is a blank check
company incorporated on April 17, 2006 to serve as a vehicle for the acquisition of an operating business. Prior to executing the Merger Agreement with
First Communications, Renaissances efforts were limited to organizational activities, completion of its IPO and the evaluation of possible
business combinations.
Offering Proceeds Held in Trust
On February 1, 2007, Renaissance
completed its IPO of 15,600,000 Units, and on February 16, 2007, it completed the sale of an additional 2,340,000 Units that were subject to the
underwriters over-allotment option. Each Unit consists of one share of common stock and two warrants entitling the holder to purchase one share
of common stock at a price of $5.00. Beginning February 15, 2007, Renaissance common stock and warrants began trading separately on the American Stock
Exchange. The public offering price of each Unit was $6.00, and Renaissance generated gross proceeds of $107,640,000 in the IPO (including proceeds
from the exercise of the over-allotment option). Of the gross proceeds: (i) it deposited $104,047,840 into the Trust Account at JPMorgan Chase NY Bank,
maintained by Continental Stock Transfer & Trust Company as trustee, which included $3,051,240 of deferred underwriting fees; (ii) the underwriters
received $4,811,160 as underwriting fees (excluding the deferred underwriting fees); and (iii) Renaissance retained $781,000 for offering expenses. In
addition, Renaissance deposited into the Trust Account $2,100,000 that it received from the issuance and sale of 4,666,667 warrants to directors
Charles Miersch and Morton Farber and RAC Partners on February 1, 2007. The Trust Account will not be released until the earlier of the consummation of
a business combination or the liquidation of Renaissance. The Trust Account contained approximately $106,407,992 as of September 30, 2008. If the
Merger with First Communications is consummated, the Trust Account will be released to Renaissance, less the amounts paid to holders of Public Shares
who vote against the Merger and elect to convert their shares of common stock into their pro-rata share of the Trust Account.
The holders of Public Shares will
be entitled to receive funds from the Trust Account only in the event of Renaissances liquidation or if such stockholders seek to convert their
respective shares into cash and the Merger is actually completed. In no other circumstances will a stockholder have any right or interest of any kind
to or in the Trust Account.
Fair Market Value of Target Business
Under Renaissances amended
and restated certificate of incorporation and the underwriting agreement for Renaissances IPO, the initial target business that Renaissance
acquires must have a fair market value equal to at least 80% of Renaissances net assets at the time of such acquisition. Renaissances board
of directors determined that this test was met in connection with its acquisition of First Communications. Further, Renaissance has received an opinion
from Houlihan Smith that this test has been met.
Stockholder Approval of Business
Combination
Renaissance will proceed with the
Merger only if the holders of a majority of the Public Shares voting on the merger proposal at the special meeting vote in favor of the merger
proposal. The Renaissance Inside Stockholders have agreed to vote their common stock issued prior to the IPO on the merger proposal in accordance with
the vote of holders of a majority of the Public Shares present in person or represented by proxy and entitled to vote at the special meeting. If the
holders of 20% or more of the Public Shares vote against the merger proposal and properly demand that Renaissance convert their Public Shares into
their pro rata share of the Trust Account, then Renaissance will not consummate the Merger. In this case, Renaissance will be forced to
liquidate.
124
Liquidation If No Business Combination
Renaissances amended and
restated certificate of incorporation provides for the termination of Renaissances corporate existence and mandatory liquidation if Renaissance
does not consummate a business combination by January 29, 2009. If Renaissance has not completed a business combination by such date, its corporate
existence will cease except for the purposes of winding up its affairs and liquidating pursuant to Section 278 of the DGCL. This has the same effect as
if its board of directors and stockholders had formally voted to approve dissolution pursuant to Section 275 of the DGCL. Accordingly, limiting
Renaissances corporate existence to a specified date as permitted by Section 102(b)(5) of the DGCL removes the necessity to comply with the
formal procedures set forth in Section 275 (which would have required its board of directors and stockholders to formally vote to approve its
dissolution and liquidation and to have filed a certificate of dissolution with the Delaware Secretary of State).
Renaissance anticipates notifying
the trustee of the Trust Account within 10 business days to begin liquidating the Trust Account assets promptly after such date and anticipates it will
take no more than 10 business days to effectuate such distribution. The Renaissance Inside Stockholders have waived their rights to participate in any
liquidation distribution with respect to their Original Shares. Also, as there will be no funds remaining to pay the costs associated with the
implementation and completion of liquidation and distribution, Barry W. Florescue has agreed to advance Renaissance the funds necessary to pay such
costs and complete such liquidation (currently anticipated to be no more than approximately $15,000) and not to seek repayment for such
expenses.
In connection with its
liquidation, Renaissance will distribute to the holders of its Public Shares, in proportion to their respective amounts of Public Shares, an aggregate
sum equal to the amount in the Trust Account, inclusive of any interest thereon, plus remaining net assets (subject to its obligations under Delaware
law to provide for claims of creditors as described below). Renaissances stockholders who obtained their Renaissance stock prior to
Renaissances IPO have waived their rights to participate in any liquidation distribution with respect to shares of common stock owned by them
immediately prior to the IPO. As a consequence of the provisions of Renaissances amended and restated certificate of incorporation and such
waivers, a liquidating distribution will be made only with respect to the Public Shares and no liquidating distribution will be made with respect to
any other shares of Renaissance capital stock. There will be no distribution from the Trust Account with respect to Renaissance warrants, which will
expire worthless.
Renaissance expects to expend all
of the net proceeds of the IPO, other than the proceeds deposited in the Trust Account, in pursuit of its business combination transaction.
Accordingly, the per-share liquidation price for the Public Shares as of
, the
record date for Renaissances special meeting, is approximately $
, or
$
less than the per-unit offering price of $6.00 in Renaissances IPO. The proceeds
deposited in the Trust Account could, however, become subject to the claims of Renaissances creditors (which could be senior to the claims of the
holders of the Public Shares and could include vendors and service providers Renaissance has engaged to assist it in connection with its search for a
target business and that are owed money by it, as well as target businesses themselves) and there is no assurance that the actual per-share liquidation
price will not be less than $
, due to those claims. Barry W. Florescue has personally
agreed that if Renaissance liquidates prior to the consummation of a business combination, he will be personally liable to ensure that the proceeds in
the Trust Account are not reduced by the claims of target businesses or vendors or other entities that are owed money by Renaissance for services
rendered or contracted for or products sold to Renaissance. Renaissance cannot assure you that he would be able to satisfy those obligations. Pursuant
to the underwriting agreement between Renaissance and Ladenburg Thalmann, Renaissance agreed not to commence its due diligence investigation of any
operating business which it sought to acquire or obtain the services of any vendor without obtaining an agreement pursuant to which such party would
waive any claims against the Trust Account. As of the date of this proxy statement/prospectus, Renaissance has received waiver agreements from each of
its vendors other than its independent registered accounting firm. There is currently an outstanding balance to Renaissances independent
registered accounting firm of approximately $52,000 and Renaissance intends to pay such fees in full in accordance with its past practices.
Accordingly, Renaissance cannot assure you that the per-share distribution from the Trust Account, if it liquidates, will not be less than
$
, plus interest, due to claims of creditors.
125
The holders of Renaissances
Public Shares will be entitled to receive funds from the Trust Account only in the event of Renaissances liquidation or if they seek to convert
their respective shares into cash upon a business combination in connection with which the stockholder properly demanded conversion of his Public
Shares into cash and which is consummated. In no other circumstances will a stockholder have any right or interest of any kind to or in the Trust
Account.
Under the DGCL, stockholders may
be held liable for claims by third parties against a corporation to the extent of distributions received by them in a dissolution. If the corporation
complies with certain procedures set forth in Section 280 of the DGCL intended to ensure that it makes reasonable provision for all claims against it,
including a 60-day notice period during which any third-party claims can be brought against the corporation, a 90-day period during which the
corporation may reject any claims brought, and an additional 150-day waiting period before any liquidating distributions are made to stockholders, any
liability of stockholders with respect to a liquidating distribution is limited to the lesser of such stockholders pro rata share of the claim or
the amount distributed to the stockholder, and any liability of the stockholder would be barred after the third anniversary of the dissolution.
However, as stated above, it is Renaissances intention to make liquidating distributions to its stockholders as soon as reasonably possible after
January 29, 2009 and, therefore, Renaissance does not intend to comply with those procedures. As such, its stockholders could potentially be liable for
any claims to the extent of distributions received by them and any liability of its stockholders may extend well beyond the third anniversary of such
date. Because Renaissance will not be complying with Section 280, Section 281(b) of the DGCL requires it to adopt a plan that will provide for its
payment, based on facts known to Renaissance at such time, of (i) all existing claims, (ii) all pending claims and (iii) all claims that may be
potentially brought against it within the subsequent 10 years. Accordingly, Renaissance would be required to provide for any claims of creditors known
to it at that time or those that it believes could be potentially brought against it within the subsequent 10 years prior to distributing the funds in
the Trust Account to its public stockholders. However, because Renaissance is a blank check company, rather than an operating company, and its
operations will be limited to searching for prospective target businesses to acquire, the only likely claims to arise would be from potential target
businesses, many of whom have given it agreements waiving any right, title, interest or claim of any kind they may have in or to any monies held in the
Trust Account, or Renaissances vendors (such as accountants, lawyers, investment bankers, etc.). As a result, the claims that could be made
against it are significantly limited and the likelihood that any claim that would result in any liability extending to the trust is remote.
Nevertheless, such agreements may not be enforceable. Accordingly, Renaissance cannot assure you that third parties will not seek to recover from
Renaissances stockholders amounts owed to them by Renaissance.
Additionally, if Renaissance is
forced to file a bankruptcy case or an involuntary bankruptcy case is filed against it that is not dismissed, the proceeds held in the Trust Account
could be subject to applicable bankruptcy law, and may be included in its bankruptcy estate and subject to the claims of third parties with priority
over the claims of its stockholders. Also, in any such case, any distributions received by stockholders could be viewed under applicable
debtor/creditor and/or bankruptcy laws as either a preferential transfer or a fraudulent conveyance. As a result, a bankruptcy
court could seek to recover all amounts received by Renaissances stockholders. Furthermore, because Renaissance intends to distribute the
proceeds held in the Trust Account to its public stockholders promptly after January 29, 2009, this may be viewed or interpreted as giving preference
to its public stockholders over any potential creditors with respect to access to or distributions from its assets. In addition, Renaissances
board may be viewed as having breached their fiduciary duties to its creditors and/or may have acted in bad faith, and thereby exposing itself and
Renaissance to claims of punitive damages, by paying public stockholders from the Trust Account prior to addressing the claims of creditors and/or
complying with certain provisions of the DGCL with respect to its liquidation. Renaissance cannot assure you that claims will not be brought against it
for these reasons. To the extent any bankruptcy or other claims deplete the Trust Account, Renaissance cannot assure you it will be able to return to
its public stockholders at least $
per share.
126
Facilities
Renaissance maintains its
principal executive office at 50 East Sample Road, Suite 400, Pompano Beach, Florida. The cost for this space is included in an $8,000 per-month fee
BMD Management Company, Inc., an affiliate of Barry w. Florescue, charges Renaissance for general and administrative services, including office space
and certain office and secretarial services, pursuant to a letter agreement between them. Renaissance considers its current office space, combined with
the other office space otherwise available to its executive officers, adequate for its current operations.
Employees
As of September 30, 2008,
Renaissance had three executive officers and a treasurer. These individuals are not obligated to devote any specific number of hours to
Renaissances matters and intend to devote only as much time as they deem necessary to its affairs and receive no salary or similar compensation.
Renaissance does not believe the value of these services to be significant to its operating results. Renaissance does not intend to add any additional
full time employees prior to the consummation of a business combination. None of Renaissances employees is covered by a collective bargaining
agreement.
Periodic Reporting and Audited Financial
Statements
Renaissance has registered its
securities under the Exchange Act and has reporting obligations, including the requirement to file annual and quarterly reports with the SEC. In
accordance with the requirements of the Exchange Act, Renaissances annual reports contain financial statements audited and reported on by
Renaissances independent accountants. Renaissance has filed with the SEC its Annual Reports on Form 10-K covering from April 17, 2006 (inception)
to December 31, 2006 and the year ended December 31, 2007, and as of December 31, 2006 and December 31, 2007.
Legal Proceedings
There are no legal proceedings
pending against Renaissance.
Current Directors and Executive Officers
Renaissances current
directors and executive officers are as follows:
Name
|
|
|
|
Age
|
|
Position
|
Barry W.
Florescue
|
|
|
|
|
63
|
|
|
Chairman
of the Board and Chief Executive Officer
|
Richard A.
Bloom
|
|
|
|
|
41
|
|
|
President
and Chief Operating Officer
|
Logan D. Delany,
Jr.
|
|
|
|
|
59
|
|
|
Executive
Vice President and Director
|
Stanley
Kreitman
|
|
|
|
|
77
|
|
|
Director
|
Charles W.
Miersch
|
|
|
|
|
61
|
|
|
Director
|
Morton
Farber
|
|
|
|
|
80
|
|
|
Director
|
Barry W. Florescue
has
been chairman of the board and chief executive officer since Renaissances inception. Since 1988, Mr. Florescue has also been the chairman of the
board, chief executive officer and owner of Century Financial Group, Inc., a private holding company which owns Century Bank, a federally chartered
thrift institution and currently serves as a director of Century Bank. Since 1980, Mr. Florescue has also been the chairman of the board and president
of BMD Management Company, Inc., a privately-owned management services, finance and real estate investment company. From 1996 to December 2004, Mr.
Florescue was the major stockholder, chairman of the board, chief executive officer and chief operating officer of BFMA Holding Corporation, a private
holding company which until 2004 owned and operated Marietta Corporation. From 2003 to 2006, Mr. Florescue was chief executive officer of
Caswell-Massey Ltd. and served as its chairman of the board from 2003 to 2007. He is the chairman of the board of its parent company, Caswell Massey
Holding Corporation. Mr. Florescue is the managing member of RAC Partners, which holds a significant portion of the Original Shares and all of the
Insider Warrants.
127
In 1997, Mr. Florescue
entered into a stipulation and consent with the Office of Thrift Supervision (OTS) relating to certain activities that occurred in 1990 and
1991 pursuant to which he consented to cease and desist from certain activities with Century Bank. The order providing for these restrictions was
terminated by the OTS in 2004. Mr. Florescue had agreed that he would not participate in day-to-day management as an officer or employee of Century
Bank and that his service as a director of Century Bank would be subject to certain restrictions. He also consented to the payment of a civil money
penalty of $50,000. Mr. Florescue did not admit or deny the findings of the OTS in connection with such stipulation and consent. Mr. Florescue is on
the Executive Advisory Committee of the Simon Graduate School of Business Administration and is a Trustee of the University of Rochester. Mr. Florescue
received a B.S. from the University of Rochester and an M.B.A. from New York University Graduate School of Business.
Richard A. Bloom
has been
chief operating officer since consummation of Renaissances IPO and its president since early 2007. From 2003 to 2007, Mr. Bloom served as a
director and vice chairman of Caswell-Massey, Ltd. and from 2006 to 2007, served as its chief executive officer. From 2004 to 2006, Mr. Bloom served
as president and CEO of Marietta Holding Corporation. From 1999 to 2004, Mr. Bloom was president and chief operating officer of Marietta
Corporation . Mr. Bloom is also a member of RAC Partners. Mr. Bloom received a B.S.E. summa cum laude from the Wharton School of Business at the
University of Pennsylvania.
Logan D. Delany, Jr.
has
been executive vice president and a member of the board of directors since Renaissances inception. Since 1986, Mr. Delany has been the president
and chief executive officer of Delany Capital Management Corp., a private equity investments firm, and chairman of the board and chief executive
officer of DMI Technology, Inc., a private holding company owning interests in EADmotors, Inc., Arkansas General Industries, Inc. and ElectroCraft,
Inc. From 1996 to 2004, Mr. Delany was a director of BFMA Holding Corporation. He is also a member of RAC Partners. Mr. Delany is a member of the Board
of Trustees of the Phoenix House and is a member of the American Council on Germany and of the Harvard University Art Museums. Mr. Delany received an
A.B. from Harvard College and a J.D. from Harvard Law School and attended the Balliol College at Oxford University.
Stanley Kreitman
has been
a member of the board of directors since Renaissances inception. Since 2000, Mr. Kreitman has served as senior advisor to Signature Bank. Since
1996, Mr. Kreitman has served as the chairman of the board of Manhattan Associates, an investment banking company, and non-executive chairman of the
board of Geneva Financial Corp. Mr. Kreitman currently serves on the board of directors of Medallion Financial Corp., CCA Industries, Inc., KSW Corp.
and Capital Lease Funding, Inc. He serves as the chairman of the New York City Board of Corrections and Nassau County Crime Stoppers. Mr. Kreitman
received an A.B. from New York University and an M.B.A. from New York University Graduate School of Business.
Charles W. Miersch
has
been a member of the board of directors since Renaissances inception. Since February 2005, Mr. Miersch has served as a consultant to the Graduate
Management Admission Council, a national management organization responsible for the Graduate Management Admission Test (GMAT). From June 1984 to
December 2003, Mr. Miersch was affiliated with the University of Rochester and its Simon Graduate School of Business Administration, as senior
associate dean for corporate relations and institutional advancement. From 1996 to 2004, Mr. Miersch was a director of BFMA Holding Corporation and
served on the boards compensation committee. From June 2004 to October 2004, Mr. Miersch served as acting president of Caswell-Massey Ltd. Mr.
Miersch has also served as the chairman of the board of Century Bank since October 1991. Mr. Miersch received an A.B. from Lafayette College and an
M.B.A. from the University of Rochester.
Morton Farber
has been a
member of the board of directors since Renaissances inception. Mr. Farber has been a certified public accountant since 1957. Since 1995, Mr.
Farber has acted as a private financial consultant and tax advisor to substantial individual clients. From 1977 to 1994, Mr. Farber was managing
partner of Farber, Blicht, Eyerman & Herzog, an accounting firm he formed. Mr. Farber received a B.S. in accounting from New York University School
of Commerce.
The board of directors is
currently divided into three classes with only one class of directors being elected in each year and each class serving a three-year term. The term of
office of the first class of directors, consisting
128
of Morton Farber, will expire
at Renaissances first annual meeting of stockholders. The term of office of the second class of directors, consisting of Logan D. Delany, Jr. and
Charles W. Miersch, will expire at the second annual meeting. The term of the third class of directors, consisting of Barry W. Florescue and Stanley
Kreitman, will expire at the third annual meeting. In the event the Merger is completed and the director election proposal is approved, Barry W.
Florescue will be the only current Renaissance director who will continue to serve as a director of the post-merger combined company.
Meetings and Committees of the Board of Directors of
Renaissance
During the fiscal year ended
December 31, 2007, Renaissances board of directors held four meetings. Although Renaissance does not have any formal policy regarding director
attendance at annual stockholder meetings, Renaissance will attempt to schedule its meetings so that all of its directors can attend. Renaissance
expects its directors to attend all board and any committee meetings and to spend the time needed and meet as frequently as necessary to properly
discharge their responsibilities. Each of Renaissances current directors attended at least two-thirds of the aggregate number of meetings of the
board in fiscal 2007.
Independence of Directors
The American Stock Exchange
requires that a majority of Renaissances board must be composed of independent directors which is defined generally as a person other
than an officer or employee of the company or its subsidiaries or any other individual having a relationship, which, in the opinion of the
companys board of directors would interfere with the directors exercise of independent judgment in carrying out the responsibilities of a
director. Stanley Kreitman, Charles W. Miersch and Morton Farber are Renaissances independent directors, constituting a majority of its board.
The independent directors have regularly scheduled meetings at which only independent directors are present. Any affiliated transactions will be on
terms no less favorable to Renaissance than could be obtained from independent parties. Any affiliated transactions must be approved by a majority of
Renaissances independent and disinterested directors.
Audit Committee
Renaissances audit
committee consists of Stanley Kreitman, as chairman, Charles W. Miersch and Morton Farber, each of whom is an independent director and
financially literate under the American Stock Exchanges listing standards. The American Stock Exchange listing standards define
financially literate as being able to read and understand fundamental financial statements, including a companys balance sheet,
income statement and cash flow statement. In addition, the board of directors has determined that Stanley Kreitman satisfies the American Stock
Exchanges definition of financial sophistication and also qualifies as an audit committee financial expert, as defined under rules
and regulations of the SEC. Renaissances audit committee met five times in the year ended December 31, 2007.
For more information about the
audit committees duties as described in the audit committee charter, which is to be retained upon the consummation of the Merger, see the section
entitled
The Director Election Proposal Audit Committee.
Nominating Committee
Renaissance has established a
nominating committee of the board of directors, which consists of Charles W. Miersch, as chairman, and Stanley Kreitman, each of whom is an independent
director under the American Stock Exchanges listing standards.
For more information about the
nominating committees duties as described in the nominating committee charter, which is to be retained upon the consummation of the Merger, see
the section entitled
The Director Election Proposal Nominating Committee.
129
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND
RESULTS OF OPERATIONS OF RENAISSANCE
Overview
Renaissance was formed on April
17, 2006 for the purpose of effecting a merger, capital stock exchange, asset acquisition or other similar business combination with one or more
operating businesses.
On February 1, 2007, Renaissance
completed its IPO of 15,600,000 Units, and on February 16, 2007, it completed the sale of an additional 2,340,000 Units that were subject to the
underwriters over-allotment option. The public offering price of each Unit was $6.00 and Renaissance generated gross proceeds of $107,640,000 in
the IPO (including proceeds from the exercise of the over-allotment option). Of the gross proceeds: (i) Renaissance deposited $102,047,840 into the
Trust Account at JPMorgan Chase NY Bank, maintained by Continental Stock Transfer & Trust Company as trustee, which included $3,051,240 of deferred
underwriting fees; (ii) the underwriters received $4,811,160 as underwriting fees (excluding the deferred underwriting fees); and (iii) Renaissance
retained $781,000 for offering expenses. In addition, Renaissance deposited into the Trust Account $2,100,000 that Renaissance received from the
issuance and sale of 4,666,667 warrants to RAC Partners LLC, an entity controlled by Barry W. Florescue, Charles Miersch and Morton Farber on January
29, 2007.
Renaissance intends to utilize
cash derived from the proceeds of its initial public offering, its capital stock, debt or a combination of cash, capital stock and debt, in effecting a
business combination. To the extent that Renaissance capital stock is used in whole or in part as consideration to effect a business combination, the
remaining proceeds held in the Trust Account as well as any other net proceeds not expended will be used as working capital to finance the operations
of the target business. Such working capital funds could be used in a variety of ways including continuing or expanding the target business operations,
for strategic acquisitions and for marketing, research and development of existing or new products. Such funds could also be used to repay any
operating expenses or finders fees which Renaissance had incurred prior to the completion of its business combination if the funds available to
Renaissance outside of the Trust Account were insufficient to cover such expenses.
Recent Events
On September 13, 2008,
Renaissance signed the agreement and plan of merger pursuant to which it will acquire First Communications and on December 22,
2008, Renaissance executed Amendment No. 1 to the agreement and plan of merger . First Communications Holders will receive an aggregate of
1 4 ,460,000 shares of Renaissance common stock and the right to receive up to an aggregate of an additional (i) 13 ,950,000 shares of
Renaissance common stock if the EBITDA Condition is satisfied and (ii) 8,500,000 shares of Renaissance common stock if the Warrant Condition is
satisfied. Based on the closing market price of $5.80 per share on September 12, 2008, the last trading day prior to the announcement of the Merger
Agreement, the Initial Shares had an aggregate value of $ 83,868 ,000. Based on the closing market price of $5. 81 per share on December
1 5 , 2008, the Initial Shares had an aggregate value of $ 84,012 ,600. In addition, holders of First Communications Series A Preferred Stock
will receive an aggregate of $15.0 million in cash consideration, together with an accrued dividend of 12% per annum, pro rated and calculated from
September 28, 2008 in exchange for their shares of Series A Preferred Stock. Renaissance anticipates using approximately
$
of the net proceeds in its Trust Account to consummate the Merger, including
transaction expenses but not including payments with respect to the conversion of Public Shares. Transaction expenses will include professional fees
for legal and accounting services, deferred underwriting compensation of $3,051,240 an investment banking fee of $2,500,000 to Jefferies and $55,000
that will be paid to Houlihan Smith & Company, Inc. for the balance it is owed for the fairness opinion it issued in connection with the Merger.
The balance of the proceeds held in the Trust Account, which Renaissance anticipates will be approximately
$
, will be used to fund conversions into cash of its Public Shares and to finance the
operations of First Communications business.
130
Results of Operations, Financial Condition and
Liquidity
Through September 30, 2008,
Renaissances efforts have been limited to organizational activities, activities relating to its IPO, activities relating to identifying and
evaluating prospective acquisition candidates, and activities relating to general corporate matters. Renaissance has neither engaged in any operations
nor generated any revenues, other than interest income earned on the proceeds of its private placement and initial public offering.
Net income (loss) totaled
$277,904 for the three months ended September 30, 2007, ($727,950) for the three months ended September 30, 2008, $1,432,797 for the nine months ended
September 30, 2007, ($233,642) for the nine months ended September 30, 2008 and $2,066,218 and for the period from inception to September 30, 2008. The
decrease in net income for the three months ended September 30, 2008 versus the three months ended September 30, 2007 was primarily due to
Renaissances transferring of its Trust Account assets from money market funds invested in various short term credits to United States Treasuries,
which had a comparatively lower yield.
Renaissances operating
expenses totaled $466,888 for the three months ended September 30, 2007, $994,357 for the three months ended September 30, 2008, $761,264 for the nine
months ended September 30, 2007, $1,323,749 for the nine months ended September 30, 2008 and $2,173,305 for the period from inception to September 30,
2008.
Renaissance had net interest
income earned on marketable securities and held in the Trust Account of $1,268,684 for the three months ended September 30, 2007, $407,398 for the
three months ended September 30, 2008, $2,788,458 for the nine months ended September 30, 2007, $1,676,380 for the nine months ended September 30, 2008
and $5,790,312 for the period from inception to September 30, 2008. Interest income, after $1,875,000 which has been released to the Renaissance,
excludes earnings on funds held in the Trust Account associated with Renaissance common stock subject to possible conversion and, except for amounts
equal to any taxes payable by Renaissance relating to such interest earned, will not be released from the Trust Account until the earlier of the
completion of a business combination or the expiration of the time period during which Renaissance may complete a business combination. After deduction
on the amount related to the Renaissances income taxes payable on the interest, approximately $2,269,700 of interest income remains to be
allocable, with approximately $453,700 of such amount being allocable to common shares subject to conversion.
Net income or (loss) totaled
$(1,518) for the period from inception to December 31, 2006, $2,301,378 year ended December 31, 2007 and $2,299,860 for the period from inception to
December 31, 2007. The increase in net income (loss) in the year ended December 31, 2007 relates primarily to interest earned on the funds held in the
Trust Account.
Renaissances operating
expenses totaled $1,998 the period from inception to December 31, 2006, $847,558 year ended December 31, 2007 and $849,556 for the period from
inception to December 31, 2007. The increase in the year ended December 31, 2007 operating expenses is attributable to Renaissance beginning to incur
significant expenses after the closing of its IPO in connection with the due diligence of target companies as well as public company operating
expenses.
Renaissance had net interest
income earned on marketable securities and held in the Trust Account of $0 for the period from inception (April 17, 2006) to December 31, 2006,
$4,113,933 for the year ended December 31, 2007 and $4,113,933 for the period from inception to December 31, 2007. Interest income in excess of the
first $1,875,000 that has been released to Renaissance, excludes earnings on funds held in the Trust Account associated with common stock subject to
possible conversion. No additional interest income, except for amounts equal to any taxes payable by Renaissance relating to such interest earned, will
be released from the Trust Account until the earlier of the completion of a business combination or the expiration of the time period during which
Renaissance may complete a business combination. After deduction of the amount related to Renaissances income taxes payable on the interest,
approximately $1,226,000 of interest income remains to be allocable, with approximately $245,200 of such amount being allocable to shares of common
stock subject to conversion.
Renaissance has an installment
loan from First Insurance Funding Corp. of N.Y. for the sole purpose of financing its insurance policy for directors and officers
liability. The loan requires 21 installment payments of
131
$4,898 beginning on February 28, 2007. As of September 30, 2008, $4,864 was
outstanding, excluding accrued interest. The installment loan bears interest at 7.75% per annum and is payable from the funds transferred from earnings
of the Trust Account, which funds will be distributed to the Public Stockholders if Renaissance does not consummate a business combination within the
required time periods. Interest expense for the periods presented relates to the borrowings from the installment loan for insurance.
Renaissance has provided for an
effective tax rate of slightly under 31% for the year ended December 31, 2007 and from inception through December 31, 2007 since a substantial portion
of its interest income is from non-taxable sources. As of December 31, 2007, there was a liability of $1,012,842, of which estimated payments were made
totaling $1,022,000.
Renaissance has only provided for
an effective tax rate of over 44% on an inception to-date basis. As of September 30, 2008, there is an estimated liability of $614,299 which is fully
provided for by estimated payments.
The following table shows the
total funds held in the Trust Account through September 30, 2008:
Net proceeds
from its initial public offering and private placement of warrants placed in trust
|
|
|
|
$
|
104,147,840
|
|
Total
interest and miscellaneous income received to date
|
|
|
|
|
5,790,462
|
|
Less total
interest disbursed to Renaissance for working capital through September 30, 2008
|
|
|
|
|
(1,875,000
|
)
|
Less total
taxes paid through September 30, 2008
|
|
|
|
|
(1,655,310
|
)
|
Total
funds held in trust account through September 30, 2008
|
|
|
|
$
|
106,407,992
|
|
As of September 30, 2008,
Renaissance had approximately $870,793 of unrestricted cash available for activities in connection with identifying and conducting due diligence of a
suitable business combination and for general corporate matters. Renaissance believes that it has sufficient funds to allow it to operate through
January 29, 2009, assuming that a business combination is not consummated during that time. Over this time period, Renaissance anticipates incurring
expenses for the following purposes:
|
|
payment of premiums associated with directors and
officers insurance;
|
|
|
payment of estimated taxes incurred as a result of interest
income earned on funds currently held in the Trust Account;
|
|
|
due diligence and investigation of prospective target
businesses;
|
|
|
legal and accounting fees relating to SEC reporting obligations
and general corporate matters;
|
|
|
structuring and negotiating a business combination, including
the making of a down payment or the payment of exclusivity or similar fees and expenses; and
|
|
|
other miscellaneous expenses including $8,000 per month to a
related party for office space and general and administrative services.
|
Renaissance has agreed to pay BMD
Management Company, Inc. approximately $8,000 per month for office space and administrative support services.
Renaissance believes it will have
sufficient available funds outside of the Trust Account to operate through January 29, 2009 because its officers and directors have agreed with
Renaissance to advance funds (without recourse to the Trust Account) to meet Renaissances reasonable out-of-pocket expenses when available funds
held outside the Trust Account are insufficient for that purpose. Renaissance has incurred and expects to incur significant costs in pursuit of its
acquisition plans. There is no assurance that Renaissances plans to consummate a business combination with First Communications will be
successful or successful within the target business acquisition period. Barry W. Florescue has personally agreed that if Renaissance liquidates prior
to the consummation of a business combination, he will be personally liable to ensure that the proceeds of the Trust Account are not reduced by the
claims of target businesses or vendors or other entities that are owed money by Renaissance for services
132
rendered or contracted for or
products sold to Renaissance. Renaissance cannot assure you that he would be able to satisfy those obligations. Pursuant to the underwriting agreement
between Renaissance and Ladenburg Thalmann, Renaissance agreed not to commence its due diligence investigation of any operating business which it
sought to acquire or obtain the services of any vendor without obtaining an agreement pursuant to which such party would waive any claims against the
Trust Account. As of the date of this proxy statement/prospectus, Renaissance has received waiver agreements from each of its vendors other than its
independent registered accounting firm. There is currently an outstanding balance to Renaissances independent registered accounting firm of
approximately $52,000 and Renaissance intends to pay such fees in full in accordance with its past practices.
Contractual Obligations
The following table summarizes
Renaissances contractual obligations and commitments as of December 31, 2007.
|
|
|
|
|
|
Payments Due by Period
|
|
Contractual Obligations
|
|
|
|
Total
|
|
Less than
1 Year
|
|
1-3 Years
|
|
3-5 Years
|
|
More than
5 Years
|
Long-Term
Contractual Obligations (1)(2)
|
|
|
|
$
|
104,000
|
|
|
$
|
96,000
|
|
|
$
|
8,000
|
|
|
$
|
|
|
|
$
|
|
|
(1)
|
|
Represents sums payable to BMD Management Company for office
space, office and secretarial space commencing February 1, 2007 and continuing at $8,000 per month through the acquisition of a target
business.
|
(2)
|
|
Does not include obligations which are contingent upon the
consummation of a business combination, including $3,051,240 in deferred underwriting compensation in connection with Renaissances
IPO.
|
Critical Accounting Policies
In presenting Renaissances
financial statements in conformity with accounting principles generally accepted in the United States, Renaissance makes estimates and judgments that
affect the amounts reported in its financial statements. Some of the estimates and assumptions Renaissance is required to make relate to matters that
are inherently uncertain as they pertain to future events. Renaissance formulates these estimates and assumptions based on historical experience and on
various other matters that Renaissance believes to be reasonable and appropriate. Actual results may differ significantly from these estimates.
Renaissance has determined that it is currently not subject to any critical accounting policies.
Off-Balance Sheet Arrangements
Other than contractual
obligations incurred in the normal course of business, Renaissance does not have any off-balance sheet financing arrangements or liabilities, guarantee
contracts, retained or contingent interests in transferred assets or any obligations arising out of a material variable interest in unconsolidated
entity.
Quantitative and Qualitative Disclosures About Market
Risk
Market risk is the sensitivity of
income to changes in interest rates, foreign exchanges, commodity prices, equity prices, and other market-driven rates or prices. Renaissance is not
presently engaged in and, if Renaissance does not consummate a suitable business combination prior to the prescribed liquidation date of the Trust
Account, will not engage in, any substantive commercial business. Accordingly, Renaissance is not and, until such time as it consummates a business
combination, will not be, exposed to risks associated with foreign exchange rates, commodity prices, equity prices or other market-driven rates or
prices. The net proceeds of its IPO held in the Trust Account may be invested by the trustee only in United States government securities
within the meaning of Section 2(a) (16) of the Investment Company Act of 1940 having a maturity of 180 days or less, or in money market funds meeting
certain conditions under Rule 2a-7 promulgated under the Investment Company Act of 1940. Given its limited risk in its exposure to government
securities and money market funds, Renaissance does not view the interest rate risk to be significant.
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BUSINESS OF FIRST COMMUNICATIONS
Company Overview
First Communications is a leading
facilities-based competitive communications provider offering voice and data solutions to small- and medium- sized businesses and residential customers
throughout the Midwest and Mid-Atlantic United States, including metropolitan areas such as Cleveland, Detroit and Chicago. In addition to its
competitive communications business, First Communications operates wireless communications towers on which it leases capacity to wireless carriers such
as AT&T, Sprint Nextel, T-Mobile and Verizon Wireless under long-term lease contracts.
First Communications offers
dedicated data and dynamic integrated services, local service, switched and dedicated long-distance service, Internet access service, as well as
value-added products and services, such as collocation and hosting services. The network architecture leverages a traditional TDM infrastructure with
an IP platform, which First Communications has deployed to support its dynamic data and integrated product offerings and other next generation
technologies. In addition, the network incorporates metro Ethernet access in key markets, enabling First Communications to provide T-1 equivalent and
high-speed Ethernet services in certain metropolitan markets. As of September 30, 2008, pro forma for the acquisition of Globalcom, First
Communications provided services to over 39,000 business customers and 161,000 residential customers.
As of September 30, 2008, First
Communications operated 327 towers that were occupied by 391 wireless tenants. In addition, First Communications has an exclusive agreement with
FirstEnergy Corp. which gives it access to 36,000 square miles of land and over 12,000 miles of transmission lines and radio towers, monopoles,
distribution poles, property and rights of way which comprise the energy distribution infrastructure of FirstEnergy Corp. The agreement gives First
Communications the right to develop additional towers and collocation capacity to meet the current and future collocation demands of its wireless
carrier customers and the geographic and structural diversity of the infrastructure to attract new wireless carriers. The primary source of revenue
from First Communications wireless communication towers is generated by leasing space on its towers for antennas and other equipment necessary
for the transmission of wireless signals to a variety of carriers operating cellular, personal communications services (PCS), enhanced
specialized mobile radio, 3G, and wireless data.
First Communications has
successfully expanded its operations through organic growth, disciplined capital investments and strategic acquisitions that it has seamlessly
integrated into its core operations. On September 30, 2008, First Communications acquired Globalcom. This acquisition provides First Communications
with facilities-based access to the Chicago metropolitan market and approximately 15 route miles of metro fiber through out the market. A suburban
fiber ring consisting of 180 route miles is also being deployed. The acquisition enables First Communications to extend its geographic footprint in the
Midwest and to serve additional cities in the Chicago suburban market. Globalcoms fiber based products and advanced data and managed service
offerings will enhance the First Communications suite of products and services. First Communications believes that the addition of Globalcoms
products and services and combined network infrastructure improves operating leverage, expands the addressable market and enhances its ability to
deliver end-to-end integrated communications solutions.
First Communications
business strategy is focused on providing services delivered on high-speed digital transmission connections (T-1 or greater capacity), which it
believes offer greater value to customers, increase customer retention and provide revenue growth opportunities to First Communications. Historically,
First Communications revenue was dominated by off-net, voice revenue from smaller customers. Due to efforts to migrate customers onto T-1 based
products provisioned on First Communications own network (on-net) and the acquisition of Globalcom, First Communications has
transitioned a large percentage of the revenue base to its own network. Sales of T-1 based products grew from approximately 22 circuits per quarter to
in excess of 349 circuits per quarter from the third quarter of 2007 to the third quarter of 2008, with typical incremental gross profit margins in
excess of 60%.
First Communications targets
small- and medium-sized businesses with four to twenty-four access line equivalents, or lines, physically located within the footprint of its switching
centers. First Communications focuses
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its sales efforts on
communications intensive business customers who purchase multiple products that can be cost effectively serviced on First Communications network.
These customers generally purchase higher margin services and have higher retention rates. The addition of Globalcoms fiber solutions allows the
First Communications sales focus to include carrier customers and large enterprises that require metro and long haul products.
Pro forma for the acquisition of
Globalcom, First Communications network will be comprised of three Siemens Class 4 switches, two MetaSwitch IP softswitches, one Nortel CS2K
switch, five regional switching centers and 106 collocations with a substantial presence in ILEC central offices and approximately 3,800 route miles of
metro and long haul fiber. By providing services utilizing First Communications owned facilities, it can (i) ensure service quality and
reliability, (ii) maintain attractive margins and cash flow, (iii) provide advanced and differentiating solutions and (iv) have greater control over
customer care and service delivery. First Communications accesses its customers using, among other methods, unbundled network elements, digital T-1
transmission lines, fiber, fixed wireless and broadband over power line (BPL), for products provisioned on-net. In addition, First
Communications has commercial agreements with AT&T, Qwest and Verizon under which it receives off-net alternatives. For the three months ended
September 30, 2008, sales of products provisioned on-net contributed over 84.5% of new revenue.
First Communications Strengths
First Communications believes
that the following strengths will help to execute its strategy:
Significant Growth
Potential
. First Communications focuses sales efforts on providing small- and medium-sized businesses comprehensive communications solutions
normally reserved for large enterprises. First Communications believes these organizations have historically been underserved by the ILECs and have
limited alternatives for high-quality integrated communications products and services. First Communications further believes that this demand combined
with its current product offerings present First Communications with significant growth opportunity, which will enable it to increase market
penetration within its operating footprint. In addition, the acquisition of Globalcom provides First Communications with the ability to deliver
fiber-based solutions in the high growth enterprise market and a competitive alternative to the ILEC for other carriers. First Communications has
capacity on its 327 communications towers to support the needs of wireless carriers as they build out and upgrade their networks, and the ability to
continue to cost effectively develop towers for First Communications customers through its exclusive agreement with FirstEnergy Corp.
Unique Network
Infrastructure
. First Communications provides services to its customers through a network of telecommunications switches, data routers and related
equipment, and owned and leased communications lines and transport facilities which have the breadth and flexibility to address the complex data, voice
and infrastructure demands of its target customers. First Communications has deployed an IP-based platform comprised of Multi-Protocol Label Switching
(MPLS) core and aggregation routers and MetaSwitch IP softswitches, in the core and at the edge of its network. First Communications
expects that this technology will facilitate the development of next-generation services and the migration of First Communications traffic and
customer base to a more cost-effective and efficient IP-based infrastructure, which will enhance the performance of its network.
Diverse Revenue Base and End
Markets
. First Communications offers a comprehensive suite of communications solutions across a variety of end-markets, which provides stability to
its financial performance and mitigates the potential effects of changes in demand for any one product or from any one region or customer type. As of
September 30, 2008, pro forma for the acquisition of Globalcom, First Communications served approximately 39,000 business customers, 161,000
residential customers and had 391 wireless carrier tenants collocated on its communications towers. For the nine months ended September 30, 2008,
proforma for the acquisition of Globalcom, the top 10 customers accounted for 15.8% of total revenue and no single customer represented more than 3.3%
of total revenue.
Successful History of
Acquiring and Integrating Complementary Assets
. Since 2004, First Communications has acquired nine companies, for a total consideration of
approximately $148.2 million, eight of which are successfully integrated and generating meaningful synergies. The most recent of those acquisitions was
the
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acquisition of Globalcom,
which closed on September 30, 2008, and integration is expected to take the next 18 months. Each transaction allowed First Communications to extend its
facilities-based network, grow its customer base and significantly improve the operations and profitability of the acquired entity.
Experienced and Proven Senior
Management Team
. First Communications team of senior executives and operating managers has significant experience in the communications
industry and extensive knowledge of its local markets. First Communications executive management team has over 70 years of collective experience
in managing communications companies. In addition to industry knowledge, the management team has public company operational experience and expertise in
integrating acquired facilities with its existing facilities. First Communications believes that its ability to successfully integrate acquisitions
positions it to take advantage of significant growth opportunities that are available as consolidation continues in the communications
industry.
First Communications Strategy
Key elements of First
Communications competitive wireline strategy are:
Focus on High Margin Customers
and Revenue
. As part of the acquisition of Globalcom, First Communications will continue its migration from off-net voice-only plain old telephone
service (POTS) customers to communications intensive customers who purchase multiple or integrated services that can be cost effectively
serviced using its network and facilities. These customers generally purchase higher margin services, have higher retention rates and are, therefore,
more profitable. By providing integrated solutions, First Communications is able to cost-effectively increase network utilization and average revenue
per user (ARPU) while decreasing churn and customer acquisition costs.
Leverage Network and
Operational Infrastructure
. First Communications will continue to leverage its network and operational infrastructure to develop new products and
expand its customer base while improving the performance of its business. First Communications has deployed an IP-based platform comprised of MPLS core
routers and softswitch gateways, which facilitate the development of next generation services and the migration of traffic and customer base to a more
cost-effective and efficient IP-based infrastructure. First Communications believes that the deployment of this infrastructure will support growth
needs and cost reductions while facilitating the migration of customers to VoIP technology and services, and enhancement of automated flow-through
provisioning of services through the switch application programming interface. Through its next generation platform, First Communications has expanded
its product line and market reach to include dynamic VoIP integrated T-1 products as well as traditional circuit-switched voice and data services
designed to allow digital transmission of voice and data over ordinary telephone copper wires and high speed dedicated Internet connections. This
network and operational infrastructure will allow First Communications to meet the current and future demands of its target markets and create new high
margin revenue opportunities, increasing revenue per customer and market share while improving customer retention and operating
leverage.
Deliver a Comprehensive Suite
of Communications Solutions
. First Communications broad set of products and services allow it to deliver an end-to-end communications
solution to a broad segment of voice and data customers. First Communications will continue to add services and technologies to meet the increasingly
complex communications needs of its customers and maintain its competitive advantage in its target markets.
Pursue Strategic
Acquisitions
. First Communications will continue to pursue strategic growth opportunities that complement its service capabilities,
cost-effectively increase market share and expand its operating footprint. In pursuing strategic acquisitions, First Communications will focus on
acquiring companies that operate in its markets or adjacent markets, serve similar customers and offer complementary products and
services.
Key elements of First
Communications tower strategy are:
Leverage Significant
Undeveloped Tower Infrastructure
. First Communications has access to more than 36,000 square miles of land that support 12,000 miles of
transmission line and radio towers, monopoles, distribution poles, property and rights of way that allow First Communications to provide wireless tower
development services. First
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Communications intends to
grow the current tower portfolio by continuing to opportunistically develop additional towers where it has access through its agreement with
FirstEnergy Corp.
Focus on Site Leasing Business
with Stable, Recurring Revenues
. First Communications intends to continue to focus on expanding the site leasing business due to its attractive
characteristics such as long-term contracts, built-in rent escalators, high operating margins and low customer churn. The long-term nature of the
revenue stream of the site leasing business makes it less volatile than the site development business, which is more cyclical. By focusing on the site
leasing business, First Communications believes that it can maintain a stable, recurring cash flow stream and reduce exposure to cyclical changes in
customer spending.
Maximize Use of Tower
Capacity
. First Communications generally has constructed or acquired towers that accommodate multiple tenants and a substantial majority of its
towers are high capacity lattice or guyed towers. Most of its towers have significant capacity available for additional antennas and First
Communications believes that increased use of its towers can be achieved at a low incremental cost. First Communications actively markets space on its
towers through its internal sales force.
Industry and Market Overview
Competitive
Communications
The market for communications
services, particularly local voice, is dominated by the ILECs in the United States. These carriers consist primarily of the Regional Bell Operating
Companies (RBOCs), which include Verizon, AT&T and Qwest Communications International, Inc., or Qwest. While the RBOCs own
substantially all of the local exchange networks in their respective operating regions, competitive communications providers hold significant market
share. According to data from the FCC as of December 31, 2007, competitive communications providers served 28.7 million, or 18.1%, of end-user lines in
the United States. In addition, the number of competitive communications providers in the United States has been reduced as the industry continues to
consolidate. Since June 2005, First Communications believes over 60 mergers and acquisitions have been completed within the industry. While RBOCs
provide a broad range of communications services, First Communications believes that they have neglected the small- and medium-sized business segment
due to an increased focus on the global enterprise business segments of the market, increased competitive pressures in the residential market and the
integration of recent mergers and acquisitions. First Communications believes this lack of focus from the RBOCs has created an increased demand for
alternatives in the small- and medium-sized business communications market. Consequently, First Communications views the market as a sustainable growth
opportunity and has therefore focused its strategies on providing small- and medium-sized businesses with a competitive communications
solution.
Towers
First Communications believes
that growing wireless traffic, the successful recent spectrum auctions and technology developments will require wireless service providers to improve
their network infrastructure and increase their network capacity resulting in an overall increase in the number of communication sites that they use.
First, consumers continue to push wireless minutes of use higher, whether through wireline to wireless migration, increasing use of broadband services,
new data products or simply talking more. Consumers are demanding quality wireless networks, and list network coverage and quality as two of the
greatest contributors to their dissatisfaction when terminating or changing service. To decrease subscriber churn rate and drive revenue growth,
wireless carriers have made substantial capital expenditures on wireless networks to improve service quality and expand coverage. Second, First
Communications expects that the roll-out of 3G and 4G wireless services by existing carriers will require its customers to add a large number of
additional cell sites and increase the amount of their equipment at current cell sites. The FCCs recent advanced wireless service spectrum
auction 66 for advanced broadband services and spectrum auction 73, relating to the auction of the 700 MHz band, provided existing and emerging
carriers with the opportunity to acquire spectrum for 3G and 4G wireless service, which First Communications believes will further drive the demand for
communication sites. Finally, the third area of growth in the U.S. market comes
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from new market launches for
emerging carriers to get into traditional wireless services or new technologies like WiMAX, a technology enabling the delivery of last mile wireless
broadband access. For example, Leap Wireless and Metro PCS acquired spectrum in new coverage areas that will require brand new networks while Clearwire
is in the process of building out a nationwide network. Based on these factors, First Communications believes that the U.S. wireless industry is
growing, well-capitalized, highly competitive and focused on quality and advanced services. Therefore, First Communications expects that it will see a
multi-year trend of strong additional cell site demand from its customers, which First Communications believes will translate into strong leasing
growth.
First Communications
Markets
First Communications has focused
network deployment and marketing efforts in markets throughout the Midwest United States, where AT&T, Qwest, and Verizon are the ILECs. The FCC
estimates that as of December 31, 2006, the Midwest geographic market (which consists of Illinois, Indiana, Michigan, Ohio, and Wisconsin) represented
$33.1 billion and encompassed 13.9% of the U.S. communications market. Additionally, the FCC estimates that there are approximately 50.0 million lines
in the First Communications target geographic market, pro forma for the acquisition of Globalcom.
According to data prepared by the
FCC, as of December 31, 2007, there were approximately 21.4 million business lines in the First Communications target geographic market. First
Communications targets small- and medium-sized business or enterprise customers with four to twenty-four lines physically located within the footprint
of its switching centers and 106 collocations. First Communications believes small- and medium-sized business customers have historically been
underserved by RBOCs. In addition, First Communications believes its T-1 based next generation services will allow it to continue to gain market share
and enter into new markets without abandoning the core installed base. First Communications serves the following markets:
Region
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Market
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Ohio
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Akron
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Ohio
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Youngstown
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Ohio
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Cleveland
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Ohio
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Dayton
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Ohio
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Columbus
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Ohio
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Canton
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Illinois
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Chicago
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Michigan
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Detroit
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Michigan
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Grand
Rapids
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Michigan
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East
Lansing
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Wisconsin
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Milwaukee
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First Communications tower
leasing business focuses on the Ohio, Pennsylvania and New Jersey markets. Specifically, First Communications emphasizes structures and property within
the territory of FirstEnergy Corp.s seven electric distribution companies.
First Communications Customers
Wireline
Operations
First Communications
customers generally consist of small- and medium- sized businesses with four to twenty-four access lines, large enterprise customers and residential
customers. As of September 30, 2008, pro forma for the acquisition of Globalcom, First Communications has approximately 200,000 customers located
primarily in the Midwest United States. First Communications, proforma for the acquisition of Globalcom, has approximately 39,000 commercial customers
and 161,000 residential customers in total, representing approximately 78.6% and 21.4% of the companys revenues respectively.
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First Communications has invested
heavily in customer service utilizing a customized training program for customer service representatives, which includes formal training, real-time
call monitoring, ongoing evaluation, and advancement dependent on completion of continuing education. First Communications 24-hour customer care
facility currently handles more than 28,000 customer calls each month. In the past nine years, over 80% of customer calls have been answered in less
than 30 seconds by live customer care representatives. In addition to the customer care departments, First Communications operates a sophisticated
network operations center through which the network is monitored on a 24 x 7 basis and it is able to detect and troubleshoot network problems often
before its customers are aware of them.
Further displaying First
Communications commitment to its customers, First Communications has deployed comprehensive quality control programs in all customer care
departments including provisioning, customer service, repair and the network operations center. Each quality control plan is customized for the
department and details quantitative measures to ensure top agent performance in a defined structure while ultimately measuring and ensuring high
customer satisfaction.
First Communications believes
that its customer service advantage is especially significant in the small- and medium- sized business market, where larger competitors traditionally
have not focused their efforts. Each new customer is contacted multiple times by the First Communications service delivery team during the service
initiation process to ensure accuracy and on-time delivery of services ordered.
Tower
Operations
First Communications
primary customers are the major wireless carriers including AT&T Wireless, Sprint Nextel, T-Mobile and Verizon. Other customers include newer
wireless technology and service companies deploying WiMAX (a technology enabling the delivery of last mile wireless broadband access), WiFi (a wireless
networking technology), and technologies to take advantage of the recent government spectrum auctions. There is also some demand from government and
broadcasting entities.
Wireline Products and Services
Fiber Network
Services
First Communications provides
carriers a complete infrastructure when a fiber solution is required. The services include dark fiber, private builds, and collocation space, along
with the power and physical operations and maintenance of the fiber and associated infrastructure.
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Dark Fiber:
Dark fiber services provide dark (unlit)
strands of fiber optic cable between target destinations for a customers use in data and telecommunications networks. The customer installs its
own optoelectronic equipment and this product permits a customer to use as much or as little capacity as it desires and to customize its capacity with
feature-rich technology and deploy various network protocols.
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Private Build:
Private build services develop a custom
dark fiber network between a customers target sites. This may involve existing dark fiber in combination with construction of new routes and
building entries. This is a system dedicated to the customer its own private network.
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Collocation:
Collocation is providing First
Communications customers with space and power at strategic locations along the fiber optic network in which its customers install customer-owned
electronic equipment. The collocation is often needed to regenerate a signal over a long distance or allow the customer to aggregate or deliver
traffic.
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Maintenance services are also
provided for routine activities, such as moving the fiber cable for road widening projects, and non-routine activities such as emergency restoration.
First Communications operates a 24 x 7 Network Management Center with on-call operators responsible for maintaining the fiber network and responding to
emergency conditions.
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Business
Solutions
First Communications provides its
customers with a comprehensive array of circuit-switched and IP voice and data communications services, including local and long-distance voice
services, integrated voice and data services, Internet services and private data networking as well as value-added products and services designed to
deliver an end-to-end communications offering to its target markets. First Communications leverages the scalability and broad technology base of its
infrastructure to deliver products that address the increasingly complex communications needs of its customers. First Communications has deployed MPLS
and softswitch equipment that allows it to deliver IP services and provide its customers with cost-effective alternatives to traditional TDM-based
products. First Communications products and services are offered with a range of alternatives and customized packages, which allows it to reach a
larger number of potential business customers. First Communications sales and marketing initiatives focus on bundling its products and services
into a single competitively priced solution. First Communications believes this bundling of its products and services adds value for its business
customers by providing specific services desired by small- and medium-sized businesses and increases the overall profitability of its
operations.
First Communications recently
introduced an Achieve product suite, which provides bundled applications-based product sets to small- and medium- sized businesses. The
Essential T-1 product, part of the Achieve product suite, serves as a dynamic platform delivering 1.56.0 Mbps of dynamic bandwidth, as well as
local voice and long distance over a single communication circuit. The applications available with this bundle are specifically tailored to provide
enterprise level business benefits to First Communications target markets. The Essential T-1 base package includes First Communications
application bundle overlaid on top of the base package, including features such as:
Voice
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Data
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Mobility
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Fixed cost
Flexible long distance spending
Toll-free and conferencing services
Fax-to-email service
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Web
hosting
Data storage and back up
Managed firewall
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Blackberry smartphones
Standard cell phones
Remote access to call forwarding
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The emphasis of Achieve is
helping First Communications target market do Big Business.
The following table summarizes
First Communications voice and data product and service offerings:
Voice Services
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Data Services
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Value-Added Products and Services
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Local, regional,
domestic and
international services
T-1 PRI services
Private line
Voicemail
Caller identification
Call waiting
Call
forwarding
Conference calling
VoIP
Toll free services
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Dedicated Internet T-1 access
Broadband Internet access
Dial-up
E-mail
Collocation
Metro Ethernet Services
Dynamic
T-1s from 1.5 to 6.0
Megabyte of High Speed
bandwidth Integrated with Voice
Services
Wireless Data via Blackberry
Wireless
Internet (WiFi)
Connectivity
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Traditional and
converged
telephone systems
Enhanced e-mail security
Managed firewall
Internet policy management
Fax to Email
Local Area
Network/Wide Area
Network integration
Web hosting
Inside wiring
Data backup and recovery
Unified Communications solutions
Cellular
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Voice
Services
First Communications provides
customized packages of voice services to fulfill all of its customers voice communications needs. First Communications offers local telephone
services, including basic voice services and vertical features such as call forwarding, call waiting, call transfer, calling number
identification/calling name
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identification plus enhanced
services such as voice mail, direct inward dialing and automatic call back. First Communications services are provided by leveraging its
circuit-switched and IP-based network infrastructure. First Communications utilizes UNE-Loops, digital T-1 lines and, in certain instances, commercial
agreements with AT&T, Qwest and Verizon to access its customers. In addition to local service offerings, First Communications offers a range of
dedicated long-distance services to customers connected to its network. These include services that originate and terminate within the same local
transport area and in different local transport areas, international services, one plus (1+) outbound services and inbound toll-free services. First
Communications also offers ancillary long-distance services such as operator assistance, calling cards and pre-paid long-distance. In those instances
where First Communications is not able to connect a customer to its network, First Communications resells the long-distance services of other
communications carriers through agreements it has entered into with those carriers. First Communications generally sells its long-distance services as
part of a bundle that includes one or more of its other service offerings.
Data
Services
First Communications data
service offerings are designed to provide a full range of products targeted at businesses that require single or multipoint high-speed, dedicated
connections to the Internet. It provides dedicated transmission capacity on its network to customers that desire high bandwidth data links between
locations. First Communications offers special access and point-to-point circuits to communications carriers and other high volume
customers.
Integrated
Services
First Communications offers
integrated voice and data packages to small- and medium- sized businesses. These integrated solutions include a variety of service options designed to
accommodate customers needs. Its integrated offerings result in significant savings over the average cost of buying these services from separate
competitive voice and data providers. First Communications also offers integrated access services, which can reduce costs by combining local voice,
long-distance and Internet access on a single facility. First Communications is focused on increasing the sales of its integrated packages provided
over its network facilities as these services tend to provide increased profitability and reduced customer churn. In August 2007, First Communications
added dynamic IP Integrated T-1 services to its communication solutions. This product leverages First Communications MetaSwitch IP softswitch
gateways and MPLS network to deliver highly flexible voice and data services over an IP T-1.
Value-Added Products and
Services
First Communications also
provides other value-added products and services including:
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Managed Services.
First Communications managed
services offering includes web hosting services, managed firewalls, managed WAN services, email virus security and Internet browsing
security.
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In-Building Broadband over Power Lines.
In-building BPL
delivers a very high capacity (up to 200 Mbps) broadband Internet connection through the existing electrical infrastructure of a building, allowing for
high-speed Internet, VoIP and video services, as well as value-added services such as security systems, monitoring, biometric access and e-concierge
services. In-building BPL networks allow for high-speed Internet access through any electrical outlet. Once a BPL network has been installed, the
customer has high-speed access to the Internet in the building simply by plugging a modem into any electrical outlet and plugging a PC or other
Internet device into the modem. In-building BPL avoids the need for inside wiring. It can be used in new construction to avoid the expense associated
with installing Ethernet cable, and in existing buildings where Ethernet cable is not available.
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Hardware Solutions.
First Communications provides
customers premise equipment bundled with its telecommunications products, leading to a single source provisioning of bundled data and voice services.
The equipment provided includes routers, integrated access devices, servers, and other voice and data equipment.
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Residential
Solutions
First Communications offers
bundled local, long distance and cellular packages and a full suite of features and other value added services to residential
customers:
Voice Services
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Data & Other Services
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Local, Regional,
Domestic and International Services
Cellular Phones and Calling Plans
Voicemail
Caller Identification
Call Waiting
Ring
Identification
Conference Calling
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BPL
(limited basis)
Dial-up Internet access
Fixed Wireless (limited basis)
VoIP
Inside Wiring
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Wireless Tower Services
First Communications
primary focus is the leasing of antenna space on its multi-tenant towers to a variety of wireless service providers under long-term lease contracts.
These tower sites can accommodate equipment providing a variety of fixed and mobile wireless voice, data and video services delivered by various
transmission technologies, including the upgrades the wireless service providers plan for their 3G and 4G networks. Site leasing revenues are received
primarily from wireless service provider tenants. Wireless service providers enter into numerous leases with First Communications, each of which
relates to the lease or use of space at an individual tower site. Tenant leases are generally for an initial term of five years renewable for four
5-year periods at the option of the tenant. These tenant leases typically contain specific rent escalators, which average 3-4% per year, including the
renewal option periods.
As of September 30, 2008, First
Communications operated 327 towers. First Communications intends to grow the tower portfolio by leveraging the FirstEnergy Corp. infrastructure and
property available to First Communications.
First Communications site
development service is part of its site leasing business and provides the ability to keep in close contact with the wireless service providers who
generate substantially all of the site leasing revenue and capture ancillary maintenance revenues. Through First Communications site development
effort, it offers customers the following range of services: (i) identification of potential locations for towers and antennas; (ii) site
visits/audits; (iii) consultation on site layout and design; (iv) engineering review of structural analysis; (v) support in leasing the location; (vi)
assistance in obtaining zoning approvals and permits; (vii) construction oversight, and (viii) ongoing structure and antennae maintenance and emergency
restoration services. First Communications operates a 24 x 7 network control center and employees are on-call for maintenance and emergency restoration
activities such as antennae replacement or adjustment.
Network Overview
First Communications employs a
smart-build facilities-based strategy in deploying its network. First Communications purchases and installs its own switching and
collocation equipment and uses its owned metro and long-haul fiber or leases the required transmission capacity. First Communications occasionally
purchases fiber transmission capacity, but only after achieving high utilization of its primarily leased transmission capacity. The network deployment
strategy is focused on deploying capital after reaching a sufficient critical mass of customers, reducing the risk of stranding assets in
under-utilized markets. The network can support provision of triple play voice, data and video applications via one network at a much lower
cost than traditional telephony networks.
First Communications has assets
and facilities that have the breadth and flexibility to address the complex data, voice and infrastructure demands of its target customers. By
providing services utilizing its owned facilities, it can (i) ensure service quality and reliability, (ii) maintain attractive margins and cash flow,
(iii) provide advanced and differentiating solutions and (iv) have greater control over customer care and service delivery. First
Communications
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accesses its customers using,
among other methods, unbundled network elements, digital T-1 transmission lines, fiber, fixed wireless and BPL for products provisioned on on-net. In
addition, it has commercial agreements with AT&T, Qwest and Verizon under which it provides off-net alternatives.
Voice and Data
Switches
First Communications currently
has MetaSwitch IP softswitches and regional switching centers in multiple markets. The MetaSwitch IP softswitch gateways offer a complete suite of
integrated voice services, delivering local, long-distance, Centrex services and a full suite of CLASS 5 services which provide dial tone, local
switching and access to the rest of the network that its customers currently utilize. In addition, First Communications operates three Siemens EWSD
long-distance switches in Los Angeles, New York and Akron, Ohio, which carry over 40 million minutes of long-distance call traffic per month. These
switches have direct connections to the major RBOCs tandems along the East and West coasts, Texas and Ohio. In areas where First
Communications does not have direct interconnects, it relies on Tier 1 long-distance carriers to transport calls to its switches for further
processing. In order to ensure a more reliable and cost effective completion of calls, First Communications operates a least cost routing system, which
automatically chooses the lowest cost routing option from among a dozen or more carriers.
Collocations and Edge
Equipment
First Communications is currently
collocated in 106 collocation facilities with hubbing in an additional 47 collocations. The Zhone Universal Edge, or UE, family of products, deployed
in ILEC collocations, allows First Communications to deliver voice, or plain old telephone service, known as POTS, T-1 voice,
Primary Rate Interface data T-1s, integrated voice and data T-1s.
Network Infrastructure
First Communications currently
operates a technologically advanced, multi-state fiber network consisting of high-bandwidth metropolitan fiber rings and interstate long-haul fiber
systems. First Communications employs its network assets and facilities to increase the operating efficiency and enhance the reliability of its
customers product offerings. The network is comprised of 3,800 route miles and over 233,715 fiber miles throughout seven states, including, Ohio,
Pennsylvania, New Jersey and New York and metro rings in Akron, Ohio; Cleveland, Ohio; Toledo, Ohio; Youngstown, Ohio; Erie, Pennsylvania; Harrisburg,
Pennsylvania; and Chicago, Illinois with the acquisition of Globalcom.
Next Generation IP and Fiber
Transport System
First Communications has deployed
a next generation IP-centric overlay network, with MPLS-enabled core and edge routers located in Chicago, Cleveland, Columbus, Akron, New York and
Pittsburgh, and next generation softswitch technology from MetaSwitch and Nortel to handle future growth and support new IP-based services. First
Communications believes that the deployment of this infrastructure will support growth needs and cost reduction while facilitating the migration of
customers to VoIP technology and services, and enhancement of automated flow-through provisioning of services through the switch application
programming interface. Through its next generation platform, First Communications expects to expand its product line and geographic market reach to
include dynamic VoIP integrated T-1s and MPLS virtual private networks as well as traditional services such as Frame Relay and Asynchronous Transfer
Mode (ATM).
First Communications has deployed
a 600 route mile metro Ethernet network throughout Northeast Ohio and Western Pennsylvania to support wholesale and enterprise customers. The system
currently supports speeds up to two gigabits through wave division multiplexing and can be expanded to support speeds up to eight gigabits. By using a
native Ethernet architecture, First Communications can inexpensively add large bandwidth customers and provide true last mile diversity from the
ILEC.
143
First Communications deployed six
initial OC48 synchronous optinca network (SONET) nodes in Chicago and Northeast Ohio to provide connectivity to LEC colocation sites and carrier hotels
to reduce leased facility costs and deploy new high bandwidth IP applications. An additional 14 nodes are expected to be deployed in
2009.
Customer Access
Methods
First Communications
smart-build strategy for acquiring new customers and deploying network facilities is designed to create customer density before deploying
significant network capital. This approach to network and customer management allows First Communications to acquire customers in targeted geographic
areas using off-net access methods, and then build out collocations based on its penetration in specific ILEC central offices. This strategy enables
First Communications to take advantage of the pre-existing switching and transport facilities of the ILEC and/or other access providers, thus
minimizing its need to spend capital in advance of orders and reducing its risk of inefficient capital investments or stranded plant. Once First
Communications reaches sufficient customer density within an ILEC central office, it deploys the necessary equipment and facilities to provide on-net
service in that ILEC central office, thus making it a collocation.
When constructing the network,
First Communications objective is to own the intelligent components such as switches, network electronics and software, but where it does not own
fiber transport, it will lease readily available transport elements. This strategy provides First Communications with significant cost and
time-to-market advantages. By owning the switches, First Communications can configure its network to provide high performance, high reliability and
cost-effective solutions for its customers needs. By leasing its own transport lines where First Communications does not own fiber, it can reduce
upfront capital expenditures, and offer service ubiquitously within a collocation, which leads to a larger addressable market than business models that
are based on building dedicated facilities to specific customer locations.
First Communications delivers
services to customers through one or more of the following access methods:
|
|
On-Net T-1 / On-Net UNE-Loops.
On-net T-1 is a leased
high capacity connection directly from First Communications collocation equipment to the customers location. This T-1 can provide voice,
data or integrated communications services to its customers. T-1s are generally the most cost-effective and reliable access method. To provide voice
lines to residential and small business accounts, First Communications collocates its access equipment in an ILEC central office and leases UNE-loops
from its equipment to the customer premise. For the three months ended September 30, 2008, sales of integrated T-1 lines and POTS lines, installed
on-net, contributed 84.5% of newly acquired revenue.
|
|
|
Off-Net.
Off-net access methods are used to implement
First Communications smart-build strategy by acquiring customers located in ILEC central offices in which there is not yet sufficient density to
build a collocation. Off-net access is also used in order to be able to serve all locations of a multi-location account. There are two major forms of
off-net access. The first is utilizing the transport and/or loops and facilities of an alternative communications provider other than the ILEC. First
Communications has contracts with several major providers of access and transport. The second form of off-net access is provided through the ILEC.
First Communications has entered into commercial agreements with AT&T, Qwest, Verizon, McLeod and One Communications, which guarantee multi-year
availability and predictable pricing for the required access and associated features needed to provide services to its end-users. First
Communications commercial agreement with AT&T extends through September 2010, with Qwest through January 2011, with Verizon through February
2011, with Paetec through January 2011, and with One Communications through July 2009.
|
|
|
Wireless.
First Communications owns 15 LMDS A-block
spectrum licenses, with 1150 MHz of spectrum per market. LMDS is an authorized, point-to-multipoint fixed wireless service that provides a
high-capacity broadband connection. First Communications has deployed an LMDS service and intends to use last mile wireless access opportunistically as
a cost effect replacement for leasing access from the ILEC or another competitive service provider.
|
144
|
|
BPL.
First Communications has a 50% interest in the
FirstSpeed joint venture, which is involved in a pilot project for the purpose of offering customers access to BPL along FirstEnergy Corp. power lines.
Access BPL is designed to provide broadband telecommunications and Internet access to commercial and residential customers, by installing additional
equipment attached to an electric utilitys power lines, thereby permitting broadband telecommunications to travel over the electricity lines. As
with utilizing First Communications LMDS spectrum as an access technology, First Communications will leverage its BPL technology in situations
where the platform is the most appropriately suited to serve the needs of the customer.
|
Marketing and Sales
Marketing
First Communications
marketing strategy is based on offering small- and medium-sized businesses access to communications-based applications to improve their businesses.
This market segment is challenged to find the resources and combination of service from many different providers to serve their needs. First
Communications has developed a unique set of applications to allow small businesses to compete with big businesses. These applications are delivered to
the customer over high bandwidth T-1 access lines, DS-3 and Ethernet services. Current applications are based on voice communications such as local,
long distance and conferencing, data needs such as Internet, security, storage, and web hosting and mobility needs such as Blackberry, wireless data
access and cell phone services. Customers in this segment provide First Communications high margin revenue, have low churn rates, sign long-term, multi
year agreements and have lower than average support costs.
Marketing support is provided to
the First Communications sales channels in many forms. In addition to printed materials and sales promotions, First Communications sales professionals
are provided with qualified leads and vertical marketing programs. First Communications affinity partners represent over one hundred commercial
trade organizations whose members are encouraged to participate in the program by purchasing their voice and data needs from First Communications.
Brand recognition is developed through press releases, media advertising and editorial coverage in industry publications.
Sales
First Communications sales
organization consists of three separate sales channels direct, client care and indirect to reach small- and medium-sized businesses. The
direct sales channel is principally aimed at acquiring new customers, the client care channel is aimed at up-selling and renewing existing customers
and the indirect sales channel is made up of independent agents from outside First Communications that both bring new customers and service their
existing base of customers. Each channel enables First Communications to provide a bundled product offering of voice and data communications through a
consultative analysis of each customers specific needs. By developing a detailed proposal based on each customers individual requirements
for network configuration, service reliability, future expansion and budget constraints, First Communications delivers the quality, reliability and
value that customers demand. First Communications pricing and sales commission plans provide significant incentives for sales of higher-margin
T-1 based products in its on-net territories for two and three year terms.
The direct sales organization is
made up of sales personnel that call on small- and medium- sized business prospects in their designated geographic territories. First Communications
has sales teams, typically a district manager and five to eight sales professionals, located in Cleveland, Columbus, Akron, Grand Rapids, Detroit, and
Chicago. First Communications direct sales teams are comprised of 48 sales professionals supported by full-time sales engineers, who serve as pre
sales and post sales technical overlay support.
First Communications provides
special services to key clients. First Communications client care group consists of a full time sales team of eleven people, with an aggregate of
over 50 years of telecommunications industry experience in direct sales. First Communications also has a team of seven account relations managers whose
primary responsibility is advanced customer care. These professionals provide consultative business and technical solutions
145
to a select group of First
Communications key strategic customers. The team has been professionally trained in-house in legacy and next generation voice and data sales transport
technologies.
First Communications
indirect sales team leverages an extensive network of independent sales agents focusing on specific market segments. The indirect sales team is
comprised of eight quota-bearing agent managers, specifically trained and deployed to provide consultative services and support to the indirect sales
channel independent sales agents who focus on customers who are already aligned with a communications consultant that may not provide many of the
services First Communications provides and who are looking to their consultant for a solution. Over 160 indirect sales agents provided approximately
44% of First Communications new sales for the period from September 30, 2007 to September 30, 2008.
Service Agreements with Carriers
First Communications obtains
services from AT&T, Qwest and Verizon through state-specific interconnection agreements, commercial agreements, local wholesale tariffs and
interstate contract tariffs. First Communications currently has interconnection agreements in effect with AT&T, Qwest and Verizon for California,
Colorado, Florida, Iowa, Illinois, Indiana, Kansas, Massachusetts, Michigan, Minnesota, Montana, North Dakota, Nebraska, New Jersey, New York, Ohio,
Oregon, Pennsylvania, Texas, Washington and Wisconsin. Though the initial terms of all of the interconnection agreements has expired, each of these
agreements contains an evergreen provision that allows the agreement to continue in effect until terminated with the exception of the
AT&T interconnection agreements in California, Kansas, Texas and Wisconsin which First Communications has extended to December 2010. First
Communications is in the process of renegotiating the terms of its multiple AT&T interconnection agreements. First Communications has entered into
commercial agreements with AT&T, Verizon and Qwest to purchase a substitute product at rates based on the former unbundled network platform rates
plus a surcharge that increases over time. First Communications has converted substantially all of its unbundled network platform lines to these new
products. The commercial agreement with AT&T expires in September 2010, the commercial agreement with Verizon expires in February 2011 and the
commercial agreement with Qwest expires in January 2011. These agreements are subject to earlier termination in certain circumstances, including
termination if a regulatory authority asserts jurisdiction over an agreement.
First Communications maintains
agreements with a number of other carriers for the provision of network facilities, including fiber routes and high capacity loops and transport, and
local voice and data services. These agreements often provide cost-effective alternatives to ILEC-provided services. First Communications also
maintains agreements with a number of different long distance carriers. Under the terms of these long distance contracts, after meeting certain minimum
purchasing requirements, First Communications is able to choose which services and in what volume it wishes to obtain the services from each carrier.
Finally, First Communications maintains agreements with various entities for ancillary services such as out-of-band signaling and directory
assistance.
Operational Support Systems
First Communications
cost-effectively developed and continues to improve and update a state-of-the-art operational support system (OSS) that connects all facets
of the business including: sales, billing, customer care, order provisioning and tracking, circuit monitoring and inventory, fiber network management,
fraud monitoring and detection, and collection services. This system has been designed to allow for management and reporting of mission critical data
and centers around its billing and customer support platform (Teleflex), which runs on an IBM AS/400 utilizing 16 gigabytes of memory and 4 terabytes
of storage. This software has been in production for 15 years and the source code is owned and maintained by First Communications.
The core OSS combines extensive
internal developments with licensed software and applications, integrated through in-house and contracted development resources. Software supporting
business processes and operations have been developed largely in RPG, with some front end systems written in ASP, supporting both portability and
scalability. Systems supporting network management and operation are composed of licensed core applications
146
platforms that have been
customized and integrated by in-house and contracted software developers. Process automation is achieved through various applications, which are
generally integrated with workflow management to drive work orders through from start to finish.
First Communications continues to
develop and invest in its OSS infrastructure to maintain its unparalleled scalability and flexibility, which has allowed for unprecedented timeframes
to complete system integrations of new acquisitions. This continued development and implementation of the OSS has improved provisioning time in First
Communications markets and reduced operating costs across all divisions. First Communications applications include the
following:
Teleflex
First Communications utilizes
Teleflex for customer management, billing, call rating, accounts receivable, revenue assurance, collections and dunning. Teleflex enables First
Communications to preview and run each of the multiple bill cycles and customer account information for the many different, tailored service packages,
increasing customer satisfaction while minimizing revenue leakage. Enhanced development of Teleflex provides the flexibility for extensive and
intuitive management reports that allow customers the insight to manage their communications costs and usage. All billing information is available
on-line via a customer bill presentment web portal, for viewing, analysis and downloading of data. All billing information, including a .pdf image of
the actual bill, is available on demand in real-time to customers, increasing customer satisfaction.
First Communications has
developed a robust revenue assurance module in Teleflex, which ensures the bills sent to customers are accurate, manages fraud and reconciles cost of
goods sold against billed revenue. The revenue assurance module enables First Communications to analyze multiple ILEC and long distance carrier bills
that First Communications receives on a monthly basis, performing comprehensive audits and identifying inconsistencies, and charging irregularities.
The revenue assurance module also allows for detailed margin analysis on a customer by customer basis for the majority of the First Communications
customer base. Management reporting is automatically generated for work lists and workflow management allowing for a rapid response from First
Communications for filing vendor disputes or resolving billing issues.
The automated collections module
in Teleflex was developed by in-house software developers and is integrated with the billing and accounts receivable modules, which increases the
efficiency of First Communications collection process, accelerates the collection of accounts receivable and assists in the retention of valuable
customers.
Direct Order Entry
(DOE)
Direct order entry
(DOE) is an internally developed application in a Microsoft environment. DOE provides modules that support workflow management, track and
report sales quotes, order sales to new customers, move, add and change existing customers, repair and trouble tickets, circuit inventory, field
technician dispatching, monitor call center, customer payment interface and invoice copy lookup. DOE interfaces with Teleflex to automatically update
billing and status information for many order types. DOE also interfaces TRS-on-demand electronic bonding software by Concretio for provisioning
automation.
First Communications order
entry and provisioning systems enable it to shorten the customer provisioning time cycle and reduce associated costs. The sales process is managed by
this web based front end tracking system, allowing full sales management from quote through customer contract. An integrated component of DOE is
automated sales quote generation, which utilizes automated pre-order address validation via e-bonding; locating a potential customer within First
Communications network footprint in order to identify service availability and zone pricing. This simplifies the creation of professional and complete
proposals in real-time in support of the sales process and to hasten the closing of sales deals. Order entry is conducted by sales operations through
the DOE web portal, which provides a highly efficient method for tracking sales productivity. Prior to submitting an order for access service to the
RBOCs, First Communications performs customer credit approval and automatically obtains and processes the customers service record detailing the
customers existing phone service to establish
147
their data records in the
First Communications centralized customer records database. This has enabled First Communications to deliver an automated flow-through customer
provisioning process for qualified and verified orders.
Other
Systems
First Communications utilizes
Goldmine Corporate Edition for customer relationship management and opportunity management. Goldmine allows sales personnel to manage all phases of the
pre-sale customer relationship cycle.
First Communications utilizes HP
Openview for network monitoring. HP Openview allows real time monitoring of First Communications voice and data network infrastructure and
customer circuits. First Communications also utilizes two additional external applications to manage network circuit inventory, Circuit Vision and
Granite.
First Communications utilizes
Complete Suite by Concretio which is a workflow engine designed for facilities based ordering.
Wireline Competition
The communications industry is
highly competitive. First Communications believes it competes principally by offering superior customer service, accurate billing, a broad set of
services and systems tailored to small to medium-sized business customers and competitive pricing. First Communications competes with the RBOCs, other
competitive local exchange carriers and new market entrants (including cable TV companies, VoIP providers and wireless companies), interexchange
carriers, data/Internet service providers and vendors, installers and communication management companies.
Regional Bell Operating
Companies
In each of the existing markets,
First Communications faces, and expects to continue to face, significant competition from RBOCs (principally AT&T and Verizon), which currently
dominate their local communications markets as a result of their historic monopoly position. The RBOCs have also entered the long distance market and
offer data and Internet services.
The RBOCs have long-standing
relationships and strong reputations with their customers, as well as financial, technical, marketing personnel and other resources substantially
greater than First Communications. In addition, the RBOCs have the potential to subsidize competitive services with revenues from a variety of
businesses and currently benefit from existing regulations that favor them over First Communications in some respects. First Communications expects
that the RBOCs will continue to be the beneficiaries of increased pricing flexibility and relaxed regulatory oversight, which may provide them with
additional competitive advantages.
Competitive Local Exchange
Carriers and New Market Entrants
First Communications faces
competition from other competitive local exchange carriers, operating both on a facilities and non-facilities basis. Some of these carriers have
competitive advantages over First Communications, including substantially greater financial, personnel and other resources, brand name recognition and
long-standing relationships with customers. In addition, the industry has seen a number of mergers and consolidations among competitive local exchange
carriers in an effort to gain a competitive advantage in the sector, while some have entered and subsequently emerged from bankruptcy with dramatically
altered business plans and financial structures. Both of these groups may have the ability to offer more competitive rates than First Communications
can offer. Significant customers include Cbeyond, Inc., Cavalier Communications, Inc. and PAETEC Holding Corp.
In addition, First Communications
faces competition from new and potential market entrants such as cable television companies, wireless service providers, electric utilities and
providers using VoIP over the public Internet or private networks. Cable television companies have entered the communications market by upgrading
their
148
networks with hybrid fiber
coaxial lines and installing facilities to provide fully interactive transmission of broadband voice, video and data communications. While many
competitive local exchange carriers have always targeted small- and medium-sized enterprises and multi-location customers, cable television companies
are increasingly targeting these customers and are doing so at rates lower than First Communications generally offers. Wireless service providers are
providing not only voice, but also broadband, substitutes for traditional wireline local telephones. Electric utility companies have existing assets
and low cost access to capital that could allow them to enter a market and accelerate network development. Many VoIP providers operate down-market from
the First Communications target audience and are offering a lower quality service, with little or no Quality of Service (QoS), primarily to
residential customers. Many ILECs and interexchange carriers have deployed VoIP technology for business customers by offering higher quality,
QoS-supported, services. VoIP providers are currently subject to substantially less regulation than traditional local telephone companies and do not
pay certain taxes and regulatory charges that First Communications is required to pay.
Interexchange
Carriers
Interexchange carriers
(principally AT&T and Verizon) that provide long distance and other communications services offer or have the capability to offer switched local,
long distance, data and Internet services. Some of these carriers have vast financial resources and a much larger service footprint than First
Communications. In addition, there have been a number of mergers and consolidations among interexchange carriers and between ILECs and interexchange
carriers that have allowed carriers to expand dramatically the reach of their services and, thus, to gain a significant competitive advantage. These
consolidated entities may have the ability to offer more services and more competitive rates than First Communications can offer.
Data/Internet Services
Providers
The Internet services market is
highly competitive, and First Communications expects that competition will continue to intensify. Internet service, including both Internet access and
on-line content services, is provided by Internet services providers, ILECs, satellite-based companies, interexchange carriers and cable television
companies. Many of these companies provide direct access to the Internet and a variety of supporting services to businesses and individuals. In
addition, many of these companies, such as AOL and MSN, offer online content services consisting of access to closed, proprietary information networks.
Interexchange carriers, among others, are aggressively entering the Internet access markets. Long distance providers have substantial transmission
capabilities, traditionally carry data to large numbers of customers and have an established billing system infrastructure that permits them to add new
services. Satellite companies are offering broadband access to Internet from desktop PCs. Cable companies are providing Internet services using cable
modems to customers in major markets. Many of these competitors have substantially greater financial, technological, marketing, personnel, brand
recognition and other resources than those available to First Communications.
Vendors, Installers and
Communication Management Companies
First Communications competes
with numerous equipment vendors and installers and communications management companies for business telephone systems and related services. First
Communications generally offers its products at prices consistent with other providers and differentiates its service through product packages and
customer service.
Wireless Tower Competition
Site Leasing and
Development
The primary competitors for First
Communications site leasing activities are (i) the large independent tower companies, American Tower Corp., Crown Castle International and SBA
Communications, (ii) a large number of smaller independent tower owners, (iii) wireless service providers who currently market excess space on their
owned towers to other wireless service providers and (iv) alternative facilities such as rooftops and, broadcast towers.
149
There has been significant
consolidation among the large independent tower companies in the past three years. Specifically, American Tower Corp. completed its merger with
SpectraSite, Inc. in 2005, and Crown Castle International completed its merger with Global Signal, Inc. in 2007. As a result of these consolidations,
American Tower and Crown Castle have substantially more towers and greater financial resources than First Communications does. Wireless service
providers that own and operate their own tower networks are also generally substantially larger and have greater financial resources than First
Communications does. First Communications believes that tower location and capacity, quality of service to its tenants, and, to a lesser extent, price
have been and will continue to be the most significant competitive factors affecting the site leasing business.
Intellectual Property
First Communications relies on a
combination of copyright, trademark and trade secret laws, as well as licensing agreements, third party non-disclosure agreements and other contractual
provisions and technical measures to protect its intellectual property rights. No individual trademark or copyright is material to its business.
Generally, all licensing agreements are perpetual in duration.
Employees
As of September 30, 2008, pro
forma for the acquisition of Globalcom, First Communications had approximately 376 employees, including approximately 49 direct quota-bearing sales
representatives. First Communications employees are not members of any labor unions. First Communications believes that relations with its employees
are good and has not experienced any work stoppage due to labor disputes.
Properties
First Communications
corporate headquarters is located in Akron, Ohio and it conducts its principal operations in Ohio, Illinois and Pennsylvania. First Communications does
not own any of its facilities. The table below lists its current material leased facilities.
Location
|
|
|
|
Use
|
|
Approximate
Square Footage
|
|
Lease Expiration
|
Akron,
OH
|
|
|
|
Corporate
Headquarters
|
|
|
33,345
|
|
|
February 28,
2013
|
Akron,
OH
|
|
|
|
Switch
Facility
|
|
|
2,400
|
|
|
February 28,
2010
|
Worthington,
OH
|
|
|
|
Sales Office,
Switch Facility
|
|
|
13,600
|
|
|
February, 28
2009
|
Pittsburgh,
PA
|
|
|
|
Network
Operations Center
|
|
|
3,800
|
|
|
August 31,
2011
|
Cleveland,
OH
|
|
|
|
Sales
Office
|
|
|
3,540
|
|
|
March 31,
2010
|
Cleveland,
OH
|
|
|
|
Switch
Facility
|
|
|
4,375
|
|
|
October 20,
2009
|
Cleveland,
OH
|
|
|
|
Operations
Center
|
|
|
3,300
|
|
|
December 31,
2009
|
Cleveland,
OH
|
|
|
|
Warehouse
|
|
|
5,000
|
|
|
February 28,
2009
|
Los Angeles,
CA
|
|
|
|
Switch
Facility
|
|
|
6,390
|
|
|
MTM
|
New York,
NY
|
|
|
|
Switch
Facility
|
|
|
6,000
|
|
|
June 30,
2010
|
San Diego,
CA
|
|
|
|
Operations
Center
|
|
|
15,498
|
|
|
April 30,
2011
|
Southfield,
MI
|
|
|
|
Sales
Office
|
|
|
1,570
|
|
|
February 28,
2009
|
Reading,
PA
|
|
|
|
Sales Office,
Operations Center
|
|
|
2,500
|
|
|
September 30,
2013
|
Lauderdale,
PA
|
|
|
|
Warehouse
|
|
|
6,000
|
|
|
May 31,
2010
|
Chicago,
IL
|
|
|
|
Sales Office,
Operations Center
|
|
|
30,274
|
|
|
November 30,
2013
|
Chicago,
IL
|
|
|
|
Switch
Facility
|
|
|
6,647
|
|
|
May 31,
2009
|
Lombard,
IL
|
|
|
|
Sales
Office
|
|
|
6,175
|
|
|
October 31,
2013
|
Legal Proceedings
First Communications may be
involved in various legal proceedings arising in the ordinary course of business, none of which is material to its business.
150
Management
The current directors and
executive officers of First Communications are as follows:
Name
|
|
|
|
Age
|
|
Position
|
|
Raymond
Hexamer
|
|
|
|
47
|
|
Chief
Executive Officer and Director
|
|
|
|
|
|
|
|
|
Joseph R.
Morris
|
|
|
|
38
|
|
Chief
Operating and Financial Officer and Director
|
|
|
|
|
|
|
|
|
Richard J.
Buyens
|
|
|
|
52
|
|
President
|
|
|
|
|
|
|
|
|
Theodore V.
Boyd
|
|
|
|
66
|
|
Chairman
of the Board
|
|
|
|
|
|
|
|
|
David Johnson,
II
|
|
|
|
47
|
|
Senior
Vice President Sales and Marketing
|
|
|
|
|
|
|
|
|
Marshall B.
Belden Jr.
|
|
|
|
60
|
|
Director
|
|
|
|
|
|
|
|
|
Mark T. Clark
|
|
|
|
58
|
|
Director
|
|
|
|
|
|
|
|
|
Scott M.
Honour
|
|
|
|
42
|
|
Director
|
|
|
|
|
|
|
|
|
Mark R. Stone
|
|
|
|
44
|
|
Director
|
|
|
|
|
|
|
|
|
H. Arthur
Bellows, Jr.
|
|
|
|
70
|
|
Director
|
|
|
|
|
|
|
|
|
H. Arthur Bellows, Jr.
has
served as a director of First Communications since July 2007, and has been an investor in McKinley Communications, Inc. since 2005. Mr. Bellows has
also served as the Chairman of Braeburn Associates (a private holding personal investment company), since 1999, and as Chairman of The Finance Network,
LLC (a private financial services firm) since 1999. In 1967 Mr. Bellows founded Triangle Corporation, of which he served as Chairman, President and
Chief Executive Officer until 1995. Mr. Bellows served as director of Hexcel Corporation (NYSE) from 2000 to May 2008; and, as director of Beacon
Roofing Supply, Inc. (NASDAQ) since 2005; and, President and director of Audits & Surveys Worldwide, Inc. (AMEX) from 1995 to 1999. Mr. Bellows
received a Bachelor of Arts in Political Science from Princeton University and an MBA from Harvard Business School.
Mr. Bellows will not serve as a
director of the post-merger combined company. For a description of First Communications current executive officers and directors who will
continue in such capacities with the post-merger combined company, see
The Director Election Proposal.
151
FIRST COMMUNICATIONS MANAGEMENTS DISCUSSION
AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and
analysis should be read in conjunction with the financial statements and related notes and the other financial information appearing elsewhere in this
proxy statement/prospectus. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. See the
section entitled Forward-Looking Statements for more information. Actual results could differ materially from those anticipated in the
forward-looking statements as a result of many factors, including those discussed in Risk Factors and elsewhere in this proxy
statement/prospectus.
In the interest of providing a
more fulsome presentation of First Communications financial performance since its inception in July 2007 and of the historical performance of its
subsidiaries, FC LLC and Xtension, this discussion and analysis includes comparisons of: First Communications consolidated financial results for
the nine months ended September 30, 2008 to First Communications results for the period from July 2, 2007 through December 31, 2007 together with
results for FC LLC and Xtension for the period from January 1, 2007 through July 1, 2007; FC LLC results for the year ended December 31, 2007 and the
year ended December 31, 2006; and Xtension results for the year ended December 31, 2007 to the year ended December 31, 2006.
Overview
First Communications common stock
is publicly traded on the AIM. First Communications was formed on April 4, 2007 but did not have any material activity until July 2, 2007, upon
completion of its listing on the AIM.
First Communications and its
subsidiaries provide local and long-distance telephone, data, fiber and other telecommunications related services to commercial and residential
customers throughout the United States. Certain First Communications subsidiaries are subject to regulation by state public service commissions for
intrastate telecommunications services. For applicable interstate matters related to telephone service, certain First Communications subsidiaries are
subject to regulation by the FCC.
Key Components of Results of Operations
Revenues
Revenues consist almost
exclusively of local telephone service, long distance service, fiber, data and other recurring services. Local service reflects the total
packages sold to both commercial and residential customers, including the monthly line rental and other charges (such as voicemail, call
waiting, free long distance and other features). Long distance services (including toll-free intra and inter-state) relate to both switched and
dedicated T-1 or DS-3 usage based services for commercial customers. Data and other recurring charges primarily relate to the monthly fees charged to
corporate customers for their dedicated service lines (such as MPLS, Frame Relay, fixed wireless, dedicated Internet or other dedicated
connections).
Monthly recurring service
revenues are recognized in the month the services are used. In the case of local service revenues, mobile service and dedicated access connections,
charges are billed in advance but accrued for and recognized on a prorated basis based on length of service in any given month.
Cost of
Facilities
First Communications cost
of facilities consists primarily of the costs of operating its network facilities and costs incurred from purchasing wholesale services from other
carriers. The network components for its facilities-based business include the cost of:
|
|
Maintenance of fiber transport services;
|
|
|
Leasing local loops and digital T-1 lines that connect its
customers to its network;
|
|
|
Leasing high capacity digital lines that connect its switching
equipment to its collocations;
|
152
|
|
Leasing high capacity digital lines that interconnect its
network with the RBOCs;
|
|
|
Leasing space, power and terminal connections in the RBOC
central offices for collocating its equipment;
|
|
|
Signaling system network connectivity;
|
|
|
Leasing or maintaining its long-haul Internet backbone network;
and
|
|
|
Internet transit and peering, which is the cost of delivering
Internet traffic from its customers to the public Internet.
|
The costs to lease local loops,
digital T-1 lines and high capacity digital interoffice transport facilities from the RBOCs vary by carrier and state and in many cases are regulated
under federal and state laws. In virtually all areas, First Communications leases local loops, T-1 lines and interoffice transport capacity from the
RBOCs. Cost of facilities also includes the fees First Communications pays for long distance, data and other services. First Communications accounts
for all of its network depreciation in depreciation and amortization expense and does not include any depreciation expense in cost of
facilities.
Sales, General and Administrative
Expenses
Sales, general and administrative
expenses are comprised primarily of employee compensation and benefits, commissions, occupancy costs, bad debt, operating taxes, billing expense and
professional services.
Depreciation and
Amortization
Depreciation and amortization
expense includes depreciation for network related voice and data equipment, back office systems, furniture, fixtures, leasehold improvements, office
equipment and computers. All internal costs directly related to the expansion of its network and operating and support systems, including salaries of
certain employees, are capitalized and depreciated over the lives of the switches or systems, as the case may be.
First Communications Consolidated Financial Results for
the Nine Months Ended September 30, 2008 and Comparison to the Nine Months Ended September 30, 2007
Revenues
Revenues for First Communications
for the nine months ended September 30, 2008 increased by $15.0 million, or 15.3%, to $113.5 million from $98.4 million for the nine months ended
September 30, 2007. Approximately $11.3 million of this increase is due to the integration in the nine months ended September 30, 2008 of seven months
of 2008 financial results from First Communications acquisition of the assets and customer base from FE Telecom and $3.8 million is due to
organic growth of First Communications and Xtension. First Communications strategy has been to increasingly focus on the small- and medium-sized
businesses market in key geographical areas, and the supply of higher margin services, including dedicated T-1 integrated voice and data on-net
services, while de-emphasizing some of its legacy voice services.
Cost of
Facilities
Cost of facilities for First
Communications for the nine months ended September 30, 2008 increased by $0.5 million, or 0.8%, to $69.8 million from $69.3 million for the nine months
ended September 30, 2007. Cost of facilities increased $6.0 million due to the acquisition of FE Telecom, which increase was partially offset by a $5.7
million decrease due to First Communications success in increasing the percentage of revenue serviced on First Communications owned network
and in selling higher margin dedicated T-1 products while de-emphasizing legacy voice services. For the nine months ended September 30, 2008, over 84%
of newly acquired revenue was sold via T-1 on-net services.
153
Selling, General and
Administrative Expenses
Sales, general and administrative
expenses for First Communications for the nine months ended September 30, 2008 increased by $4.1 million, or 18.8%, to $26.2 million from $22.0 million
for the nine months ended September 30, 2007. $0.9 million of the increase came from operating expenses associated with managing the FE Telecom assets
and $2.3 million of the increase was associated with an increase in investment in sales and marketing initiatives.
Depreciation and
Amortization
Depreciation and amortization
charges increased from $6.3 million for the nine months ended September 30, 2007 to $8.5 million for the nine months ended September 30, 2008, based on
additional depreciation and amortization associated with the FE Telecom assets acquired in March 2008.
Operating
Income
Operating income increased by
$8.1 million from $0.9 million for the nine months ended September 30, 2007 to $9.0 million for the nine months ended September 30, 2008 as a result of
higher gross margin on-net services, continued expansion of higher margin T-1 customers and the integration of seven months of financial results from
First Communications acquisition of the assets and customer base of FE Telecom.
Interest
Expense
Interest expense increased by
$1.8 million for the nine months ended September 30, 2008. This increase was due to borrowings under First Communications new credit facility
entered into in 2008 which was primarily used to finance the acquisitions of FE Telecom and Globalcom and the redemption of $25.0 million of First
Communications Series A Preferred Stock.
Income
Taxes
Income taxes increased by $2.0
million for the nine months ended September 30, 2008 primarily due to an increase in income before income taxes of $6.2 million for the nine months
ended September 30, 2008.
Net
Income
Net income for First
Communications for the nine months ended September 30, 2008 was $4.0 million compared to a net loss for the nine months ended September 30, 2007 of
$0.2 million.
FC LLC Results for the Year Ended December 31, 2007, and
Comparison to the Year Ended December 31, 2006
Revenues
Revenues for FC LLC were $106.4
million for the year ended December 31, 2007, which represented an increase of 46.4% from $72.7 million for the year ended December 31, 2006. This
growth in revenue was the result of a $27.5 million increase in revenue from the acquisition of certain assets of Acceris in February 2007
and a $6.2 million increase due to ongoing sales efforts from within FC LLC.
Cost of
Facilities
Cost of facilities for the year
ended December 31, 2007 increased to $70.8 million, or 40%, from $50.6 million for the year ended December 31, 2006. Increased costs were attributed to
the increased revenue offset by the reduction of expenses paid to wholesale carriers related to off-net services.
154
Selling, General and
Administrative Expenses
Selling, general and
administrative expenses for FC LLC increased by $9.0 million, or 52%, to $26.4 million for 2007 from $17.4 million for 2006. As a percentage of
revenues, FC LLCs selling, general and administrative expenses for the year ended December 31, 2007 increased moderately to 24.8%, compared to
23.9% for the year ended December 31, 2006. Although cost reduction strategies met or exceeded managements expectations, these reductions were
offset by continued investments in sales and marketing which increased from $4.3 million in 2006 to $6.7 million in 2007. Sales and marketing expenses
increased related to the expansion of the direct sales force of FC LLC including the addition of 30 new voice and data sales representatives in the
Ohio markets of Cleveland, Columbus, Akron and Canton.
Depreciation and
Amortization
FC LLCs depreciation and
amortization charges increased from $2.4 million in 2006 to $5.9 million in 2007 due to the acquisition and subsequent depreciation of the Acceris
assets, coupled with increased amortization associated with new appraisals of customer lists.
Operating
Income
Income from operations for FC LLC
increased 40% from $2.3 million in 2006 to $3.3 million in 2007, primarily due to increased revenue and gross profit, offset by increased depreciation
and amortization expense and taxes paid in the second half of 2007.
Net
Income
Net Income for FC LLC increased
11% from $1.9 million in 2006 to $2.2 million in 2007.
Xtension Results for the Year Ended December 31, 2007,
and Comparison to the Year Ended December 31, 2006
Revenues
Revenues for Xtension for the
year ended December 31, 2007 were $26.3 million, a decrease of 23.6% from $34.4 million for the year ended December 31, 2006. The $8.1 million
decline in revenues was due to a fall-off in demand in the provisioning of voice services by certain customers based on increasing
prices.
Cost of
Facilities
Cost of facilities for Xtension
for the year ended December 31, 2007 decreased to $20.2 million, or 16%, from $24.2 million for the year ended December 31, 2006, due to lower revenues
for the period.
Selling, General and
Administrative Expenses
Selling, general and
administrative expenses for Xtension decreased from $5.1 million in 2006 to $3.5 million in 2007. The decrease was based on lower commission and other
sales expenses associated with lower revenue for the period. As a percentage of revenue, selling, general and administrative expenses nominally
decreased from 14.8% in 2006 to 13.4% in 2007.
Depreciation and
Amortization
Xtension depreciation and
amortization expense decreased from $0.03 million in 2006 to $0.02 million in 2007. As a percentage of revenue, depreciation and amortization for both
periods was 0.1%.
155
Operating
Income
Income from operations for
Xtension decreased 51% from $5.1 million in 2006 to $2.5 million in 2007, due to lower revenue and lower gross profit, offset by lower operating
expenses.
Xtension Results for the Year Ended December 31, 2006
and Comparison to the Year Ended December 31, 2005
Revenues
Revenues for Xtension for the
year ended December 31, 2006 increased by $15.1 million, or 78%, to $34.4 million from $19.3 million for the year ended December 31, 2005, as a result
of organic growth in its customer base.
Cost of
Facilities
Cost of facilities for Xtension
increased by $10.4 million, or 75.6%, to $24.2 million for 2006 from $13.8 million for 2005, as a result of the increased revenue in 2006, which
generated higher costs of providing services.
Operating
Expenses
Operating expenses for Xtension
increased by $1.7 million, or 50%, to $5.1 million for 2006 from $3.4 million for 2005, primarily as a result of an increase in sales commissions from
$1.6 million for 2005 to $3.3 million for 2006. Operating expenses as a percentage of revenues declined for 2006 to 14.9% from 17.5% for 2005 as a
result of a slight decline in salaries, partially offset by an increase in sales commissions as a percentage of revenues, from 8.4% in 2005 to 9.7% in
2006.
Income from
Operations
Income from operations for
Xtension increased by $3.0 million, or 142.9%, to $5.1 million for 2006 from $2.1 million for 2005. Income from operations as a percentage of revenues
was 14.7% in 2006, compared to 11.1% in 2005.
FC LLC Results for the Year Ended December 31, 2006, and
Comparison to the Year Ended December 31, 2005
Revenues
Revenues for FC LLC in the year
ended December 31, 2006 increased by $14.7 million, or 25.4%, to $72.7 million from $58.0 million in the year ended December 31, 2005, primarily as a
result of a $19.9 million increase in local service revenues derived from a complete year of revenues from the CoreComm customer base
acquisition and a $4.2 million increase due to the acquisition of certain assets of Acceris in October 2006 , partially offset by a decline in
FC LLC revenues of $9.4 million due to a decline in FC LLCs legacy customers.
Cost of
Facilities
Cost of facilities for FC LLC
increased by $9.2 million, or 22.2%, to $50.6 million for 2006 from $41.4 million for 2005, primarily as a result of increased revenues associated with
a complete year of the CoreComm customer acquisition and partially as a result of the new wholesale agreement with AT&T, which increased the cost
of off-net local services. Cost of facilities declined as a percentage of revenues from 71.4% in 2005 to 69.6% in 2006, following the elimination of
unprofitable customers, the integration of the enlarged customer base, improvement in overall ARPU and by upselling services to the enlarged customer
base, grooming of the network, one-time recognition of a carrier credit of $788,000 and the start of the transfer of off-net customers to on-net
services.
156
Selling, General and
Administrative Expenses
Selling, general and
administrative expenses for FC LLC increased by $3.3 million, or 23.4%, to $17.4 million for 2006 from $14.1 million for 2005. As percentage of
revenues, selling, general and administrative expenses declined from 24.3% for 2005 to 23.9% for 2006, reflecting the ongoing synergies associated with
the CoreComm customer base acquisition, offset by increased commissions associated with higher sales and increased corporate expenses consisting
primarily of integration costs (estimated at $630,000) associated with the acquisition of certain assets of Acceris in October 2006.
Depreciation and
Amortization
Depreciation and amortization for
FC LLC increased by $1.3 million, or 118.2%, to $2.4 million for 2006 from $1.1 million for 2005, primarily as a result of the acquisition of tangible
assets, $0.4 million of depreciation related to property, plant and equipment and intangible assets and $0.9 million of amortization related to
customer lists.
Income from
Operations
Income from operations for FC LLC
increased by $0.9 million, or 64.3%, to $2.3 million for 2006 compared to $1.4 million for 2005. Income from operations as a percentage of revenues
increased from 2.3% in 2005 to 3.2% in 2006 as a result of higher gross margins and a reduction in selling, general and administrative expenses as a
percentage of revenue.
Liquidity and Capital Resources
First Communications cash
flow from operations is a key driver of liquidity. In assessing liquidity, First Communications reviews working capital measurements to define areas of
improvement. First Communications anticipates being able to satisfy cash requirements for the foreseeable future primarily with cash generated by
operations, existing cash balances and, if necessary, borrowings under existing credit facilities.
Cash and cash equivalents
decreased at September 30, 2008, to $2.8 million, compared to $9.3 million as of December 31, 2007.
Cash provided by operating
activities was $11.4 million for the nine months ended September 30, 2008, primarily due to net income of $4.0 million and $11.8 million in non-cash
items, partially offset by a $4.4 million net decrease in operating assets and liabilities. Cash used in operating activities was $2.3 million for the
period from inception (July 2, 2007) through December 31, 2007, primarily due to increased depreciation and amortization expense.
Cash used in investing activities
was $109.9 million for the nine months ended September 30, 2008, primarily due to acquisitions of $105.8 million. Cash used in investing activities was
$73.8 million for the period from inception (July 2, 2007) through December 31, 2007, primarily due to acquisitions of assets and assumption of
liabilities, net of cash acquired, of $72.3 million.
Cash provided by financing
activities was $92.0 million for the nine months ended September 30, 2008, primarily due to proceeds from First Communications term loan and
revolver of $130.0 million, which was primarily used to finance the acquisition of the FE Telecom assets, purchase of Globalcoms stock and
redemption of $25.0 million of First Communications preferred stock. Cash provided by financing activities was $85.4 million for the period from
inception (July 2, 2007) through December 31, 2007, primarily due to proceeds from stock issuance, net of issuance and transaction costs of $81.6
million.
157
Acquisitions and
Debt
On March 6, 2008, First
Communications acquired substantially all of the assets and certain assumed liabilities of FE Telecom, a fiber and wireless infrastructure provider,
for $45 million. FE Telecom was a subsidiary of FirstEnergy Corp., a shareholder of First Communications. Concurrently, with the closing of the FE
Telecom acquisition, First Communications closed a $90 million credit facility syndicated by JP Morgan Securities Inc. The financing facility includes
a $70 million term loan and a $20 million revolving line of credit (which replaces the line of credit agreement described in Note 5 to the First
Communications consolidated financial statements for the year ended December 31, 2007), secured by substantially all of First Communications
assets. The proceeds of the new credit facility were used to pay for the acquisition of FE Telecoms assets, along with the pro-rata redemption of
$25 million of First Communications preferred stock, and will be used in the future for ongoing general working capital purposes. The facility is for a
term of five years, with pricing starting at 375 basis points over US LIBOR (53% of which is fixed under interest rate swaps for three years at 3.03%
and 22% of which is fixed for five years at 3.56%). First Communications may increase the term loan by an additional $25 million under an accordion
feature.
On March 31, 2008, First
Communications merged its joint venture BPL operations, FirstSpeed, LLC with PowerGrid Communications, Inc. (PowerGrid), a Delaware
corporation. As a result, First Communications owns a 25% interest in PowerGrid, the surviving company.
First Communications acquired
Globalcom, a fiber and wireless infrastructure provider, for $58.5 million in cash on September 30, 2008. Concurrently with the Globalcom acquisition,
First Communications closed a $50 million incremental term loan commitment, syndicated by JP Morgan Securities Inc. The facility term is coterminous
with the existing facility, with pricing starting at 425 over US LIBOR (75% of which is fixed under interest rate swap for three years at 3.77%) The
proceeds of the debt were used to pay for the acquisition. In addition, First Communication used $8.5 million under the existing $20 million revolving
credit facility to pay for the balance of the purchase price.
On September 13, 2008, First
Communications signed a definitive agreement to merge with Renaissance which was amended on December 22, 2008 . Renaissance will
issue its common stock to current First Communications stockholders, as further described herein, will assume the outstanding debt of First
Communications and will redeem $15 million of First Communications preferred stock.
Contractual Obligations and Commercial
Commitments
First Communications has various
commitments primarily related to leases for collocations centers, tower leases and office equipment. It expects to fund these commitments with cash
generated from operations.
The following table summarizes
First Communications contractual obligations at December 31, 2007 (in thousands):
|
|
|
|
Payments Due by Period
|
|
Contractual Obligations at December 31, 2007
|
|
|
|
Less than
1 Year
|
|
2-3 Years
|
|
4-5 Years
|
|
After
5 Years
|
|
Total
|
Operating
leases
|
|
|
|
$
|
1,405
|
|
|
$
|
2,391
|
|
|
$
|
1,256
|
|
|
$
|
95
|
|
|
$
|
5,147
|
|
Line of
credit
|
|
|
|
|
625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
contractual cash obligations
|
|
|
|
$
|
2,030
|
|
|
$
|
2,391
|
|
|
$
|
1,256
|
|
|
$
|
95
|
|
|
$
|
5,147
|
|
158
The following table summarizes
First Communications commercial commitments at December 31, 2007 (in thousands):
|
|
|
|
Amount of Commitment Expiration Per Period
|
|
Commercial Commitments at December 31, 2007
|
|
|
|
Less than
1 Year
|
|
2-3 Years
|
|
4-5 Years
|
|
After
5 Years
|
|
Total
|
Standby
letters of credit
|
|
|
|
$
|
171
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
171
|
|
Total
commercial commitments
|
|
|
|
$
|
171
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
171
|
|
Off-Balance Sheet Financial Instruments
First Communications has $171
thousand in letters of credit as described above.
Impact of Inflation and Changing Prices
The increased acquisition cost of
equipment is the primary inflationary factor affecting First Communications. Many of First Communications other operating expenses are also
expected to increase with inflation, including health care costs. Management does not expect that the effects of inflation on First
Communications overall operating costs will be greater for First Communications than for its competitors.
Qualitative and Quantitative Disclosures about Market
Risk
First Communications is
potentially exposed to market risk associated with changes in interest rates. For more information on these exposures, see the discussion of First
Communications debt facilities above.
Recently Issued Accounting Pronouncements
In April 2008, FASB Staff
Position 142-3, Determination of the Useful Life of Intangible Assets (FSP 142-3) was issued. This standard amends the factors
that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS
142. FSP 142-3 is effective for consolidated financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within
those fiscal years. Early adoption is prohibited. First Communications has not yet determined the impact, if any, of the adoption of FSP 142-3 on its
consolidated financial statements.
In March 2008, the FASB issued
SFAS 161, Disclosures about Derivative Instruments and Hedging Activities, an Amendment of SFAS 133. SFAS 161 requires disclosures of how
and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for and how derivative instruments and
related hedged items affect an entitys financial position, financial performance and cash flows. SFAS 161 is effective for fiscal years beginning
after November 15, 2008, with early adoption permitted. First Communications has not yet determined the impact, if any, of the adoption of SFAS 161 on
its consolidated financial statements.
In December 2007, the FASB issued
SFAS 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of Accounting Research Bulletin (ARB) 51.
SFAS 160 clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity
in the consolidated financial statements. SFAS 160 changes the way the consolidated statement of operations is presented, thus requiring consolidated
net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. SFAS 160 is effective
for the fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. First Communications does not expect the
adoption of SFAS 160 to have a material impact on its consolidated financial statements.
In December 2007, the FASB issued
SFAS 141 (revised 2007), Business Combinations. SFAS 141(R) replaces SFAS 141, Business Combinations. SFAS 141(R) retains the
fundamental requirements in SFAS 141 that the acquisition method of accounting (which SFAS 141 called the purchase method) be used for all business
combinations and for an acquirer to be identified for each business combination. SFAS 141(R) defines the acquirer as the entity that obtains control of
one or more businesses in the business combination and establishes the
159
acquisition date as the date
that the acquirer achieves control. SFAS 141(R) requires an acquirer to recognize the assets acquired, the liabilities assumed and any noncontrolling
interest in the acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions specified in the statement.
SFAS 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008. Early adoption is prohibited. First Communications will be required to apply SFAS 141(R) to any
acquisition subsequent to December 31, 2008.
In February 2007, the FASB issued
SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS 159 permits entities to choose to measure many
financial instruments and certain other items at fair value and establishes presentation and disclosure requirements to facilitate comparisons between
entities that choose different measurement attributes for similar types of assets and liabilities. A company may also elect the fair value option for
eligible items that exist on the effective date of FAS 159. A companys decision to elect the fair value option for an eligible item is
irrevocable. First Communications did not elect the fair value option for eligible financial assets or financial liabilities upon adoption. The
adoption of FAS 159 on January 1, 2008 did not have a material impact on First Communications consolidated financial statements.
In September 2006, the FASB
issued SFAS 157, Fair Value Measurements. SFAS 157 defines fair value, establishes a framework for measuring fair value in GAAP, and
expands disclosures about fair value measurements. In February 2008, the FASB issued FASB Staff Position (FSP) 157-2, which delays the
effective date of FAS 157 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the
financial statements on a recurring basis (at least annually). The provisions of FSP 157-2 are effective for First Communications on January 1, 2009.
In January 2008, First Communications adopted SFAS 157 except as it applies to those nonfinancial assets and nonfinancial liabilities as noted in
proposed FSP FAS 157-b. The partial adoption of SFAS 157 on January 1, 2008 did not have a material impact on First Communications consolidated
financial position, results of operations or cash flows. First Communications management does not expect the adoption of the remaining provisions
of SFAS 157 to have a material impact on its financial position, results of operations or cash flows.
Critical Accounting Policies
First Communications
consolidated financial statements are based on the selection and application of significant accounting policies, which require management to make
estimates and assumptions. Management considers an accounting estimate to be critical if it requires assumptions to be made that were uncertain at the
time the estimate was made and changes in the estimate or different estimates that could have been selected have a material impact on First
Communications consolidated results of operations or financial condition. These estimates and assumptions are reviewed periodically by management
and compared to historical trends to determine the accuracy of estimates and assumptions used. If warranted, these estimates and assumptions may be
changed as current trends are assessed and updated. Historically, estimates have been determined to be reasonable. No material changes to First
Communications accounting policies were made during 2007 or the six months ended June 30, 2008.
First Communications believes the
following are some of the more critical judgment areas in the application of its accounting policies that affect its financial condition and results of
operations.
Allowance for Doubtful
Accounts
The allowance for doubtful
accounts represents managements best estimate of probable losses in the accounts receivable balance. The allowance is based on known troubled
accounts, historical experience and other currently available evidence. Accounts are written off when management determines that the accounts are
uncollectible.
160
Property and
Equipment
Property and equipment are stated
at cost less accumulated depreciation. Major additions and improvements are charged to the property accounts while replacements and maintenance and
repairs, which do not improve or extend the life of the assets, are expensed currently. When property is retired or otherwise disposed of, the cost of
the property is removed from the asset accounts, accumulated depreciation is charged with an amount equivalent to the depreciation provided and the
associated gain or loss is recorded in cost of facilities in the accompanying consolidated statement of operations.
Software included in property and
equipment includes amounts paid for purchased software and implementation services and direct internal payroll for software used internally that has
been capitalized in accordance with the Statement of Position (SOP) 98-1, Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use.
Impairment of Long-Lived
Assets
First Communications reviews its
long-lived assets, including definite-lived intangible assets, for impairment in accordance with the provisions of SFAS No.144, Accounting for
the Impairment or Disposal of Long-Lived Assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. In analyzing potential impairments, projections of future cash flows are used to estimate fair value and are compared to the carrying
amount of the asset. There is inherent subjectivity in estimating future undiscounted cash flows, which can have a material impact on the amount of
potential impairments.
Goodwill and Other Intangible
Assets
Goodwill represents the excess of
the cost of an acquired entity over the net fair value of assets acquired and liabilities assumed. First Communications accounts for its goodwill in
accordance with SFAS 142, Goodwill and Other Intangible Assets. Under this pronouncement, goodwill is not amortizable, but requires First
Communications to test goodwill and other indefinite lived intangibles for impairment annually or if certain impairment indicators arise. First
Communications performs its annual impairment test on a recurring basis in the fourth quarter of each year. Impairments, if any, are expensed in the
year incurred.
Other intangible assets primarily
consist of trademarks, customer lists and Local Multipoint Distribution System (LMDS) licenses. The useful lives of trademarks were
determined to be indefinite and, therefore, these assets are not being amortized and have been tested for impairment. There was no impairment of
trademarks at December 31, 2007 or at June 30, 2008. LMDS is an authorized fixed broadband wireless service that may be used to provide high-speed data
transfer, telephone service, telecommunications network transmission, internet access, video broadcasting, video conferencing and other services.
Customer lists and LMDS licenses are being amortized on a straight-line basis over their estimated economic lives of eight and 25 years, respectively,
and are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable as described
above.
The straight-line method of
amortization reflects an appropriate allocation of the cost of the intangible assets to earnings in proportion to the amount of economic benefits
obtained by us in each reporting period.
Income
Taxes
First Communications accounts for
income taxes in accordance with SFAS 109, Accounting for Income Taxes. Deferred income taxes are determined based upon enacted tax laws and
the rates applied to the differences between the financial statements and tax basis of assets and liabilities.
First Communications utilizes the
liability method of accounting for income taxes, as set forth in SFAS 109. Under the liability method, deferred taxes are determined based on the
difference between the financial and tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are
expected to reverse. Deferred tax benefit or expense represents the change in the deferred tax asset and liability balances.
161
On July 2, 2007, First
Communications adopted the provisions of FASB Interpretation No. (FIN) 48, Accounting for Uncertainty in Income Taxes. FIN 48
addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the consolidated financial
statements. Under FIN 48, First Communications may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the
tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in
the consolidated financial statements from such a position should be measured based on the largest benefit that has a greater than 50% likelihood of
being realized upon ultimate settlement. FIN 48 also provides guidance on derecognition, classification, interest and penalties on income taxes and
accounting in interim periods and it requires increased disclosures. At the date of adoption, and as of June 30, 2008 and December 31, 2007, First
Communications unrecognized tax benefit for uncertain tax positions was immaterial.
Accounts
Payable
First Communications performs
periodic bill verification procedures to identify errors in vendors billing processes. The bill verification procedures include the examining of
bills, comparing billed rates with contracted rates, evaluating the trends of invoice amounts by vendors and reviewing the types of charges being
assessed. If First Communications concludes that it has been billed inaccurately, it will dispute the charge with the vendor and begin resolution
procedures. Although dispute charges may relate to several periods, in accordance with industry standards dispute resolutions are recognized in the
period of resolution. Disputes of this nature occur in the ordinary course of business within the telecommunications industry. As of December 31, 2007,
the offset to accounts payable as a result of the unresolved disputes was $1,471.
Warrants
Warrants to purchase shares of
common stock have been classified as equity in accordance with Emerging Issues Task Force Issue No. (EITF) 00-19: Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a Companys Own Stock. The fair value of warrants is determined
using the Black-Scholes pricing model. Key assumptions used in the Black-Scholes pricing model include the stock price at the date of issuance, the
contractual life of the warrants, the risk free interest rate, the dividend yield, and the estimated volatility of the companys common stock. The
risk free interest rate is based on U.S. treasury yields in effect at the time of issuance for the contractual life of the warrants. The dividend yield
is an estimate of the expected dividend yield on the companys common stock. As First Communications does not have sufficient historical or
implied volatility data for its own common stock, it estimates its volatility based on similar public entities in the telecommunications
industry.
Concentration of Credit
Risk
Financial instruments that
potentially subject First Communications to concentration of credit risk consist primarily of accounts receivable and cash depository accounts. First
Communications grants credit and performs ongoing credit evaluations of its customers, and generally does not require collateral. It maintains all cash
in accounts at high credit quality financial institutions. The Federal Deposit Insurance Corporation (FDIC) insures these cash accounts up
to $250,000. First Communications periodically assesses the financial conditions of the commercial banks and believes the risk of loss is
minimal.
Accounting
Estimates
The preparation of consolidated
financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue
and expenses during the reporting period. On an on-going basis, First Communications evaluates its estimates, including those related to collectability
of accounts receivable, valuation of inventories, useful lives of property, plant and equipment, recoverability of goodwill and intangible assets,
income taxes and contingencies. First Communications
162
bases its estimates on
historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis
for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ
from these estimates under different assumptions or conditions. These changes in estimates are recognized in the period they are
realized.
163
EXECUTIVE COMPENSATION
Renaissance Executive Compensation
Compensation
Discussion and Analysis
No executive officer has received
any cash compensation for services rendered to Renaissance. Commencing upon the date of its IPO and continuing through the closing of the Merger,
Renaissance has paid BMD Management Company, an affiliate of Barry W. Florescue, a fee of $8,000 per month for providing Renaissance with office space
and certain office and secretarial services. However, this arrangement is solely for its benefit and is not intended to provide Mr. Florescue
compensation in lieu of a salary. Other than the $8,000 per month administrative fee, no compensation of any kind, including finders, consulting or
other similar fees, is paid to any of Renaissances existing stockholders, including its directors, or any of their respective affiliates, prior
to, or for any services they render in order to effectuate the consummation of a business combination. However, such individuals are reimbursed for any
out-of-pocket expenses incurred in connection with activities on Renaissances behalf such as identifying potential target businesses and
performing due diligence on suitable business combinations. There is no limit on the amount of these out-of-pocket expenses and there will be no review
of the reasonableness of the expenses by anyone other than Renaissances board of directors, which includes persons who may seek reimbursement, or
a court of competent jurisdiction if such reimbursement is challenged. Because of the foregoing, Renaissance has generally not had the benefit of
independent directors examining the propriety of expenses incurred on its behalf and subject to reimbursement.
First Communications Executive
Compensation
Compensation
Discussion and Analysis
Set out below is various
information about the compensation paid during the 2007 fiscal year to the named executive officers of First Communications, Messrs. Hexamer, Morris
and Johnson. Additionally, this discussion and analysis addresses actions taken after the close of the last fiscal year with respect to the named
executive officers and Mr. Buyens, who joined First Communications in 2008 as its President. This discussion and analysis should be read together with
the compensation tables and related disclosure below.
The compensation paid to Messrs.
Hexamer, Morris and Johnson for 2007 consisted of the following principal elements: base salary, bonuses, stock awards and non-equity based
compensation. The executives also received other benefits made available generally to First Communications employees, including health, disability,
life insurance and participation in First Communications 401(k) plan.
First Communications
remuneration committee is responsible for evaluating the compensation and benefit plans applicable to its named executive officers and making
recommendations to the entire board. Each year, First Communications board reviews, modifies and approves proposals prepared by its remuneration
committee to determine the adjustments, if any, that need to be made to all elements of First Communications named executive officers
compensation, including base salary and annual bonus.
In determining the appropriate
level of compensation for 2007, the First Communications remuneration committee focused on attaining the following objectives upon making its
recommendations to the board of directors:
|
|
Staying competitive with other companies with whom it competes
for talent;
|
|
|
Providing a strong incentive to the executives to achieve their
individual and First Communications short- and long-term goals; and
|
|
|
Aligning the interests of the executives with the interests of
First Communications stockholders.
|
In determining the levels and mix
of compensation, the chief executive officer and the board have not generally relied on formulaic guidelines, but rather sought to maintain a flexible
compensation program which allows First Communications to adapt components and levels of compensation to motivate and reward individual
executives
164
within the context of its
desire to attain certain strategic and financial goals. In addition to any objective criteria, subjective factors considered in compensation
determinations include an executives skills and capabilities, contributions as a member of the executive management team, and contributions to
First Communications overall performance. First Communications board does not employ a compensation consultant and does not rely on
industry benchmarking or general compensation surveys in determining executive compensation. First Communications chief executive officer makes
recommendations to the remuneration committee with respect to compensation and benefits of the other named executive officers but is not involved in
establishing his own compensation.
Elements of
Compensation
Base Salary
The purpose of base salary is to
reflect job responsibilities, anticipated future value to the organization and market competitiveness, while providing a stable source of income for
First Communications named executive officers.
The process of setting base
salary is subjective and does not utilize a formulaic weighting of any factors. The remuneration committee considers each executives talents,
experience and responsibilities, including his past and expected future contributions to First Communications.
The base salary payable to each
named executive officer is intended to provide a fixed component of compensation reflecting the executives skill set, experience, role and
responsibilities. Additionally, First Communications intends to be competitive within the geographic territory in which it operates and in the
telecommunications sector generally. Base salary is reviewed periodically by the remuneration committee and the board of directors, with First
Communications chief executive officer providing recommendations to the board for each other named executive officer. In determining base salary,
the remuneration committee and the board consider individual performance during the prior year, the mix of fixed to overall compensation and subjective
considerations relating to cost of living adjustments and value to First Communications. Mr. Hexamer received a base salary of $140,000 in 2007, Mr.
Morris received a base salary of $130,000 in 2007 and Mr. Johnson received a base salary of $110,000 in 2007.
In light of the strong
performance in 2007 by Messrs. Hexamer and Morris and their continued efforts on behalf of First Communications, the board of directors of First
Communications increased Messrs. Hexamers and Morris base salaries to $265,000 and $250,000, respectively, effective March 1, 2008. In
order to provide Mr. Johnson with a competitive base salary, the board increased Mr. Johnsons base salary in 2007 from its 2006
level.
Annual Bonus
The annual bonuses are intended
to compensate named executive officers for achieving strong company performance. For 2007, the annual bonuses were determined in the discretion of the
remuneration committee. The remuneration committee considered overall company performance, growth in revenue, achievement of synergies from
acquisitions and each executives individual performance during the year. Actual 2007 bonus amounts paid to First Communications named
executive officers are set forth in the Summary Compensation Table below.
Annual bonuses for 2008 for the
named executive officers will be determined by measuring First Communications annual performance against financial performance objectives
established by the remuneration committee in April 2008. These objectives are based on First Communications achieving targeted total revenues and
adjusted EBITDA. There is no discretionary element to the bonus calculation.
165
For 2008, the bonus potential and
the relative weight of the two financial performance objectives in calculating the total bonus for each named executive officer is as
follows:
Name
|
|
|
|
Bonus Potential as a Percentage
of Annual Base
Salary
|
|
Relative Weight of Revenue
Target/Adjusted EBITDA
Target
|
Raymond
Hexamer
|
|
|
|
|
60
|
%
|
|
|
40%/60
|
%
|
Joseph R.
Morris
|
|
|
|
|
50
|
%
|
|
|
40%/60
|
%
|
Richard J.
Buyens
|
|
|
|
|
50
|
%
|
|
|
50%/50
|
%
|
David Johnson,
II
|
|
|
|
|
120
|
%
|
|
|
80%/20
|
%
|
No bonus will be paid unless the
trigger points for each financial objective are met, unless the renumeration committee determines otherwise. The trigger point for total
revenue is 95% of the target, and the trigger point for adjusted EBITDA is 90% of the target. The named executive officers will earn 25% of their bonus
potential if the trigger points are met and between 25%75% of their bonus potential (calculated on a ratable linear scale) for performance
between the trigger points and 99.9% of the targets. If First Communications outperforms its financial objectives, the named executive officers are
eligible to receive bonuses up to 200% of their bonus potential, as set forth in the following table:
Achievement
(% of Target)
|
|
|
|
Multiplier
(times % over 100%)
|
|
Example
|
Revenue
Target:
|
|
|
|
|
|
|
|
|
|
|
At or above
100%
|
|
|
|
None
|
|
Performance at 100% of objective results in eligibility for 100% of incentive potential for revenue target objective
|
At or above
103%
|
|
|
|
3x
|
|
Performance at 103% of objective results in eligibility for 109% of incentive potential for revenue target objective
|
At or above
106%
|
|
|
|
4.5x
|
|
Performance at 106% of objective results in eligibility for 127% of incentive potential for revenue target objective
|
At or above
109%
|
|
|
|
6x
|
|
Performance at 109% of objective results in eligibility for 154% of incentive potential for revenue target objective
|
At or above
112%
|
|
|
|
7.5x
|
|
Performance at 112% or more of objective results in eligibility for 200% of incentive potential for revenue target objective
|
Adjusted EBITDA Target:
|
|
|
|
At or above
100%
|
|
|
|
None
|
|
Performance at 100% of objective results in eligibility for 100% of incentive potential for adjusted EBITDA target objective
|
At or above
104%
|
|
|
|
2.25x
|
|
Performance at 104% of objective results in eligibility for 109% of incentive potential for adjusted EBITDA target objective
|
At or above
108%
|
|
|
|
3.38x
|
|
Performance at 108% of objective results in eligibility for 127% of incentive potential for adjusted EBITDA target objective
|
At or above
112%
|
|
|
|
4.5x
|
|
Performance at 112% of objective results in eligibility for 154% of incentive potential for adjusted EBITDA target objective
|
At or above
116%
|
|
|
|
6.25x
|
|
Performance at 116% or more of objective results in eligibility for 200% of incentive potential for adjusted EBITDA target
objective
|
By way of example, if First
Communications were to meet 100% of its revenue objective and 106% of its adjusted EBITDA objective, Mr. Hexamer would be entitled to a bonus equal to
100% of the portion of the bonus attributable to the revenue target (i.e., 24% of his annual base salary) plus 113.5% of the portion of the bonus
attributable to the adjusted EBITDA target (i.e., 40.86% of his annual base salary), for a total of 64.86% of his annual base salary.
166
Cash and Stock Awards Upon
Consummation of the IPO
In March 2005, Messrs. Hexamer,
Morris and Johnson entered into employment agreements with FC LLC that provided that they each would be entitled to participate in an incentive
compensation program based upon enhanced owner value in the event of a sale of FC LLC. In June 2007, in connection with the sale of FC LLC to First
Communications and with First Communications initial public offering on AIM, Messrs. Hexamer, Morris and Johnson agreed with the members of FC
LLC to modify the existing incentive compensation program such that these executives would be entitled to be paid cash payments and shares of First
Communications common stock by the members of FC LLC upon consummation of the sale and the public offering. In July 2007, pursuant to the amended
incentive compensation plan, Messrs. Hexamer, Morris and Johnson received cash awards of $1,662,921, $1,662,921 and $1,638,481, respectively, and stock
awards of 199,352, 199,532 and 239,091 shares of First Communications common stock, respectively.
Long Term Incentive Compensation
(Stock Option Awards)
First Communications board
of directors has discussed implementing an equity incentive plan to provide First Communications employees with a financial interest in the
appreciation of First Communications common stock and to provide additional incentives to meet long-term financial objectives. In light of the
transaction with Renaissance, the board has elected not to adopt an equity incentive plan at this time. Pursuant to the Merger Agreement, Renaissance
has agreed to adopt an equity incentive plan and to make stock option and restricted stock grants to certain current First Communications employees,
effective upon consummation of the Merger. Messrs. Hexamer, Morris, Buyens and Johnson will receive options exercisable for 80,000, 80,000, 413,850 and
60,000 shares of Renaissance common stock, respectively, and Messrs. Hexamer, Morris and Johnson will receive 40,500, 40,500 and 30,500 shares of
restricted stock, respectively. The allocations of the stock option grants for all employees were determined by members of Renaissances and First
Communications management based on grants that previously had been conditionally approved by First Communications board of directors. In
determining the amounts conditionally approved, First Communications board of directors factored in each executive officers length of
service with the First Communications, existing stock ownership and past individual performance.
Severance
Each of the named executive
officers is party to an employment agreement with First Communications wherein First Communications has agreed to pay such executive his annual base
salary for a 12 month period following the termination of his employment and the portion of his annual bonus earned as of the termination date if his
employment is terminated without cause, and to pay such amounts upon the death or disability of such executive, but offset on a dollar for dollar basis
by the amount of any Social Security payments received by the executive or any life or disability insurance, the premiums for which First
Communications has paid, received by the executive. If Mr. Buyens employment is terminated by First Communications without cause, or by Mr.
Buyens for good reason, prior to November 6, 2008, First Communications will pay him his annual base salary for 60 days after such termination. If Mr.
Buyens employment is terminated by First Communications without cause or by Mr. Buyens for good reason, on or after November 6, 2008 and before May 7,
2009, First Communications will pay him his annual base salary for 90 days after such termination. If Mr. Buyens employment is terminated by
First Communications without cause, or by Mr. Buyens for good reason, on or after May 7, 2009, First Communications will pay him his annual base salary
for 12 months after such termination. If a termination without cause or for good reason occurs at any time within a 12 month period following a change
in control of First Communications, Mr. Buyens will be entitled to be paid his annual base salary for 12 months following such termination and a pro
rated portion of his annual bonus. First Communications board of directors has determined that these severance arrangements are necessary to
assist First Communications in retaining top executive talent, to encourage the executive officers honest discourse with the chief executive
officer and the board of directors without fear of adverse consequences and to ensure that the executive officers will act in the best interest of
First Communications in any situation involving a potential change in control of First Communications.
167
Perquisites and Personal
Benefits
First Communications did not
provide significant personal benefits during 2007 to Messrs. Hexamer, Morris and Johnson other than certain company paid life and disability insurance
benefits, 401(k) matching payments in accordance with First Communications policy applicable to all full time employees and club dues. The
aggregate value of the perquisites paid to each named executive officer during 2007 was less than $10,000 and, thus, is not reported in the 2007
Summary Compensation Table below.
Impact of Accounting and Tax
on the Form of Compensation
Section 162(m) of the Internal
Revenue Code (the IRC) limits the tax deduction for compensation paid to named executive officers to $1,000,000. This deduction limitation
does not apply to compensation that constitutes qualified performance-based compensation within the meaning of Section 162(m) of the IRC
and regulations promulgated thereunder, including certain performance-based compensation that has been approved by stockholders. Pursuant to this proxy
statement/prospectus, Renaissance is seeking approval of an equity incentive plan, which is designed to allow the deduction of income recognized in
connection with stock options granted under such plan.
First Communications does not
compensate executives for any excise tax liability they may incur by reason of payments and benefits received upon a termination of employment. As a
result, if an executive officer is assessed any excise tax liability under Section 280G of the IRC as a result of payments and benefits received upon a
change in control, that executive officer is responsible for the payment of such excise tax. Additionally, if an executive officer is assessed any
excise tax liability under Section 280G of the IRC as a result of payments and benefits received upon a change in control, First Communications will
not be able to deduct the cost of those payments and benefits on which the excise tax is imposed.
2007 Executive Compensation
Information
The following table sets forth
certain compensation information for the fiscal year ended December 31, 2007 for the three executive officers of First Communications on December 31,
2007. The named executive officers were employees of FC LLC prior to its acquisition by First Communications, and the table below includes compensation
paid to the named executive officers prior to that acquisition. The named executive officers and Mr. Buyens will be the only executive officers of the
combined company.
2007 Summary Compensation Table
Name and Principal Position
|
|
|
|
Year
|
|
Salary
($)
|
|
Bonus
($)
|
|
Stock Awards
($)
|
|
Non-Equity
Incentive Plan
Compensation
|
|
Total ($)
|
Raymond
Hexamer
Chief Executive Officer
|
|
|
|
|
2007
|
|
|
$
|
140,000
|
|
|
$
|
120,000
|
|
|
$
|
997,660
|
(1)
|
|
$
|
1,662,921
|
(2)
|
|
$
|
2,920,581
|
|
Joseph R.
Morris
Chief Financial Officer and Chief Operating Officer
|
|
|
|
|
2007
|
|
|
$
|
130,000
|
|
|
$
|
100,000
|
|
|
$
|
997,660
|
(1)
|
|
$
|
1,662,921
|
(2)
|
|
$
|
2,890,581
|
|
David Johnson,
II
Senior Vice President, Sales
|
|
|
|
|
2007
|
|
|
$
|
110,000
|
|
|
$
|
90,000
|
|
|
$
|
1,195,455
|
(1)
|
|
$
|
1,638,481
|
(2)
|
|
$
|
3,033,936
|
|
(1)
|
|
Consists of grants of common stock of First Communications made
by the former members of FC LLC upon the consummation of First Communications initial public offering, pursuant to an incentive compensation
program adopted by FC LLC and amended in June 2007. The amount of the grants were as follows: Mr. Hexamer, 199,532 shares; Mr. Morris, 199,532 shares;
and Mr. Johnson, 239,091 shares. For purposes of calculating the dollar values above, each share of First Communications common stock was valued at
$5.00 per share on the date of grant. Because the grants were made by the former members of FC LLC, neither First Communications nor any of the
companies it acquired recognized an accounting charge in connection with these grants.
|
168
(2)
|
|
Consists of one time cash bonus paid by the former members of FC
LLC upon the consummation of First Communications initial public offering, pursuant to an incentive compensation program adopted by FC LLC and
amended in June 2007 in connection with the sale of substantially all of its assets to First Communications.
|
The following Grants of
Plan-Based Awards table summarizes the equity and non-equity incentive compensation awards made to First Communications named executive officers
in 2007.
2007 Grants of Plan-Based Awards
|
|
|
|
|
|
Estimated Future Payouts Under
Non-Equity
Incentive Plan Awards
|
|
Estimated Future Payouts Under
Equity Incentive
Plan Awards
|
|
Name
|
|
|
|
Grant
Date
|
|
Threshold
($)
|
|
Target
($)
|
|
Maximum
($)
|
|
Threshold
(#)
|
|
Target
(#)
|
|
Maximum
(#)
|
|
All Other
Stock
Awards:
Number of
Shares of
Stock or
Units
(#)
|
|
Grant Date
Fair Value
of Stock
and
Option
Awards
|
Raymond
Hexamer
|
|
|
|
|
6/15/07
|
(1)
|
|
$
|
1,662,921
|
|
|
$
|
1,662,921
|
|
|
$
|
1,662,921
|
|
|
|
199,532
|
|
|
|
199,532
|
|
|
|
199,532
|
|
|
|
|
|
|
$
|
2,660,581
|
|
Joseph R.
Morris
|
|
|
|
|
6/15/07
|
(1)
|
|
$
|
1,662,921
|
|
|
$
|
1,662,921
|
|
|
$
|
1,662,921
|
|
|
|
199,532
|
|
|
|
199,532
|
|
|
|
199,532
|
|
|
|
|
|
|
$
|
2,660,581
|
|
David
Johnson, II
|
|
|
|
|
6/15/07
|
(1)
|
|
$
|
1,638,481
|
|
|
$
|
1,638,481
|
|
|
$
|
1,638,481
|
|
|
|
239,091
|
|
|
|
239,091
|
|
|
|
239,091
|
|
|
|
|
|
|
$
|
2,833,936
|
|
(1)
|
|
Consists of grants of First Communications common stock and cash
made by the former members of FC LLC upon the consummation of First Communications initial public offering, pursuant to incentive compensation
plans adopted by FC LLC in March 2005 and amended in June 2007. For purposes of calculating the dollar values above, each share of First Communications
common stock was valued at $5.00 per share on the date of grant. The cash and stock awards vested in full upon consummation of the sale of First
Communications, LLC and First Communication, Inc.s initial public offering on AIM. These awards are not subject to further vesting or any other
risk of forfeiture. Because the grants were made by the former members of FC LLC, neither First Communications nor any of the companies it acquired
recognized an accounting charge in connection with these grants.
|
The following Stock Vested table
summarizes information concerning equity incentive compensation awards to each First Communications named executive officer that vested in
2007.
Option Exercises and Stock Vested
|
|
|
|
Option Awards
|
|
Stock Awards
|
|
Name
|
|
|
|
Number of
Shares
Acquired
on Exercise
(#)
|
|
Value Realized
on Exercise
($)
|
|
Number of
Shares
Acquired
on Vesting
(#)
|
|
Value Realized
on Vesting
(1)
($)
|
Raymond
Hexamer
|
|
|
|
|
|
|
|
|
|
|
|
|
199,532
|
|
|
$
|
997,660
|
|
Joseph R.
Morris
|
|
|
|
|
|
|
|
|
|
|
|
|
199,532
|
|
|
$
|
997,660
|
|
David
Johnson, II
|
|
|
|
|
|
|
|
|
|
|
|
|
239,091
|
|
|
$
|
1,195,455
|
|
(1)
|
|
For purposes of calculating the dollar values above, each share
of First Communications common stock was valued at $5.00 per share on the date of grant.
|
Termination of Employment and
Change-in-Control Agreements for Named Executive Officers
First Communications
employment agreements with each of Messrs. Hexamer, Morris and Johnson provide that First Communications will pay the executive officer severance if
his employment is terminated without cause or upon his death or disability. Upon termination for death or disability, each executive, or his estate, is
entitled to be paid twelve months base salary and his annual bonus earned as of the termination date, reduced dollar for dollar by the amount of
any Social Security benefits or life insurance proceeds or disability benefits, the premiums for which have been paid by First Communications. Upon
termination without cause, each executive is entitled to be paid twelve months base salary and his annual bonus earned as of the termination
date. Additional details
169
and definitions can be found
below under the heading
Executive Compensation Post Merger Employment Agreements
and in the employment agreements, which are
filed as exhibits to the registration statement of which this proxy statement/prospectus forms a part.
Assuming that the named executive
officers employment had terminated as of December 31, 2007 and that they had earned 100% of their annual bonuses as of that date, the severance
payments to each named executive officer would have been as follows:
|
|
|
|
Termination Without Cause
|
|
Termination Upon Death or Disability
(1)
|
|
Name
|
|
|
|
Base Salary
($)
|
|
Bonus
($)
|
|
Total
($)
|
|
Base Salary
($)
|
|
Bonus
($)
|
|
Total
($)
|
Raymond
Hexamer
|
|
|
|
$
|
140,000
|
|
|
$
|
120,000
|
|
|
$
|
260,000
|
|
|
$
|
140,000
|
|
|
$
|
120,000
|
|
|
$
|
260,000
|
|
Joseph R.
Morris
|
|
|
|
$
|
130,000
|
|
|
$
|
100,000
|
|
|
$
|
230,000
|
|
|
$
|
130,000
|
|
|
$
|
100,000
|
|
|
$
|
230,000
|
|
David
Johnson, II
|
|
|
|
$
|
110,000
|
|
|
$
|
90,000
|
|
|
$
|
200,000
|
|
|
$
|
110,000
|
|
|
$
|
90,000
|
|
|
$
|
200,000
|
|
(1)
|
|
Reported payments would be offset by the amount of any Social
Security benefits payable to the named executive officer and by the amount of any life insurance proceeds or disability benefits paid to such named
executive officer, or his estate, pursuant to policies, the premiums for which First Communications paid.
|
Post-Merger Employment
Agreements
Following the Merger, Messrs.
Hexamer, Morris, Buyens and Johnson are expected to become, respectively, Chief Executive Officer, Chief Operating Officer and Chief Financial Officer,
President and Senior Vice President, Sales and Marketing of Renaissance. Each officer will serve Renaissance pursuant to an existing employment
agreement between such officer and First Communications, which will be assumed by Renaissance in connection with the Merger.
Messrs. Hexamer, Morris and
Johnson each entered into an employment agreement with First Communications effective upon the consummation of First Communications initial
public offering on AIM on July 2, 2007. Mr. Buyens entered into an employment agreement effective as of May 6, 2008. These employment agreements have
an initial term of two years and, subject to any prior termination, will be automatically extended for additional one year periods unless a notice of
non-renewal is provided by either party not later than three months prior to the expiration of the then current employment term. Messrs. Hexamer,
Morris and Johnson have each agreed that for a period of two years following the termination of his employment for any reason, he will not compete with
the business of First Communications or any of its subsidiaries or affiliates anywhere in the United States. Mr. Buyens has agreed that, for a period
of one year following termination of his employment for any reason, he will not compete with the business of First Communications or any of its
subsidiaries or affiliates in Ohio, Michigan, Illinois, Pennsylvania, New York, New Jersey or Maryland. Each officer has agreed that, for a period of
one year following the termination of his employment for any reason, he will not solicit any customers or employees of First Communications. In
addition, each employment agreement requires the officers to protect First Communications confidential information.
Each employment agreement is
terminable by First Communications at any time for cause, and upon ten days advance written notice if such termination is without cause. If Messrs.
Hexamers, Morris, Johnsons or Buyens employment is terminated by reason of death or disability, each employment agreement
provides that First Communications will pay the executive, or his estate, his annual base salary for 12 months following his death or disability, as
well as the portion of his annual bonus earned as of the termination date, with such amounts to be reduced dollar for dollar by the amount of any
Social Security payments or any disability benefits or life insurance proceeds received from policies, the premiums for which have been paid by First
Communications. If Messrs. Hexamers, Morris or Johnsons employment is terminated without cause, each employment agreement provides
that First Communications will pay the executive his annual base salary for 12 months following the termination date, as well as the portion of his
annual bonus earned as of the termination date. Additionally, if First Communications terminates Messrs. Hexamers, Morris or Johnsons
employment without cause and enforces the
170
non-competition provisions
contained in the employment agreement beyond the 12 month period following such termination of employment, First Communications will continue to pay
the executive his annual base salary for so long as it enforces such non-competition provisions. If Mr. Buyens employment is terminated by First
Communications without cause, or by Mr. Buyens for good reason, prior to November 6, 2008, First Communications will pay him his annual base salary for
60 days after such termination. If Mr. Buyens employment is terminated by First Communications without cause, or by Mr. Buyens for good reason,
on or after November 6, 2008 and before May 7, 2009, First Communications will pay him his annual base salary for 90 days after such termination. If
Mr. Buyens employment is terminated by First Communications without cause, or by Mr. Buyens for good reason, on or after May 7, 2009, First
Communications will pay him his annual base salary for 12 months after such termination. If a termination without cause or for good reason occurs at
any time within a 12 month period following a change in control of First Communications, Mr. Buyens will be entitled to be paid his annual base salary
for 12 months following such termination and a pro rated portion of his annual bonus. If Mr. Buyens employment is terminated due to his death or
disability, First Communications will pay him his base salary for 12 months after his death or disability and a pro rated portion of his annual bonus,
but such amounts will be offset on a dollar-for-dollar basis by the amount of any Social Security payments received by Mr. Buyens or any life or
disability insurance, the premiums for which First Communications has paid, received by Mr. Buyens. If Messrs. Hexamers, Morris,
Johnsons or Buyens employment is terminated for cause, First Communications will pay the executive his base salary accrued as of the
termination date.
For purposes of the employment
agreements, cause generally means gross misconduct by the executive, the executives material failure to perform his duties, a
material breach of the employment agreement by the executive, the executives habitual alcohol or drug use, illegal actions taken by the executive
with respect to First Communications, the executives conviction of a crime constituting a felony or the executives commission of certain
securities laws violations. For purposes of the employment agreements, disability generally means the executives inability to perform
his duties on a full-time basis for a period of six consecutive months. For purposes of Mr. Buyens employment agreement, change in
control means a sale of substantially all of the assets of FC LLC or a transaction or series of transactions resulting in the transfer of more
than 50% of all voting securities of First Communications or FC LLC. For purposes of Mr. Buyens employment agreement, good reason
means a material reduction in Mr. Buyens base salary or annual bonus (other than a reduction in annual bonus which is consistent with reductions
in bonus opportunities for all employees eligible for an annual bonus), a requirement that Mr. Buyens work at a location that is more than 50 miles
from his current office location, a reduction in Mr. Buyens position such that Mr. Buyens no longer occupies the same position or a substantially
similar position, or a material reduction in Mr. Buyens authority, duties or responsibilities.
Additionally, First
Communications has agreed to reimburse Mr. Buyens up to $2,000 per month for expenses relating to travel between his home and First
Communications offices. For a description of First Communications executive officers base salaries and bonus amounts, see the section
entitled
The Merger Proposal Interests of First Communications Directors and Executive Officers in the
Merger.
171
First Communications Director
Compensation
The following table sets forth
information relating to compensation paid to First Communications non-employee directors for the fiscal year ended December 31, 2007. Marshall
Belden, Jr. joined the board of directors of First Communications in May 2008 and, thus, does not appear in the table below.
2007 Director Compensation
Name
|
|
|
|
Fees Earned or
Paid in
Cash
(1)
($)
|
|
Total
($)
|
Theodore V.
Boyd
|
|
|
|
$
|
41,754
|
|
|
$
|
41,754
|
|
H. Arthur
Bellows, Jr.
|
|
|
|
$
|
41,454
|
|
|
$
|
41,454
|
|
Mark T.
Clark
|
|
|
|
$
|
35,666
|
|
|
$
|
35,666
|
|
Scott M.
Honour
|
|
|
|
|
|
|
|
|
|
|
Roderick
Sherwood, III
|
|
|
|
|
|
|
|
|
|
|
Mark
Stone
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Each non-employee director other than Messrs. Honour, Sherwood
and Stone received a pro rata annual retainer in an amount equal to $50,000 paid in quarterly installments at or before the beginning of each calendar
quarter and a stipend of $1,500 for each meeting of the board attended in person and $1,000 for each such meeting attended telephonically. Each
non-employee director serving on a board committee, other than Messrs. Honour, Sherwood and Stone, received an annual stipend of $1,000 for each
meeting of such board committee attended in person and $750 for each such meeting attended telephonically. The chairman of the audit, nomination,
remuneration and finance committees received additional pro rata annual retainers of $10,000, $7,500, $5,000 and $5,000, respectively. Messrs. Honour,
Sherwood and Stone agreed to forgo payment of directors fees for so long as First Communications Series A Preferred Stock remains
outstanding.
|
172
REGULATION
The telecommunications services
provided by First Communications in the United States are subject to government regulation at the federal, state and local levels. The regulatory
environment described in this section is subject to change on an ongoing basis, due to new legislation, court decisions, and regulatory agency orders,
and some of these actions could substantially change the regulatory environment in a manner adverse to its ability to successfully operate its
business. In addition, the FCC and State PUCs or third parties could raise issues with regard to First Communications compliance with applicable
laws or regulations that could have a material adverse effect on its business, results of operations and financial condition.
Through its operating
subsidiaries, First Communications holds various federal and state regulatory authorizations. The FCC has jurisdiction over its telecommunications
facilities and services to the extent they are used to provide, originate or terminate domestic interstate or international telecommunications. The FCC
also has jurisdiction over services classified as information services such as Internet access services. State PUCs retain jurisdiction over the same
facilities and services to the extent they are used to provide, originate or terminate local or intrastate long distance telecommunications services.
Local governments may regulate aspects of First Communications business through zoning requirements, permit or right-of-way procedures, and
franchise fees. Foreign laws and regulations apply to communications that originate or terminate in a foreign country. Generally, the FCC and state
public utility commissions do not regulate Internet, video conferencing, or certain data services, although the underlying communications components of
such offerings may be regulated. First Communications operations also are subject to various environmental, building, safety, health, and other
governmental laws and regulations.
Federal Regulation of Telecommunications
Services
The FCC imposes extensive
regulations on common carriers that have some degree of market power such as ILECs. The FCC imposes less regulation on common carriers without market
power, such as First Communications. The FCC permits these non-dominant carriers to provide domestic interstate services (including long distance and
access services) without prior authorization; but it requires these carriers to receive an authorization to construct and operate telecommunications
facilities and to provide or resell communications services between the United States and international points. First Communications must offer
interstate services at just and reasonable rates in a manner that is not unreasonably discriminatory, and must maintain geographically averaged
interstate rates as required by federal law. It must comply with various FCC consumer protection requirements affecting the format and content of its
bills, disclosure of rates and terms and conditions of service, and other matters, and it is subject to various FCC reporting requirements and
mandatory monetary assessments for regulatory programs. The FCC has the authority to condition, modify, cancel, terminate or revoke the First
Communications licenses and authorizations for failure to comply with federal laws or the rules, regulations and policies of the FCC. The FCC may
also impose fines or other penalties for such violations.
The FCC limits the prices that
carriers like First Communications can charge to other carriers for access services, and has a proceeding pending in which it is reviewing all types of
intercarrier compensation.
The FCC requires prior approval
of transfers of control and assignments of operating authorizations, discontinuation of services, and of sales of assets by providers of regulated
services, including sales of customer bases. First Communications cannot complete the Merger without the FCCs prior approval.
The FCC has established a
universal service program that is intended to ensure that affordable, quality basic telecommunications services are available to all
Americans. Like other telecommunications providers, First Communications is required to make contributions to support federal and state universal
service goals, which are assessed as a percentage of its interstate and international end-user telecommunications gross revenues. The contribution
factor as of the third quarter of 2008 is 11.4% of interstate and international end-user telecommunications gross revenue, which factor may change from
quarter to quarter as determined by the Universal Service Administrative Company, the entity that oversees the Universal Service Fund. Some states also
assess contribution to state universal service programs against First Communications intrastate revenues. Although State
173
PUCs generally adopt
assessment methodologies similar to the federal methodology, states may calculate telecommunications service provider contributions in any manner they
choose as long as the process is not inconsistent with the FCCs rules.
Telephone companies are subject
to limitations on the use of customer proprietary network information the carrier acquires by virtue of providing telecommunications services.
Protected information includes information related to the quantity, technical configuration, type, destination and the amount of use of services. A
carrier may not use such information acquired through one of its service offerings to market unrelated service offerings without the approval of the
affected customers. These restrictions may affect its ability to market a variety of packaged services to existing customers. In addition, First
Communications is subject to various other federal and state legal obligations to protect the privacy of its customers personal information. For
example, under rules recently adopted by the Federal Trade Commission to implement the Fair and Accurate Credit Transactions Act of 2003, First
Communications is required to implement measures to detect, prevent and mitigate identity theft. First Communications may be subject to regulatory
penalties or consumer litigation, or both, in the event of unauthorized releases (whether intentional or not) of protected customer
information.
A customer may change its
preferred telecommunications carrier at any time. Both the FCC and some states regulate this process and require that specific procedures be followed.
When these procedures are not followed, particularly if the change is unauthorized or fraudulent, the process is known as slamming. The FCC
has levied substantial fines for slamming and has increased the penalties for slamming. Although no such fines have been assessed against First
Communications, on occasion it has been unable to refute customer slamming claims and has been required to write-off charges to customers as a
result.
The FCC has adopted rules
limiting telemarketing activities by telecommunications services providers. The FCC rules require First Communications to implement procedures to avoid
calling individuals who have placed their names on a national do-not-call list, limit its use of technologies that improve the efficiency of its
telemarketing efforts, limit the hours in which it may place telemarketing calls, limit the number of calls abandoned and limit the time before which
individuals are connected to a salesperson. Rules such as these reduce the effectiveness of telemarketing efforts and result in additional customer
acquisition costs. Several states have adopted similar measures with unique state requirements that require First Communications to incur additional
compliance costs.
State Regulation of Telecommunications
Services
Federal law generally preempts
state statutes and regulations that restrict the provision of competitive local, long distance and enhanced services. Because of this preemption, First
Communications is generally free to provide the full range of local, long distance and data services in every state. While this federal preemption
greatly increases First Communications potential for growth, it also increases the amount of competition to which it may be subject. In addition,
the cost of enforcing federal preemption against certain state policies and programs may be large and may involve considerable delay.
First Communications local
and intrastate long distance common carrier services are subject to state laws and regulations, the details of which vary from state to state. Most
states require providers similar to First Communications to obtain authority from the State PUC before initiating service. In most states, such
providers are also required to file tariffs setting forth the terms, conditions and prices for common carrier services that are classified as
intrastate. First Communications is often required to update or amend these tariffs when it adjusts its rates or adds new common carrier services,
which may require prior regulatory approval. First Communications is also subject to various reporting and record-keeping requirements in these states.
Some states impose service quality standards on its local service operations and require First Communications to file reports showing its performance
in meeting those standards. States also impose a variety of consumer-protection rules, including regulations affecting billing format and content, and
some states also require payment of universal service contributions and other fees and assessments.
Many states also 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
174
by carriers of significant
debt obligations (directly or as a guarantor) or pledges of collateral in support of such debt obligations.
Certificates of authority can
generally be conditioned, modified, canceled, terminated or revoked by state regulatory authorities for failure to comply with state law or the rules,
regulations and policies of state regulatory authorities. State utility commissions generally have authority to supervise telecommunications service
providers in their states and to enforce state utility laws and regulations. Fines or other penalties also may be imposed for
violations.
Many states regulate First
Communications practices with regard to advance payments and deposits it receives from customers. Although the details of these regulations vary
from state to state, they include requirements to maintain surety bonds to cover the amounts on deposit, to credit interest on deposits, and to refund
deposits after a period of time to those customers who have established a good credit history.
Local Regulation
First Communications generally is
required to obtain construction permits and licenses or franchises from state or local governments to install and expand its fiber optic communications
networks using public rights-of-way. Some local governments, where First Communications has installed or anticipates constructing networks, are
proposing and enacting ordinances regulating use of rights-of-way and imposing various fees in connection with such use, including fees based on a
percentage of certain revenues related to the use of the rights-of-way. First Communications cannot guarantee that fees will remain at their current
levels following the expiration of existing franchises or that other local jurisdictions will not impose similar fees. In many markets, the traditional
local telephone companies do not pay rights-of-way fees or pay fees that are substantially less than those imposed on more recent
entrants.
Access to ILEC Facilities and
Services
The Telecommunications Act of
1996 imposes a number of access and interconnection requirements on all local telephone companies, including competitive local exchange carriers like
First Communications, with additional requirements imposed on ILECs. These requirements are intended to ensure access to ILEC network facilities and
services under reasonable rates, terms and conditions.
The Telecommunications Act
requires ILECs to provide requesting telecommunications carriers with nondiscriminatory access to network elements on an unbundled basis at any
technically feasible point on rates, terms and conditions that are just, reasonable and non-discriminatory, in accordance with the other requirements
set forth in Sections 251 and 252 of the Telecommunications Act. The Telecommunications Act gives the FCC authority to determine which network elements
must be made available to requesting carriers such as First Communications. The FCC is required to determine whether the failure to provide access to
such network elements would impair the ability of the carrier seeking access to provide the services it seeks to offer. The FCC has adopted rules
regulating the pricing of these unbundled network elements. The U.S. Supreme Court has upheld both the FCCs authority to adopt such pricing
rules, and the specific pricing guidelines created by the FCC. A series of court decisions, however, overturned many of the FCC rules regarding which
network elements must be unbundled by the ILECs for lease by competitive local exchange carriers.
First Communications originally
entered the local service market by reselling a package of ILEC facilities known as the unbundled network element platform. The rules
mandating the availability of this platform were revoked by the FCC in 2005, and as a result First Communications entered into unregulated commercial
agreements with the major ILECs, Verizon, AT&T and Qwest, for continued access to their services, but at higher rates than had prevailed under the
regulated regime. Since that time, First Communications has sought to reduce its proportion of Off Net customers and thereby reduce its dependence on
facilities leased from the ILECs.
Under current rules, carriers
such as First Communications are entitled to access certain unbundled ILEC facilities (principally loop facilities connecting subscribers to ILEC
central offices and transport facilities between ILEC central offices) at regulated prices. Because its own facilities and facilities leased from
non-incumbent
175
providers cannot provide
access to the premises occupied by all of its customers, First Communications continues to rely on ILEC-provided last mile facilities in
provisioning its services. Changes in the availability or prices of these leased facilities as the result of future regulatory decisions or legislation
could have a material adverse effect on its costs and profitability. For example:
|
|
The FCCs current rules make an exception to the
ILECs unbundling obligations for mass market fiber-to-the-home and fiber-to-the-curb loops with fiber that is within 500 feet of the premises.
The FCC also clarified that ILECs are not required to equip new packetized transmission facilities with the capability to transmit conventional
telephony signals for third party carriers. In October 2004, the FCC voted to eliminate any independent unbundling obligation under Section 271 of the
Telecommunications Act for any broadband unbundled network element (UNE) that has been relieved from unbundling under Section 251 of the
Telecommunications Act. As ILECs deploy fiber optic technology deeper into their loop networks, these rules could limit First Communications
ability to compete in particular geographic submarkets, and particularly its ability to offer competitive data services to customers served over these
fiber loops.
|
|
|
In September 2003, the FCC issued a proposed rulemaking to
review the Total Element Long Run Incremental Cost (TELRIC) methodology used to determine the prices charged to competitive carriers for
unbundled network elements. A change in pricing methodology that materially increases unbundled network element prices would increase First
Communications costs and could have a materially adverse affect on its ability to compete. The FCC has taken no further action to date in this
proceeding.
|
|
|
In September 2005, the FCC agreed, at Qwests request, to
forebear from applying its unbundling rules to Qwest in certain wire centers in the Omaha, Nebraska market. Similarly, in December 2006, the FCC
granted similar forbearance to ACS Anchorage, Inc. for certain wire centers in the Anchorage, Alaska market. The decision to forebear from applying the
unbundling rules in these wire centers means that Qwest does not have to provide competitive providers, such as First Communications, access to
unbundled loops at prices based on the FCCs TELRIC rules. Subsequently, the FCC denied petitions for similar relief sought by Verizon in six
Eastern markets, and by Qwest in an additional four Western markets. Although, to date, none of the FCC forbearance decisions have directly affected
markets that First Communications serves, it is possible that similar petitions may be brought by ILECs in other markets in the future. As part of its
application for approval of its merger with Bell South, AT&T has committed that it will not file or give effect to any forbearance from its
obligations provide unbundled loops and transport facilities for 42 months from the date of its merger closing in December 2006. However, Verizon and
Qwest have made no commitment to refrain from filing future forbearance petitions. There can be no assurance that First Communications business
or financial condition will not be materially adversely affected if the FCC forbears from applying its unbundling rules in material portions of its
markets.
|
|
|
In a series of orders since 2006, the FCC has effectively
deregulated provision of certain broadband services to enterprise customers by most major ILECs, including Verizon, AT&T, Qwest, Embarq Corporation
and Citizens Communication Company. First Communications does not directly purchase these broadband services from the ILECs, so these decisions did not
affect its costs, but the orders may result in increased competitive pressure on its own broadband service offerings.
|
Interconnection
Agreements.
Pursuant to FCC rules implementing the Telecommunications Act, First Communications obtains access to unbundled network elements by
negotiating interconnection agreements with ILECs to services, generally on a state-by-state basis. These agreements typically have three-year terms.
First Communications currently has interconnection agreements in effect with AT&T, Qwest and Verizon for California, Florida, Iowa, Illinois,
Indiana, Kansas, Massachusetts, Michigan, Minnesota, Montana, North Dakota, Nebraska, New Jersey, New York, Ohio, Oregon, Pennsylvania, Texas,
Washington and Wisconsin. If First Communications enters new markets, it expects to establish interconnection agreements with ILECs on an individual
state basis.
All of First Communications
interconnection agreements provide either that a party is entitled to demand renegotiation of particular provisions or of the entire agreement based on
intervening changes in law resulting from
176
ongoing legal and regulatory
activity, or that a change of law is immediately effective in the agreement and set out a dispute resolution process if the parties do not agree upon
the change of law. The initial terms of all of its interconnection agreements with ILECs have expired; however, First Communications has renewed its
AT&T agreements in California, Kansas, Texas and Wisconsin through 2010, and the rest of its agreements contains an evergreen provision
that allows the agreement to continue in effect until terminated. If First Communications receives a termination notice from an ILEC, it may be able to
negotiate a new agreement or initiate an arbitration proceeding at the relevant state commission before the agreement actually terminates. In addition,
as an alternative to negotiating or arbitrating an interconnection agreement, First Communications may adopt, in its entirety, another carriers
approved agreement, provided the agreement is still in effect and provided that it adopts the entire agreement. Renegotiated or arbitrated
interconnection agreements, however, could result in changes in prices or other terms and conditions of access to unbundled network elements that could
affect its business.
Collocation.
FCC rules
generally require ILECs to permit competitors to collocate equipment used for interconnection and/or access to unbundled network elements. Those rules
allow competitors to collocate multifunctional equipment and require ILECs to provision cross-connects between collocated carriers. The terms and
conditions on which First Communications can obtain collocation in ILEC central offices generally are incorporated into its interconnection agreements
in each state. Future changes in the FCCs collocation rules could have material impacts on First Communications business or
operations.
Intercarrier
Compensation
In April 2001, the FCC released
an order declaring that competitive local exchange carriers interstate access charges would be presumed reasonable, and may be imposed by tariff
on interchange carriers, if they do not exceed the interstate access charges of the ILEC serving the same location. In May 2004, the FCC announced in
addition that where the competitive local exchange carrier did not directly serve the end-user, the competitive local exchange carriers
interstate access charge could be no more than the rate charged by the ILEC for the same functionality. These FCC rules, and similar rate caps in
several states, limit First Communications ability to gain additional revenue by increasing its access charges. However, as a provider of
interexchange services, First Communications is also protected against increases in the cost of terminating its interexchange traffic on other
carriers networks.
The FCC has classified services
that provide dedicated Internet access to end users, including cable modem service and wireline broadband Internet access service offered
by local exchange carriers, as information services. This classification means, among other things, that providers of Internet access service are not
compelled to provide wholesale access to their services to competitors, and that their prices are not regulated by the FCC or state commissions. This
classification relieved the ILECs of any duty to offer digital subscriber line transmission services subject to regulatory oversight. It also limited
CLECs rights to obtain unbundled network elements to provide end-user broadband Internet access (because such elements must be used in connection
with a telecommunications service, not an information service). However, the FCC has allowed providers to offer the underlying transmission service
used as an input to broadband Internet access as a common-carrier telecommunications service. To the extent a CLEC offers transmission on
this basis, it is entitled to use unbundled network elements in the provision of this transmission.
On January 31, 2005, the FCC
issued a Notice of Proposed Rulemaking (NPRM) on special access pricing for services offered by ILECs. Special access pricing by these
carriers currently is subject to price cap rules, as well as pricing flexibility rules which permit these carriers to offer volume and term discounts
and contract tariffs (Phase I pricing flexibility) and/or remove from price caps regulation special access service in a defined geographic area (Phase
II pricing flexibility) based on showings of competition. In its NPRM, the FCC tentatively concluded to continue to permit pricing flexibility where
competitive market forces are sufficient to constrain special access prices, but would undertake an examination of whether the current triggers for
pricing flexibility accurately assess competition and have worked as intended. The NPRM also asked for comments on whether certain aspects of ILEC
special access tariff offerings (e.g., basing discounts on previous volumes of service; tying nonrecurring charges and termination penalties to term
commitments; and imposing use restrictions in connection with discounts) are unreasonable. For those markets where access to unbundled high capacity
circuits has been eliminated, the pricing
177
structure of special access
circuits will impact the feasibility of using special access services to serve customers. In 2007, the FCC asked for further comment on these issues.
To date, however, the FCC has taken no action on this proposed rulemaking.
On December 29, 2006, the FCC
approved the AT&T-BellSouth merger after AT&T voluntarily entered into certain merger-related commitments. Among other things, AT&T
committed that, for 42 months after the merger closing date, it will not seek to increase its prices for unbundled loop and transport elements provided
to competitive local exchange carriers, and it will not request or implement any forbearance from its obligation to provide loop and transport UNEs at
regulated prices. It also committed not to increase its prices for interstate special access services for 48 months after the merger closing date and
agreed to renew existing interconnection agreements with competitive local exchange carriers under certain conditions.
Federal Regulation of Internet Access
Service
The FCC has classified
transmission services that provide dedicated Internet access, including cable modem service and wireline broadband Internet access service
offered by local exchange carriers, as information services. This classification means, among other things, that providers of Internet access service
are not compelled to provide wholesale access to their services to competitors, and that their prices are not regulated by the FCC or state
commissions. This classification did not affect competitive local exchange carriers ability to obtain unbundled network elements, but did relieve
the ILECs of any duty to offer digital subscriber line transmission services subject to regulatory oversight.
To date, the FCC has treated
Internet service providers as enhanced service providers, which are generally exempt from federal and state regulations governing common carriers.
Nevertheless, regulations governing the disclosure of confidential communications, copyright, excise tax and other requirements may apply to First
Communications Internet access services. In addition, the FCC released a NPRM in September 2005, seeking comments on a broad array of consumer
protection regulations for broadband Internet access services, including rules regarding the protection of Customer Proprietary Network Information
slamming, truth in billing, network outage reporting, service discontinuance notices and rate-averaging requirements. First Communications cannot
predict whether the FCC will adopt new rules regulating broadband Internet access services and, if it does so, how such rules would affect First
Communications, except that new obligations could increase the costs of providing digital subscriber line service.
Moreover, Congress has passed a
number of laws that concern the Internet and Internet users. Generally, these laws limit the potential liability of Internet service providers and
hosting companies that do not knowingly engage in unlawful activity. First Communications expects that Congress will continue to consider various bills
concerning the Internet and Internet users, some of which, if signed into law, could impose additional obligations on First
Communications.
Wireless Tower Regulation
Federal
Regulations
Both the FCC and the Federal
Aviation Administration (the FAA) regulate antenna towers and structures that support wireless communications and radio or television
antennas. Many FAA requirements are implemented in FCC regulations. These regulations govern the construction, lighting and painting or other marking
of towers and structures and may, depending on the characteristics of particular towers or structures, require prior approval and registration of
towers or structures. Wireless communications equipment and radio or television stations operating on towers or structures are separately regulated and
may require independent licensing depending upon the particular frequency or frequency band used.
Pursuant to the Communications
Act of 1934, the FCC, in conjunction with the FAA, has developed standards to consider proposals involving new or modified antenna towers or
structures. These standards mandate that the FCC and the FAA consider, among other things, the height of the proposed tower or structure, the
relationship of
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the tower or structure to
existing natural or man-made structures, and the proximity of the tower or structure to runways and airports. Proposals to construct or to modify
existing towers or structures above certain heights must be reviewed by the FAA to ensure the structure will not present a hazard to air navigation.
The FAA may condition its issuance of a no-hazard determination upon compliance with specified lighting and/or painting requirements. Antenna towers or
structures that meet certain height and location criteria must also be registered with the FCC. Proposals to modify existing towers or structures above
certain heights or widths may also require FCC approval. A tower or structure that requires FAA clearance will not be registered by the FCC until it is
cleared by the FAA. Upon registration, the FCC may also require special lighting and/or painting. Owners of antenna towers and structures may have an
obligation to maintain painting and lighting or other marking in conformance with FAA and FCC standards. Antenna tower and structure owners and
licensees that operate on those towers or structures also bear the responsibility of monitoring any lighting systems and notifying the FAA of any
lighting outage or malfunction. First Communications generally indemnify its customers against any failure to comply with applicable regulatory
standards relating to the construction, modification, or placement of antenna towers or structures. Failure to comply with the applicable requirements
may lead to civil penalties.
The Telecommunications Act of
1996 amended the Communications Act of 1934 by preserving state and local zoning authorities jurisdiction over the construction, modification and
placement of towers. The law, however, limits local zoning authority by prohibiting any action that would discriminate among different providers of
personal wireless services or ban altogether the construction, modification or placement of radio communication towers. Finally, the Telecommunications
Act of 1996 requires the federal government to help licensees for wireless communications services gain access to preferred sites for their facilities.
This may require that federal agencies and departments work directly with licensees to make federal property available for tower
facilities.
Owners and operators of antenna
towers and structures may be subject to, and therefore must comply with, environmental laws. Any licensed radio facility on an antenna tower or
structure is subject to environmental review pursuant to the National Environmental Policy Act of 1969, among other statutes, which requires federal
agencies to evaluate the environmental impact of their decisions under certain circumstances. The FCC has issued regulations implementing the National
Environmental Policy Act. These regulations place responsibility on applicants to investigate potential environmental effects of their operations and
to disclose any potential significant effects on the environment in an environmental assessment prior to constructing or implementing certain
modifications to an antenna tower or structure and prior to commencing certain operation of wireless communications or radio or television stations
from the tower or structure. In the event the FCC determines the proposed structure, modification or operation would have a significant environmental
impact based on the standards the FCC has developed, the FCC would be required to prepare an environmental impact statement, which will be subject to
public comments. This process could significantly delay the registration of a particular tower or structure.
As an owner and operator of real
property, First Communications is subject to certain environmental laws that govern tower or structure placement, including the need to conduct
pre-construction environmental studies. Operators of towers or structures must also take into consideration certain radio frequency (RF)
emissions regulations that impose a variety of procedural and operating requirements. Certain proposals to operate wireless communications and radio or
television stations from antenna towers and structures are also reviewed by the FCC to ensure compliance with requirements relating to human exposure
to RF emissions. Exposure to high levels of RF energy can produce negative health effects. The potential connection between the exposure to low-level
RF energy and certain negative health effects, including some forms of cancer, has been the subject of substantial study by the scientific community in
recent years. First Communications believes that it is in substantial compliance with, and it has no material liability under, any applicable
environmental laws. The costs of compliance with existing or future environmental laws and liability related thereto may have a material adverse effect
on its prospects, financial condition or results of operations.
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State and Local
Regulations
Most states regulate certain
aspects of real estate acquisition, leasing activities and construction activities. Where required, First Communications conducts the site acquisition
portions of its site development services business through licensed real estate brokers agents, who may be its employees or hired as independent
contractors, and conduct the construction portions of its site development services through licensed contractors, who may be its employees or
independent contractors. Local regulations include city and other local ordinances, zoning restrictions and restrictive covenants imposed by community
developers. These regulations vary greatly from jurisdiction to jurisdiction, but typically require tower and structure owners to obtain approval from
local officials or community standards organizations or certain other entities prior to tower or structure construction and establish regulations
regarding maintenance and removal of towers or structures. In addition, many local zoning authorities require tower and structure owners to post bonds
or cash collateral to secure their removal obligations. Local zoning authorities often have been unreceptive to construction of new antenna towers and
structures in their communities because of, among other things, the height and visibility of the towers or structures, and have, in some instances,
instituted moratoria.
Other Domestic Regulation
First Communications is subject
to a variety of federal, state, local, and foreign environmental, safety and health laws and governmental regulations. These laws and regulations
govern matters such as the generation, storage, handling, use and transportation of hazardous materials, the emission and discharge of hazardous
materials into the atmosphere, the emission of electromagnetic radiation, the protection of wetlands, historic sites and endangered species and the
health and safety of employees. First Communications also may be subject to laws requiring the investigation and cleanup of contamination at sites it
owns or operates or at third-party waste disposal sites. Such laws often impose liability even if the owner or operator did not know of, or was not
responsible for, the contamination. First Communications operates numerous sites in connection with its operations. First Communications is not aware
of any liability or alleged liability at any operated sites or third-party waste disposal sites that would be expected to have a material adverse
effect on its business, financial condition or results of operations. Although First Communications monitors its compliance with environmental, safety
and health laws and regulations, it cannot give assurances that it has been or will be in complete compliance with these laws and regulations. First
Communications may be subject to fines or other sanctions by federal, state and local governmental authorities if it fails to obtain required permits
or violate applicable laws and regulations.
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COMPARISON OF RIGHTS OF RENAISSANCE AND FIRST
COMMUNICATIONS STOCKHOLDERS
Renaissance and First
Communications are both incorporated under the laws of the State of Delaware. If the Merger is completed, First Communications stockholders, whose
rights are currently governed by the DGCL, First Communications amended and restated certificate of incorporation and the First
Communications amended and restated bylaws, will become stockholders of Renaissance, and their rights as such will be governed by the DGCL and
Renaissances amended and restated certificate of incorporation (in the form presented to the Renaissance stockholders at the special meeting) and
Renaissances amended and restated bylaws. The material differences between the rights of holders of First Communications common stock and the
rights of holders of Renaissance common stock are summarized below.
This summary does not purport to
be a complete statement of the rights of holders of Renaissance common stock under Renaissances amended and restated certificate of incorporation
or its amended and restated bylaws. In addition, this summary does not purport to be a complete description of the specific provisions referred to
herein and is qualified entirely by reference to the governing corporate documents of First Communications and Renaissance. You are urged to read those
documents carefully in their entirety. A copy of Renaissances amended and restated certificate of incorporation as will be in effect if the
charter amendment proposal is approved is attached as Annex B to this proxy statement/prospectus. A copy of Renaissances amended and restated
bylaws is included with Renaissances Form S-1 Registration Statement filed with the SEC (SEC File No. 333-13444) on May 24,
2006.
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Rights of
Renaissances
Stockholders
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Rights of First
Communications
Stockholders
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Capitalization:
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Renaissances amended and restated certificate of incorporation authorizes it to issue 201,000,000 shares, of which 200,000,000 are
common stock, par value $0.0001 per share, and 1,000,000 are preferred stock, par value $0.0001. Renaissances board of directors is expressly
granted the power to issue shares of the preferred stock in one or more series and to fix the rights and preferences, including voting powers, of each
series of preferred stock.
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First
Communications amended and restated certificate of incorporation authorizes it to issue 70,000,000 shares, consisting of 59,165,000 shares of
common stock, par value $0.001 per share, 835,000 shares of Class B common stock, par value $0.001 per share and 10,000,000 shares of preferred stock,
par value $0.001 per share. First Communications board of directors is authorized to provide for the issuance of shares of preferred stock and
may establish from time to time the number of shares to be included in such series, and to fix the rights and preferences, including voting powers, of
each series of preferred stock.
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Rights of
Renaissances
Stockholders
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Rights of First
Communications
Stockholders
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Voting
Rights:
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Except as otherwise required by law or as otherwise provided in the terms of any class or series of stock having a preference over the common
stock as to dividends or upon liquidation, the holders of Renaissance common stock shall exclusively possess all voting power, and each share of common
stock shall have one vote.
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Except as required by law or by a preferred stock designation, First Communications amended and restated certificate of incorporation
provides that the holders of First Communications common stock shall exclusively possess all voting power, and that each share of common stock will
have one vote. Except as otherwise required by law, the holders of Class B Common Stock shall have no right to vote and shall not be included in
determining the number of shares voting or entitled to vote.
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So
long as an aggregate of more than fifty percent (50%) of the outstanding shares of Series A Preferred Stock are held collectively by Gores FC Holdings,
LLC or any affiliate thereof, at any annual or other meeting of the stockholders at which members of the board of directors are to be elected or
whenever directors are to be elected by written consent, the holders of a majority of the Series A Preferred Stock shall be entitled to elect one less
than a majority of the members of the board where the total number of directors is an odd number, or two less than a majority of the board where the
total number of directors is an even number, provided, that the holders of a majority of the Series A Preferred Stock shall be entitled to elect at
least one director.
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Rights of
Renaissances
Stockholders
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Rights of First
Communications
Stockholders
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Upon
receipt of all necessary governmental and regulatory consents and approvals required in order for the holders of shares of Series A Preferred Stock to
be entitled to elect a majority of the members of the board of directors, and so long as an aggregate of more than fifty percent (50%) of the
outstanding shares of Series A Preferred Stock are held collectively by Gores FC Holdings, LLC or any affiliate thereof, at any annual or other meeting
of the stockholders at which members of the board of directors are to be elected or whenever directors are to be elected by written consent, the
holders of a majority of the shares of Series A Preferred Stock shall be entitled to elect a majority of the members of the board of
directors.
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Conversion
Rights:
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Shares of Renaissance common stock are not subject to conversion rights.
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Shares of First Communications Series A Preferred Stock are not subject to conversion rights. Subject to certain limitations, holders of
shares of Class B Common Stock are entitled to convert any and all shares of Class B Common Stock into the same number of shares of First
Communications common stock.
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Number of
Directors:
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Pursuant to Renaissances amended and restated certificate of incorporation and amended and restated bylaws, the board of directors shall
consist of three (3) classes and each such class shall consist, as nearly as may be possible, of one-third of the total number of directors
constituting the entire board of directors. The number of directors shall be fixed from time to time by a vote of a majority of the entire board of
directors and shall be not less than one (1) director and no more than (15) fifteen directors.
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Pursuant to First Communications amended and restated bylaws, the board of directors shall consist of at least three (3) directors and
no more than nine (9) directors. The exact number shall be determined by the board of directors or the stockholders from time to
time.
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Rights of
Renaissances
Stockholders
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Rights of First
Communications
Stockholders
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Removal of
Directors:
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Renaissances amended and restated bylaws provide that any director may be removed, only for cause, by the affirmative vote of the
holders of a majority of all the shares of the stock of the company outstanding and entitled to vote for the election of directors.
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First
Communications amended and restated bylaws provide that, except as otherwise required by the laws of the State of Delaware or the amended and
restated certificate of incorporation, a director may be removed only for cause by the affirmative vote or consent of more than fifty percent (50%) of
the shares entitled to vote at an election of directors.
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Filling
Vacancies on the
Board of Directors:
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Renaissances amended and restated bylaws provide that any newly created directorships resulting from an increase in the number of
directors or vacancies occurring in the board of directors for any reason whatsoever shall be filled by vote of the board of directors. If the number
of directors then in office is less than a quorum, such newly created directorships and vacancies may be filled by a vote of a majority of the
directors then in office.
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First
Communications amended and restated bylaws provide that except as otherwise required by the certificate of incorporation, any vacancy occurring
in the board of directors, including a vacancy created by an increase in the number of directors, may be filled for the remainder of the unexpired term
by the affirmative vote of a majority of the remaining directors then in office, even if there is less than a quorum of the board of
directors.
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Amendments to
Certificate
of Incorporation:
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The
DGCL prescribes that any amendment to Renaissances certificate of incorporation must be approved by the board of directors in a resolution
recommending that the amendment be approved by a majority of the outstanding stock entitled to vote on the amendment, plus the approval of a majority
of the outstanding stock of any class entitled under the DGCL to vote separately as a class on the amendment. The DGCL also provides that restrictions
on transfers of securities may not be amended without the consent of each holder thereof.
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The
DGCL prescribes that any amendment to First Communications certificate of incorporation must be approved by the board of directors in a
resolution recommending that the amendment be approved by a majority of the outstanding stock entitled to vote on the amendment, plus the approval of a
majority of the outstanding stock of any class entitled under the DGCL to vote separately as a class on the amendment. The DGCL also provides that
restrictions on transfers of securities may not be amended without the consent of each holder thereof.
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Rights of
Renaissances
Stockholders
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Rights of First
Communications
Stockholders
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Renaissances amended and restated certificate of incorporation provides that except as otherwise set forth in the amended and restated
certificate of incorporation, Renaissance reserves the right to amend, alter, change or repeal any provision contained in the certificate of
incorporation, in the manner now or hereafter prescribed by statute or therein, and all rights conferred upon stockholders therein are granted subject
to this reservation.
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First
Communications amended and restated certificate of incorporation provides that, in order to cancel the admission of First Communications common
stock trading on the AIM or to amend the provisions of Seventeenth Article (concerning such cancellation of trading), the company must first obtain the
approval of the holders of at least seventy-five percent (75%) of the issued and outstanding shares of common stock present and voting at a general
meeting of the stockholders called for that purpose.
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Eighteenth Article (relating to the obligation to notify First Communications and comply with any requests to purchase outstanding shares of
First Communications common stock and Class B Common Stock by a person or entity that is the beneficial owner of more than ninety percent (90%) of the
issued and outstanding shares of First Communications common stock) may be amended only by a resolution made at a duly called meeting of the
stockholders and approved by the stockholders of record of at least ninety percent (90%) of the issued and outstanding common stock.
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Amendments to
Bylaws:
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Renaissances amended and restated bylaws provide that the bylaws may be altered, amended or repealed at any meeting of the board of
directors or at any meeting of the stockholders by the vote of the holders of a majority of the stock issued and outstanding and entitled to vote at
such a meeting.
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First
Communications amended and restated certificate of incorporation and amended and restated bylaws provide that the board of directors shall have
the power, without the assent or vote of the stockholders, to make, alter, amend, change, add to or repeal the bylaws of the company as provided in the
bylaws and new bylaws may be adopted by the affirmative vote of a majority of the shares of stock of each class of First Communications capital
stock.
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Rights of
Renaissances
Stockholders
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Rights of First
Communications
Stockholders
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Special
Meetings of the
Board of Directors:
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Renaissances amended and restated bylaws provide that special meetings of the board of directors may be called by the chairman of the
board, chief executive officer, the president or the secretary upon the written request of a majority of the directors. Such request shall state the
date, time and place of the meeting. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the board of
directors need be specified in the notice or waiver of notice of such meeting.
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First
Communications amended and restated bylaws provide that special meetings of the board of directors may be called by any of the directors then in
office. Notice of special meetings need not state the purpose of such meeting, unless otherwise required by the DGCL and shall be given to each
director either in person, by telephone, by overnight courier service, by facsimile transmission, by first-class mail or by electronic mail
transmission.
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Special
Stockholders
Meetings:
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Renaissances amended and restated bylaws provide that special meetings of stockholders may be called by a majority of the board of
directors, the chairman of the board, the chief executive officer or the president and shall be called by the president or the secretary upon the
written request of the holders of a majority of the outstanding shares of the Renaissance common stock. Any such request shall state the date, time,
place and the purpose or purposes of the meeting. At such meetings the only business which may be transacted is that relating to the purpose or
purposes set forth in the notice or waivers of notice thereof.
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First
Communications amended and restated bylaws provide that special meetings of stockholders may be called, unless otherwise prescribed by the DGCL
or the certificate of incorporation, by the board of directors, the chairman of the board or the chief executive officer. Written notice of any such
special meeting, stating the place, date, hour of the meeting, the means of remote communication, if any, by which stockholders and proxy holders may
be deemed present in person and vote, and the purpose or purposes of such special meeting, shall be given not less than ten (10) but not more than
sixty (60) days prior to the meeting.
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Rights of
Renaissances
Stockholders
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Rights of First
Communications
Stockholders
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With
respect to special meetings of stockholders, notice must be delivered to the secretary of the company not more than ninety (90) days prior to a special
meeting and not later than the later of (i) sixty (60) days prior to such meeting, or (ii) ten (10) days following the date on which public
announcement of the date of such meeting is made by the Company. Such stockholder notice shall set forth as to each matter the stockholders propose to
bring before the meeting (a) a brief description of, and reasons for, the business to be brought before the meeting, (b) the name and address of the
stockholder, (c) a statement regarding the stockholders beneficial ownership of the stock of the company and (d) a description of the
stockholders material interest, and all arrangements and understandings between such stockholder and any other person, in connection with such
business.
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Action by
Consent of the Stockholders:
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Renaissances amended and restated certificate of incorporation provides that any action required or permitted to be taken by
stockholders pursuant to the certificate of incorporation or under applicable law may be effected only at a duly called annual or special meeting of
stockholders and with a vote thereat, and may not be effected by consent in writing.
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First
Communications amended and restated bylaws provide that, unless otherwise indicated in the certificate of incorporation, any action required to
be taken or that may be taken at any annual or special meeting of stockholders of the company may be taken without a meeting, without prior notice and
without a vote, if a consent or consents in writing, setting forth the action so taken, shall be signed by persons entitled to vote stock representing
not less than the number of shares necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present
and voted.
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Rights of
Renaissances
Stockholders
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Rights of First
Communications
Stockholders
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Requirements
for Timely Stockholder Notification:
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Renaissances amended and restated bylaws provide that, to be timely, a stockholders notice must be delivered to or mailed and
received at the principal executive offices of the company not less than 120 days nor more than 150 days prior to the first anniversary of the date
that the companys proxy statement is delivered to stockholders in connection with the preceding years annual meeting, or if the annual
meeting is more than thirty (30) days before or more than sixty (60) days after such anniversary, or if no proxy was delivered in connection with the
preceding years annual meeting, then such notice must be delivered not earlier than ninety (90) days prior to such annual meeting and no later
than the later of (i) sixty (60) days prior to the annual meeting and (ii) ten (10) days following the date on which public announcement of the date of
such annual meeting is first made by the company.
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First
Communications amended and restated certificate of incorporation and amended and restated bylaws do not list the requirements that must be
fulfilled in order for a stockholder to raise a matter at a stockholder general meeting.
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Rights of
Renaissances
Stockholders
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Rights of First
Communications
Stockholders
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Limitation of
Personal Liability of Directors:
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Renaissances amended and restated certificate of incorporation provides that no director shall be personally liable to the company or
its stockholders for monetary damages for breach of a fiduciary duty as a director, provided, however, that to the extent required by the provisions of
Section 102(b)(7) of the DGCL or any other laws of Delaware, a director may be held personally liable (i) for any breach of the directors duty of
loyalty to the company or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation
of law, (iii) under Section 174 of the DGCL (unlawful payment or dividend or unlawful stock purchase or redemption), (iv) for any transaction from
which the director derived an improper personal benefit, or (v) for any act or omission occurring prior to the date when the referenced article becomes
effective.
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First
Communications amended and restated certificate of incorporation provides that a director shall not be personally liable to the company or its
stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the directors duty of
loyalty to the company or its stockholders, (ii) for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation
of law, (iii) under Section 174 of the DGCL (unlawful payment or dividend or unlawful stock purchase or redemption), or (iv) for any transaction from
which the director derived an improper personal benefit. In addition, upon any amendment of the DGCL further eliminating or limiting the personal
liability of directors, such personal liability shall be eliminated or limited to the fullest extent permitted by the DGCL, as
amended.
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Rights of
Renaissances
Stockholders
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Rights of First
Communications
Stockholders
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Indemnification of
Directors and Officers:
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Renaissances amended and restated certificate of incorporation provides that Renaissance shall indemnify, to the fullest extent
permitted by Section 145(b) of the DGCL, each person who was or is party or is threatened to be made a party to or is involved in any threatened,
pending or completed action, suit or proceeding, whether civil, criminal or otherwise, formal or informal, by reason of the fact that he or she is or
was a director, officer employee or agent of the company or is or was serving at the request of the company as a director, officer or employee of
another entity, whether the basis of such proceeding is alleged action in an official capacity as such a director or officer of the company or in any
other capacity while serving as such other director or officer, against all judgments, penalties, fines and expenses incurred or paid (including
attorneys fees), except in relation to matters as to which the person did not act in good faith and in a manner the person reasonably believed to
be in or not opposed to the best interests of the company, and, with respect to any criminal proceeding, had no reasonable cause to believe the
persons conduct was unlawful.
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First
Communications amended and restated certificate of incorporation and amended and restated bylaws provide that First Communications shall to the
maximum extent and in the manner permitted by the DGCL indemnify each of its directors and officers against all expenses (including attorneys
fees), liabilities, losses, judgments, fines, settlements and other amounts actually and reasonably incurred in connection with any action, suit or
proceeding, whether civil, criminal, administrative, investigative or otherwise, arising by reason of the fact that such person is or was an agent of
the company. A director or officer of the company includes any person (a) who is or was a director or officer of the company,
(b) who, while serving as a director or officer of the company, is or was serving at the request of the company as a director or officer of another
entity, or (c) who was a director or officer of a predecessor corporation of the company or of another enterprise at the request of such predecessor
corporation.
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BENEFICIAL OWNERSHIP OF SECURITIES
The following table sets forth
information regarding the beneficial ownership of the common stock of Renaissance as of December 1 5 , 2008 and the beneficial ownership of the
common stock of the post-merger combined company by:
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each person known by Renaissance to be the beneficial owner of
more than 5% of its outstanding shares of common stock either on December 1 5 , 2008 or after the consummation of the Merger;
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each of Renaissances current executive officers and
directors;
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each of the executive officers and directors upon consummation
of the Merger;
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all of Renaissances current executive officers and
directors as a group; and
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all of Renaissances executive officers and directors as a
group after the consummation of the Merger.
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This table is based on an
exchange ratio in the Merger of 0. 44932 shares of Renaissance common stock per share of First Communications common stock and includes shares of
Renaissance common stock issuable to holders of First Communications T1 warrants who make an irrevocable cashless exercise of such warrants
immediately prior to and contingent upon the consummation of the Merger. This table assumes that (1) no holder of shares of Renaissance common stock
issued in its IPO converts such shares into cash and that no holder of shares of First Communications common stock exercises its appraisal rights and
(2) approximately 1 4 ,460,000 shares are issued to First Communications stockholders in the Merger and that 36 ,573,917 shares of common
stock will be outstanding upon consummation of the Merger (which does not include those shares which will be placed in escrow upon the closing of the
Merger and which could be released to First Communications stockholders upon the satisfaction of the Warrant Condition and the EBITDA Condition but
does include the 3,900,000 shares held in escrow by the Renaissance Inside Stockholders 2,000,000 of which are subject to forfeiture in
the event the EBITDA condition is not satisfied ). In addition, for purposes of the table below, Renaissance has deemed shares subject to warrants
that are exercisable within 60 days of December 1 5 , 2008 or within 60 days of the Merger, as applicable, to be outstanding and to be
beneficially owned by the person holding the warrants for the purpose of computing the percentage ownership of that person but does not treat them as
outstanding for the purposes of computing the percentage ownership of any other person.
|
|
|
|
Beneficial Ownership of Renaissance
Common Stock on
December 1 5 , 2008
|
|
Beneficial Ownership of Common Stock
After the
Consummation of the Merger
|
|
Name and Address of Beneficial Owner
(1)
|
|
|
|
Number of Shares
|
|
Percent of Class
|
|
Number of Shares
|
|
Percent of Class
|
RAC Partners
LLC
|
|
|
|
|
4, 421 , 069 (2
|
)
|
|
|
20. 2 4
|
%
|
|
|
8, 868 , 736 (2
|
)(3) (4)
|
|
|
21 . 71
|
%
|
Barry W.
Florescue
|
|
|
|
|
4, 456 , 069 ( 5 )
|
|
|
|
20. 4 0
|
%
|
|
|
8, 903 , 736 (3
|
)( 5 ) (6)
|
|
|
21 . 62
|
%
|
Logan D.
Delany, Jr.
|
|
|
|
|
30,000
|
( 7 )
|
|
|
*
|
|
|
|
30,000
|
( 7 )
|
|
|
*
|
|
Richard A.
Bloom
|
|
|
|
|
|
( 8 )
|
|
|
*
|
|
|
|
|
( 8 )
|
|
|
*
|
|
Stanley
Kreitman
|
|
|
|
|
30,000
|
( 9 )
|
|
|
*
|
|
|
|
30,000
|
|
|
|
*
|
|
Charles W.
Miersch
|
|
|
|
|
122,600
|
( 9 )
|
|
|
*
|
|
|
|
232,100
|
( 9 )
|
|
|
*
|
|
Morton Farber
|
|
|
|
|
117,600
|
( 9 )
|
|
|
*
|
|
|
|
227,100
|
( 9 )
|
|
|
*
|
|
Integrated
Core Strategies (US) LLC( 10 )
|
|
|
|
|
1,460,631
|
( 10)
|
|
|
6.69
|
%
|
|
|
1,460,631
|
|
|
|
3. 99
|
%
|
QVT Financial
LP( 1 1)
|
|
|
|
|
1,273,750
|
( 11)
|
|
|
5.83
|
%
|
|
|
1,273,750
|
|
|
|
3. 48
|
%
|
Jeffrey
Thorp(1 2 )
|
|
|
|
|
1,214,443
|
(1 2 )
|
|
|
5.56
|
%
|
|
|
1,214,443
|
|
|
|
3 . 32
|
%
|
Raymond
Hexamer
|
|
|
|
|
|
|
|
|
*
|
|
|
|
279 , 102 (1 3 )
|
|
|
|
*
|
|
Joseph R.
Morris
|
|
|
|
|
|
|
|
|
*
|
|
|
|
27 9 , 102 (1 4 )
|
|
|
|
*
|
|
Richard J.
Buyens
|
|
|
|
|
|
|
|
|
*
|
|
|
|
|
|
|
|
*
|
|
David
Johnson, II
|
|
|
|
|
|
|
|
|
*
|
|
|
|
2 31 , 020 (1 5 )
|
|
|
|
*
|
|
Theodore V.
Boyd(1 6 )
|
|
|
|
|
|
|
|
|
*
|
|
|
|
277 , 601 (1 6 )
|
|
|
|
*
|
|
Marshall B.
Belden Jr. (1 7 )
|
|
|
|
|
|
|
|
|
*
|
|
|
|
2, 331 , 844 (1 7 )
|
|
|
|
6 . 38
|
%
|
191
|
|
|
|
Beneficial Ownership of Renaissance
Common Stock on
December 15, 2008
|
|
Beneficial Ownership of Common Stock
After the
Consummation of the Merger
|
|
Name and Address of Beneficial Owner
(1)
|
|
|
|
Number of Shares
|
|
Percent of Class
|
|
Number of Shares
|
|
Percent of Class
|
Mark T.
Clark(1 8 )
|
|
|
|
|
|
|
|
|
*
|
|
|
|
|
|
|
|
*
|
|
Scott M.
Honour(1 9 )
|
|
|
|
|
|
|
|
|
*
|
|
|
|
5 , 300 , 179
|
|
|
|
1 3 . 81
|
%
|
Mark R.
Stone(1 9 )
|
|
|
|
|
|
|
|
|
*
|
|
|
|
5 , 300 , 179
|
|
|
|
1 3 . 81
|
%
|
Rockledge
Limited( 20 )
|
|
|
|
|
|
|
|
|
*
|
|
|
|
277 , 601
|
|
|
|
*
|
|
Gores FC
Holdings LLC( 21 )
|
|
|
|
|
|
|
|
|
*
|
|
|
|
5 , 300 , 179 ( 21 )
|
|
|
|
1 3.81
|
%
|
Marbel
Investments LLC(2 2 )
|
|
|
|
|
|
|
|
|
*
|
|
|
|
2, 331 , 844
|
|
|
|
6 . 38
|
%
|
First Energy
Corp(2 3 ).
|
|
|
|
|
|
|
|
|
*
|
|
|
|
1 , 733 , 643
|
|
|
|
4 . 74
|
%
|
All
pre-merger Renaissance
directors and officers as a group (6 individuals)
|
|
|
|
|
4,7 56 , 269
|
|
|
|
21. 78
|
%
|
|
|
9, 422 , 936
|
|
|
|
2 1 . 84
|
%
|
All
post-merger Renaissance directors and officers as a group (11 individuals)
|
|
|
|
|
4, 756 , 269
|
|
|
|
21. 78
|
%
|
|
|
1 8 , 121 , 783
|
|
|
|
4 2 . 00
|
%
|
(1)
|
|
Unless otherwise noted, the business address of each of the
following is c/o Renaissance Acquisition Corp., 50 East Sample Road, Pompano Beach, Florida 33064 and the business address for Messrs. Hexamer, Morris,
Buyens and Johnson is c/o First Communications, Inc., 33340 West Market Street, Akron, Ohio 44333.
|
(2)
|
|
Barry W. Florescue is the managing member of RAC Partners and
has sole voting and dispositive power with respect to these shares. Certain of Renaissances other officers and directors and certain of
Renaissances special advisors are members of RAC Partners.
|
(3)
|
|
Includes 4,447,667 shares of common stock issuable upon exercise
of warrants held by RAC Partners, an entity which Mr. Florescue controls. Such warrants will be exercisable 30 days after the closing of the
Merger.
|
(4)
|
|
Includes 2,000.000 shares held by RAC Partners which are
subject to forfeiture if the EBITDA Condition is not satisfied. In the event such shares are forfeited, RAC Partners ownership percentage would
decrease to 17.60%.
|
( 5 )
|
|
Includes 4,376,069 shares held by RAC Partners, an entity which
Mr. Florescue controls.
|
(6)
|
|
Includes 2,000,000 shares held by RAC Partners which are
subject to forfeiture if the EBITDA Condition is not satisfied. In the event such shares are forfeited, Mr. Florescues ownership
percentage would decrease to 17.69%.
|
( 7 )
|
|
Does not include any securities held by RAC
Partners.
|
( 8 )
|
|
All of Mr. Blooms interest in shares of common stock of
Renaissance is held through RAC Partners.
|
( 9 )
|
|
Includes 109,500 shares of common stock issuable upon exercise
of warrants held by such director. Such warrants will be exercisable 30 days after the closing of the Merger.
|
( 10)
|
|
The business address for Integrated Core Strategies (US) LLC
(Integrated) is c/o Millennium Management LLC, 666 Fifth Avenue, New York, New York 10103. The number of shares held by Integrated, as of
October 24, 2008, is derived from a Schedule 13G filed by Integrated, Millennium Management LLC (Millennium Management), Millenco LLC
(Millenco) and Israel A. Englander on November 3, 2008. Each of Integrated, Millennium Management and Israel A. Englander may be deemed to
be the beneficial owner of 1,460,631 shares of Renaissance common stock held by Integrated. Millennium Management, is the general partner of Integrated
Holding Group LP, which is the managing member of Integrated, and consequently may be deemed to have shared voting control and investment discretion
over securities owned by Integrated. Israel A. Englander is the managing member of Millennium Management. As a result, Mr. Englander may be deemed to
have shared voting control and investment discretion over securities deemed to be beneficially owned by Millennium Management.
|
192
( 11 )
|
|
The business address for QVT Financial LP (QVT
Financial) is 1177 Avenue of the Americas, 9
th
Floor, New York, New York 10036. The
number of shares held by QVT Financial is derived from a Schedule 13G/A filed by QVT Financial and QVT Financial GP LLC on October 8, 2008. QVT
Financial is the investment manager for QVT Fund LP (the Fund), which beneficially owns 1,017,426 shares of Renaissance common stock, and
for Quintessence Fund L.P. (Quintessence), which beneficially owns 111,732 shares of Renaissance common stock. QVT Financial is also the
investment manager for a separate discretionary account managed for Deutsche Bank AG (the Separate Account), which holds 144,592 shares of
Renaissance common stock. QVT Financial has the power to direct the vote and disposition of the shares of Renaissance common stock held by the Fund,
Quintessence and the Separate Account. Accordingly, QVT Financial may be deemed to be the beneficial owner of an aggregate amount of 1,273,750 shares
of Renaissance common stock, consisting of the shares owned by the Fund and Quintessence and the shares held in the Separate Account. QVT Financial GP
LLC, as General Partner of QVT Financial, may be deemed to beneficially own the same number of shares of Renaissance common stock reported by QVT
Financial.
|
(1 2 )
|
|
The business address for Jeffrey Thorp is 954 Third Avenue, No.
705, New York, New York 10022. The number of shares held by Jeffrey Thorp, as of November 21, 2008, is derived from a Schedule 13G filed by (i) Jeffrey
Thorp, (ii) Sonoma Capital, LP, (iii) Sonoma Capital, LLC, (iv) Sonoma Capital Management, LLC, (v) Jeffrey Thorp IRA, Merrill Lynch, Pierce, Fenner
& Smith, Inc., as custodian (the Merrill Lynch IRA), (vi) Jeffrey Thorp IRA, Charles Schwab & Co., Inc., as custodian (the
Charles Schwab IRA) and (vii) Jeffrey Thorp IRA, Delaware Charter Guarantee & Trust Company, as custodian (the Delaware Charter
IRA), on December 1, 2008. Each of Sonoma Capital, LP, Sonoma Capital Management, LLC, Sonoma Capital LLC and Jeffrey Thorp may be deemed to be
the beneficial owner of 475,000 shares of Renaissance common stock held by Sonoma Capital, LP. Sonoma Capital, LLC is the general partner of Sonoma
Capital, LP. Jeffrey Thorp is the managing member of Sonoma Capital, LLC. Sonoma Capital Management, LLC is the investment manager of Sonoma Capital,
LP. Jeffrey Thorp is the managing member of Sonoma Capital Management, LLC. As a result, Sonoma Capital, LP, Sonoma Capital Management, LLC, Sonoma
Capital LLC and Jeffrey Thorp may be deemed to have shared power to vote or to direct the vote and shared power to dispose or to direct the disposition
of the shares of common stock owned by Sonoma Capital, LP. In addition to the 475,000 shares of Renaissance common stock held by Sonoma Capital, LP,
Jeffrey Thorp may be deemed to be the beneficial owner of the following: (a) 493,443 shares of Renaissance common stock held by Merrill Lynch IRA, (b)
60,000 shares of Renaissance common stock held by Charles Schwab IRA and (c) 186,000 shares of Renaissance common stock held by Delaware Charter IRA.
Jeffrey Thorp is the controlling person of each of the Merrill Lynch IRA, Charles Schwab IRA and the Delaware Charter IRA. As a result, Jeffrey Thorp
may be deemed to have shared power to vote or to direct the vote and shared power to dispose or to direct the disposition of the shares of common stock
owned by each of the Merrill Lynch IRA, Charles Schwab IRA and the Delaware Charter IRA.
|
(1 3 )
|
|
Includes 40,500 restricted shares of Renaissance common stock to
be awarded under the 2008 Plan upon the closing of the Merger.
|
(1 4 )
|
|
Includes 40,500 restricted shares of Renaissance common stock to
be awarded under the 2008 Plan upon the closing of the Merger.
|
(1 5 )
|
|
Includes 30,500 restricted shares of Renaissance common stock to
be awarded under the 2008 Plan upon the closing of the Merger.
|
(1 6 )
|
|
Mr. Boyds business address is P.O. Box 20590, Canton, Ohio
44701. Mr. Boyd may be deemed to be the beneficial owner of 277 , 601 shares held by Rockledge Limited, a company in which Mr. Boyd is a
general partner.
|
(1 7 )
|
|
Mr. Beldens business address is 612 Market Avenue South,
Canton, Ohio 44702. Mr. Belden may be deemed to be the beneficial owner of 2, 331 , 844 shares held by Marbel Investments LLC, of which Mr.
Belden is a member.
|
(1 8 )
|
|
Mr. Clarks business address is c/o FirstEnergy, 76 South
Main Street, Akron, Ohio 44308.
|
(1 9 )
|
|
Messrs. Honours and Stones business address is c/o
The Gores Group, 10877 Wilshire Boulevard, 18th Floor, Los Angeles, California 90024. Represents shares held by Gores FC Holdings LLC. Messrs. Honour
and Stone
|
193
|
|
are Senior Managing Directors of The Gores Group, LLC, which is
the manager of Gores FC Holdings, LLC. Each of Messrs. Honour and Stone disclaims beneficial ownership of the securities of Renaissance owned by Gores
FC Holdings, LLC, except to the extent of any pecuniary interest therein
|
( 20 )
|
|
The business address for Rockledge Limited is P.O. Box 20590,
Canton, Ohio 44701.
|
( 21 )
|
|
The business address for Gores FC Holdings LLC is 10877 Wilshire
Boulevard, 18th Floor, Los Angeles, California 90024. Includes 1,800,000 shares of common stock issuable upon exercise of warrants that are immediately
exercisable. Does not include 720,000 shares of common stock issuable upon exercise of warrants that will be exercisable if the Warrant Condition is
met.
|
(2 2 )
|
|
The business address for Marbel Investments LLC is 612 Market
Avenue South, Canton, Ohio 44702.
|
(2 3 )
|
|
The business address for FirstEnergy Corp. is 76 South Main
Street, Akron, Ohio 44308.
|
All 3,900,0000 shares of
Renaissance common stock owned by its stockholders prior to its IPO are subject to an escrow agreement which will be amended and restated in
connection with the closing of the Merger as described in the section entitled The Merger Proposal Amended and Restated Stock
Escrow Agreement.
194
TRANSACTIONS WITH RELATED PERSONS
Renaissance Transactions With Related
Persons
In April 2006, Renaissance issued
3,900,000 shares (as adjusted for a 5,000-for-1 stock split effected in May 2006, a 1-for-1.1153846 reverse stock split effected in July 2006, the
transfer on July 12, 2006 by RAC Partners of 3,103 shares to each of the other stockholders at a purchase price of $0.0064 per share, the withdrawal of
certain of its directors as members of RAC Partners in January 2007 described below and a stock dividend of one share for every five shares issued in
January 2007) of its common stock to the individuals set forth below for an aggregate of $25,000 in cash, at an average purchase price of approximately
$0.0064 per share, as follows:
Name
|
|
|
|
Number of Shares
|
|
Relationship to Renaissance
|
RAC Partners
LLC
|
|
|
|
|
3,574,800
|
|
|
Entity
controlled by Barry W. Florescue
|
Barry W.
Florescue
|
|
|
|
|
30,000
|
|
|
Chairman
and Chief Executive Officer
|
Logan D. Delany,
Jr.
|
|
|
|
|
30,000
|
|
|
Executive
Vice President and Director
|
Stanley
Kreitman
|
|
|
|
|
30,000
|
|
|
Director
|
Charles W.
Miersch
|
|
|
|
|
117,600
|
|
|
Director
|
Morton
Farber
|
|
|
|
|
117,600
|
|
|
Director
|
Mr. Miersch and Mr. Farber were
originally members of RAC Partners, but each of them withdrew as members and as a consequence received his pro rata shares of common stock that RAC
Partners held (87,600 shares each) and assumed the obligation of RAC Partners to purchase 109,500 Insider Warrants. The holders of the majority of
these shares are entitled to make up to two demands that Renaissance register these shares. The holders of the majority of these shares may elect to
exercise these registration rights at any time commencing three months prior to the date on which these shares of common stock are released from
escrow. In addition, these stockholders have certain piggy-back registration rights with respect to registration statements filed
subsequent to the date on which these shares of common stock are released from escrow. Renaissance will bear the expenses incurred in connection with
the filing of any such registration statements.
On April 30, 2006, Renaissance
issued a $150,000 unsecured promissory note to Barry W. Florescue. The note was non-interest bearing and was payable on the earlier of April 30, 2007
or the consummation of the IPO and was repaid with the proceeds of the IPO on February 1, 2007.
In connection with the closing of
the IPO, Renaissance sold 4,666,667 Insider Warrants to the individuals set forth below for $2,100,000 in cash, at a purchase price of $0.45 per
warrant as follows:
Name
|
|
|
|
Number of
Insider
Warrants
|
|
Relationship to Renaissance
|
RAC Partners
|
|
|
|
|
4,447,667
|
|
|
Entity controlled by Barry W. Florescue, Renaissances Chairman of the Board and
Chief Executive Officer
|
Morton Farber
|
|
|
|
|
109,500
|
|
|
Director
|
Charles W.
Miersch
|
|
|
|
|
109,500
|
|
|
Director
|
In connection with the IPO,
a ll the Original Shares and the Insider Warrants were placed into an escrow account maintained by Continental Stock Transfer & Trust
Company, acting as escrow agent. Pursuant to the stock escrow agreement, t he Insider Warrants would not be released from escrow until 30
days after the consummation of a business combination and the Original Shares would not be released from escrow until the earlier of twelve months
after a business combination or Renaissances liquidation. As a condition to closing the Merger, RAC Partners agreed, pursuant to
the Amended and Restated Stock Escrow Agreement to be delivered to First Communications at the closing of the Merger, that 2,000,000 of its
Original Shares would be released only in the event that the EBITDA Condition is satisfied, with the remaining 1,900,000 Original Shares to be
released upon the earlier of twelve months after a business combination or Renaissances liquidation. In the event the EBITDA Condition
is
195
not satisfied, the
2,000,000 Original Shares held by RAC Partners will be released to the post-merger combined company and cancelled.
Barry W. Florescue entered into a
share purchase plan prior to the IPO pursuant to which RAC Partners, an entity controlled by him, would place a limit order for $12 million of
Renaissance common stock which commenced ten business days after Renaissance filed its Current Report on Form 8-K announcing its execution of a
definitive agreement for the Merger and will end on the business day immediately preceding the record date for the meeting of stockholders at which
this Merger is to be voted upon. Since the placement of the limit order, as of December 1 5 , 2008, RAC Partners had purchased 8 1 1,269
shares of Renaissance common stock for an aggregate purchase price of $4,5 95,532 and at an average purchase price per share of
$5.66.
Barry W. Florescue has personally
agreed, pursuant to an agreement with Renaissance and Ladenburg Thalmann, the representative of the underwriters of the IPO, that if Renaissance
liquidates prior to the consummation of a business combination, he will be personally liable to ensure that the proceeds in the Trust Account are not
reduced by the claims of target businesses or vendors or other entities that are owed money by Renaissance for services rendered or contracted for or
products sold to Renaissance in excess of the net proceeds of the IPO not held in the Trust Account. Renaissance cannot assure you that he would be
able to satisfy those obligations. Pursuant to the underwriting agreement between Renaissance and Ladenburg Thalmann, Renaissance agreed not to
commence its due diligence investigation of any operating business which it sought to acquire or obtain the services of any vendor without obtaining an
agreement pursuant to which such party would waive any claims against the Trust Account. As of the date of this proxy statement/prospectus, Renaissance
has received waiver agreements from each of its vendors other than its independent registered accounting firm. There is currently an outstanding
balance to Renaissances independent registered accounting firm of approximately $52,000 and Renaissance intends to pay such fees in full in
accordance with its past practices.
BMD Management Company, Inc., an
affiliate of Barry W. Florescue, makes available to Renaissance a small amount of office space and certain office and secretarial services, as
Renaissance may require from time to time. Renaissance pays BMD Management Company $8,000 per month for these services. Mr. Florescue is the chairman
of the board and president of BMD Management Company, Inc. and, as a result, benefits from the transaction to the extent of his interest in BMD
Management Company, Inc. However, this arrangement is solely for Renaissances benefit and is not intended to provide Mr. Florescue compensation
in lieu of a salary. Renaissance believes, based on rents and fees for similar services in the Miami-Ft. Lauderdale, Florida metropolitan area, that
the fee charged by BMD Management Company, Inc. is at least as favorable as Renaissance could have obtained from an unaffiliated
person.
Renaissance engages in ordinary
course banking relationships on customary terms with Century Bank including the investment of excess operating funds in short term certificates of
deposit. Barry W. Florescue is the chairman and owner of the bank and two of Renaissances directors are directors of the bank. Such amounts at
December 31, 2006 and 2007 total $60,165 and $1,410,028, respectively.
Code of Ethics and Related Person Policy
Renaissances written Code
of Ethics requires it to avoid, wherever possible, all transactions with related persons that could result in actual or potential conflicts of
interest, except under guidelines approved by its board of directors (or the audit committee). SEC rules generally define transactions with related
persons as transactions in which (1) the aggregate amount involved will or may be expected to exceed $120,000 in any calendar year, (2) Renaissance or
any of its subsidiaries is a participant, and (3) any (a) executive officer, director or nominee for election as a director, (b) greater than 5%
beneficial owner of Renaissance common stock, or (c) immediate family member, of the persons referred to in clauses (a) and (b), has or will have a
direct or indirect material interest (other than solely as a result of being a director or a less than 10% beneficial owner of another entity). A
conflict of interest situation can arise when a person takes actions or has interests that may make it difficult to perform his or her work objectively
and effectively. Conflicts of interest may also arise if a person, or a member of his or her family, receives improper personal benefits as a result of
his or her position.
196
Upon consummation of the Merger,
Renaissances audit committee, pursuant to its written charter, will be responsible for reviewing and approving transactions with related persons
to the extent Renaissance enters into such transactions. The audit committee will consider all relevant factors when determining whether to approve a
transaction with a related person, including whether the transaction is on terms no less favorable than terms generally available to an unaffiliated
third-party under the same or similar circumstances and the extent of the related persons interest in the transaction. No director may
participate in the approval of any transaction in which he is a related person, but that director is required to provide the audit committee with all
material information concerning the transaction. Additionally, Renaissance will require each of its directors and executive officers to complete a
directors and officers questionnaire annually that elicits information about transactions with related persons. These written policies and
procedures are intended to determine whether any such transaction impairs the independence of a director or presents a conflict of interest on the part
of a director, employee or officer.
First Communications Transactions With Related
Persons
First Communications derived 5.6%
of its revenues for the year ended December 31, 2007 from sales of telecommunications services to FirstEnergy Corp., a stockholder that held 14.34% of
First Communications capital stock as of September 30, 2008. First Communications provides these services on an arms length basis at market
rates.
Additionally, First
Communications and FirstEnergy Corp. have entered into a right of negotiations agreement, expiring in 2015, which provides First Communications with a
first and last look at all telecommunications services provided by FirstEnergy Corp.
In March 2008, First
Communications purchased substantially all of the assets of FE Telecom from FirstEnergy Corp. for total consideration of $45.0 million in cash together
with the assumption of certain liabilities relating to the assets acquired.
In April 2008, First
Communications purchased call center equipment from SER for a total purchase price of $221,073. SER is wholly owned by The Gores Group, which owned 13%
of First Communications capital stock as of September 30, 2008. This transaction was negotiated on an arms length basis.
Section 16(a) Beneficial Ownership Reporting
Compliance
Section 16(a) of the Exchange Act
requires Renaissance directors, officers and persons owning more than 10% of Renaissance common stock to file reports of ownership and changes of
ownership with the SEC. Based on its review of the copies of such reports furnished to Renaissance, or representations from certain reporting persons
that no other reports were required, Renaissance believes that all applicable filing requirements were complied with during the fiscal year ended
December 31, 2007.
197
DESCRIPTION OF RENAISSANCE COMMON STOCK AND OTHER
SECURITIES
General
On February 1, 2008, Renaissance
closed its initial public offering of 15,600,000 Units, and on February 16, 2007, Renaissance completed the sale of and additional 2,340,000 Units that
were subject to the underwriters over-allotment option. Each Unit consists of one share of its common stock and two warrants, each to purchase
one share of its common stock at an exercise price of $5.00 per share. The Units were sold at an offering price of $6.00 per Unit, generating total
gross proceeds of $107,640,000. Renaissances Units, common stock and warrants are traded on the American Stock Exchange under the symbols RAK.U,
RAK, and RAK.WS, respectively. The closing price for each Unit, share of common stock and warrant on September 12, 2008 the last trading day before
announcement of the execution of the Merger Agreement, was $6.00, $5.80 and $0.10, respectively.
The amended and restated
certificate of incorporation of Renaissance authorizes the issuance 72,000,000 shares of common stock, par value $.0001, and 1,000,000 shares of
preferred stock, par value $.0001. As of the record date, shares of common stock are outstanding, held by stockholders of record and no shares of
preferred stock were outstanding. The number of authorized shares of common stock will be increased to 200,000,000 upon approval of the merger proposal
and the charter amendment proposal and the filing of an amended and restated certificate of incorporation with the Secretary of State of the State of
Delaware.
Common Stock
The holders of Renaissance common
stock are entitled to one vote for each share held of record on all matters to be voted on by Renaissance stockholders. In connection with the vote
required for any business combination, all of the existing stockholders, including all officers and directors of Renaissance, have agreed to vote their
respective shares of common stock owned by them immediately prior to the IPO in accordance with the vote of the holders of a majority of the Public
Shares present in person or represented by proxy and entitled to vote at the special meeting. This voting arrangement does not apply to shares included
in Units purchased in the IPO or purchased following the IPO in the open market by any of Renaissances stockholders, officers and directors.
Renaissances stockholders, officers and directors may vote their shares in any manner they determine, in their sole discretion, with respect to
any other items that come before a vote of Renaissance stockholders.
Renaissance will proceed with the
Merger only if stockholders who own at least a majority of the Public Shares present at the Special Meeting in person or by proxy and entitled to vote
thereon in favor of the Merger and stockholders owning fewer than 20% of the Public Shares exercise their conversion rights discussed
below.
Renaissances board of
directors is currently divided into three classes, each of which will generally serve for a term of three years with only one class of directors being
elected in each year. Directors are elected based on a plurality of the votes cast.
If Renaissance is required to
liquidate, the holders of the Public Shares will be entitled to share ratably in the Trust Account, inclusive of any interest, and any net assets
remaining available for distribution to them after payment of liabilities. Holders of common stock issued prior to Renaissances IPO have agreed
to waive their rights to share in any distribution with respect to common stock owned by them prior to the IPO if Renaissance is forced to
liquidate.
Holders of Renaissance common
stock do not have any conversion, preemptive or other subscription rights and there are no sinking fund or redemption provisions applicable to the
common stock, except that the holders of the Public Shares have the right to have their Public Shares converted to cash equal to their pro rata share
of the Trust Account if they vote against the merger proposal, properly demand conversion and the Merger is approved and completed. Holders of common
stock who convert their stock into a share of the Trust Account still have the right to exercise the warrants that they received as part of the Units
if the Merger is completed.
198
Preferred Stock
The amended and restated
certificate of incorporation of Renaissance authorizes the issuance of 1,000,000 shares of a blank check preferred stock with such designations, rights
and preferences as may be determined from time to time by Renaissances board of directors. Accordingly, Renaissances board of directors is
empowered, without stockholder approval, to issue preferred stock with dividend, liquidation, conversion, voting or other rights which could adversely
affect the voting power or other rights of the holders of common stock, although Renaissance has entered into an underwriting agreement which prohibits
Renaissance, prior to a business combination, from issuing preferred stock which participates in any manner in the proceeds of the Trust Account, or
which votes as a class with the common stock on a business combination. Renaissance may issue some or all of the preferred stock to effect a business
combination. In addition, the preferred stock could be utilized as a method of discouraging, delaying or preventing a change in control of Renaissance.
There are no shares of preferred stock outstanding and Renaissance does not currently intend to issue any preferred stock.
Warrants
Renaissance currently has
outstanding 40,546,667 warrants. Each warrant entitles the registered holder to purchase one share of its common stock at a price of $5.00 per share
and in the case of the Insider Warrants, $6.00 per share, subject to adjustment as discussed below, at any time during which, other than in the case of
the Insider Warrants, a registration statement relating to the common stock issuable upon the exercise is effective and a prospectus with respect
thereto current, commencing on the later of (i) the completion of a business combination; and (ii) January 29, 2008. The warrants will expire on
January 28, 2011, at 5:00 p.m., New York City time.
We may call the warrants for
redemption (including the Insider Warrants and any warrants issued upon exercise of the unit purchase option issued to Ladenburg
Thalmann),
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in whole and not in part;
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at a price of $.01 per warrant at any time while the warrants
are exercisable;
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upon not less than 30 days prior written notice of
redemption to each warrant holder; and
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if, and only if, the reported last sale price of the common
stock equals or exceeds $8.50 per share, for any 20 trading days within a 30 trading day period ending on the third business day prior to the notice of
redemption to warrant holders.
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The right to exercise a warrant
will be forfeited unless the warrant is exercised prior to the date specified in the notice of redemption. On and after the redemption date, a record
holder of a warrant will have no further rights except to receive the redemption price for such holders warrant upon surrender of such
warrant.
The redemption criteria for
Renaissance warrants was established at a price which was intended to provide warrant holders a reasonable premium to the initial exercise price and to
provide a sufficient degree of liquidity to cushion the market reaction to Renaissances redemption call.
Renaissance has agreed to allow
the purchasers of the Insider Warrants, including RAC Partners and its affiliates, to exercise the Insider Warrants on a cashless basis. If
the holders take advantage of this option, they would pay the exercise price by surrendering their Insider Warrants for that number of shares of common
stock equal to the quotient obtained by dividing (x) the product of the number of shares of common stock underlying the Insider Warrants, multiplied by
the difference between the exercise price of the warrants and the fair market value by (y) the fair market value. The fair market
value is the average reported last sale price of the common stock for the five trading days ending on the day prior to the date on which the
warrant is exercised. The reason that Renaissance has agreed that the Insider Warrants will be exercisable on a cashless basis so long as they are held
by the purchasers of the Insider Warrants, including RAC Partners or its affiliates, is because it was not known at the time of the IPO whether the
purchasers would be affiliated with Renaissance following a business combination. If they are, their ability to sell Renaissance securities in the open
market will be significantly limited. If they remain insiders, Renaissance will put policies in place that prohibit insiders from selling its
securities except
199
during specific periods of
time. Even during such periods of time, an insider cannot trade in Renaissances securities if he is in possession of material non-public
information. Accordingly, unlike public stockholders who could exercise their warrants and sell the shares of common stock received upon such exercise
freely in the open market in order to recoup the cost of such exercise, the insiders could be significantly restricted from selling such securities. As
a result, Renaissance believes that allowing the holders to exercise such warrants on a cashless basis is appropriate.
The warrants have been issued in
registered form under a warrant agreement between Continental Stock Transfer & Trust Company, as warrant agent and Renaissance. You should review a
copy of the warrant agreement, which has been filed as an exhibit to Renaissances registration statement on Form S-1 (Reg. No. 333-134444) that
became effective on January 29, 2007, for a complete description of the terms and conditions applicable to the warrants.
The exercise price and number of
shares of common stock issuable on exercise of the warrants may be adjusted in certain circumstances including in the event of a stock dividend, or
Renaissances recapitalization, reorganization, merger or consolidation. However, the warrants will not be adjusted for issuances of common stock
at a price below their respective exercise prices.
The warrants may be exercised
upon surrender of the warrant certificate on or prior to the expiration date at the offices of the warrant agent, with the exercise form on the reverse
side of the warrant certificate completed and executed as indicated, accompanied by full payment of the exercise price, by certified or official bank
check payable to Renaissance, for the number of warrants being exercised. The warrant holders do not have the rights or privileges of holders of common
stock and any voting rights until they exercise their warrants and receive shares of common stock. After the issuance of shares of common stock upon
exercise of the warrants, each holder will be entitled to one vote for each share held of record on all matters to be voted on by
stockholders.
No warrants will be exercisable
unless, at the time of exercise, a prospectus relating to the common stock issuable upon exercise of the warrants is current and the common stock has
been registered or qualified or deemed to be exempt under the securities laws of the state of residence of the holder of the warrants. Under the terms
of the warrant agreement, Renaissance has agreed to meet these conditions and use its best efforts to maintain a current prospectus relating to the
common stock issuable upon exercise of the warrants until the expiration of the warrants. However, Renaissance cannot assure you that it will be able
to do so and, if it does not maintain a current prospectus relating to the common stock issuable upon exercise of the warrants, holders will be unable
to exercise their warrants and Renaissance will not be required to settle any such warrant exercise. If the prospectus relating to the common stock
issuable upon the exercise of the warrants is not current or if the common stock is not qualified or exempt from qualification in the jurisdictions in
which the holders of the warrants reside, Renaissance will not be required to net cash settle or cash settle the disallowed warrant exercise, the
warrants may have no value, the market for the warrants may be limited and the warrants may expire worthless.
No fractional shares will be
issued upon exercise of the warrants. If, upon exercise of the warrants, a holder would be entitled to receive a fractional interest in a share,
Renaissance will, upon exercise, round up to the nearest whole number the number of shares of common stock to be issued to the warrant
holder.
Purchase Option
Renaissance has issued to the
underwriters of its IPO an option to purchase up to a total of 650,000 units at $7.50 per unit. The units issuable upon exercise of this option are
identical to those offered in the IPO. The unit purchase option may be exercised for cash or on a cashless basis, at the holders
option, such that the holder may use the appreciated value of the unit purchase option (the difference between the exercise prices of the unit purchase
option and the underlying warrants and the market price of the units and underlying securities) to exercise the unit purchase option without the
payment of any cash. Renaissance has no obligation to cash settle or net cash settle the exercise of the unit purchase option or the warrants
underlying the unit purchase option. The holders of the unit purchase option will not be entitled to exercise the unit purchase option or the warrants
underlying the unit purchase options unless a registration statement covering the securities underlying the unit purchase option is
200
effective or an exemption
from registration is available. If the holder is unable to exercise the unit purchase option or underlying warrants, the unit purchase option or
warrants, as applicable, will expire worthless.
Transfer Agent and Warrant Agent
The transfer agent for
Renaissances securities and the warrant agent for Renaissance warrants is Continental Stock Transfer & Trust Company, 17 Battery Place, New
York, New York 10004; telephone (212) 509-4000.
201
PRICE RANGE OF FIRST COMMUNICATIONS SECURITIES AND
DIVIDENDS
First Communications common stock
is listed on AIM as regulated by the London Stock Exchange under the symbol FCOM. There have been no sales on AIM since First
Communications initial public offering of its shares of common stock on that market for $5.00 per share on July 2, 2007.
Holders of First Communications
common stock should obtain current market quotations for their securities. The market price of First Communications common stock could vary at any time
before the Merger.
Holders
As of September 30, 2008, there
were 48 holders of record of First Communications common stock.
Dividends
First Communications has not paid
any dividends on its common stock to date and does not intend to pay dividends in the foreseeable future.
202
PRICE RANGE OF RENAISSANCE SECURITIES AND
DIVIDENDS
Renaissance Units, which consist
of one share of Renaissance common stock, par value $.0001 per share, and two warrants, each to purchase an additional share of Renaissance common
stock, trade on the American Stock Exchange under the symbol RAK.U. Renaissance common stock has traded separately on the American Stock
Exchange under the symbol RAK since February 15, 2007. Renaissance warrants have traded separately on the American Stock Exchange under the
symbol RAK.WS since February 15, 2007. Each warrant entitles the holder to purchase from Renaissance one share of common stock at an
exercise price of $5.00 commencing the later of (a) one year from the effective date of the IPO; or (b) the completion of a business combination.
Renaissance warrants will expire at 5:00 p.m., New York City time, on January 28, 2011.
The following tables set forth,
for the calendar quarter indicated, the quarterly high and low sale prices for Renaissances Units, common stock and warrants, respectively, as
reported on the American Stock Exchange.
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Units
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Common Stock
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Warrants
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High
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Low
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High
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Low
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High
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Low
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2008:
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Third Quarter
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$
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6.35
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$
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5.70
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$
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5.82
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$
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5.55
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$
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.18
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$
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.03
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Second
Quarter
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6.00
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5.70
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5.80
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5.60
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.25
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.05
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First
Quarter
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6.26
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5.79
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6.62
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5.50
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.40
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.13
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2007:
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Fourth
Quarter
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6.40
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6.10
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5.65
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5.52
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.50
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.35
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Third
Quarter
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6.79
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6.15
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5.85
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5.45
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.60
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.40
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Second
Quarter
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6.90
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6.09
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5.62
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5.42
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.65
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.38
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First
Quarter
(1)
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6.74
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6.00
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5.51
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5.31
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.45
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.38
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(1)
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Represents the high and low sale prices for Renaissance Units
and warrants from February 15, 2007, the date that Renaissance warrants and Units first became separately tradable, through March 31, 2007.
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The closing price for each share
of common stock, warrant and Unit of Renaissance on September 12, 2008, the last trading day before announcement of the execution of the Merger
Agreement, was $5.80, $0.10 and $6.00, respectively. As of
, the record date for
the Renaissance special meeting, the closing price for each share of common stock, warrant and Unit of Renaissance was
$
, $
and
$
, respectively.
Holders of Renaissance common
stock, warrants and Units should obtain current market quotations for their securities. The market price of Renaissance common stock, warrants and
Units could vary at any time before the Merger.
Holders
As of
, there were
holders of record of Renaissance Units,
holders of record of Renaissance common stock and
holders of record of Renaissance warrants.
Dividends
Renaissance has not paid any
dividends on its common stock to date and does not intend to pay dividends in the foreseeable future.
203
APPRAISAL RIGHTS
Renaissance
Renaissance stockholders do not
have appraisal rights under the DGCL in connection with the Merger.
First Communications
Holders of record of First
Communications common stock who do not vote in favor of adopting the Merger, and who otherwise comply with the applicable provisions of Section 262 of
the DGCL will be entitled to exercise appraisal rights under Section 262 of the DGCL.
204
STOCKHOLDER PROPOSALS
The Renaissance 2009 annual
meeting of stockholders will be held on or about
, 2009 unless the date is changed
by the board of directors. If you are a stockholder and you want to include a proposal in the proxy statement/prospectus for the 2009 annual meeting,
you need to provide it to Renaissance by no later than
, 2009. You should direct any
proposals to Renaissances secretary at its principal office which will be located at 3340 West Market Street, Akron, OH 44333. If you want to
present a matter of business to be considered at the 2009 annual meeting, under Renaissances by-laws you must give timely notice of the matter,
in writing, to Renaissances secretary. To be timely, the notice has to be given between
, 2009 and
, 2009. If
Renaissance is liquidated as a result of not consummating a business combination transaction prior to January 29, 2009, there will be no annual meeting
in 2009.
LEGAL MATTERS
Dechert LLP will pass upon the
validity of the common stock issued in connection with the Merger and certain other legal matters related to this proxy
statement/prospectus.
EXPERTS
The consolidated financial
statements of First Communications, Inc. and its subsidiaries as of December 31, 2007 and for the period from July 2, 2007 (inception) to December 31,
2007, included in this proxy statement/prospectus have been so included in reliance on a report of Frazier & Deeter, LLC, an independent registered
public accounting firm, appearing elsewhere herein given on the authority of said firm, as experts in auditing and accounting.
The financial statements of First
Communications, LLC as of July 1, 2007 and for the period from January 1, 2007 to July 1, 2007, included in this proxy statement/prospectus have been
so included in reliance on a report of Bober, Markey, Fedorovich & Company, an independent registered public accounting firm, appearing elsewhere
herein given on the authority of said firm, as experts in auditing and accounting.
The financial statements of First
Communications, LLC as of December 31, 2006, and 2005 and for the years ended December 31, 2006, 2005 and 2004, included in this proxy
statement/prospectus have been so included in reliance on a report of Bober, Markey, Fedorovich & Company, an independent registered public
accounting firm, appearing elsewhere herein given on the authority of said firm, as experts in auditing and accounting.
The financial statements of
Xtension Services, Inc. as of July 1, 2007 and for the period from January 1, 2007 to July 1, 2007, included in this proxy statement/prospectus have
been so included in reliance on a report of Bober, Markey, Fedorovich & Company, an independent registered public accounting firm, appearing
elsewhere herein given on the authority of said firm, as experts in auditing and accounting.
The financial statements of
Xtension Services, Inc. as of December 31, 2006, 2005 and 2004 and for the years ended December 31, 2006, 2005 and 2004, included in this proxy
statement/prospectus have been so included in reliance on a report of RubinBrown LLP, an independent registered public accounting firm, appearing
elsewhere herein given on the authority of said firm, as experts in auditing and accounting.
The consolidated financial
statements of GCI Globalcom Holdings, Inc. as of December 31, 2007 and for the year ended December 31, 2007, included in this proxy
statement/prospectus have been so included in reliance on a report of Plante & Moran, PLLC, an independent registered public accounting firm,
appearing elsewhere herein given on the authority of said firm, as experts in auditing and accounting.
The financial statements of
Renaissance Acquisition Corp. as of December 31, 2007 and 2006 and for the year ended December 31, 2007 and the period from April 17, 2006 (inception)
to December 31, 2006 and the period from April 17, 2006 (inception) to December 31, 2007, included in this proxy statement/prospectus have been so
included in the reliance on a report of Eisner LLP, an independent registered public accounting firm, appearing elsewhere herein given on the authority
of said firm, as experts in auditing and accounting.
205
Representatives of Frazier &
Deeter, LLC and Eisner LLP will be present at the stockholder meeting or will be available by telephone with the opportunity to make statements, if so
desired, and to respond to appropriate questions.
DELIVERY OF DOCUMENTS TO STOCKHOLDERS
Pursuant to the rules of the SEC,
Renaissance and services that it employs to deliver communications to its shareholders are permitted to deliver to two or more stockholders sharing the
same address a single copy of each of Renaissances annual report to stockholders and Renaissances proxy statement/prospectus. Upon written
or oral request, Renaissance will deliver a separate copy of the annual report to stockholder and/or proxy statement/prospectus to any stockholder at a
shared address to which a single copy of each document was delivered and who wishes to receive separate copies of such documents in the future.
Stockholders receiving multiple copies of such documents may likewise request that Renaissance deliver single copies of such documents in the future.
Stockholders may notify Renaissance of their requests by calling or writing Renaissance at its principal executive offices at 50 East Sample Road,
Pompano Beach, FL 33064, telephone (954) 784-3031.
206
WHERE YOU CAN FIND MORE INFORMATION
Renaissance files reports, proxy
statements and other information with the SEC as required by the Exchange Act. You may read and copy reports, proxy statements and other information
filed by Renaissance with the SEC at the SEC public reference room located at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on
the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. You may also obtain copies of the materials described above at
prescribed rates by writing to the SEC, Public Reference Section, 100 F Street, N.E., Washington, D.C. 20549. You may access information on Renaissance
at the SEC web site containing reports, proxy statement/prospectus and other information at: http://www.sec.gov.
Information and statements
contained in this proxy statement/prospectus are qualified in all respects by reference to the relevant contract or other document included as an annex
to this proxy statement/prospectus.
If you would like additional
copies of this proxy statement/prospectus or if you have questions about the Merger, you should contact via phone or in writing:
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Mark Seigel
Secretary
Renaissance Acquisition Corp.
50 East Sample Road, Suite 400
Pompano Beach, FL 33064
(954) 784-3031
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207
INDEX TO FINANCIAL STATEMENTS
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Page
|
First
Communications, Inc.
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Report of
Independent Registered Public Accounting Firm
|
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|
F-4
|
|
Consolidated
Balance Sheet as of December 31, 2007
|
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|
F-5
|
|
Consolidated
Statement of Operations for the period from inception (July 2, 2007) through December 31, 2007
|
|
|
|
|
F-7
|
|
Consolidated
Statement of Changes in Redeemable Stock and Shareholders Equity for the period from inception (July 2, 2007) through December 31, 2007
|
|
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|
|
F-8
|
|
Consolidated
Statement of Cash Flows for the period from inception (July 2, 2007) through December 31, 2007
|
|
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|
|
F-9
|
|
Notes to
Consolidated Financial Statements
|
|
|
|
|
F-10
|
|
|
Condensed
Consolidated Balance Sheets as of September 30, 2008 (unaudited) and December 31, 2007
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|
|
F-26
|
|
Condensed
Consolidated Statement of Operations for the three and nine months ended September 30, 2008 (unaudited)
|
|
|
|
|
F-28
|
|
Condensed
Consolidated Statement of Cash Flows for nine months ended September 30, 2008 (unaudited)
|
|
|
|
|
F-29
|
|
Notes to
Unaudited Consolidated Financial Statements
|
|
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|
|
F-30
|
|
|
First
Communications, LLC
|
|
|
|
|
|
|
Independent
Auditors Report
|
|
|
|
|
F-37
|
|
Balance
Sheets as of December 31, 2006 and 2005
|
|
|
|
|
F-38
|
|
Statements of
Income for the years ended December 31, 2006, 2005 and 2004
|
|
|
|
|
F-40
|
|
Statement of
Changes in Members Equity for the years ended December 31, 2006, 2005 and 2004
|
|
|
|
|
F-41
|
|
Statements of
Cash Flows for the years ended December 31, 2006, 2005 and 2004
|
|
|
|
|
F-42
|
|
Notes to
Financial Statements
|
|
|
|
|
F-44
|
|
|
Independent
Auditors Report
|
|
|
|
|
F-54
|
|
Balance Sheet
as of July 1, 2007
|
|
|
|
|
F-55
|
|
Statement of
Income for the period from January 1, 2007 to July 1, 2007
|
|
|
|
|
F-57
|
|
Statement of
Changes in Members Equity for the period from January 1, 2007 to July 1, 2007
|
|
|
|
|
F-58
|
|
Statement of
Cash Flow for the period from January 1, 2007 to July 1, 2007
|
|
|
|
|
F-59
|
|
Notes to
Financial Statements
|
|
|
|
|
F-60
|
|
|
Xtension
Services, Inc.
|
|
|
|
|
|
|
Independent
Auditors Report
|
|
|
|
|
F-69
|
|
Balance
Sheets as of December 31, 2006, 2005 and 2004
|
|
|
|
|
F-70
|
|
Statements of
Income and Retained Earnings for the years ended December 31, 2006, 2005 and 2004
|
|
|
|
|
F-71
|
|
Statements of
Cash Flows for the years ended December 31, 2006, 2005 and 2004
|
|
|
|
|
F-72
|
|
Notes to
Financial Statements
|
|
|
|
|
F-73
|
|
|
Independent
Auditors Report
|
|
|
|
|
F-76
|
|
Balance Sheet
as of July 1, 2007
|
|
|
|
|
F-77
|
|
Statement of
Income and Retained Earnings for the period from January 1, 2007 to July 1, 2007
|
|
|
|
|
F-78
|
|
Statement of
Cash Flows for the period from January 1, 2007 to July 1, 2007
|
|
|
|
|
F-79
|
|
Notes to
Financial Statements
|
|
|
|
|
F-80
|
|
F-1
|
|
|
|
Page
|
|
GCI
Globalcom Holdings, Inc.
|
|
|
|
|
|
|
Independent
Auditors Report
|
|
|
|
|
F-83
|
|
Consolidated
Balance Sheets as of September 30, 2008 and 2007 (unaudited) and
December 31, 2007
|
|
|
|
|
F-84
|
|
Consolidated
Statement of Operations for the nine months ended September 30, 2008 and 2007 (unaudited) and year ended December 31, 2007
|
|
|
|
|
F-85
|
|
Consolidated
Statement of Stockholders Equity (Deficit) for the nine months ended September 30, 208 and 2007 (unaudited) and year ended December 31,
2007
|
|
|
|
|
F-86
|
|
Consolidated
Statement of Cash Flows for the nine months ended September 30, 2008 and 2007 (unaudited) and year ended December 31, 2007
|
|
|
|
|
F-87
|
|
Notes to
Consolidated Financial Statements
|
|
|
|
|
F-88
|
|
|
Renaissance Acquisition Corp.
|
|
|
|
|
|
|
Report of
Independent Registered Public Accounting Firm
|
|
|
|
|
F-98
|
|
Balance
Sheets as of December 31, 2007 and 2006
|
|
|
|
|
F-99
|
|
Statements of
Operations for the for the year ended December 31, 2007 and for the period from April 17, 2006 (inception) to December 31, 2007 and for the period from
April 17, 2006 (inception) to December 31, 2006
|
|
|
|
|
F-100
|
|
Statements of
Stockholders Equity for the year ended December 31, 2007 and for the period from April 17, 2006 (inception) to December 31, 2007 and the period
from April 17, 2006 (inception) to December 31, 2006
|
|
|
|
|
F-101
|
|
Statements of
Cash Flows for the year ended December 31, 2007 and for the period from April 17, 2006 (inception) to December 31, 2007 and for the period from April
17, 2006 (inception) to December 31, 2006
|
|
|
|
|
F-102
|
|
Notes to
Financial Statements
|
|
|
|
|
F-103
|
|
|
Condensed
Balance Sheets as of September 30, 2008 and December 31, 2007
|
|
|
|
|
F-110
|
|
Condensed
Statements of Operations for the nine and three months ended September 30, 2008 and 2007 and for the period from April 17, 2006 (inception) to
September 30, 2008
|
|
|
|
|
F-111
|
|
Condensed
Statements of Stockholders Equity for the nine months ended September 30, 2008 and 2007 and the period from April 17, 2006 (inception) to
September 30, 2008
|
|
|
|
|
F-112
|
|
Condensed
Statements of Cash Flows for the nine months ended September 30, 2008 and 2007 and for the period from April 17, 2006 (inception) to September 30, 2008
|
|
|
|
|
F-113
|
|
Notes to
Unaudited Condensed Financial Statements
|
|
|
|
|
F-114
|
|
F-2
FIRST COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2007 AND
FOR THE PERIOD FROM INCEPTION (JULY 2, 2007) TO DECEMBER 31,
2007
F-3
Report of Independent Registered Public Accounting
Firm
We have audited the accompanying
consolidated balance sheet of First Communications, Inc. and Subsidiaries (the Company) as of December 31, 2007, and the related
consolidated statements of operations, changes in redeemable stock and shareholders equity, and cash flows for the period from inception (July 2,
2007) to December 31, 2007. These financial statements are the responsibility of the Companys management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in
accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit
of the Companys internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness
of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated
financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31,
2007, and the consolidated results of its operations and its cash flows for the period from inception (July 2, 2007) to December 31, 2007 in conformity
with U.S. generally accepted accounting principles.
As discussed in Note 14 to the
consolidated financial statements, the 2007 consolidated financial statements have been restated to correct misstatements.
/s/ Frazier & Deeter, LLC
Atlanta, Georgia
September 21, 2008
F-4
FIRST COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 2007
(in thousands)
(Restated)
ASSETS
|
|
|
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
|
|
$
|
9,300
|
|
Accounts
receivable trade, less allowance for doubtful accounts of $661
|
|
|
|
|
13,793
|
|
Accounts
receivable related party
|
|
|
|
|
945
|
|
Inventory
|
|
|
|
|
136
|
|
Prepaid
expenses
|
|
|
|
|
823
|
|
|
TOTAL CURRENT
ASSETS
|
|
|
|
|
24,997
|
|
|
PROPERTY AND
EQUIPMENT
|
|
|
|
|
|
|
Switches
|
|
|
|
|
2,750
|
|
Technical
equipment
|
|
|
|
|
1,922
|
|
Leasehold
improvements
|
|
|
|
|
28
|
|
Office
equipment
|
|
|
|
|
232
|
|
Furniture and
fixtures
|
|
|
|
|
561
|
|
Software
|
|
|
|
|
1,500
|
|
Software
development in progress
|
|
|
|
|
823
|
|
|
|
|
|
|
7,816
|
|
Less:
Accumulated depreciation
|
|
|
|
|
(593
|
)
|
|
NET PROPERTY
AND EQUIPMENT
|
|
|
|
|
7,223
|
|
|
OTHER
ASSETS
|
|
|
|
|
|
|
Goodwill
|
|
|
|
|
88,079
|
|
Other
intangible assets, net
|
|
|
|
|
63,280
|
|
Deposits and
other assets
|
|
|
|
|
1,357
|
|
|
TOTAL OTHER
ASSETS
|
|
|
|
|
152,716
|
|
|
TOTAL ASSETS
|
|
|
|
$
|
184,936
|
|
See accompanying notes.
F-5
FIRST COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 2007
(in thousands, except share data)
(Restated)
LIABILITIES AND SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
Line of
credit
|
|
|
|
$
|
625
|
|
Accounts
payable trade
|
|
|
|
|
13,220
|
|
Federal
income tax payable
|
|
|
|
|
362
|
|
Accrued
expenses
|
|
|
|
|
2,600
|
|
Deferred tax
liability, net current
|
|
|
|
|
213
|
|
Deferred
revenue current
|
|
|
|
|
3,244
|
|
|
TOTAL CURRENT
LIABILITIES
|
|
|
|
|
20,264
|
|
|
NON-CURRENT
LIABILITIES
|
|
|
|
|
|
|
Deferred tax
liability, net long term
|
|
|
|
|
4,064
|
|
Deferred
revenue long term
|
|
|
|
|
170
|
|
TOTAL
NON-CURRENT LIABILITIES
|
|
|
|
|
4,234
|
|
|
TOTAL
LIABILITIES
|
|
|
|
|
24,498
|
|
|
Redeemable
Preferred Stock, $0.001 par value; 10,000,000 shares
authorized, 40,000 shares issued and outstanding (liquidation
preference $1,000 per share)
|
|
|
|
|
40,000
|
|
|
SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
Series A
Common Stock, $0.001 par value; 59,165,000 shares authorized,
26,067,000 shares issued and outstanding
|
|
|
|
|
26
|
|
Series B
Non-Voting Common Stock, $0.001 par value; 835,000 shares
authorized, issued and outstanding
|
|
|
|
|
1
|
|
Additional
paid in capital
|
|
|
|
|
119,482
|
|
Retained
earnings
|
|
|
|
|
929
|
|
|
TOTAL
SHAREHOLDERS EQUITY
|
|
|
|
|
120,438
|
|
|
TOTAL
LIABILITIES AND SHAREHOLDERS EQUITY
|
|
|
|
$
|
184,936
|
|
See accompanying notes.
F-6
FIRST COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
For the Period from Inception (July 2, 2007) through December 31, 2007
(in thousands, except per share
amounts)
(Restated)
REVENUES,
NET
|
|
|
|
|
|
|
Revenues, net
|
|
|
|
$
|
61,200
|
|
Revenues, net
related party
|
|
|
|
|
4,353
|
|
|
TOTAL
REVENUES, NET
|
|
|
|
|
65,553
|
|
|
COST OF
FACILITIES, exclusive of depreciation and amortization stated below
|
|
|
|
|
44,560
|
|
|
SELLING,
GENERAL AND ADMINISTRATIVE EXPENSES
|
|
|
|
|
15,706
|
|
|
DEPRECIATION
AND AMORTIZATION
|
|
|
|
|
3,712
|
|
|
OPERATING
INCOME
|
|
|
|
|
1,575
|
|
|
OTHER
EXPENSES, NET
|
|
|
|
|
58
|
|
|
INCOME BEFORE
INCOME TAXES
|
|
|
|
|
1,517
|
|
|
PROVISION FOR
INCOME TAXES
|
|
|
|
|
588
|
|
|
NET INCOME
|
|
|
|
$
|
929
|
|
|
EARNINGS PER
SHARE
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
Net income
|
|
|
|
$
|
929
|
|
Preferred
stock accretion
|
|
|
|
|
(12,548
|
)
|
Net loss
attributable to common shareholders
|
|
|
|
$
|
(11,619
|
)
|
Per share
amounts:
|
|
|
|
|
|
|
Basic
earnings per share
|
|
|
|
$
|
(0.43
|
)
|
Diluted
earnings per share
|
|
|
|
$
|
(0.43
|
)
|
See accompanying notes.
F-7
FIRST COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN REDEEMABLE STOCK
AND SHAREHOLDERS EQUITY
For the period from inception (July 2, 2007) through
December 31, 2007
(in thousands, except share data)
(Restated)
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
Redeemable Preferred
Stock Series A
|
|
Series A
|
|
Series B
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Additional
Paid In
Capital
|
|
Retained
Earnings
|
|
Total
Shareholders
Equity
|
Balances at
July 2, 2007 (date of inception)
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Management
shares
|
|
|
|
|
|
|
|
|
|
|
|
|
1,326,000
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
Issuance of
common stock, preferred stock and warrants, net of issuance costs
|
|
|
|
|
40,000
|
|
|
|
27,452
|
|
|
|
9,165,000
|
|
|
|
9
|
|
|
|
835,000
|
|
|
|
1
|
|
|
|
54,167
|
|
|
|
|
|
|
|
54,177
|
|
Shares issued
to acquire FC LLC and Xtensions
|
|
|
|
|
|
|
|
|
|
|
|
|
15,576,000
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
77,864
|
|
|
|
|
|
|
|
77,880
|
|
Accretion of
preferred stock to redemption value
|
|
|
|
|
|
|
|
|
12,548
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,548
|
)
|
|
|
|
|
|
|
(12,548
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
929
|
|
|
|
929
|
|
Balances at
December 31, 2007
|
|
|
|
|
40,000
|
|
|
$
|
40,000
|
|
|
|
26,067,000
|
|
|
$
|
26
|
|
|
|
835,000
|
|
|
$
|
1
|
|
|
$
|
119,482
|
|
|
$
|
929
|
|
|
$
|
120,438
|
|
See accompanying notes.
F-8
FIRST COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Period from Inception (July 2, 2007) through December 31, 2007
(in thousands)
(Restated)
CASH FLOWS
FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
Net income
|
|
|
|
$
|
929
|
|
Adjustments
to reconcile net income to net cash used in operating activities:
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
|
|
3,712
|
|
Bad debt
expense
|
|
|
|
|
917
|
|
Deferred
taxes
|
|
|
|
|
225
|
|
Changes in
operating assets and liabilities, net of effects of acquisition:
|
|
|
|
|
|
|
Accounts
receivable trade, net
|
|
|
|
|
(839
|
)
|
Inventory
|
|
|
|
|
93
|
|
Prepaid
expenses
|
|
|
|
|
(243
|
)
|
Deposits and
other assets
|
|
|
|
|
(281
|
)
|
Accounts
payable trade
|
|
|
|
|
(4,536
|
)
|
Federal
income tax payable
|
|
|
|
|
363
|
|
Accrued
expenses
|
|
|
|
|
(2,853
|
)
|
Deferred
revenue
|
|
|
|
|
196
|
|
NET CASH USED
IN OPERATING ACTIVITIES
|
|
|
|
|
(2,317
|
)
|
|
CASH FLOWS
FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
Purchases of
property and equipment
|
|
|
|
|
(1,605
|
)
|
Acquisition
of assets and assumption of liabilities, net of cash acquired
|
|
|
|
|
(72,250
|
)
|
Net change in
accounts receivable related party
|
|
|
|
|
45
|
|
NET CASH USED
IN INVESTING ACTIVITIES
|
|
|
|
|
(73,810
|
)
|
|
CASH FLOWS
FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
Proceeds from
stock issuance, net of issuance and transaction costs
|
|
|
|
|
81,631
|
|
Net
borrowings on line of credit
|
|
|
|
|
625
|
|
Bank
overdraft liability
|
|
|
|
|
3,171
|
|
NET CASH
PROVIDED BY FINANCING ACTIVITIES
|
|
|
|
|
85,427
|
|
|
NET INCREASE
IN CASH AND CASH EQUIVALENTS
|
|
|
|
|
9,300
|
|
|
CASH AND CASH
EQUIVALENTS, BEGINNING OF PERIOD
|
|
|
|
|
|
|
|
CASH AND CASH
EQUIVALENTS, END OF PERIOD
|
|
|
|
$
|
9,300
|
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
Cash paid
during the period for:
|
|
|
|
|
|
|
Interest paid
|
|
|
|
$
|
708
|
|
Income taxes
paid
|
|
|
|
|
|
|
Non-cash
investing and financing activities:
|
|
|
|
|
|
|
Stock issued
in exchange for assets acquired and liabilities assumed
|
|
|
|
$
|
77,880
|
|
See accompanying notes.
F-9
FIRST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data or as otherwise specified)
December 31,
2007
(Restated)
NOTE 1 NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Organization and Nature of Business
First Communications, Inc. and
its subsidiaries are publicly traded on the London Stock Exchanges Alternative Investment Market (AIM). Unless the context requires
otherwise or unless otherwise noted, when we use the terms we, us, our, or the Company, we are
referring to First Communications, Inc. and its subsidiaries.
The Company was formed on April
4, 2007; however, we did not have any material activity until July 2, 2007, the completion of our listing on the AIM.
First Communications, Inc. and
its subsidiaries provide local and long-distance telephone and other telecommunications related services to commercial and residential customers
throughout the United States. Certain subsidiaries are subject to regulation by state public service commissions of applicable states for intrastate
telecommunications services. For applicable interstate matters related to telephone service, certain subsidiaries are subject to regulation by the
Federal Communications Commission.
Restatement
Our previously issued financial
statements for the period from inception (July 2, 2007) to December 31, 2007 have been restated to reflect adjustments which lowered income before
income taxes by $4.3 million primarily due to amounts recorded in the statement of operations which should be purchase price adjustments and $350 of
aborted financing costs. Net income was lowered by the changes above offset by the income taxes on the adjustments and corrections of other income tax
expense misstatements. See Note 14 for further information.
Principles of Consolidation
The consolidated financial
statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America
(GAAP). The consolidated financial statements reflect the accounts of First Communications, Inc. and its wholly owned subsidiaries, First
Communications, LLC and Xtension Services, Inc. All significant intercompany balances and transactions have been eliminated in
consolidation.
We operate in one reportable
segment, the telecommunications industry. Our operations are conducted entirely in the United States.
On July 2, 2007, we completed the
acquisitions of First Communications, LLC (FC LLC) and Xtension Services, Inc. (Xtensions). The financial position and results
of operations for FC LLC and Xtensions are included in our consolidated financial statements since the date of acquisition.
Cash and Cash Equivalents
We consider all short-term
securities purchased with an original maturity of three months or less to be cash equivalents.
F-10
FIRST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except per share data or as otherwise specified)
December 31,
2007
(Restated)
Allowance for Doubtful Accounts
The allowance for doubtful
accounts represents our best estimate of probable losses in the accounts receivable balance. The allowance is based on known troubled accounts,
historical experience and other currently available evidence. Accounts are written off when we determine that the accounts are uncollectible. Activity
in the allowance for doubtful accounts for the period from inception (July 2, 2007) through December 31, 2007 is as follows:
Beginning
balance
|
|
|
|
$
|
|
|
Charged to
expense
|
|
|
|
|
917
|
|
Uncollectible
amounts written-off, net of recoveries
|
|
|
|
|
256
|
|
Ending
balance
|
|
|
|
$
|
661
|
|
Inventory
Inventory consists of cellular
telephones and is valued at the lower of cost or market.
Property and Equipment
Property and equipment are stated
at cost less accumulated depreciation. Major additions and improvements are charged to the property accounts while replacements and maintenance and
repairs, which do not improve or extend the life of the assets, are expensed currently. When property is retired or otherwise disposed of, the cost of
the property is removed from the asset accounts, accumulated depreciation is charged with an amount equivalent to the depreciation provided, and the
associated gain or loss is recorded in cost of facilities in the accompanying consolidated statement of operations.
Software included in property and
equipment includes amounts paid for purchased software and implementation services and direct internal payroll for software used internally that has
been capitalized in accordance with the Statement of Position (SOP) 98-1, Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use. Accordingly, internal and external costs incurred during the preliminary project stage are expensed as incurred.
Qualifying costs incurred during the application development stage are capitalized. The application development stage is characterized by software
design and configuration activities, coding, testing and installation. Training costs and maintenance are expensed as incurred, while upgrades and
enhancements are capitalized if it is probable that such expenditures will result in additional functionality. Once the project is substantially
complete and ready for its intended use, capitalized costs are amortized on a straight-line basis over the technologys estimated useful
life.
Depreciation is computed using
the straight-line method over the useful lives of the assets as follows:
|
|
|
|
Years
|
Switches
|
|
|
|
|
7
|
|
Technical
equipment
|
|
|
|
|
35
|
|
Leasehold
improvements
|
|
|
|
|
5
|
|
Office
equipment
|
|
|
|
|
3
|
|
Furniture and
fixtures
|
|
|
|
|
5
|
|
Software
|
|
|
|
|
6
|
|
Software
development in progress
|
|
|
|
|
6
|
|
Depreciation
expense for the period from inception (July 2, 2007) through December 31, 2007 amounted to $593.
F-11
FIRST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except per share data or as otherwise specified)
December 31,
2007
(Restated)
Valuation of Long-Lived Assets
Long-lived assets are reviewed
for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the sum of the expected future
undiscounted cash flows is less than the carrying amount of the asset, a loss is recognized for the difference between the fair value and the carrying
amount of the asset. No impairments were recorded in the period from inception (July 2, 2007) through December 31, 2007.
Goodwill and Other Intangible Assets
Goodwill represents the excess of
the cost of an acquired entity over the net fair value of assets acquired and liabilities assumed. We account for our goodwill in accordance with
Statement of Financial Accounting Standard No. (SFAS) 142, Goodwill and Other Intangible Assets. Under this pronouncement,
goodwill is not amortizable, but requires us to test goodwill and other indefinite lived intangibles for impairment annually or if certain impairment
indicators arise. We perform our annual impairment test on a recurring basis in the fourth quarter of each year. Impairments, if any, will be expensed
in the year incurred. As of December 31, 2007, there was no impairment to goodwill.
Other intangible assets primarily
consist of trademarks, customer lists and Local Multipoint Distribution System (LMDS) licenses. The useful lives of trademarks were
determined to be indefinite and, therefore, these assets are not being amortized and have been tested for impairment. There was no impairment of
trademarks at December 31, 2007. LMDS is an authorized fixed broadband wireless service that may be used to provide high-speed data transfer, telephone
service, telecommunications network transmission, internet access, video broadcasting, video conferencing, and other services. Customer lists and LMDS
licenses are being amortized on a straight-line basis over their estimated economic lives of eight and 25 years, respectively, and are reviewed for
impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable as described above.
The straight-line method of
amortization reflects an appropriate allocation of the cost of the intangible assets to earnings in proportion to the amount of economic benefits
obtained by us in each reporting period.
Income Taxes
We account for income taxes in
accordance with SFAS 109, Accounting for Income Taxes. Deferred income taxes are determined based upon enacted tax laws and the rates
applied to the differences between the financial statements and tax basis of assets and liabilities.
We utilize the liability method
of accounting for income taxes, as set forth in SFAS 109. Under the liability method, deferred taxes are determined based on the difference between the
financial and tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse.
Deferred tax benefit or expense represents the change in the deferred tax asset and liability balances.
On July 2, 2007, we adopted the
provisions of Financial Accounting Standards Board (FASB) Interpretation No. (FIN) 48, Accounting for Uncertainty in
Income Taxes. FIN 48 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in
the consolidated financial statements. Under FIN 48, we may recognize the tax benefit from an uncertain tax position only if it is more likely than not
that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits
recognized in the consolidated financial statements from such a position should be measured based on the largest benefit that has a greater than fifty
percent likelihood of being realized upon ultimate settlement. FIN 48 also provides guidance on derecognition, classification, interest and penalties
on income taxes, accounting in interim periods and it requires increased disclosures. At the date of adoption, and as of December 31, 2007, our
unrecognized tax benefit for uncertain tax positions was immaterial.
F-12
FIRST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except per share data or as otherwise specified)
December 31,
2007
(Restated)
Accounts Payable
We perform periodic bill
verification procedures to identify errors in vendors billing processes. The bill verification procedures include the examining of bills,
comparing billed rates with contracted rates, evaluating the trends of invoice amounts by vendors, and reviewing the types of charges being assessed.
If we conclude that we have been billed inaccurately, we will dispute the charge with the vendor and begin resolution procedures. Although dispute
charges may relate to several periods, in accordance with industry standards dispute resolutions are recognized in the period of resolution. Disputes
of this nature occur in the ordinary course of business within the telecommunications industry. As of December 31, 2007, the offset to accounts payable
as a result of the unresolved disputes was $1,471. Included in accounts payable is a bank overdraft liability of $3,171, which is not available for
netting against other cash accounts.
Financial Instruments
The amounts in the financial
statements for cash equivalents, accounts receivable, accounts payable, and line of credit approximate fair value due to the short-term maturities of
these instruments.
Asset Retirement Obligations
We have asset retirement
obligations associated with our contractual tower leases for cell sites. We record our asset retirement obligations in accordance with SFAS No. 143,
Accounting for Asset Retirement Obligations and FIN 47, Accounting for Conditional Asset Retirement Obligations, an
interpretation of SFAS No. 143. In accordance with the provisions of SFAS No. 143, we recognize a retirement obligation (future cost of removal)
pertaining to our long-lived assets when a legal obligation exists to remove long-lived assets at some point in the future. As of December 31, 2007,
such obligations have been immaterial.
We also have asset retirement
obligations related to pole attachment agreements and right of way and easement agreements. We record these obligations in accordance with FIN 47,
Accounting for Conditional Asset Retirement Obligations, an interpretation of SFAS No. 143. At December 31, 2007, we have no liability
recorded for these asset retirement obligations as they have indeterminate settlement dates due principally to perpetual renewal terms. As a result, we
cannot reasonably estimate the fair value of the liability. We will recognize a liability in the period in which sufficient information becomes
available to reasonably estimate its fair value in accordance with FIN 47.
Warrants
Warrants (as defined in Note 11)
to purchase shares of our common stock have been classified as equity in accordance with Emerging Issues Task Force Issue No. (EITF) 00-19:
Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Companys Own Stock. The fair value of
warrants is determined using the Black-Scholes pricing model. Key assumptions used in the Black-Scholes pricing model include the stock price at the
date of issuance, the contractual life of the warrants, the risk free interest rate, the dividend yield, and the estimated volatility of our common
stock. The risk free interest rate is based on U.S. treasury yields in effect at the time of issuance for the contractual life of the warrants. The
dividend yield is an estimate of the expected dividend yield on our common stock. As we do not have sufficient historical or implied volatility data
for our own common stock, we estimate our volatility based on similar public entities in the telecommunications industry.
Sales Taxes
We collect sales taxes from
customers and remit these amounts to applicable taxing authorities. Our accounting policy is to exclude these taxes from revenues and cost of
facilities.
F-13
FIRST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except per share data or as otherwise specified)
December 31,
2007
(Restated)
Revenue Recognition
We record as revenue the amount
of communications services rendered. Revenue is recognized as service is provided to customers, who are billed monthly. Provisions for discounts and
credits are recorded when the revenue is recognized. Unbilled receivables (Note 3) represent revenues earned for communications services rendered but
not yet billed.
Advertising
We expense all advertising costs
when the advertising first takes place. Advertising expenses for the period from inception (July 2, 2007) through December 31, 2007 amounted to
$46.
Earnings Per Share
We follow SFAS No. 128,
Earnings Per Share, which requires the disclosure of basic net income per share and diluted net income per share. Basic net income per
share is computed by dividing net income attributable to common stockholders by the weighted average number of common shares outstanding during the
period. Diluted net loss per share gives effect to all potentially dilutive securities.
Common stock issuable upon the
exercise of warrants is excluded from the calculation of diluted earnings per share when the calculation of equivalent shares is anti-dilutive. The
calculation of diluted earnings per share for 2007 excludes 5,333,333 shares that were anti-dilutive.
Concentration of Credit Risk
Financial instruments that
potentially subject us to concentration of credit risk consist primarily of accounts receivable and cash depository accounts. We grant credit and
perform ongoing credit evaluations of our customers, and generally do not require collateral. We maintain all of our cash in accounts at high credit
quality financial institutions. The Federal Deposit Insurance Corporation (FDIC) insures these cash accounts up to $100. We periodically
assess the financial conditions of the commercial banks and believe the risk of loss is minimal.
Accounting Estimates
The preparation of consolidated
financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue
and expenses during the reporting period. On an on-going basis, we evaluate our estimates, including those related to collectability of accounts
receivable, valuation of inventories, useful lives of property, plant and equipment, recoverability of goodwill and intangible assets, income taxes and
contingencies. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. These changes in estimates are
recognized in the period they are realized.
New Accounting Pronouncements
In April 2008, FASB Staff
Position 142-3, Determination of the Useful Life of Intangible Assets (FSP 142-3) was issued. This standard amends the factors
that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS
142. FSP 142-3 is effective for consolidated financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within
those fiscal years. Early adoption is prohibited. We have not yet determined the impact, if any, from the adoption of FSP 142-3 on our consolidated
financial statements.
F-14
FIRST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except per share data or as otherwise specified)
December 31,
2007
(Restated)
In March 2008, the FASB issued
SFAS 161, Disclosures about Derivative Instruments and Hedging Activities, an Amendment of SFAS 133. SFAS 161 requires disclosures of how
and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for, and how derivative instruments
and related hedged items affect an entitys financial position, financial performance, and cash flows. SFAS 161 is effective for fiscal years
beginning after November 15, 2008, with early adoption permitted. We have not yet determined the impact, if any, from the adoption of SFAS 161 on our
consolidated financial statements.
In December 2007, the FASB issued
SFAS 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of Accounting Research Bulletin (ARB) 51.
SFAS 160 clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity
in the consolidated financial statements. SFAS 160 changes the way the consolidated statement of operations is presented, thus requiring consolidated
net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. SFAS 160 is effective
for the fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. We do not expect the adoption of SFAS 160
to have a material impact on our consolidated financial statements.
In December 2007, the FASB issued
SFAS 141 (revised 2007), Business Combinations. SFAS 141(R) replaces SFAS 141, Business Combinations. SFAS 141(R) retains the
fundamental requirements in SFAS 141 that the acquisition method of accounting (which SFAS 141 called the purchase method) be used for all business
combinations and for an acquirer to be identified for each business combination. SFAS 141(R) defines the acquirer as the entity that obtains control of
one or more businesses in the business combination and establishes the acquisition date as the date that the acquirer achieves control. SFAS 141(R)
requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition
date, measured at their fair values as of that date, with limited exceptions specified in the statement. SFAS 141(R) applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.
Early adoption is prohibited.
In February 2007, the FASB issued
SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS 159 permits entities to choose to measure many
financial instruments and certain other items at fair value and establishes presentation and disclosure requirements to facilitate comparisons between
entities that choose different measurement attributes for similar types of assets and liabilities. SFAS 159 is effective for fiscal years beginning
after November 15, 2007. We do not expect the adoption of SFAS 159 to materially effect on our consolidated financial statements.
In September 2006, the FASB
issued SFAS 157, Fair Value Measurements. SFAS 157 defines fair value, establishes a framework for measuring fair value in GAAP, and
expands disclosures about fair value measurements. SFAS 157 is effective for consolidated financial statements issued for fiscal years beginning after
November 15, 2007. We do not expect the adoption of SFAS 157 to materially affect our consolidated financial statements.
NOTE 2 BUSINESS COMBINATIONS
On July 2, 2007, we acquired all
of the issued and outstanding membership units of FC LLC (an Ohio Limited Liability Company) (FC LLC) for $61.3 million in cash, which
included $29.5 million for the repayment of its debt and the issuance of 13,176,000 shares of common stock having a value, based on the $5 per share
IPO price (See Note 11), of approximately $65.9 million.
Concurrently, we acquired all of
the issued and outstanding stock of Xtensions (a Delaware Corporation) for $11 million cash and the issuance of 2,400,000 shares of common stock having
a value, based on the $5 per share IPO price (See Note 11), of approximately $12 million.
The primary reason for the
acquisitions was to increase our market share in certain targeted areas and to position us for further expansion.
F-15
FIRST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except per share data or as otherwise specified)
December 31,
2007
(Restated)
In accordance with SFAS 141 we
applied the purchase method of accounting to record these acquisitions, whereby we determined that First Communications was the accounting acquirer in
accordance with SFAS 141 based on the following factors:
|
|
As a significant portion of the purchase proceeds was comprised
of cash compared to the issuance of equity interests.
|
|
|
On a fully diluted basis, holders of our stock before we
acquired FC LLC held 9,165,000 shares of Series A Common Stock along with 5,333,333 in-the-money warrants after the acquisition of FC LLC,
whereas the prior owners of FC LLC held 13,176,000 shares of Series A Common Stock after the acquisition.
|
|
|
Through our agreement with Gores FC Holdings, LLC as the
majority owner of the Series A Redeemable Preferred Stock, Gores FC Holdings, LLC has the ability to elect a majority of the members of our Board of
Directors and retains this right for as long as long as it maintains its ownership interest in Series A Redeemable Preferred Stock.
|
|
|
We did not retain the President or the CFO of FC LLC, choosing
instead to hire a new President and to continue to search for a new CFO.
|
Based on the above-noted factors,
we determined that First Communications is the accounting acquirer for purposes of applying SFAS 141.
The accompanying consolidated
financial statements include the operating results of each company from the date of acquisition.
The purchase price allocation to
the assets acquired and liabilities assumed are based on their fair values on the date of acquisition and are as follows:
|
|
|
|
FC LLC
|
|
Xtensions
|
|
TOTAL
|
|
|
|
|
(Restated)
|
|
(Restated)
|
|
(Restated)
|
Assets
Acquired:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
|
|
$
|
33
|
|
|
$
|
460
|
|
|
$
|
493
|
|
Accounts
receivable trade, net
|
|
|
|
|
11,842
|
|
|
|
1,503
|
|
|
|
13,345
|
|
Accounts
receivable related party
|
|
|
|
|
990
|
|
|
|
|
|
|
|
990
|
|
Inventory
|
|
|
|
|
228
|
|
|
|
|
|
|
|
228
|
|
Prepaid
expenses
|
|
|
|
|
562
|
|
|
|
20
|
|
|
|
582
|
|
Property and
equipment
|
|
|
|
|
6,143
|
|
|
|
33
|
|
|
|
6,176
|
|
Goodwill
|
|
|
|
|
71,704
|
|
|
|
16,375
|
|
|
|
88,079
|
|
Other
intangibles, net
|
|
|
|
|
55,600
|
|
|
|
10,800
|
|
|
|
66,400
|
|
Deferred tax
assets
|
|
|
|
|
86
|
|
|
|
|
|
|
|
86
|
|
Deposits and
other assets
|
|
|
|
|
1,075
|
|
|
|
|
|
|
|
1,075
|
|
Total assets
acquired
|
|
|
|
|
148,263
|
|
|
|
29,191
|
|
|
|
177,454
|
|
|
Liabilities
Assumed:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable trade
|
|
|
|
|
13,115
|
|
|
|
1,470
|
|
|
|
14,585
|
|
Accrued
expenses
|
|
|
|
|
4,800
|
|
|
|
583
|
|
|
|
5,383
|
|
Deferred tax
liability
|
|
|
|
|
|
|
|
|
4,138
|
|
|
|
4,138
|
|
Deferred
revenues
|
|
|
|
|
3,218
|
|
|
|
|
|
|
|
3,218
|
|
Total
liabilities assumed
|
|
|
|
|
21,133
|
|
|
|
6,191
|
|
|
|
27,324
|
|
Net assets
acquired
|
|
|
|
$
|
127,130
|
|
|
$
|
23,000
|
|
|
$
|
150,130
|
|
F-16
FIRST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except per share data or as otherwise specified)
December 31,
2007
(Restated)
Of the $66.4 million of acquired
intangible assets, $12.4 million was assigned to trademarks that are not subject to registered trademarks that are not subject to amortization, $48.0
million was allocated to customer lists which have a weighted average useful life of 8 years, and $6.0 million was allocated to LMDS licenses which
have a weighted average useful life of 25 years.
Approximately $66.5 million of
goodwill arising from prior acquisitions of FC LLC is expected to be deductible for income tax purposes over a period of 15 years from the original
acquisition dates.
We have identified certain
contingencies related to disputes regarding vendor billing errors and vendor bill-backs from the 24-month preceding period that have not yet been
resolved and cannot be reasonably estimated at this time. Our vendors have the right to bill us for errors for a period of two years.
NOTE 3 ACCOUNTS RECEIVABLE
TRADE
Trade accounts receivable are
comprised of billed and unbilled receivables. At December 31, 2007, billed receivables amounted to $9,904. Unbilled receivables amounted to $4,550 as
of December 31, 2007. Trade accounts receivable are offset by an allowance for doubtful accounts of $661 at December 31, 2007.
NOTE 4 OTHER INTANGIBLE ASSETS
The following is a summary of
other intangible assets at December 31, 2007:
|
|
|
|
Other
Intangible
Assets
|
|
Accumulated
Amortization
|
|
Net
|
|
Weighted
Average
Amortization
Period
|
Trademarks
|
|
|
|
$
|
12,400
|
|
|
$
|
|
|
|
$
|
12,400
|
|
|
Indefinite
|
Customer
lists
|
|
|
|
|
48,000
|
|
|
|
3,000
|
|
|
|
45,000
|
|
|
8
years
|
LMDS licenses
|
|
|
|
|
6,000
|
|
|
|
120
|
|
|
|
5,880
|
|
|
25
years
|
|
|
|
|
$
|
66,400
|
|
|
$
|
3,120
|
|
|
$
|
63,280
|
|
|
|
Total amortization expense
related to other intangible assets for the period from inception (July 2, 2007) through December 31, 2007 was $3,120.
As of December 31, 2007, future
estimated amortization expense related to amortizable other identifiable intangible assets will be:
2008
|
|
|
|
$
|
6,240
|
|
2009
|
|
|
|
|
6,240
|
|
2010
|
|
|
|
|
6,240
|
|
2011
|
|
|
|
|
6,240
|
|
2012
|
|
|
|
|
6,240
|
|
Thereafter
|
|
|
|
|
19,680
|
|
|
|
|
|
$
|
50,880
|
|
NOTE 5 LINE OF CREDIT
In July 2007, we entered into a
$6 million unsecured demand line of credit with a bank, with a variable interest rate of one month London Inter-Bank Offered Rate (LIBOR)
plus 150 basis points (effective rate of 6.345% at December 31, 2007). The balance outstanding on the line of credit was $625 at December 31, 2007. We
had $171 in letters of credit outstanding under the line of credit at December 31, 2007 related to three vendors.
F-17
FIRST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except per share data or as otherwise specified)
December 31,
2007
(Restated)
NOTE 6 OPERATING LEASES
We lease facilities and certain
office equipment under operating leases expiring at various dates through February 2013. Certain leases require us to pay specified taxes, insurance,
utilities, and repairs and maintenance on the leased items.
Approximate minimum future rental
payments under these operating leases are as follows:
2008
|
|
|
|
$
|
1,405
|
|
2009
|
|
|
|
|
1,416
|
|
2010
|
|
|
|
|
975
|
|
2011
|
|
|
|
|
689
|
|
2012
|
|
|
|
|
567
|
|
Thereafter
|
|
|
|
|
95
|
|
|
|
|
|
$
|
5,147
|
|
Rental expense under these
operating leases was $785 for the period from inception (July 2, 2007) through December 31, 2007.
NOTE 7 RELATED PARTY TRANSACTIONS
We provide telecommunication
services to a shareholder, and also had a management service agreement (the Agreement) with the shareholder to provide management services
through December 31, 2007 which amounted to $4,353 or 6.7% of revenues, recorded within revenues, net related party in the accompanying
Consolidated Statement of Operations, for the period from inception (July 2, 2007) through December 31, 2007. The Agreement related to the
shareholders telecommunications subsidiary, which we subsequently acquired on March 6, 2008. In accordance with the Agreement, included in the
related party revenue is management fee income of $400. The accounts receivable balance for this shareholder was $945 at December 31,
2007.
We also have an agreement with
related parties to provide services to unrelated parties. As a result of this agreement, we recorded deferred revenue of $196 from an unrelated party
at December 31, 2007 of which $27 is classified as current. This deferred revenue will be earned ratably over twenty years beginning October
2003.
NOTE 8 EMPLOYEE BENEFIT PLAN
We have a contributory 401(k)
profit-sharing plan covering substantially all employees. Generally, employees must have at least one-half year of service and be twenty-one years of
age to be eligible to participate in the plan. Employees are able to contribute up to 15% of their compensation to the plan with employer matching
contributions of up to 4% of employee compensation. Total employer contributions made under the plan equaled $49 for the period from inception (July 2,
2007) through December 31, 2007.
NOTE 9 MAJOR CARRIERS AND
CUSTOMERS
We have agreements with various
carriers to permit our customers to use their networks. If these carriers decide not to continue those agreements due to a change in ownership or other
circumstances, this could cause a loss of service in certain areas and possible loss of customers.
We purchase network access from
three major carriers comprising 65.6% (24.3%, 21.6%, and 19.7%) of cost of facilities for the period from inception (July 2, 2007) through December 31,
2007. No individual customer comprised more than 10% of our total revenues for the period from inception (July 2, 2007) through December 31,
2007.
F-18
FIRST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except per share data or as otherwise specified)
December 31,
2007
(Restated)
NOTE 10 INCOME TAXES (RESTATED)
The income tax provision for the
period from inception (July 2, 2007) to December 31, 2007 is comprised of the following:
|
|
|
|
(Restated)
|
Current:
|
|
|
|
|
|
|
Federal
|
|
|
|
$
|
323
|
|
State and
local
|
|
|
|
|
40
|
|
|
|
|
|
|
363
|
|
|
Deferred:
|
|
|
|
|
|
|
Federal
|
|
|
|
$
|
200
|
|
State and
local
|
|
|
|
|
25
|
|
|
|
|
|
|
225
|
|
|
|
|
|
$
|
588
|
|
Deferred income taxes reflect the
net tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for
income tax purposes. The significant components of deferred tax assets and liabilities as of December 31, 2007 are as follows:
Current
deferred tax (assets) liabilities:
|
|
|
|
|
|
|
Allowance for
doubtful accounts
|
|
|
|
$
|
(253
|
)
|
Vacation
accrual
|
|
|
|
|
(85
|
)
|
Prepaid
expenses
|
|
|
|
|
342
|
|
COGS disputes
|
|
|
|
|
209
|
|
Deferred tax
liability, net current
|
|
|
|
|
213
|
|
|
Non-current
deferred tax (assets) liabilities:
|
|
|
|
|
|
|
Non-goodwill
intangibles
|
|
|
|
$
|
3,649
|
|
Goodwill
|
|
|
|
|
280
|
|
Fixed assets
|
|
|
|
|
242
|
|
Deferred rent
|
|
|
|
|
(28
|
)
|
Unearned
revenue
|
|
|
|
|
(65
|
)
|
Other
|
|
|
|
|
(14
|
)
|
Deferred tax
liability, net long-term
|
|
|
|
|
4,064
|
|
Net deferred
tax liability
|
|
|
|
$
|
4,277
|
|
A reconciliation of the income
tax provision computed at statutory tax rates to the income tax provision for the period from inception (July 2, 2007) to December 31, 2007 is as
follows:
Statutory
federal income tax rate
|
|
|
|
|
34.0
|
%
|
Increases
(reductions) in taxes resulting from:
|
|
|
|
|
|
|
State income
taxes, net of federal tax benefit
|
|
|
|
|
4.3
|
%
|
Other, net
|
|
|
|
|
1.4
|
%
|
Effective
income tax rate for the period
|
|
|
|
|
39.7
|
%
|
We recognize interest and
penalties related to uncertain tax positions in income tax expense. As of December 31, 2007, we have made no provisions for interest or penalties
related to uncertain tax positions.
F-19
FIRST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except per share data or as otherwise specified)
December 31,
2007
(Restated)
We file income tax returns in the
U.S. federal jurisdiction, and various state jurisdictions. For federal tax purposes, our 2007 tax year remains open for examination by the tax
authorities under the normal three year statute of limitations. Generally, for state tax purposes, our 2007 tax year will remain open for examination
by the tax authorities under a four year statute of limitations.
The realization of our deferred
tax assets are significant estimates requiring assumptions regarding the sufficiency of future taxable income to realize the future tax deductions from
the reversal of deferred tax assets. Our unrecognized tax benefit for uncertain tax positions was immaterial at December 31, 2007.
NOTE 11 STOCKHOLDERS EQUITY AND REDEEMABLE
PREFERRED STOCK
Amended Articles of Incorporation
On April 16, 2007, we amended and
restated our articles of incorporation to authorize 70,000,000 shares of capital stock that may be issued consisting of 59,165,000 (Series A
common stock) shares of common stock, par value $0.001 per share, 835,000 shares of Series B nonvoting common stock (Series B common
stock), par value $0.001 per share, and 10,000,000 shares of preferred stock, par value $0.001 per share.
Management Shares
Prior to the Initial Public
Offering (IPO) transaction we issued 1,326,000 shares of common stock to certain members of management of FC LLC and Xtensions in exchange
for their interests in FCI Investments, Inc. We accounted for this exchange in accordance with SAB No. 48, Transfers of Nonmonetary Assets by
Promoters or Shareholders in Exchange for Common Stock which required a valuation based upon the historical cost basis of managements
interests in FCI Investments.
Initial Public Offering
On July 2, 2007, in our IPO on
the AIM of the London Stock Exchange, we issued 9,165,000 shares of Series A common stock, 835,000 shares of Series B common stock, 40,000 shares of
Series A Redeemable Preferred Stock (Series A Preferred Stock), and 15,333,333 warrants to purchase common stock for gross proceeds of
approximately $81.6 million, net of issuance costs of $8.4 million. We recorded the value of the common stock, preferred stock and warrants issued as
part of the IPO at their relative fair values. On July 2, 2007, we issued 16,902,000 shares of common stock in conjunction with the acquisitions of FC
LLC and Xtension, see Note 2 for further details. On March 6, 2008, 25,000 shares of the Series A Preferred Stock were redeemed in conjunction with the
closing of a new credit facility, see Note 13 for further details.
The aforementioned warrants
consist of the following:
Tranche 1
Warrants
We issued
Tranche 1 Warrants to the holders of Series A Preferred Stock in conjunction with our IPO, pursuant to which they are entitled to purchase up to
5,333,333 shares of common stock at $0.05 per share. The Tranche 1 Warrants expire on July 2, 2012. The holders of the Tranche 1 Warrants have agreed
that, subject to certain exceptions, they will not dispose of any interest in the Tranche 1 Warrants or common stock issued upon the exercise of the
warrants before July 2008. The relative fair value of the Tranche 1 Warrants was $19,329 and is included in additional paid in
capital.
Tranche 2
Warrants
We issued
Tranche 2 Warrants to the holders of Series A Preferred Stock in conjunction with our IPO, pursuant to which they are entitled to purchase up to
8,000,000 shares of common stock at $7.50
F-20
FIRST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except per share data or as otherwise specified)
December 31,
2007
(Restated)
per share.
The Tranche 2 Warrants expire on July 2, 2010. The holders of the Tranche 2 Warrants have agreed that, subject to certain exceptions, they will not
dispose of any interest in the Tranche 2 Warrants or common stock issued upon the exercise of the warrants before July 2008. The relative fair value of
the Tranche 2 Warrants was $3,909 and is included in additional paid in capital.
IPO
Warrants
We issued IPO
Warrants to certain holders of common stock and Series A Preferred Stock in conjunction with our IPO, pursuant to which they are entitled to purchase
up to 2,000,000 shares of common stock at $7.50 per share. The IPO Warrants expire on July 2, 2010. The holders of the IPO Warrants have agreed that,
subject to certain exceptions, they will not dispose of any interest in the IPO Warrants or common stock issued upon the exercise of the warrants
before July 2008. The relative fair value of the IPO Warrants was $977 and is included in additional paid in capital.
The following table summarizes
the Black-Scholes assumptions used to determine the fair value of the aforementioned warrants:
Warrant
|
|
|
|
Tranche 1
Warrants
|
|
Tranche 2
Warrants
|
|
IPO
Warrants
|
Term
(years)
|
|
|
|
|
5
|
|
|
|
3
|
|
|
|
3
|
|
Volatility
|
|
|
|
|
40.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
Risk-free
rate
|
|
|
|
|
3.6
|
%
|
|
|
3.1
|
%
|
|
|
3.1
|
%
|
Dividend
rate
|
|
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Based on our articles of
incorporation and share purchase agreements the common and preferred shares have the following rights and privileges:
Conversion
The Series B common stock is
convertible into common stock on a one to one basis. The Series A Preferred Stock is not convertible.
Dividends
The Series A Preferred Stock is
entitled to dividends subsequent to September 2008, which are cumulative and accrue at a 12% annual rate based on the original issue price of $1,000
per share.
Liquidation Preference
The holders of Series A Preferred
Stock have liquidation rights equal to the original purchase price of $1,000 per share, plus any declared but unpaid dividends on a pari passu basis.
The holders of Series A Preferred Stock have preference over common stockholders. After payment in full to the holders of Series A Preferred Stock, the
remaining assets, if available, of the Company shall be distributed ratably to the holders of Series A common stock and Series B common
stock.
Redemption
We have the option to redeem the
Series A Preferred Stock at any time at the original issue price of $1,000 per share plus all accrued but unpaid dividends. On or after July 2, 2012,
at the election of the holders of the majority of the then outstanding Series A Preferred Stock, the holders may redeem part or all of the Series A
Preferred Stock at the original issue price of $1,000 per share plus all accrued but unpaid dividends.
F-21
FIRST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except per share data or as otherwise specified)
December 31,
2007
(Restated)
The Series B common stock had the
right to become redeemable if we failed to obtain certain regulatory approvals, as defined in the articles of incorporation, prior to November 2, 2007.
We obtained the regulatory approvals in October 2007 thus the Series B common stock redemption feature was terminated.
Voting and Other Rights
The Series A Common stock
exclusively possesses all voting power and each share of common stock has one vote. Gores FC Holdings, LLC, as the majority owner of the Series A
Preferred Stock, is entitled to elect a majority of the members of the Board of Directors. As long as they hold a majority of the Series A Preferred
Stock, they shall have the right at each annual meeting to elect the majority of the members of the Board of Directors or upon written notice a special
meeting shall be called to immediately elect the majority of the Board of Directors. In addition, we cannot, without obtaining the approval by vote or
written consent of Gores FC Holdings, LLC, take any number of actions, including but not limited to changing the lines of business or exit existing
lines of business, incur indebtedness above a leverage level or hire or materially change the terms of employment of any member of senior
management.
Stock-Based Compensation
We have reserved 274,000 shares
of Series A common stock for the issuance of shares under a stock option incentive plan. The terms of a stock option plan have not been approved by the
Board of Directors and none of the reserved shares have been granted as of December 31, 2007.
NOTE 12 CONTINGENCIES
We are subject to various claims
and legal proceedings covering a range of matters that arise in the ordinary course of our business activities. We believe that any liability that may
ultimately result from the resolutions of these matters will not have a material effect on our financial position, results of operations or cash
flows.
We have identified certain
contingencies related to disputes regarding vendor billing errors and vendor bill-backs from the 24-month preceding period that have not yet been
resolved and can not be reasonably estimated at this time. Our vendors have the right to bill us for errors for a period of two years.
Disclosure of the potential for
changes in other estimates used in determining amounts reported for our vendor billing errors and vendor bill-backs is not required because, given our
history of making similar estimates, it is not considered at least reasonably possible that they will change in the near term by amounts that would be
material to the consolidated financial statements.
NOTE 13 SUBSEQUENT EVENTS
On March 6, 2008, we acquired
substantially all of the assets and certain assumed liabilities of FirstEnergy Telecom Services, Inc. (FE Telecom), a fiber and wireless
infrastructure provider, for $45 million and subject to certain working capital adjustments to be determined subject to closing the transaction. FE
Telecom was a subsidiary of FirstEnergy Corp., which is a shareholder of the Company. We are still evaluating the allocation of purchase price to the
fair value of acquired assets and assumed liabilities.
Concurrently, we closed a $90
million credit facility syndicated by JP Morgan Securities Inc. The financing facility includes a $70 million term loan and a $20 million revolving
line of credit (which replaces the line of credit agreement described in Note 5), secured by substantially all of our assets. The proceeds of the new
credit facility were used to pay for the acquisition of FE Telecoms assets, along with the pro-rata redemption of $25 million of our outstanding
Preferred Stock, and will be used ongoing for general working capital purposes. The facility is five years, with pricing starting at 375 basis points
over US LIBOR (53% of which is fixed under interest rate swaps
F-22
FIRST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except per share data or as otherwise specified)
December 31,
2007
(Restated)
for three years at 3.03% and
22% of which is fixed for five years at 3.56%). We also have the ability to increase the term loan by an additional $25 million under an accordion
feature.
On March 31, 2008, we merged our
joint venture BPL operations, FirstSpeed, LLC with PowerGrid Communications, Inc. (PowerGrid), a Delaware based C corporation. We now own a
25% interest in PowerGrid, which is the surviving company. PowerGrid provides utilities and energy users a more efficient, reliable, and responsible
power grid through the deployment of BPL and other communication technologies and management software.
On July 21, 2008, we signed a
definitive agreement to acquire GCI Globalcom Holdings, Inc., the sole shareholder of Globalcom, Inc. (Globalcom), a fiber and wireless
infrastructure provider, for $58.5 million in cash.
Concurrently, we closed $50
million in incremental term loan commitments, syndicated by JP Morgan Securities Inc. The proceeds of the debt raise will be used to pay for the
acquisition along with $8.5 million under the existing $20 million revolving credit facility.
On August 15, 2008, we signed a
letter of intent to transact a reverse merger with Renaissance Acquisition Corp. (RAK) in which we will be the surviving company. The
purchase price will be approximately $365 million. RAK is listed on the American Stock Exchange and was organized as a special purpose acquisition
corporation. RAK will issue $224 million of stock to our current equity holders, assume $130 million of our debt, including the Globalcom transaction,
and retire $15 million of our Preferred Stock less $4 million of our cash.
NOTE 14 RESTATEMENT
Our previously issued
consolidated financial statements for the period from inception (July 2, 2007) to December 31, 2007 have been restated to reflect adjustments to
purchase accounting entries; cash; accounts receivable trade; deferred tax assets and liabilities; prepaid expenses; goodwill; deposits and
other assets; accounts payable trade; income tax payable; accrued expenses; deferred revenue; redeemable preferred stock; additional paid in
capital; retained earnings; revenues; cost of facilities; selling, general and administrative expenses; other expense, net; provision for income taxes;
and cash flows.
The restatement lowered income
before income taxes by $4.3 million, which was primarily due to amounts recorded in the consolidated statement of operations, which should be purchase
price adjustments and $350 of aborted financing costs. Net income was lowered by the changes above offset by the income taxes on the adjustments and
corrections of other income tax expense misstatements.
Earnings per share was not
disclosed in the previously reported consolidated financial statements and notes.
F-23
Effects on the financial
statements are as follows:
|
|
|
|
As
Previously
Reported
|
|
Restated
|
Consolidated
Balance Sheet:
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
|
|
$
|
11,163
|
|
|
$
|
9,300
|
|
Accounts
receivable trade
|
|
|
|
|
14,469
|
|
|
|
13,793
|
|
Accounts
receivable related party
|
|
|
|
|
502
|
|
|
|
945
|
|
Deferred tax
asset current
|
|
|
|
|
215
|
|
|
|
|
|
Prepaid
expenses
|
|
|
|
|
1,256
|
|
|
|
823
|
|
Total current
assets
|
|
|
|
|
27,740
|
|
|
|
24,997
|
|
Office
equipment
|
|
|
|
|
278
|
|
|
|
232
|
|
Furniture and
fixtures
|
|
|
|
|
606
|
|
|
|
561
|
|
Goodwill
|
|
|
|
|
103,410
|
|
|
|
88,079
|
|
Deposits and
other assets
|
|
|
|
|
1,707
|
|
|
|
1,357
|
|
Total other
assets
|
|
|
|
|
168,397
|
|
|
|
152,716
|
|
Total assets
|
|
|
|
|
203,359
|
|
|
|
184,936
|
|
Accounts
payable trade
|
|
|
|
|
14,802
|
|
|
|
13,220
|
|
Federal
income tax payable
|
|
|
|
|
1,466
|
|
|
|
362
|
|
Accrued
expenses
|
|
|
|
|
2,455
|
|
|
|
2,600
|
|
Deferred tax
liability, net current
|
|
|
|
|
|
|
|
|
213
|
|
Deferred
revenue current
|
|
|
|
|
1,625
|
|
|
|
3,244
|
|
Total current
liabilities
|
|
|
|
|
20,974
|
|
|
|
20,264
|
|
Deferred tax
liability, net long-term
|
|
|
|
|
13,735
|
|
|
|
4,064
|
|
Total
non-current liabilities
|
|
|
|
|
13,905
|
|
|
|
4,234
|
|
Redeemable
preferred stock mezzanine
|
|
|
|
|
|
|
|
|
40,000
|
|
Redeemable
preferred stock shareholders equity
|
|
|
|
|
40
|
|
|
|
|
|
Common stock
|
|
|
|
|
27
|
|
|
|
|
|
Series A
common stock
|
|
|
|
|
|
|
|
|
26
|
|
Series B
common stock
|
|
|
|
|
|
|
|
|
1
|
|
Additional
paid in capital
|
|
|
|
|
164,854
|
|
|
|
119,482
|
|
Retained
earnings
|
|
|
|
|
3,599
|
|
|
|
929
|
|
Total
shareholders equity
|
|
|
|
|
168,480
|
|
|
|
120,438
|
|
Total
liabilities and shareholders equity
|
|
|
|
|
203,359
|
|
|
|
184,936
|
|
|
Consolidated
Statement of Operations
|
|
|
|
|
|
|
|
|
|
|
Revenues, net
|
|
|
|
$
|
64,286
|
|
|
$
|
61,200
|
|
Total
revenues, net
|
|
|
|
|
68,640
|
|
|
|
65,553
|
|
Cost of
facilities
|
|
|
|
|
43,683
|
|
|
|
44,560
|
|
Selling,
general and administrative expenses
|
|
|
|
|
15,384
|
|
|
|
15,706
|
|
Operating
income
|
|
|
|
|
5,860
|
|
|
|
1,575
|
|
Other
expenses, net
|
|
|
|
|
7
|
|
|
|
58
|
|
Income before
income taxes
|
|
|
|
|
5,854
|
|
|
|
1,517
|
|
Provision for
income taxes
|
|
|
|
|
2,255
|
|
|
|
588
|
|
Net income
|
|
|
|
|
3,599
|
|
|
|
929
|
|
|
Consolidated
Statement of Cash Flows:
|
|
|
|
|
|
|
|
|
|
|
Net cash
flows operating activities
|
|
|
|
$
|
8,150
|
|
|
$
|
(2,317
|
)
|
Net cash
flows investing activities
|
|
|
|
|
(82,787
|
)
|
|
|
(73,810
|
)
|
Net cash
flows financing activities
|
|
|
|
|
85,799
|
|
|
|
85,427
|
|
Cash and cash
equivalents, end of period
|
|
|
|
|
11,163
|
|
|
|
9,300
|
|
F-24
FIRST COMMUNICATIONS, INC.
UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2008
AND FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008
F-25
FIRST COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(in thousands)
|
|
|
|
September 30,
2008
|
|
December 31,
2007
|
|
|
|
|
(unaudited)
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
|
|
$
|
2,771
|
|
|
$
|
9,300
|
|
Accounts
receivable trade, less allowance for doubtful accounts of $1,123 at September 30, 2008 and $661 at December 31, 2007, respectively
|
|
|
|
|
20,473
|
|
|
|
13,793
|
|
Accounts
receivable related party
|
|
|
|
|
1,675
|
|
|
|
945
|
|
Federal
income tax refund receivable
|
|
|
|
|
1,722
|
|
|
|
|
|
Inventory
|
|
|
|
|
2,888
|
|
|
|
136
|
|
Prepaid
expenses
|
|
|
|
|
5,915
|
|
|
|
823
|
|
|
TOTAL CURRENT
ASSETS
|
|
|
|
|
35,444
|
|
|
|
24,997
|
|
|
PROPERTY AND
EQUIPMENT
|
|
|
|
|
|
|
|
|
|
|
Switches
|
|
|
|
|
55,676
|
|
|
|
2,750
|
|
Cell towers
|
|
|
|
|
723
|
|
|
|
|
|
Technical
equipment
|
|
|
|
|
5,100
|
|
|
|
1,922
|
|
Leasehold
improvements
|
|
|
|
|
43
|
|
|
|
28
|
|
Office
equipment
|
|
|
|
|
660
|
|
|
|
232
|
|
Furniture and
fixtures
|
|
|
|
|
640
|
|
|
|
561
|
|
Software
|
|
|
|
|
1,613
|
|
|
|
1,500
|
|
Software
development in progress
|
|
|
|
|
1,623
|
|
|
|
823
|
|
|
|
|
|
|
66,078
|
|
|
|
7,816
|
|
Less:
Accumulated depreciation
|
|
|
|
|
(3,446
|
)
|
|
|
(593
|
)
|
|
NET PROPERTY
AND EQUIPMENT
|
|
|
|
|
62,632
|
|
|
|
7,223
|
|
|
OTHER
ASSETS
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
|
|
123,527
|
|
|
|
88,079
|
|
Other
intangible assets, net
|
|
|
|
|
96,383
|
|
|
|
63,280
|
|
Deposits and
other assets
|
|
|
|
|
8,107
|
|
|
|
1,357
|
|
|
TOTAL OTHER
ASSETS
|
|
|
|
|
228,017
|
|
|
|
152,716
|
|
|
TOTAL ASSETS
|
|
|
|
$
|
326,093
|
|
|
$
|
184,936
|
|
See accompanying notes.
F-26
FIRST COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
|
|
|
|
September 30,
2008
|
|
December 31,
2007
|
|
|
|
|
(unaudited)
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
Current
portion of long-term debt
|
|
|
|
$
|
12,000
|
|
|
$
|
|
|
Revolver and
line of credit
|
|
|
|
|
10,000
|
|
|
|
625
|
|
Accounts
payable trade
|
|
|
|
|
13,628
|
|
|
|
13,220
|
|
Federal
income tax payable
|
|
|
|
|
|
|
|
|
362
|
|
Accrued
expenses
|
|
|
|
|
10,742
|
|
|
|
2,600
|
|
Deferred tax
liability, net current
|
|
|
|
|
645
|
|
|
|
213
|
|
Deferred
revenue current
|
|
|
|
|
7,277
|
|
|
|
3,244
|
|
TOTAL CURRENT
LIABILITIES
|
|
|
|
|
54,292
|
|
|
|
20,264
|
|
|
NON-CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt, net of current maturities
|
|
|
|
|
104,500
|
|
|
|
|
|
Deferred tax
liability, net long term
|
|
|
|
|
12,948
|
|
|
|
4,064
|
|
Deferred
revenue long term
|
|
|
|
|
14,965
|
|
|
|
170
|
|
|
TOTAL
NON-CURRENT LIABILITIES
|
|
|
|
|
132,413
|
|
|
|
4,234
|
|
|
TOTAL
LIABILITIES
|
|
|
|
|
186,705
|
|
|
|
24,498
|
|
|
Redeemable
Preferred Stock, $0.001 par value; 10,000,000 shares authorized, 15,000 and 40,000 shares issued and outstanding at September 30, 2008 and December 31,
2007, respectively (liquidation preference $1,000 per share)
|
|
|
|
|
15,000
|
|
|
|
40,000
|
|
|
SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
Series A
Common Stock, $0.001 par value; 59,165,000 shares authorized, 26,067,000 shares issued and outstanding
|
|
|
|
|
26
|
|
|
|
26
|
|
Series B
Non-Voting Common Stock, $0.001 par value; 835,000 shares authorized, 835,000 shares issued and outstanding
|
|
|
|
|
1
|
|
|
|
1
|
|
Additional
paid in capital
|
|
|
|
|
119,482
|
|
|
|
119,482
|
|
Retained
earnings
|
|
|
|
|
4,879
|
|
|
|
929
|
|
|
TOTAL
SHAREHOLDERS EQUITY
|
|
|
|
|
124,388
|
|
|
|
120,438
|
|
|
TOTAL
LIABILITIES AND SHAREHOLDERS EQUITY
|
|
|
|
$
|
326,093
|
|
|
$
|
184,936
|
|
See accompanying notes.
F-27
FIRST COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Nine Months Ended September 30, 2008
(in thousands, except per share data)
(unaudited)
|
|
|
|
Three Months
Ended
September 30, 2008
|
|
Nine Months
Ended
September 30, 2008
|
REVENUES,
NET
|
|
|
|
|
|
|
|
|
|
|
Revenues,
net
|
|
|
|
$
|
37,500
|
|
|
$
|
107,538
|
|
Revenues,
net related party
|
|
|
|
|
2,211
|
|
|
|
5,947
|
|
|
TOTAL
REVENUES, NET
|
|
|
|
|
39,711
|
|
|
|
113,485
|
|
|
COST OF
FACILITIES, exclusive of depreciation and
amortization stated below
|
|
|
|
|
23,741
|
|
|
|
69,838
|
|
|
SELLING,
GENERAL AND ADMINISTRATIVE EXPENSES
|
|
|
|
|
8,596
|
|
|
|
26,169
|
|
|
DEPRECIATION
AND AMORTIZATION
|
|
|
|
|
3,231
|
|
|
|
8,475
|
|
|
OPERATING
INCOME
|
|
|
|
|
4,143
|
|
|
|
9,003
|
|
|
OTHER INCOME
(EXPENSE)
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
|
|
(1,544
|
)
|
|
|
(2,552
|
)
|
Other
|
|
|
|
|
167
|
|
|
|
156
|
|
|
OTHER INCOME
(EXPENSE), NET
|
|
|
|
|
(1,377
|
)
|
|
|
(2,396
|
)
|
|
INCOME
BEFORE INCOME TAXES
|
|
|
|
|
2,766
|
|
|
|
6,607
|
|
|
PROVISION
FOR INCOME TAXES
|
|
|
|
|
1,205
|
|
|
|
2,657
|
|
|
NET INCOME
|
|
|
|
$
|
1,561
|
|
|
$
|
3,950
|
|
|
Basic
weighted average shares outstanding
|
|
|
|
|
26,902
|
|
|
|
26,902
|
|
Effect of
dilutive securities Stock options and awards
|
|
|
|
|
5,280
|
|
|
|
5,280
|
|
Diluted
weighted average shares outstanding
|
|
|
|
|
32,182
|
|
|
|
32,182
|
|
Basic
earnings per share
|
|
|
|
$
|
0.06
|
|
|
$
|
0.15
|
|
Diluted
earnings per share
|
|
|
|
$
|
0.05
|
|
|
$
|
0.12
|
|
See accompanying notes.
F-28
FIRST COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Nine Months Ended September 30, 2008
(in thousands)
(unaudited)
|
|
|
|
Nine Months
Ended
September 30,
2008
|
CASH FLOWS
FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
Net income
|
|
|
|
$
|
3,950
|
|
Adjustments
to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
|
|
8,475
|
|
Bad debt
expense
|
|
|
|
|
708
|
|
Deferred
taxes
|
|
|
|
|
2,641
|
|
Changes in
operating assets and liabilities, net of effects of acquisitions:
|
|
|
|
|
|
|
Accounts
receivable trade, net
|
|
|
|
|
778
|
|
Prepaid
expenses
|
|
|
|
|
(3,934
|
)
|
Inventory
|
|
|
|
|
18
|
|
Deposits and
other assets
|
|
|
|
|
(1,085
|
)
|
Accounts
payable trade
|
|
|
|
|
99
|
|
Federal
income tax payable
|
|
|
|
|
(1,325
|
)
|
Accrued
expenses
|
|
|
|
|
4,080
|
|
Deferred
revenue
|
|
|
|
|
(3,008
|
)
|
NET CASH
PROVIDED BY OPERATING ACTIVITIES
|
|
|
|
|
11,397
|
|
|
CASH FLOWS
FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
Purchases of
property and equipment
|
|
|
|
|
(3,265
|
)
|
Acquisition
of assets and assumption of liabilities, net of cash acquired
|
|
|
|
|
(105,750
|
)
|
Investment in
equity method investee
|
|
|
|
|
(134
|
)
|
Net change in
accounts receivable related party
|
|
|
|
|
(730
|
)
|
NET CASH USED
IN INVESTING ACTIVITIES
|
|
|
|
|
(109,879
|
)
|
|
CASH FLOWS
FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
Proceeds from
term note
|
|
|
|
|
120,000
|
|
Proceeds from
revolver
|
|
|
|
|
10,000
|
|
Proceeds from
stock issuance, net of issuance and transaction costs
|
|
|
|
|
|
|
Redemption of
preferred stock
|
|
|
|
|
(25,000
|
)
|
Payment of
deferred financing costs
|
|
|
|
|
(5,751
|
)
|
Repayment of
long-term note
|
|
|
|
|
(3,500
|
)
|
Repayment of
line of credit
|
|
|
|
|
(625
|
)
|
Change in
bank overdraft
|
|
|
|
|
(3,171
|
)
|
NET CASH
PROVIDED BY FINANCING ACTIVITIES
|
|
|
|
|
91,953
|
|
|
NET DECREASE
IN CASH AND CASH EQUIVALENTS
|
|
|
|
|
(6,529
|
)
|
|
CASH AND CASH
EQUIVALENTS, BEGINNING OF PERIOD
|
|
|
|
|
9,300
|
|
|
CASH AND CASH
EQUIVALENTS, END OF PERIOD
|
|
|
|
$
|
2,771
|
|
|
Cash paid
during the period for:
|
|
|
|
|
|
|
Interest
|
|
|
|
$
|
2,695
|
|
Income taxes,
net of refunds
|
|
|
|
|
1,724
|
|
See accompanying notes.
F-29
FIRST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, in thousands of dollars except share and per share data)
September 30,
2008
NOTE 1 BASIS OF PRESENTATION
Unless the context requires
otherwise or unless otherwise noted, when we use the terms we, us, our or the Company, we are referring
to First Communications, Inc. and its subsidiaries. All significant intercompany balances and transactions have been eliminated in
consolidation.
The accompanying unaudited
financial statements have been prepared in accordance with accounting principles for interim financial information. Accordingly, they do not include
all of the information and footnotes required by accounting principles generally accepted in the U.S. (GAAP) for complete financial
statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and nine months ended September 30, 2008 are not necessarily indicative of the results that may be
expected for the year ended December 31, 2008. The balance sheet at December 31, 2007 has been derived from the audited financial statements at that
date, but does not include all of the information and notes required by GAAP for complete financial statements. For further information, refer to our
audited consolidated financial statements and footnotes for the period ended December 31, 2007.
Our Series A Common stock
exclusively possesses all voting power and each share of common stock has one vote. Gores FC Holdings, LLC, as the majority owner of the Series A
Preferred Stock, is entitled to elect a majority of the members of the Board of Directors. As long as they hold a majority of the Series A Preferred
Stock, they shall have the right at each annual meeting to elect the majority of the members of the Board of Directors or upon written notice a special
meeting shall be called to immediately elect the majority of the Board of Directors. In addition, we cannot, without obtaining the approval by vote or
written consent of Gores FC Holdings, LLC, take any number of actions, including but not limited to changing the lines of business or exit existing
lines of business, incur indebtedness above a leverage level or hire or materially change the terms of employment of any member of senior
management.
On September 15, 2008, we entered
into a definitive agreement to transact a reverse merger with Renaissance Acquisition Corp. (RAK) in which we will be the surviving
company. The purchase price would be up to approximately $369 million. RAK is listed on the American Stock Exchange and was organized as a special
purpose acquisition company. RAK will issue approximately 18,459,917 shares of common stock to our current equity holders at closing, assume our debt
and $1.9 million of cash and retire $15 million of our Series A Preferred Stock. Our equity holders may also receive up to 18,450,000 shares of
additional RAK common stock upon satisfaction of the Warrant Condition and the EBITDA Condition.
NOTE 2 ACQUISITIONS
On September 30, 2008, we
acquired GCI Globalcom Holdings, Inc., the sole shareholder of Globalcom, Inc. (Globalcom), a fiber and wireless infrastructure provider,
for $59 million in cash including $0.5 million in transaction costs. The final purchase price is subject to certain working capital adjustments which
are still to be determined. Accordingly we have not finalized the allocation of purchase price and it is at least reasonably possible that allocated
values will change in the near term. The preliminary purchase price allocation has been recorded in our September 30, 2008 consolidated balance sheet.
We began consolidating Globalcoms results of operations in our October 2008 consolidated financial statements.
The Globalcom preliminary
purchase price is estimated at $59 million and is comprised of:
Purchase
Price Calculation:
|
|
|
|
|
|
|
Cash
|
|
|
|
$
|
58,500
|
|
Acquisition
related transaction costs
|
|
|
|
|
500
|
|
Total
Preliminary Purchase Price
|
|
|
|
$
|
59,000
|
|
F-30
FIRST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited, in thousands of dollars except share and per share data)
September 30,
2008
Preliminary
Allocation of Purchase Price
|
|
|
|
|
|
|
Cash
|
|
|
|
$
|
1,070
|
|
Goodwill
|
|
|
|
|
33,549
|
|
Identifiable
intangible assets
|
|
|
|
|
20,000
|
|
Accounts
receivable
|
|
|
|
|
5,615
|
|
Property and
equipment
|
|
|
|
|
13,343
|
|
Prepaid and
other assets
|
|
|
|
|
1,422
|
|
Tangible
liabilities assumed
|
|
|
|
|
(9,324
|
)
|
Net deferred
tax liabilities
|
|
|
|
|
(6,675
|
)
|
Total
Preliminary Purchase Price Allocation
|
|
|
|
$
|
59,000
|
|
Following are the unaudited pro
forma results of operations as if the acquisition had occurred at the beginning of 2008 (in thousands):
|
|
|
|
Three Months Ended
September 30, 2008
|
|
Nine Months Ended
September 30, 2008
|
|
Revenues
|
|
|
|
$
|
53,722
|
|
|
$
|
158,982
|
|
|
|
|
|
Net income
|
|
|
|
|
1,129
|
|
|
|
3,614
|
|
|
|
|
|
Earnings per
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
$
|
0.04
|
|
|
$
|
0.13
|
|
|
|
|
|
Diluted
|
|
|
|
$
|
0.04
|
|
|
$
|
0.11
|
|
|
|
|
|
On March 31, 2008, we merged our
joint venture BPL operations, FirstSpeed, LLC with PowerGrid Communications, Inc. (PowerGrid), a Delaware based C corporation and an
un-related party. We now own a 25% interest in PowerGrid which is the surviving company. PowerGrid provides utilities and energy users a more
efficient, reliable, and responsible power grid through the deployment of BPL and other communication technologies and management software. We account
for our remaining investment in PowerGrid under the equity method. Results of operations were immaterial to our three and nine months ended September
30, 2008 consolidated results of operations and our net investment is immaterial to our consolidated balance sheet.
On March 6, 2008, we acquired
certain identified assets and assumed liabilities of FirstEnergy Telecom Services, Inc. (FE Telecom), a fiber and wireless infrastructure
provider, for $45 million in cash. The final purchase price is subject to certain working capital adjustments which are still to be determined.
Accordingly we have not finalized the allocation of purchase price and it is at least reasonably possible that allocated values will change in the near
term. FE Telecom was a subsidiary of FirstEnergy Corp., which is a shareholder of the Company.
NOTE 3 CONTINGENCIES
We are subject to various claims
and legal proceedings covering a range of matters that arise in the ordinary course of our business activities. Management believes that any liability
that may ultimately result from the resolutions of these matters will not have a material effect on our consolidated financial position, results of
operations or cash flows.
In an attempt to settle disputes
with one of our suppliers, we were notified by the supplier that they billed us incorrectly for interstate and intrastate calls for the past seven
years. As of September 30, 2008, we have not received any bills for these claims and we believe that we have a reasonable basis to dispute any bills,
should they arrive. As of September 30, 2008, we can not reasonably estimate the potential loss, if any, and have not recorded a contingent liability.
This matter, if decided adversely through litigation or settled by us, may result in a liability material to the consolidated financial condition or
results of operations.
F-31
FIRST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited, in thousands of dollars except share and per share data)
September 30,
2008
We have identified certain
contingencies related to disputes regarding vendor billing errors and vendor bill-backs from the 24-month preceding period that have not yet been
resolved and can not be reasonably estimated at this time. Our vendors have the right to bill us for errors for a period of two years.
Disclosure of the potential for
changes in other estimates used in determining amounts reported for our vendor billing errors and vendor bill-backs is not required because, given our
history of making similar estimates, it is not considered at least reasonably possible that they will change in the near term by amounts that would be
material to the financial statements.
NOTE 4 DEBT
On September 30, 2008,
concurrently with the Globalcom acquisition, we entered into a $50 million incremental term loan syndicated by JP Morgan Securities Inc. The proceeds
from the new debt along with an additional $10 million of borrowings on the existing $20 million Revolving Credit Facility were used to pay for the
acquisition and the associated debt financing costs. The facility term is coterminous with the existing facility, with pricing starting at 425 basis
points, currently 375 basis points, over US London Inter-Bank Offered Rate (LIBOR) (75% of which is fixed under interest rate swap for
three years at 3.77%).
On March 6, 2008, concurrently
with the FE Telecom acquisition, we entered into a $90 million credit facility (the Facility), syndicated by JP Morgan Securities Inc. The
Facility includes a $70 million term loan and a $20 million revolving line of credit (which replaces the line of credit agreement described below),
secured by substantially all of our assets. The proceeds of the Facility were used to pay for the acquisition of FE Telecom, along with the pro-rata
redemption of $25 million of our outstanding Preferred Stock, and will be used for general working capital purposes. The Facility is five years, with
pricing starting at 425 basis points, currently 375 basis points, over US LIBOR (53% of which is fixed under interest rate swaps for three years at
3.03% and 22% of which is fixed under interest rate swaps for five years at 3.56%) (weighted average rate of 6.78% and 6.81% for the three and nine
months ended September 30, 2008). We also had the ability to increase the term loan by an additional $25 million under an accordion
feature.
In July 2007, we entered into a
$6 million unsecured demand line of credit with a bank, with variable interest rate at one month US LIBOR plus 150 basis points. On March 6, 2008, the
outstanding balance on the line of credit of $625 was repaid and replaced by the Facility.
NOTE 5 INTEREST RATE SWAPS
At September 30, 2008, we had
interest rate swaps in place for a total notional amount of $90.0 million of Facility. A notional amount of $36.75 million is fixed at an interest rate
of 3.03% for three years maturing in March 2011, a notional amount of $15.75 million is fixed at an interest rate of 3.56% for five years maturing in
March 2013 and a notional amount of $37.5 million is fixed at an interest rate of 3.77% for three years maturing in September 2011. The fair value of
the interest rate swaps resulted in a loss of $279 and a gain of $383 for the three and nine months ended September 30, 2008, respectively, and are
included as an adjustment to interest expense. The fair value of the interest rate swaps of $383 at September 30, 2008 is recorded on our consolidated
balance sheet in other assets.
NOTE 6 GOODWILL AND OTHER INTANGIBLE
ASSETS
Other intangible assets primarily
consist of trademarks, customer lists and Local Multipoint Distribution System (LMDS) licenses. The useful lives of trademarks were
determined to be indefinite and, therefore, these assets are not being amortized and have been tested for impairment. LMDS is an authorized fixed
broadband wireless service that may be used to provide high-speed data transfer, telephone service, telecommunications network transmission, internet
access, video broadcasting, video conferencing, and other services. Customer lists and LMDS licenses are being amortized on a straight-line basis over
their estimated economic lives of eight to 16 years and
F-32
FIRST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited, in thousands of dollars except share and per share data)
September 30,
2008
25 years, respectively. The
straight-line method of amortization reflects an appropriate allocation of the cost of the intangible assets to earnings in proportion to the amount of
economic benefits obtained by us in each reporting period.
The following is a summary of
other intangible assets at September 30, 2008:
|
|
|
|
Other
Intangible
Assets
|
|
Accumulated
Amortization
|
|
Net
|
|
Weighted
Average
Amortization
Period
|
Trademarks
|
|
|
|
$
|
12,400
|
|
|
$
|
|
|
|
$
|
12,400
|
|
|
Indefinite
|
Customer
lists
|
|
|
|
|
85,803
|
|
|
|
7,520
|
|
|
|
78,283
|
|
|
816 years
|
LMDS licenses
|
|
|
|
|
6,000
|
|
|
|
300
|
|
|
|
5,700
|
|
|
25
years
|
|
|
|
|
$
|
104,203
|
|
|
$
|
7,820
|
|
|
$
|
96,383
|
|
|
|
|
|
Total amortization expense
related to other intangible assets for the three and nine months ended September 30, 2008 was $1,780 and $4,960, respectively.
NOTE 7 INCOME TAXES
As of September 30, 2008, we did
not have any significant unrecognized tax benefits. We do not anticipate significant changes to our total unrecognized tax benefits through the end of
the third quarter of 2009. In October 2008, our subsidiary Globalcom received notice that it is subject to an Internal Revenue Service audit for the
2006 tax year.
NOTE 8 CONCENTRATION OF CREDIT
RISK
Financial instruments that
potentially subject us to concentration of credit risk consist primarily of accounts receivable and cash depository accounts. We grant credit and
perform ongoing credit evaluations of our customers, and generally do not require collateral. We maintain all of our cash in accounts at high credit
quality financial institutions. The Federal Deposit Insurance Corporation (FDIC) insures these cash accounts up to $100. As of October 3,
2008, the FDIC coverage was raised temporarily to $250 which will revert back to the earlier limit of $100 on January 1, 2010 unless further government
action is taken. We periodically assess the financial conditions of the commercial banks and believe the risk of loss is minimal.
Also, on Oct. 3, President Bush
signed a bill that temporarily increases FDIC coverage of individual accounts to $250,000, up from $100,000. Unless the government changes the
provisions, the deposit insurance reverts back to the earlier limits on Jan. 1, 2010.
NOTE 9 FAIR VALUE
In September 2006, the FASB
issued SFAS 157, Fair Value Measurements. SFAS 157 defines fair value, establishes a framework for measuring fair value in generally
accepted accounting principles (GAAP), and expands disclosures about fair value measurements. SFAS 157 is effective for financial
statements issued for fiscal years beginning after November 15, 2007. SFAS 157 does not require any new fair value measurements. In February 2008, the
FASB amended SFAS 157 to exclude SFAS 13, Accounting for Leases. In addition, the FASB delayed the effective date of SFAS 157 for
non-financial assets and liabilities to fiscal years beginning after November 15, 2008. We adopted the provisions of SFAS 157 related to our financial
assets and liabilities on January 1, 2008. The adoption of SFAS 157 did not materially affect our financial statements.
F-33
FIRST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited, in thousands of dollars except share and per share data)
September 30,
2008
The following table provides a
summary of the fair values of assets and liabilities under SFAS 157:
|
|
|
|
Fair Value Measurements at September 30, 2008 Using
|
|
Description
|
|
|
|
Carrying Value
at June 30, 2008
|
|
Quoted Prices in
Active Markets
for
Identical
Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level
3)
|
Interest rate
swap
|
|
|
|
$
|
383
|
|
|
$
|
|
|
|
$
|
383
|
|
|
$
|
In February 2007, the FASB issued
SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS 159 permits entities to choose to measure many
financial instruments and certain other items at fair value and establishes presentation and disclosure requirements to facilitate comparisons between
entities that choose different measurement attributes for similar types of assets and liabilities. SFAS 159 is effective for fiscal years beginning
after November 15, 2007. We adopted this statement as of January 1, 2008 and elected not to apply the fair value option to any of our financial
instruments.
NOTE 10 NEW ACCOUNTING
PRONOUNCEMENTS
In April 2008, Financial
Accounting Standards Board (FASB) Staff Position 142-3, Determination of the Useful Life of Intangible Assets (FSP
142-3) was issued. This standard amends the factors that should be considered in developing renewal or extension assumptions used to determine
the useful life of a recognized intangible asset under SFAS 142. FSP 142-3 is effective for financial statements issued for fiscal years beginning
after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. We have not yet determined the impact, if any,
from the adoption of SFAS 142-3 on our financial statements.
In March 2008, the FASB issued
SFAS 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of SFAS 133. SFAS 161 requires disclosures of how
and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for and how derivative instruments and
related hedged items affect an entitys financial position, financial performance, and cash flows. SFAS 161 is effective for fiscal years
beginning after November 15, 2008, with early adoption permitted. We have not yet determined the impact, if any, from the adoption of SFAS 161 on our
financial statements.
In December 2007, the FASB issued
SFAS 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of Accounting Research Bulletin (ARB) 51. SFAS
160 clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in
the consolidated financial statements. SFAS 160 changes the way the consolidated income statement is presented, thus requiring consolidated net income
to be reported at amounts that include the amounts attributable to both parent and the noncontrolling interest. SFAS 160 is effective for the fiscal
years, and interim periods within those fiscal years, beginning on or after December 15, 2008. We do not expect the adoption of SFAS 160 to have a
material impact on our financial statements.
In December 2007, the FASB issued
SFAS 141 (revised 2007), Business Combinations. SFAS 141(R) replaces SFAS 141, Business Combinations. SFAS 141(R) retains the
fundamental requirements in SFAS 141 that the acquisition method of accounting (which SFAS 141 called the purchase method) be used for all business
combinations and for an acquirer to be identified for each business combination. SFAS 141(R) defines the acquirer as the entity that obtains control of
one or more businesses in the business combination and establishes the acquisition date as the date that the acquirer achieves control. SFAS 141(R)
requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition
date, measured at their fair values as of that date, with limited exceptions specified in the statement. SFAS 141(R) applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.
Early adoption is prohibited.
F-34
FIRST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited, in thousands of dollars except share and per share data)
September 30,
2008
NOTE 11 RELATED PARTY TRANSACTIONS
We provide telecommunication
services to a shareholder which amounted to $2,211 and $5,947 or 5.6% and 5.2% of revenues, recorded within revenues, net related party in the
Consolidated Statement of Income, for the three and nine months ended September 30, 2008, respectively. The accounts receivable balance for this
shareholder was $910 at September 30, 2008.
F-35
FIRST COMMUNICATIONS, LLC
FINANCIAL STATEMENTS AS OF
DECEMBER 31, 2006 AND 2005 AND
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
F-36
INDEPENDENT AUDITORS REPORT
To the Members
First Communications, LLC
Fairlawn,
Ohio
We have audited the balance
sheets of First Communications, LLC as of December 31, 2006 and 2005, and the statements of income, changes in members equity and cash flows for
the years ended December 31, 2006, 2005 and 2004. These financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these 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 audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial
statements referred to above, present fairly, in all material respects, the financial position of First Communications, LLC as of December 31, 2006 and
2005, and the results of its operations, and its cash flows for the years ended December 31, 2006, 2005 and 2004 in conformity with accounting
principles generally accepted in the United States of America.
As discussed in Note 4 to the
financial statements, a certain error resulting in the overstatement of previously reported intangible assets and deferred revenues as of December 31,
2006, were discovered by management of the Company during March 2007. Accordingly, the 2006 financial statements have been restated to correct the
error.
/s/ BOBER, MARKEY, FEDOROVICH & COMPANY
Akron, Ohio
March 29, 2007
F-37
FIRST COMMUNICATIONS, LLC
BALANCE SHEETS
December
31, 2006 and 2005
|
|
|
|
2006
|
|
2005
|
|
ASSETS
|
|
|
|
CURRENT
ASSETS
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
|
|
$
|
502,252
|
|
|
$
|
941,490
|
|
Accounts
receivable trade, less allowance for doubtful accounts of
$625,000 and $800,000 as of December 31, 2006 and 2005,
respectively
|
|
|
|
|
9,309,320
|
|
|
|
9,706,595
|
|
Accounts
receivable related party
|
|
|
|
|
1,200,350
|
|
|
|
1,094,685
|
|
Inventory
|
|
|
|
|
240,112
|
|
|
|
53,258
|
|
Prepaid
expenses
|
|
|
|
|
974,500
|
|
|
|
311,763
|
|
|
TOTAL CURRENT
ASSETS
|
|
|
|
|
12,226,534
|
|
|
|
12,107,791
|
|
|
PROPERTY AND
EQUIPMENT
|
|
|
|
|
|
|
|
|
|
|
Switches
|
|
|
|
|
2,429,691
|
|
|
|
1,910,184
|
|
Technical
equipment
|
|
|
|
|
4,482,576
|
|
|
|
3,261,668
|
|
Leasehold
improvements
|
|
|
|
|
105,210
|
|
|
|
43,561
|
|
Office
equipment
|
|
|
|
|
1,154,358
|
|
|
|
960,885
|
|
Furniture and
fixtures
|
|
|
|
|
245,798
|
|
|
|
204,696
|
|
Vehicles
|
|
|
|
|
71,472
|
|
|
|
71,472
|
|
|
|
|
|
|
|
8,489,105
|
|
|
|
6,452,466
|
|
Less:
Accumulated depreciation
|
|
|
|
|
(3,595,534
|
)
|
|
|
(2,384,791
|
)
|
|
NET PROPERTY
AND EQUIPMENT
|
|
|
|
|
4,893,571
|
|
|
|
4,067,675
|
|
|
OTHER
ASSETS
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
|
|
11,494,007
|
|
|
|
9,788,007
|
|
Other
intangibles, net, as restated (Note 4)
|
|
|
|
|
1,891,595
|
|
|
|
4,230,800
|
|
Deposits and
other assets
|
|
|
|
|
641,260
|
|
|
|
322,996
|
|
|
|
|
|
|
14,026,862
|
|
|
|
14,341,803
|
|
|
TOTAL ASSETS
|
|
|
|
$
|
31,146,967
|
|
|
$
|
30,517,269
|
|
The accompanying notes are an integral part of these
financial statements.
F-38
FIRST COMMUNICATIONS, LLC
BALANCE SHEETS
December
31, 2006 and 2005
|
|
|
|
2006
|
|
2005
|
|
LIABILITIES AND MEMBERS EQUITY
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
Line of
credit
|
|
|
|
$
|
3,922,000
|
|
|
$
|
|
|
Current
maturities of long-term debt
|
|
|
|
|
6,168,254
|
|
|
|
557,143
|
|
Accounts
payable trade
|
|
|
|
|
4,773,884
|
|
|
|
5,443,350
|
|
Accounts
payable related party
|
|
|
|
|
|
|
|
|
171,041
|
|
Accrued
expenses
|
|
|
|
|
1,562,484
|
|
|
|
1,926,521
|
|
Accrued
distributions
|
|
|
|
|
|
|
|
|
1,577,037
|
|
Deferred
revenue current, as restated (Note 4)
|
|
|
|
|
1,616,312
|
|
|
|
2,998,315
|
|
|
TOTAL CURRENT
LIABILITIES
|
|
|
|
|
18,042,934
|
|
|
|
12,673,407
|
|
|
NON-CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt, net of current maturities
|
|
|
|
|
4,035,318
|
|
|
|
8,203,571
|
|
Deferred
revenue long term, as restated (Note 4)
|
|
|
|
|
195,699
|
|
|
|
2,125,320
|
|
|
TOTAL
NON-CURRENT LIABILITIES
|
|
|
|
|
4,231,017
|
|
|
|
10,328,891
|
|
|
TOTAL
LIABILITIES
|
|
|
|
|
22,273,951
|
|
|
|
23,002,298
|
|
|
MEMBERS
EQUITY
|
|
|
|
|
|
|
|
|
|
|
Member units,
1,000 units outstanding
|
|
|
|
|
8,881,672
|
|
|
|
8,881,672
|
|
Accumulated
deficit
|
|
|
|
|
(31,096
|
)
|
|
|
(1,364,308
|
)
|
Accumulated
other comprehensive gain (loss)
|
|
|
|
|
22,440
|
|
|
|
(2,393
|
)
|
|
|
|
|
|
8,873,016
|
|
|
|
7,514,971
|
|
|
TOTAL
LIABILITIES AND MEMBERS EQUITY
|
|
|
|
$
|
31,146,967
|
|
|
$
|
30,517,269
|
|
The accompanying notes are an integral part of these
financial statements.
F-39
FIRST COMMUNICATIONS, LLC
STATEMENTS OF INCOME
For
the Years Ended December 31, 2006, 2005 and 2004
|
|
|
|
2006
|
|
2005
|
|
2004
|
REVENUES,
NET
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues, net
|
|
|
|
$
|
67,812,190
|
|
|
$
|
52,886,942
|
|
|
$
|
36,750,341
|
|
Revenues, net
related party
|
|
|
|
|
4,881,754
|
|
|
|
5,086,303
|
|
|
|
3,780,830
|
|
|
TOTAL
REVENUES, NET
|
|
|
|
|
72,693,944
|
|
|
|
57,973,245
|
|
|
|
40,531,171
|
|
|
COST OF
FACILITIES, exclusive of
depreciation and amortization shown below
|
|
|
|
|
50,589,448
|
|
|
|
41,396,736
|
|
|
|
25,624,400
|
|
|
DEPRECIATION
AND AMORTIZATION
|
|
|
|
|
2,377,515
|
|
|
|
1,139,882
|
|
|
|
534,546
|
|
|
SELLING,
GENERAL AND ADMINISTRATIVE EXPENSES
|
|
|
|
|
17,400,416
|
|
|
|
14,078,408
|
|
|
|
12,367,869
|
|
|
INCOME FROM
OPERATIONS
|
|
|
|
|
2,326,565
|
|
|
|
1,358,219
|
|
|
|
2,004,356
|
|
|
OTHER INCOME
(EXPENSE)
|
|
|
|
|
(388,431
|
)
|
|
|
(61,751
|
)
|
|
|
370,599
|
|
|
NET INCOME
|
|
|
|
$
|
1,938,134
|
|
|
$
|
1,296,468
|
|
|
$
|
2,374,955
|
|
The accompanying notes are an integral part of these
financial statements.
F-40
FIRST COMMUNICATIONS, LLC
STATEMENTS OF CHANGES IN
MEMBERS EQUITY
For the Years Ended December 31, 2006, 2005 and 2004
|
|
|
|
Member Units
|
|
Accumulated
Deficit
|
|
Accumulated
Other
Comprehensive
Gain (Loss)
|
|
Total
Members
Equity
|
|
Comprehensive
Income
|
|
Beginning
balance,
January 1, 2004
|
|
|
|
|
1,000
|
|
|
$
|
8,881,672
|
|
|
$
|
(2,452,580
|
)
|
|
$
|
(308,802
|
)
|
|
$
|
6,120,290
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
2,374,955
|
|
|
|
|
|
|
|
2,374,955
|
|
|
$
|
2,374,955
|
|
|
Net gain on
cash flow
hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
134,560
|
|
|
|
134,560
|
|
|
|
134,560
|
|
|
Ending
balance,
December 31, 2004
|
|
|
|
|
1,000
|
|
|
$
|
8,881,672
|
|
|
$
|
(77,625
|
)
|
|
$
|
(174,242
|
)
|
|
$
|
8,629,805
|
|
|
$
|
2,509,515
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
1,296,468
|
|
|
|
|
|
|
|
1,296,468
|
|
|
$
|
1,296,468
|
|
|
Distributions
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,583,151
|
)
|
|
|
|
|
|
|
(2,583,151
|
)
|
|
|
|
|
|
Net gain on
cash flow
hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
171,849
|
|
|
|
171,849
|
|
|
|
171,849
|
|
|
Ending
balance,
December 31, 2005
|
|
|
|
|
1,000
|
|
|
|
8,881,672
|
|
|
|
(1,364,308
|
)
|
|
|
(2,393
|
)
|
|
|
7,514,971
|
|
|
$
|
1,468,317
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
1,938,134
|
|
|
|
|
|
|
|
1,938,134
|
|
|
$
|
1,938,134
|
|
|
Distributions
|
|
|
|
|
|
|
|
|
|
|
|
|
(604,922
|
)
|
|
|
|
|
|
|
(604,922
|
)
|
|
|
|
|
|
Net gain on
cash flow
hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,833
|
|
|
|
24,833
|
|
|
|
24,833
|
|
|
Ending
balance,
December 31, 2006
|
|
|
|
|
1,000
|
|
|
$
|
8,881,672
|
|
|
$
|
(31,096
|
)
|
|
$
|
22,440
|
|
|
$
|
8,873,016
|
|
|
$
|
1,962,967
|
|
The accompanying notes are an integral part of these
financial statements.
F-41
FIRST COMMUNICATIONS, LLC
STATEMENTS OF CASH FLOWS
For the Years Ended December 31 2006, 2005 and 2004
|
|
|
|
2006
|
|
2005
|
|
2004
|
CASH FLOWS
FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
$
|
1,938,134
|
|
|
$
|
1,296,468
|
|
|
$
|
2,374,955
|
|
Adjustments
to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
|
|
2,377,515
|
|
|
|
1,139,882
|
|
|
|
534,546
|
|
Gain on sale
of property and equipment
|
|
|
|
|
(220,573
|
)
|
|
|
|
|
|
|
|
|
Changes in
operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable trade, net
|
|
|
|
|
1,530,519
|
|
|
|
(4,295,506
|
)
|
|
|
(1,048,673
|
)
|
Prepaid
expenses
|
|
|
|
|
14,308
|
|
|
|
(231,564
|
)
|
|
|
(1,927
|
)
|
Inventory
|
|
|
|
|
(186,854
|
)
|
|
|
(37,570
|
)
|
|
|
(15,688
|
)
|
Deposits and
other assets
|
|
|
|
|
(27,882
|
)
|
|
|
62,924
|
|
|
|
|
|
Accounts
payable trade
|
|
|
|
|
(669,466
|
)
|
|
|
1,824,055
|
|
|
|
222,874
|
|
Accrued
expenses
|
|
|
|
|
(339,204
|
)
|
|
|
516,226
|
|
|
|
(31,930
|
)
|
Deferred
revenue
|
|
|
|
|
(2,086,624
|
)
|
|
|
1,546,965
|
|
|
|
667,471
|
|
NET CASH
PROVIDED BY OPERATING ACTIVITIES
|
|
|
|
|
2,329,873
|
|
|
|
1,821,880
|
|
|
|
2,701,628
|
|
|
CASH FLOWS
FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments for
property and equipment
|
|
|
|
|
(2,074,632
|
)
|
|
|
(988,248
|
)
|
|
|
(365,665
|
)
|
Deposits on
property and equipment
|
|
|
|
|
(190,382
|
)
|
|
|
(190,382
|
)
|
|
|
(14,424
|
)
|
Business
acquisitions
|
|
|
|
|
(3,910,290
|
)
|
|
|
(4,263,000
|
)
|
|
|
|
|
Proceeds from
sale of property and equipment
|
|
|
|
|
500,000
|
|
|
|
|
|
|
|
|
|
Net change in
accounts receivable related party
|
|
|
|
|
(105,665
|
)
|
|
|
(351,747
|
)
|
|
|
(445,626
|
)
|
NET CASH USED
IN INVESTING ACTIVITIES
|
|
|
|
|
(5,780,969
|
)
|
|
|
(5,793,377
|
)
|
|
|
(825,715
|
)
|
|
CASH FLOWS
FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings
(payments) due to cash overdraft,
funded by line of credit
|
|
|
|
|
|
|
|
|
(911,877
|
)
|
|
|
911,877
|
|
Net
borrowings on line of credit
|
|
|
|
|
3,922,000
|
|
|
|
|
|
|
|
|
|
Proceeds from
issuance of long-term notes payable
|
|
|
|
|
2,000,000
|
|
|
|
3,900,000
|
|
|
|
|
|
Payments on
notes payable
|
|
|
|
|
(557,142
|
)
|
|
|
(139,286
|
)
|
|
|
(406,504
|
)
|
Distributions
paid
|
|
|
|
|
(2,181,959
|
)
|
|
|
(1,006,114
|
)
|
|
|
|
|
Net change in
accounts payable related party
|
|
|
|
|
(171,041
|
)
|
|
|
171,041
|
|
|
|
(92,000
|
)
|
|
NET CASH
PROVIDED BY FINANCING ACTIVITIES
|
|
|
|
|
3,011,858
|
|
|
|
2,013,764
|
|
|
|
413,373
|
|
|
NET
(DECREASE) INCREASE IN CASH
CASH EQUIVALENTS
|
|
|
|
|
(439,238
|
)
|
|
|
(1,957,733
|
)
|
|
|
2,289,286
|
|
|
CASH AND CASH
EQUIVALENTS, BEGINNING OF YEAR
|
|
|
|
|
941,490
|
|
|
|
2,899,223
|
|
|
|
609,937
|
|
|
CASH AND CASH
EQUIVALENTS, END OF YEAR
|
|
|
|
$
|
502,252
|
|
|
$
|
941,490
|
|
|
$
|
2,899,223
|
|
The accompanying notes are an integral part of these
financial statements.
F-42
FIRST COMMUNICATIONS, LLC
STATEMENTS OF CASH FLOWS
For the Years Ended December 31 2006, 2005 and 2004
|
|
|
|
2006
|
|
2005
|
|
2004
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
|
|
$
|
910,587
|
|
|
$
|
188,296
|
|
|
$
|
324,712
|
|
SUPPLEMENTARY
DISCLOSURES OF NONCASH ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair market
value adjustment for derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
liabilities other
|
|
|
|
$
|
24,833
|
|
|
$
|
171,849
|
|
|
$
|
134,560
|
|
Accumulated
comprehensive loss
|
|
|
|
|
(24,833
|
)
|
|
|
(171,849
|
)
|
|
|
(134,560
|
)
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
During 2006, the Company ceased
pursuing the customers under the agreement which gave rise to the intangible assets and deferred revenue. Other intangible assets and related deferred
revenues were restated (Note 4) to $0 as of December 31, 2006.
The accompanying notes are an integral part of these
financial statements.
F-43
FIRST COMMUNICATIONS, LLC
NOTES TO FINANCIAL
STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Nature of Operations
First Communications, LLC (the
Company), is a limited liability company that provides local and long-distance telephone and other telecommunications related services
throughout the United States. The Companys long distance customer base is composed primarily of commercial and residential consumers located in
Ohio, Michigan, Pennsylvania, Indiana, Illinois and Florida. During 2004, the Company began providing cellular telephone services.
Cash and Cash Equivalents
The Company considers all
short-term securities purchased with an original maturity of three months or less to be cash equivalents.
Accounts Receivable
The Company makes sales on credit
to customers in the ordinary course of business and carries its accounts receivable at cost less allowance for doubtful accounts. On a periodic basis,
the Company evaluates its accounts receivable and establishes an allowance for doubtful accounts based on its history of past write-offs, collections
and current credit conditions. Accounts are written off when the Company determines that the accounts are uncollectible.
Inventory
Inventory consists of cellular
telephones and is valued using the lower of cost or market.
Property and Equipment
Property and equipment are stated
at cost. Major additions and improvements are charged to the property accounts while replacements, maintenance and repairs, which do not improve or
extend the life of the assets, are expensed currently. When property is retired or otherwise disposed of, the cost of the property is removed from the
asset accounts, accumulated depreciation is charged with an amount equivalent to the depreciation provided, and the difference is charged or credited
to income for the period.
Depreciation is computed using
the straight-line method over the assets estimated useful lives, which are as follows:
|
|
|
|
Years
|
Switches
|
|
|
|
|
510
|
|
Technical
equipment
|
|
|
|
|
310
|
|
Leasehold
improvements
|
|
|
|
|
35
|
|
Office
furniture, fixtures and equipment
|
|
|
|
|
310
|
|
Vehicles
|
|
|
|
|
5
|
|
Depreciation expense for the
years ended December 31, 2006, 2005 and 2004 amounted to $1,263,311, $829,365 and $534,546, respectively.
Goodwill and Other Intangible Assets
Goodwill represents the excess of
the cost of an acquired entity over the net of the amounts assigned to assets acquired and liabilities assumed. The Company accounts for its goodwill
in accordance with Statement of Financial Accounting Standard (SFAS) No. 142
Goodwill and Other Intangible Asset.
Under this
pronouncement, goodwill is not amortizable, but requires the Company to test goodwill for impairment annually. Impairments, if
F-44
FIRST COMMUNICATIONS, LLC
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
any, will be expensed in the
year incurred. As of December 31, 2006, 2005 and 2004, there was no impairment to goodwill.
Other intangible assets primarily
consist of trademarks, customer lists and other intangible assets obtained through business acquisitions. The useful lives of trademarks were
determined to be indefinite and, therefore, these assets are not being amortized and have been tested for impairment. There was no impairment of
trademarks at December 31, 2006, 2005 and 2004. Other intangible assets are being amortized on a straight-line basis over their estimated economic
lives. The useful life of other intangible assets as of December 31, 2006 and 2005 is as follows:
|
|
|
|
Years
|
Customer
lists:
|
|
|
|
|
|
|
Commercial
Customers
|
|
|
|
|
7
|
|
Residential
Customers
|
|
|
|
|
5
|
|
Other
intangible assets
|
|
|
|
|
3
|
|
The straight-line method of
amortization reflects an appropriate allocation of the cost of the intangible assets to earnings in proportion to the amount of economic benefits
obtained by the Company in each reporting period. Total amortization expense related to other intangible assets during the years ended December 31,
2006, 2005, and 2004 were $1,114,204, $310,517, and $0, respectively. As of December 31, 2006, future estimated amortization expense related to
amortizable other identifiable intangible assets will be:
2007
|
|
|
|
$
|
414,204
|
|
2008
|
|
|
|
$
|
414,204
|
|
2009
|
|
|
|
$
|
414,204
|
|
2010
|
|
|
|
$
|
331,157
|
|
2011
|
|
|
|
$
|
179,898
|
|
Income Taxes
The Company has elected to be
taxed as a partnership and, accordingly, the Company is not a taxpaying entity for federal or state income tax purposes. Consequently, federal and
state income taxes are not payable by, or provided for, the Company. Rather, such taxes are the responsibility of the Members.
The Company accrued distributions
of $1,577,037 for member income taxes at December 31, 2005. There were no accrued distributions at December 31, 2006.
Accounts Payable
The Company performs periodic
bill verification procedures to identify errors in vendors billing processes. The bill verification procedures include the examination of bills,
comparing billed rates with contracted rates, evaluating the trends of invoices amounts by vendors, and reviewing the types of charges being assessed.
If the Company concludes that it has been billed inaccurately, it will dispute the charge with the vendor and begin resolution procedures. Although
dispute charges may relate to several periods, in accordance with industry standards dispute resolutions are taken in the period.
Revenue Recognition
The Company records as revenue
the amount of communications services rendered. Revenue is recognized as service is provided to customers, who are billed monthly. Provisions for
discounts and credits are recorded as revenue is recognized. Unbilled receivables (see Note 2) represent revenues earned for communications services
rendered but not yet billed.
F-45
FIRST COMMUNICATIONS, LLC
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
Asset Retirement Obligations
The Company has asset retirement
obligations associated with its contractual tower leases for cell sites. The Company records its asset retirement obligations in accordance with SFAS
No. 143, Accounting for Asset Retirement Obligations and FIN 47, Accounting for Conditional Asset Retirement Obligations, an
interpretation of SFAS No. 143. In accordance with the provisions of SFAS No. 143, the Company recognizes a retirement obligation (future cost of
removal) pertaining to its long-lived assets when a legal obligation exists to remove long-lived assets at some point in the future. As of December 31,
2006, such obligations have been immaterial.
Advertising
The Company expenses all
advertising costs when the advertising first takes place. Advertising expenses for the years ended December 31, 2006, 2005 and 2004 amounted to
$92,464, $612,277 and $1,332,984, respectively.
Concentration of Credit Risk
Financial instruments that
potentially subject the Company to concentration of credit risk consist primarily of accounts receivable and cash depository accounts. The Company
grants credit and performs ongoing credit evaluations of its customers, generally not requiring collateral. The Company maintains all of its cash
accounts in commercial banks located in Ohio. The Federal Deposit Insurance Corporation (FDIC) insures these cash accounts up to
$100,000.
Accounting Estimates
The preparation of financial
statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those
estimates.
During 2006, 2005 and 2004, the
Company received $0, $103,215 and $87,734, respectively, in credits from a service provider pertaining to disputes on prior years invoicing,
which increased miscellaneous income and net income. While a portion of these credits was estimated in prior years, in accordance with accounting
principles generally accepted in the United States of America, no gain contingency was recorded.
Reclassifications
For comparability, certain
amounts in the 2005 and 2004 financial statements have been reclassified to conform to the 2006 financial statement presentation.
NOTE 2 ACQUISITIONS
In July 2006, the Company
acquired certain assets of Acceris Management and Acquisition LLC (Acceris Management and Acquisition LLC is a wholly owned subsidiary of North Central
Equity LLC), a long distance, data and other communications services provider, through a transaction accounted for as a purchase. The fair value
assigned to assets acquired and intangibles totaled $2,000,000. The acquired assets of Acceris Management Acquisitions LLC are reflected in the
Companys balance sheet at December 31, 2006, and Acceris Management and Acquisition LLCs results of operations are included in the
Companys statement of income from July 1, 2006. The purchase price was allocated to specific assets based on an estimated fair market value of
property and equipment, with $294,000 classified as property and equipment and $1,706,000 classified as goodwill. See Note 5 for detail of
debt.
In June 2005, the Company
acquired certain assets of Akron Canton Communications, Inc., a telecommunications provider, through a transaction accounted for as a purchase. The
fair value assigned to assets
F-46
FIRST COMMUNICATIONS, LLC
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
acquired and intangibles
totaled $363,000. The assets of Akron Canton Communications, Inc. are reflected in the Companys balance sheet at December 31, 2005, and Akron
Canton Communications, Inc.s, results of operations are included in the Companys statement of income from June 9, 2005. The purchase price
was allocated to specific assets based on the asset purchase agreement, with $10,000 classified as property and $353,000 classified as intangible
assets (customer lists). See Note 4 for detail of other intangible assets.
In September 2005, the Company
acquired certain assets of CoreComm, Inc. (CoreComm, Inc. is a subsidiary company of ATX Communications, Inc.), a long-distance, local, wireless, and
internet access telecommunications provider, through a transaction accounted for as a purchase. The fair value assigned to assets acquired and
intangibles totaled $3,900,000. The assets and liabilities of CoreComm, Inc. are reflected in the Companys balance sheet at December 31, 2005,
and CoreComm, Inc.s results of operations are included in the Companys statement of income from September 20, 2005. The purchase price was
allocated to specific assets and liabilities based on the appraisal, with $2,077,817 classified as intangible assets (customer lists), $1,822,183
classified as property and equipment, $2,100,000 of other intangible assets and $2,100,000 of deferred revenue. See Note 4 for detail of other
intangible assets and Note 5 for detail of debt.
During 2004, the Company acquired
certain assets of Skylan, Ltd., a wireless internet provider through a transaction accounted for as a purchase. The purchase price is to be calculated
based on 7.5% of monthly billed revenue of Skylans embedded base of customers and 10% of monthly billed revenue of new customers sold on
Skylans network equipment. The purchase price is paid by the Company on a monthly basis and continues for the shorter of three years or as long
as the Company generates revenue from Skylans customers as identified in the agreement. The purchase price was estimated to be $108,000 as of
December 31, 2004. During 2005, the purchase price was determined to be $78,754. The Company paid in full the purchase price and the $78,754 was
allocated to property and equipment.
NOTE 3 ACCOUNTS RECEIVABLE
TRADE
Accounts receivable are comprised
of billed receivables and unbilled receivables. At December 31, 2006 and 2005, billed receivables amounted to $9,777,058 and $9,673,757, respectively.
Unbilled receivables amounted to $157,263 and $832,838 as of December 31, 2006 and 2005, respectively. Accounts receivable are offset by an allowance
for doubtful accounts of $625,000 and $800,000 at December 31, 2006 and 2005, respectively.
NOTE 4 OTHER INTANGIBLES
The following is a summary of
other intangible assets at:
|
|
|
|
Other
Intangible
Assets
|
|
Accumulated
Amortization
|
|
Net
|
December
31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
|
|
$
|
10,500
|
|
|
$
|
|
|
|
$
|
10,500
|
|
Customer
lists:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Akron Canton
Communication
|
|
|
|
|
353,000
|
|
|
|
105,900
|
|
|
|
247,100
|
|
CoreComm,
Inc. commercial customers
|
|
|
|
|
1,259,283
|
|
|
|
232,368
|
|
|
|
1,026,915
|
|
CoreComm,
Inc. residential customers
|
|
|
|
|
818,534
|
|
|
|
211,454
|
|
|
|
607,080
|
|
|
|
|
|
$
|
2,441,317
|
|
|
$
|
549,722
|
|
|
$
|
1,891,595
|
|
F-47
FIRST COMMUNICATIONS, LLC
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
|
|
|
|
Other
Intangible
Assets
|
|
Accumulated
Amortization
|
|
Net
|
December
31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
|
|
$
|
10,500
|
|
|
$
|
|
|
|
$
|
10,500
|
|
Customer
lists:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Akron Canton
Communication
|
|
|
|
|
353,000
|
|
|
|
35,300
|
|
|
|
317,700
|
|
CoreComm,
Inc. commercial customers
|
|
|
|
|
1,259,283
|
|
|
|
52,470
|
|
|
|
1,206,813
|
|
CoreComm,
Inc. residential customers
|
|
|
|
|
818,534
|
|
|
|
47,747
|
|
|
|
770,787
|
|
Other
intangible assets
|
|
|
|
|
2,100,000
|
|
|
|
175,000
|
|
|
|
1,925,000
|
|
|
|
|
|
$
|
4,541,317
|
|
|
$
|
310,517
|
|
|
$
|
4,230,800
|
|
Other intangible assets and
related deferred revenues were restated to $0 as of December 31, 2006. During 2006, the Company ceased pursuing the customers under the agreement which
gave rise to the intangible assets and deferred revenue. Below is a summary of the effect of the restatement on the Companys balance sheet as of
December 31, 2006. The effect of the changes to the Companys balance sheet had no cumulative net impact on the Companys members
equity, statements of income and statements of cash flows for the years ended 2006, 2005 and 2004.
|
|
|
|
As Previously
Reported
|
|
Adjustments
|
|
As Restated
|
Balance
Sheet December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
intangibles, net
|
|
|
|
$
|
3,116,595
|
|
|
$
|
(1,225,000
|
)
|
|
$
|
1,891,595
|
|
Deferred
revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
$
|
2,316,312
|
|
|
$
|
(700,000
|
)
|
|
$
|
1,616,312
|
|
Long term
|
|
|
|
$
|
720,699
|
|
|
|
(525,000
|
)
|
|
$
|
195,699
|
|
Total
|
|
|
|
|
|
|
|
$
|
(1,225,000
|
)
|
|
|
|
|
As part of the CoreComm Inc.
acquisition in September 2005, the Company acquired A-Block LMDS licenses covering 15 markets in Ohio with a total of 10,573,982 POPs (estimated
population of a market), representing 95% of the POPs in Ohio. LMDS is an authorized fixed broadband wireless service that may be used to provide
high-speed data transfer, telephone service, telecommunications network transmission, internet access, video broadcasting, video conferencing, and
other services. There is no carrying value on the balance sheet related to these intangibles in accordance with generally accepted accounting
principles.
In March 2005, the Company
entered into an agreement with FirstEnergy Telecom Services, Inc. for Indefeasible Right of Use (IRU) of Dark Fibers. FirstEnergy Telecom Services,
Inc. owns and/or controls certain unlit Fiber within their network which the Company has the right to use up to 6,000 fiber miles for a term of 20
years, which approximates its useful life. The Company must pay an annual maintenance fee for fiber miles used. There is no carrying value on the
balance sheet related to these intangibles in accordance with generally accepted accounting principles.
F-48
FIRST COMMUNICATIONS, LLC
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 5 DEBT
Debt consists of the following at
December 31:
|
|
|
|
2006
|
|
2007
|
Note payable to
a bank, monthly interest payments at 6.26%, principal payment in one installment on December 24, 2007, secured by all assets of the Company and a
guaranty from a member.
|
|
|
|
$
|
5,000,000
|
|
|
$
|
5,000,000
|
|
|
Note payable to
a bank, monthly principal payments of $55,555, plus interest at one month LIBOR plus 150 basis (6.82% at December 31, 2006) commencing February, 2007
through January, 2010, secured by all assets of the Company.
|
|
|
|
|
2,000,000
|
|
|
|
|
|
|
Note payable to
a bank, monthly principal payments of $46,429, plus interest at the lower of one month LIBOR plus 175 basis (7.07% and 6.14% at December 31, 2006 and
2005, respectively) or prime, (8.25% December 31, 2006 and 7.25% at December 31, 2006 and 2005, respectively) through September, 2012, secured by all
assets of the Company.
|
|
|
|
|
3,203,572
|
|
|
|
3,760,714
|
|
|
|
|
|
|
10,203,572
|
|
|
|
8,760,714
|
|
Less: Current
maturities
|
|
|
|
|
6,168,254
|
|
|
|
557,143
|
|
|
|
|
|
$
|
4,035,318
|
|
|
$
|
8,203,571
|
|
The Company has a $6,000,000
($4,000,000 at December 31, 2005) demand line of credit with a bank, with interest at one month LIBOR plus 150 basis (6.82% and 5.89% at December 31,
2006 and 2005, respectively). The weighted average interest rate for the line of credit was 6.63% for 2006. The outstanding balance in the line of
credit at December 31, 2006 was $3,922,000. There was no outstanding balance on the line of credit at December 31, 2005. The Companys debt is
subject to certain financial covenants which were either achieved or waived for the year ended December 31, 2006.
In addition, the Company has a
$600,000 letter of credit with a bank issued in connection with its acquisition of Acceris Management and Acquisition LLC described in Note 2. On March
6, 2007, the Company utilized the letter of credit to finalize this acquisition.
Aggregate future maturities of
long-term debt for the years ending December 31, are as follows:
2007
|
|
|
|
$
|
6,168,254
|
|
2008
|
|
|
|
|
1,223,810
|
|
2009
|
|
|
|
|
1,223,810
|
|
2010
|
|
|
|
|
612,698
|
|
2011
|
|
|
|
|
557,143
|
|
Thereafter
|
|
|
|
|
417,857
|
|
|
|
|
|
$
|
10,203,572
|
|
NOTE 6 DERIVATIVE INSTRUMENTS
The Company holds a derivative
financial instrument for the purpose of hedging the risks associated with interest rate fluctuations on its Commercial Note. The derivative instrument
is accounted for in accordance with SFAS No. 133
Accounting for Derivative Instruments and Hedging Activities
, as amended by FASB 138
Accounting for Certain Derivative Instruments and Certain Hedging Activities.
These regulations require the Company to recognize all
derivatives on the balance sheet at fair value and establish criteria for the designation and effectiveness of hedging relationships.
F-49
FIRST COMMUNICATIONS, LLC
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
The interest rate swap agreement
qualifies as a cash flow hedge. The fair value of the interest rate swap agreement of $22,440 and ($2,393) as of December 31, 2006 and 2005
respectively, is recorded in the accrued expenses line of the financial statements. The effective and ineffective portion of any gain or
loss must be determined and are treated differently for financial statement purposes. A gain or loss on the effective portion of the derivative
instrument must be reported as a component of accumulated comprehensive income and reclassified into earnings in the period or periods during which the
hedged transaction affects earnings. The gain or loss related to an ineffective portion is recognized in current earnings during the period of
change.
At December 31, 2006 and 2005,
respectively, the Company had unrecognized gain of ($22,440) and an unrecognized loss of $2,393 from cash flow hedges. All hedging activity was
effective, and the loss has been included in accumulated other comprehensive income. On the date the note is paid in full, the fair value of the hedge
is expected to be transferred into earnings.
The following is an analysis of
the net gain (loss) on cash flow hedges included in accumulated other comprehensive income at December 31:
|
|
|
|
2006
|
|
2005
|
Balance
beginning of year
|
|
|
|
$
|
(2,393
|
)
|
|
$
|
(174,242
|
)
|
Net gain for
the year
|
|
|
|
|
24,833
|
|
|
|
171,849
|
|
Balance, end
of year
|
|
|
|
$
|
22,440
|
|
|
$
|
(2,393
|
)
|
NOTE 7 OPERATING LEASES
The Company leases facilities and
certain office equipment under operating leases expiring at various dates through July 2011. Certain leases require the Company to pay specified taxes,
insurance, utilities, repairs and maintenance on the leased items.
Approximate minimum future rental
payments under these operating leases are as follows:
2007
|
|
|
|
$
|
512,809
|
|
2008
|
|
|
|
|
370,664
|
|
2009
|
|
|
|
|
165,875
|
|
2010
|
|
|
|
|
57,480
|
|
2011
|
|
|
|
|
38,320
|
|
|
|
|
|
$
|
1,145,148
|
|
Net rental expense under these
operating leases aggregated $600,667, $579,672 and $579,324 for the years ended December 31, 2006, 2005 and 2004, respectively.
NOTE 8 RELATED PARTY TRANSACTIONS
The Company provides
telecommunication services to a member, which amounted to $4,881,754 or 6.8%, $5,086,303 or 9.0% and $3,780,830 or 9.6% of revenues for the years ended
December 31, 2006, 2005 and 2004, respectively. The accounts receivable balance for this member was $1,200,350 and $1,094,685 as of December 31, 2006
and 2005, respectively. The accounts payable balance for this member was $ and $171,041 as of December 31, 2006 and 2005,
respectively.
The Company has an agreement with
a related party to provide services to unrelated parties using, in part, assets owned by yet another related party. As a result of this agreement, the
Company has recorded deferred revenue of $253,148 and $262,364 from an unrelated party as of December 31, 2006 and 2005, respectively. This deferred
revenue will be earned ratably over twenty years beginning October 2003.
F-50
FIRST COMMUNICATIONS, LLC
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 9 COMMITMENTS AND
CONTINGENCIES
The Company had a commitment to
purchase certain services from another service provider in the telecommunications industry. A commitment agreement that began in March 2001 requires
purchases of $220,000 per month through May 2001, $250,000 per month from June 2001 through March 2004 and $50,000 per month from October 2004 through
September 2006. The commitment is subject to a 50% shortfall penalty for any month in which the minimum is not met. For the years ended December 31,
2006, 2005 and 2004, the Company paid $983,132, $1,646,630 and $2,404,962 under the agreement. Total cumulative payments amounted to $10,922,276 as of
December 31, 2006. This commitment was met during 2006.
During 2003, the Company entered
a commitment to purchase certain services from a service provider in the telecommunications industry. The commitment agreement began in July 2003 and
requires minimum monthly purchases of $500,000 for thirty-six months, for a total of $18,000,000 in purchases. If the Company fails to meet this
commitment, the service provider can assess a shortfall penalty equal to the difference between actual billings and the required commitment or the
service provider can increase the rates it charges. For the years ended December 31, 2006, 2005 and 2004, the Company had paid approximately
$10,317,803, $6,879,776 and $6,585,699 under the commitment agreement. Total cumulative payments amounted to $27,929,278 as of December 31 2006. This
commitment was met during 2006.
During 2004, the Company entered
another commitment to purchase certain services from a service provider in the telecommunications industry. Effective November 2005, the commitment
agreement requires minimum monthly purchases of $50,000 for twenty-four months, for a total of $1,200,000 in purchases. If the Company fails to meet
this commitment, the service provider can assess a shortfall penalty equal to the difference between actual billings and the required commitment. For
the years ended December 31, 2006 and 2005, the Company had paid approximately $747,785 and $85,717, respectively, under the commitment agreement. The
cumulative payments amounted to $833,502 as of December 31, 2006.
Management has estimated that
there are no liabilities for unmet commitments. It is reasonably possible that actual results could differ from this estimate in the near
term.
During 2004, three telephone
companies filed complaints against the Company seeking an order to compel the Company to incorporate a telephone service providers proposed
amendment to their interconnection agreements. As of the date of this report, retroactive liabilities, if any, for rate increases resulting from these
complaints were not determinable.
NOTE 10 MAJOR SUPPLIERS
Purchases from three major
suppliers comprised 53.9%, 17.1%, and 11.7% of the cost of goods sold for the year ended December 31, 2006, 53.0%, 18.7% and 10.5% of the cost of goods
sold for the year ended December 31, 2005, 41.1%, 25.3% and 9.0% of the cost of goods sold for the year ended December 31, 2004,
respectively.
The Company resolved a dispute
during 2005 that resulted in a credit from a major supplier for $1,182,025. The Company began recognizing the credit as a reduction to cost of goods
sold in 2005 over a period of three years which coincided with the term of a renegotiated supplier contract to resell certain of the suppliers
products. During 2006, the Company determined the products could not be resold competitively to the same extent as in previous years based on increased
costs charged by the supplier under the term of the suppliers contract and as such stopped selling them. As of December 31, 2006 the Company
recognized the remaining unrecognized deferred credit of $788,017 as a reduction to cost of goods sold as purchases from the supplier in 2006 were
sufficient to utilize the credit.
NOTE 11 PROFIT SHARING PLAN
The Company has a contributory
401(k) profit-sharing plan covering substantially all employees. Generally, employees must have at least one-half year of service and be twenty-one
years of age to be eligible to participate in the plan. Employees are able to contribute up to 15% of their compensation to the plan. Employer
contributions
F-51
FIRST COMMUNICATIONS, LLC
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
in 2003 were not to exceed
100% of the employees first 3% of compensation plus 50% of the employees next 2% of compensation. In August 2004, the plan was amended and
the employer contributions were not to exceed 100% of the employees first 4% of deferred compensation. Total employer contributions made under
the plan equaled $106,438, $93,056 and $91,648 for the years ended December 31, 2006, 2005 and 2004, respectively.
NOTE 12 SUBSEQUENT EVENTS
On March 6, 2007, the Company
acquired certain other assets of Acceris Management and Acquisition LLC, Choicetel LLC, and New Access Communications LLC (Acceris Management and
Acquisition LLC, Choicetel LLC, and New Access Communications LLC are wholly owned subsidiaries of North Central Equity LLC), long distance and local
telecommunications, data and other communications services providers, through a transaction accounted for as a purchase. The purchase price was
$15,082,100 (cash payment of $14,686,000 plus working capital surplus of $82,100), plus $314,000 to an escrow agent, subject to a net working capital
adjustment within 120 days after closing. The purchase price included all personal property, all customer contracts, customer lists and information
relating to current and former customers, all rights under contracts, and all intellectual property. The Company assumed liabilities that are included
in the computation of the working capital amount. The Company financed this acquisition through a $15,000,000 note payable to a bank with interest only
payments from April 2007 through September 2007, beginning October 2007, monthly principal payments of $416,667, plus interest at the lower of one
month LIBOR plus 175 basis points or the prime rate through September 2010.
During 2006, the Company entered
into a non-binding letter of intent with First Communications, Inc. (FCI), a Delaware Corporation not affiliated with the Company, whereby FCI is
expected to acquire 100% of the Company membership units. The acquisition is conditioned upon FCIs concurrent acquisition of one other
telecommunication company. These transactions are expected to close no later than April 16, 2007, but there is no assurance that such transactions will
close. The Company has employment agreements with certain members of management. These employment agreements provide for incentive compensation to be
paid out of the net proceeds of a sale, in the event of the Company selling 50% or greater ownership interest and achieving certain agreed-upon
thresholds with regards to a selling price.
F-52
FIRST COMMUNICATIONS, LLC
FINANCIAL STATEMENTS AS OF
JULY 1, 2007 AND
FOR THE PERIOD JANUARY 1, 2007 TO JULY 1, 2007
F-53
INDEPENDENT AUDITORS REPORT
To the Audit Committee
First Communications, Inc.
Akron, Ohio
We have audited the balance sheet
of First Communications, LLC (the Company) as of July 1, 2007, and the statements of income, changes in members equity and cash flows
for the period January 1, 2007 to July 1, 2007. These financial statements are the responsibility of the Companys management. Our responsibility
is to express an opinion on these financial statements based on our audit.
We conducted our audit in
accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial
statements referred to above, present fairly, in all material respects, the financial position of First Communications, LLC as of July 1, 2007, and the
results of its operations, and its cash flows for the period January 1, 2007 to July 1, 2007 in conformity with accounting principles generally
accepted in the United States of America.
/s/ BOBER, MARKEY, FEDOROVICH & COMPANY
Akron, Ohio
September 22, 2008
F-54
FIRST COMMUNICATIONS, LLC
BALANCE SHEET
July 1,
2007
|
ASSETS
|
CURRENT
ASSETS
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
|
|
$
|
33,298
|
|
Accounts
receivable trade, less allowance for doubtful accounts of $740,000
|
|
|
|
|
12,381,207
|
|
Accounts
receivable related party
|
|
|
|
|
843,825
|
|
Inventory
|
|
|
|
|
228,194
|
|
Prepaids and
other assets
|
|
|
|
|
989,174
|
|
|
TOTAL CURRENT
ASSETS
|
|
|
|
|
14,475,698
|
|
|
PROPERTY AND
EQUIPMENT
|
|
|
|
|
|
|
Switches
|
|
|
|
|
2,429,691
|
|
Technical
equipment
|
|
|
|
|
5,693,584
|
|
Leasehold
improvements
|
|
|
|
|
152,340
|
|
Office
equipment
|
|
|
|
|
1,244,378
|
|
Furniture and
fixtures
|
|
|
|
|
245,798
|
|
Vehicles
|
|
|
|
|
71,472
|
|
Software
development in progress
|
|
|
|
|
331,239
|
|
|
|
|
|
|
|
10,168,502
|
|
Less:
Accumulated depreciation
|
|
|
|
|
(4,519,422
|
)
|
|
NET PROPERTY
AND EQUIPMENT
|
|
|
|
|
5,649,080
|
|
|
OTHER
ASSETS
|
|
|
|
|
|
|
Goodwill
|
|
|
|
|
13,924,126
|
|
Other
intangibles, net
|
|
|
|
|
15,469,851
|
|
Deposits and
other assets
|
|
|
|
|
3,622,877
|
|
|
|
|
|
|
33,016,854
|
|
|
TOTAL ASSETS
|
|
|
|
$
|
53,141,632
|
|
The accompanying notes are an integral part of these
financial statements.
F-55
FIRST COMMUNICATIONS, LLC
BALANCE SHEET
July 1,
2007
LIABILITIES AND MEMBERS EQUITY
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
Line of
credit
|
|
|
|
$
|
4,003,038
|
|
Debt
|
|
|
|
|
25,194,281
|
|
Accounts
payable trade
|
|
|
|
|
6,725,378
|
|
Accrued
expenses
|
|
|
|
|
2,516,600
|
|
Deferred
revenue current
|
|
|
|
|
3,068,334
|
|
|
TOTAL CURRENT
LIABILITIES
|
|
|
|
|
41,507,631
|
|
|
NON-CURRENT
LIABILITIES
|
|
|
|
|
|
|
Deferred
revenue long term
|
|
|
|
|
185,266
|
|
|
TOTAL
NON-CURRENT LIABILITIES
|
|
|
|
|
185,266
|
|
|
TOTAL
LIABILITIES
|
|
|
|
|
41,692,897
|
|
|
MEMBERS
EQUITY
|
|
|
|
|
|
|
Member units,
1,000 units outstanding
|
|
|
|
|
8,881,672
|
|
Accumulated
income
|
|
|
|
|
2,553,454
|
|
Accumulated
other comprehensive gain
|
|
|
|
|
13,609
|
|
|
|
|
|
|
11,448,735
|
|
|
TOTAL
LIABILITIES AND MEMBERS EQUITY
|
|
|
|
$
|
53,141,632
|
|
The accompanying notes are an integral part of these
financial statements.
F-56
FIRST COMMUNICATIONS, LLC
STATEMENT OF INCOME
For
the Period January 1, 2007 to July 1, 2007
REVENUES,
NET
|
|
|
|
|
|
|
Revenues, net
|
|
|
|
$
|
48,153,990
|
|
Revenues, net
related party
|
|
|
|
|
3,275,214
|
|
|
TOTAL
REVENUES, NET
|
|
|
|
|
51,429,204
|
|
|
COST OF
FACILITIES, exclusive of
depreciation and amortization shown below
|
|
|
|
|
33,797,971
|
|
|
DEPRECIATION
AND AMORTIZATION
|
|
|
|
|
2,268,510
|
|
|
SELLING,
GENERAL AND ADMINISTRATIVE EXPENSES
|
|
|
|
|
12,327,950
|
|
|
INCOME FROM
OPERATIONS
|
|
|
|
|
3,034,773
|
|
|
OTHER EXPENSE
(INCOME)
|
|
|
|
|
|
|
Interest
expense
|
|
|
|
|
725,419
|
|
Miscellaneous
income
|
|
|
|
|
(275,198
|
)
|
|
TOTAL OTHER
EXPENSE (INCOME)
|
|
|
|
|
450,221
|
|
|
NET INCOME
|
|
|
|
$
|
2,584,552
|
|
The accompanying notes are an integral part of these
financial statements.
F-57
FIRST COMMUNICATIONS, LLC
STATEMENT OF CHANGES IN
MEMBERS EQUITY
For the Period January 1, 2007 to July 1, 2007
|
|
|
|
Member Units
|
|
Accumulated
Income
|
|
Accumulated
Other
Comprehensive
Gain (Loss)
|
|
Total
Members
Equity
|
|
Comprehensive
Income
|
|
Beginning
balance,
January 1, 2007
|
|
|
|
|
1,000
|
|
|
$
|
8,881,672
|
|
|
$
|
(31,098
|
)
|
|
$
|
22,440
|
|
|
$
|
8,873,014
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
2,584,552
|
|
|
|
|
|
|
|
2,584,552
|
|
|
$
|
2,584,552
|
|
|
Net loss on
cash flow hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,831
|
)
|
|
|
(8,831
|
)
|
|
|
(8,831
|
)
|
|
Ending
balance,
July 1, 2007
|
|
|
|
|
1,000
|
|
|
$
|
8,881,672
|
|
|
$
|
2,553,454
|
|
|
$
|
13,609
|
|
|
$
|
11,448,735
|
|
|
$
|
2,575,721
|
|
The accompanying notes are an integral part of these
financial statements.
F-58
FIRST COMMUNICATIONS, LLC
STATEMENT OF CASH FLOWS
For the Period January 1, 2007 to July 1, 2007
CASH FLOWS
FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
Net income
|
|
|
|
$
|
2,584,552
|
|
Adjustments
to reconcile net income to net cash used in operating activities:
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
|
|
2,268,510
|
|
Changes in
operating assets and liabilities, net of effect of acquisition:
|
|
|
|
|
|
|
Accounts
receivable trade, net
|
|
|
|
|
1,693,664
|
|
Prepaid
expenses
|
|
|
|
|
(14,674
|
)
|
Inventory
|
|
|
|
|
11,918
|
|
Deposits and
other assets
|
|
|
|
|
(1,341,435
|
)
|
Accounts
payable trade
|
|
|
|
|
(2,956,049
|
)
|
Accrued
expenses
|
|
|
|
|
(1,009,969
|
)
|
Deferred
revenue
|
|
|
|
|
1,092,112
|
|
|
NET CASH USED
IN OPERATING ACTIVITIES
|
|
|
|
|
2,328,629
|
|
|
CASH FLOWS
FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
Purchases of
property and equipment
|
|
|
|
|
(754,334
|
)
|
Acquisition
of assets and assumption of liabilities
|
|
|
|
|
(16,456,119
|
)
|
Net change in
accounts receivable related party
|
|
|
|
|
356,525
|
|
|
NET CASH USED
IN INVESTING ACTIVITIES
|
|
|
|
|
(16,853,928
|
)
|
|
CASH FLOWS
FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
Net
borrowings on line of credit
|
|
|
|
|
81,038
|
|
Proceeds from
issuance of debt
|
|
|
|
|
15,000,000
|
|
Payments on
debt
|
|
|
|
|
(9,291
|
)
|
Payments of
transaction costs related to sale of Company
|
|
|
|
|
(2,959,354
|
)
|
Bank
overdraft liability
|
|
|
|
|
1,943,952
|
|
|
NET CASH
PROVIDED BY FINANCING ACTIVITIES
|
|
|
|
|
14,056,345
|
|
|
NET DECREASE
IN CASH AND CASH EQUIVALENTS
|
|
|
|
|
(468,954
|
)
|
|
CASH AND CASH
EQUIVALENTS, BEGINNING OF PERIOD
|
|
|
|
|
502,252
|
|
|
CASH AND CASH
EQUIVALENTS, END OF PERIOD
|
|
|
|
$
|
33,298
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
Interest paid
|
|
|
|
$
|
466,706
|
|
|
SUPPLEMENTARY
DISCLOSURES OF NONCASH ACTIVITIES:
|
|
|
|
|
|
|
Fair market
value adjustment for derivatives
|
|
|
|
|
|
|
Accrued
liabilities other
|
|
|
|
$
|
(8,831
|
)
|
Accumulated
comprehensive loss
|
|
|
|
$
|
8,831
|
|
The accompanying notes are an integral part of these
financial statements.
F-59
FIRST COMMUNICATIONS, LLC
NOTES TO FINANCIAL
STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Nature of Operations
First Communications, LLC (the
Company), is a limited liability company that provides local and long-distance telephone and other telecommunications related services to
commercial and residential customers throughout the United States.
Cash and Cash Equivalents
The Company considers all
short-term securities purchased with an original maturity of three months or less to be cash equivalents.
Accounts Receivable
The Company makes sales on credit
to customers in the ordinary course of business and carries its accounts receivable at cost less allowance for doubtful accounts. On a periodic basis,
the Company evaluates its accounts receivable and establishes an allowance for doubtful accounts based on its history of past write-offs, collections
and current credit conditions. Accounts are written off when the Company determines that the accounts are uncollectible.
Inventory
Inventory consists of cellular
telephones and is valued using the lower of cost or market.
Property and Equipment
Property and equipment are stated
at cost less accumulated depreciation. Major additions and improvements are charged to the property accounts while replacements, maintenance and
repairs, which do not improve or extend the life of the assets, are expensed currently. When property is retired or otherwise disposed of, the cost of
the property is removed from the asset accounts, accumulated depreciation is charged with an amount equivalent to the depreciation provided, and
associated gain or loss recorded in cost of facilities in the Statement of Income.
Software included in property and
equipment includes amounts paid for purchased software and implementation services and direct internal payroll for software used internally that has
been capitalized in accordance with the Statement of Position (SOP) 98-1,
Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use.
Accordingly, internal and external costs incurred during the preliminary project stage are expensed as incurred. Qualifying
costs incurred during the application development stage are capitalized. The application development stage is characterized by software design and
configuration activities, coding, testing and installation. Training costs and maintenance are expensed as incurred, while upgrades and enhancements
are capitalized if it is probable that such expenditures will result in additional functionality. Once the project is substantially complete and ready
for its intended use, capitalized costs are amortized on a straight-line basis over the technologys estimated useful life.
Depreciation is computed using
the straight-line method over the assets estimated useful lives, which are as follows:
|
|
|
|
Years
|
Switches
|
|
|
|
|
510
|
|
Technical
equipment and software
|
|
|
|
|
310
|
|
Leasehold
improvements
|
|
|
|
|
35
|
|
Office
furniture, fixtures and equipment
|
|
|
|
|
310
|
|
Vehicles
|
|
|
|
|
5
|
|
F-60
FIRST COMMUNICATIONS, LLC
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
Depreciation expense for the
period January 1 to July 1, 2007 amounted to $924,823.
Goodwill and Other Intangible Assets
Goodwill represents the excess of
the cost of an acquired entity over the net fair value of assets acquired and liabilities assumed. The Company accounts for its goodwill in accordance
with Statement of Financial Accounting Standard (SFAS) No. 142 Goodwill and Other Intangible Asset. Under this pronouncement,
goodwill is not amortizable, but requires the Company to test goodwill for impairment annually. Impairments, if any, will be expensed in the year
incurred. As of July 1, 2007, there was no impairment to goodwill.
Other intangible assets primarily
consist of trademarks and customer lists. The useful lives of trademarks were determined to be indefinite and, therefore, these assets are not being
amortized and have been tested for impairment. There was no impairment of trademarks at July 1, 2007. Customer lists are being amortized on a
straight-line basis over their estimated economic lives ranging from 5 to 7 years.
The straight-line method of
amortization reflects an appropriate allocation of the cost of the intangible assets to earnings in proportion to the amount of economic benefits
obtained by the Company in each reporting period.
Income Taxes
The Company has elected to be
taxed as a partnership and, accordingly, the Company is not a taxpaying entity for Federal or state income tax purposes. Consequently, Federal and
state income taxes are not payable by, or provided for, the Company. Rather, such taxes are the responsibility of the members.
Accounts Payable
The Company performs periodic
bill verification procedures to identify errors in vendors billing processes. The bill verification procedures include the examination of bills,
comparing billed rates with contracted rates, evaluating the trends of invoices amounts by vendors, and reviewing the types of charges being assessed.
If the Company concludes that it has been billed inaccurately, it will dispute the charge with the vendor and begin resolution procedures. Disputes of
this nature occur in the ordinary course of business within the telecommunications industry. As of July 1, 2007, the offset to accounts payable
as a result of the unresolved disputes was $4,174,741. Also, included in accounts payable in the Balance Sheet is a liability for outstanding checks of
$1,943,952.
Sales Taxes
The Company collects sales taxes
from customers and remits these amounts to applicable taxing authorities. The Companys accounting policy is to exclude these taxes from revenues
and cost of sales.
Revenue Recognition
The Company records as revenue
the amount of communications services rendered. Revenue is recognized as service is provided to customers, who are billed monthly. Provisions for
discounts and credits are recorded as revenue is recognized. Unbilled receivables (see Note 2) represent revenues earned for communications services
rendered but not yet billed.
Asset Retirement Obligations
The Company has asset retirement
obligations associated with its contractual tower leases for cell sites. The Company records its asset retirement obligations in accordance with SFAS
No. 143, Accounting for Asset Retirement Obligations and FIN 47, Accounting for Conditional Asset Retirement Obligations, an
interpretation of SFAS No. 143. In accordance with the provisions of SFAS No. 143, the Company recognizes a retirement
F-61
FIRST COMMUNICATIONS, LLC
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
obligation (future cost of
removal) pertaining to its long-lived assets when a legal obligation exists to remove long-lived assets at some point in the future. As of July 1,
2007, such obligations have been immaterial.
Advertising
The Company expenses all
advertising costs when the advertising first takes place. Advertising expenses for the period January 1 to July 1, 2007 amounted to
$63,916.
Concentration of Credit Risk
Financial instruments that
potentially subject the Company to concentration of credit risk consist primarily of accounts receivable and cash depository accounts. The Company
grants credit and perform ongoing credit evaluations of its customers, and generally does not require collateral. The Company maintains all of its cash
in accounts at high credit quality financial institutions. The Federal Deposit Insurance Corporation (FDIC) insures these cash accounts up
to $100,000. The Company periodically assessed the financial conditions of the commercial banks and believes the risk of loss is
minimal.
Accounting Estimates
The preparation of financial
statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those
estimates.
NOTE 2 ACQUISITION
On March 6, 2007, the Company
entered into an agreement to acquire certain other assets of Acceris Management and Acquisition LLC, Choicetel LLC, and New Access Communications LLC
(wholly owned subsidiaries of North Central Equity LLC), long distance and local telecommunications, data and other communications services providers,
through a transaction accounted for as a purchase. The purchase price was $16,456,119, including a working capital adjustment of $88,452. The purchase
price includes all personal property, all customer contracts, customer lists and information relating to current and former customers, all rights under
contracts, and all intellectual property. The Company assumes liabilities that are included in the computation of the working capital liability amount.
The Company is financing this acquisition through a bank obligation. The purchase price allocation to the assets acquired and liabilities assumed are
based on their fair values on the date of acquisition and are as follows:
Assets
Acquired:
|
|
|
|
|
|
|
Accounts
receivable trade, net
|
|
|
|
$
|
4,765,551
|
|
Property and
equipment
|
|
|
|
|
48,000
|
|
Other
intangibles, net
|
|
|
|
|
12,700,000
|
|
Goodwill
|
|
|
|
|
3,308,119
|
|
Deposits and
other assets
|
|
|
|
|
902,771
|
|
Total assets
acquired
|
|
|
|
|
21,724,441
|
|
Liabilities
Assumed:
|
|
|
|
|
|
|
Accounts
payable trade
|
|
|
|
|
2,963,591
|
|
Accrued
expenses
|
|
|
|
|
1,955,254
|
|
Deferred
revenues
|
|
|
|
|
349,477
|
|
Total
liabilities assumed
|
|
|
|
|
5,268,322
|
|
Net assets
acquired
|
|
|
|
$
|
16,456,119
|
|
F-62
FIRST COMMUNICATIONS, LLC
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
The following unaudited pro forma
results of operations assume that the above acquisitions had been completed as of January 1, 2007:
|
|
|
|
(Unaudited)
Pro forma
|
Revenue
|
Revenues, net
|
|
|
|
$
|
55,304,287
|
|
Revenues, net
related party
|
|
|
|
|
3,275,214
|
|
Total
revenue, net
|
|
|
|
|
58,579,501
|
|
Cost of
facilities
|
|
|
|
|
38,308,074
|
|
Depreciation
and amortization
|
|
|
|
|
2,456,903
|
|
Selling,
general and administrative expenses
|
|
|
|
|
14,227,968
|
|
Income from
operations
|
|
|
|
|
3,586,556
|
|
Other expense
|
|
|
|
|
(535,086
|
)
|
Net Income
|
|
|
|
$
|
3,051,470
|
|
The unaudited pro forma
information presents the combined operating results of Acceris Management and Acquisition LLC, Choicetel LLC, and New Access Communications LLC, with
the results prior to the acquisition date adjusted to include the pro forma impact of: the adjustment of amortization of intangible assets and
depreciation of fixed assets based on purchase price allocation; the adjustment of interest expense reflecting the acquired debt of $15 million issued
in April 2007 at the Companys stated borrowing interest rate; and the elimination of loss on the disposal of fixed assets.
NOTE 3 ACCOUNTS RECEIVABLE
TRADE
Trade accounts receivable are
comprised of billed receivables and unbilled receivables. At July 1, 2007 billed receivables amounted to $12,913,313 and unbilled receivables amounted
to $1,051,719. Trade accounts receivable are offset by an allowance for doubtful accounts of $740,000 at July 1, 2007.
NOTE 4 OTHER INTANGIBLES
The following is a summary of
other intangible assets at July 1, 2007:
|
|
|
|
Other
Intangible
Assets
|
|
Accumulated
Amortization
|
|
Net
|
Trademarks
|
|
|
|
$
|
10,500
|
|
|
$
|
|
|
|
$
|
10,500
|
|
Other assets
|
|
|
|
|
2,238,715
|
|
|
|
306,689
|
|
|
|
1,932,026
|
|
Customer
lists
|
|
|
|
|
15,130,816
|
|
|
|
1,603,491
|
|
|
|
13,527,325
|
|
|
|
|
|
$
|
17,380,031
|
|
|
$
|
1,910,180
|
|
|
$
|
15,469,851
|
|
Total amortization expense
related to other intangible assets for the period January 1 to July 1, 2007 was $1,343,687.
F-63
FIRST COMMUNICATIONS, LLC
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
As of July 1, 2007, future
estimated amortization expense related to amortizable other identifiable intangible assets will be:
2007
|
|
|
|
$
|
1,761,811
|
|
2008
|
|
|
|
$
|
3,511,121
|
|
2009
|
|
|
|
$
|
3,481,956
|
|
2010
|
|
|
|
$
|
3,286,607
|
|
2011
|
|
|
|
$
|
2,867,096
|
|
2012
|
|
|
|
$
|
550,760
|
|
NOTE 5 DEBT
Debt consists of the following at
July 1, 2007:
Note payable to
a bank, monthly interest payments at 6.26%, principal payment in one installment on December 24, 2007, secured by all assets of the Company and a
guaranty from a member. In conjunction with sale of Company this note was paid in full on July 2, 2007, see Note 13.
|
|
|
|
$
|
5,000,000
|
|
|
Note payable to
a bank, monthly principal payments of $55,555, plus interest at one month LIBOR plus 150 basis (6.82% at July 1, 2007) commencing February, 2007
through January, 2010, secured by all assets of the Company. In conjunction with sale of Company this note was paid in full on July 2, 2007, see Note
13.
|
|
|
|
|
2,269,281
|
|
|
Note payable to
a bank, monthly principal payments of $416,667 commencing October, 2007 through September, 2010, plus interest at one month LIBOR plus 175 basis (7.07%
at July 1, 2007), payments of interest only from April through September 2007, secured by all assets of the Company. In conjunction with sale of
Company this note was paid in full on July 2, 2007, see Note 13.
|
|
|
|
|
15,000,000
|
|
|
Note payable to
a bank, monthly principal payments of $46,429, plus interest at the lower of one month LIBOR plus 175 basis (7.07% July 1, 2007) or prime, (8.25% July
1, 2007) through September, 2012, secured by all assets of the Company. In conjunction with sale of Company this note was paid in full on July 2, 2007,
see Note 13.
|
|
|
|
|
2,925,000
|
|
|
|
|
|
$
|
25,194,281
|
|
The Company has a $6,000,000
demand line of credit with a bank, with interest at one month LIBOR plus 150 basis (6.82% at July 1, 2007). The outstanding balance in the line of
credit at July 1, 2007 was $4,003,038. In conjunction with sale of the Company this line of credit was paid in full on July 2, 2007, see Note
13.
NOTE 6 DERIVATIVE INSTRUMENTS
The Company holds a derivative
financial instrument for the purpose of hedging the risks associated with interest rate fluctuations on its Commercial Note. The derivative instrument
is accounted for in accordance with SFAS No. 133
Accounting for Derivative Instruments and Hedging Activities, as amended by FASB 138
Accounting for Certain Derivative Instruments and Certain Hedging Activities
. These regulations require the Company to recognize all derivatives on
the balance sheet at fair value and establish criteria for the designation and effectiveness of hedging relationships.
The interest rate swap agreement
qualifies as a cash flow hedge. The fair value of the interest rate swap agreement of $13,609 as of July 1, 2007, is recorded in the accrued
expenses line of the financial statements. The effective and ineffective portion of any gain or loss must be determined and are treated
differently for financial
F-64
FIRST COMMUNICATIONS, LLC
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
statement purposes. A gain or
loss on the effective portion of the derivative instrument must be reported as a component of accumulated comprehensive income and reclassified into
earnings in the period or periods during which the hedged transaction affects earnings. The gain or loss related to an ineffective portion is
recognized in current earnings during the period of change.
At July 1, 2007, the Company had
unrecognized loss of $13,609 from cash flow hedges. All hedging activity was effective, and the loss has been included in accumulated other
comprehensive income. On the date the note is paid in full, the fair value of the hedge is expected to be transferred into earnings.
The following is an analysis of
the net gain (loss) on cash flow hedges included in accumulated other comprehensive income at July 1:
Balance
beginning of period
|
|
|
|
$
|
22,440
|
|
Net loss for
the period
|
|
|
|
|
(8,831
|
)
|
Balance, end
of period
|
|
|
|
$
|
13,609
|
|
NOTE 7 OPERATING LEASES
The Company leases facilities and
certain office equipment under operating leases expiring at various dates through July 2011. Certain leases require the Company to pay specified taxes,
insurance, utilities, repairs and maintenance on the leased items.
Approximate minimum future rental
payments under these operating leases are as follows:
2007
|
|
|
|
$
|
484,081
|
|
2008
|
|
|
|
|
871,053
|
|
2009
|
|
|
|
|
870,302
|
|
2010
|
|
|
|
|
467,153
|
|
2011
|
|
|
|
|
116,533
|
|
|
|
|
|
$
|
2,809,122
|
|
|
|
|
|
|
|
|
Net rental expense under these
operating leases aggregated $631,796 for the period January 1 to July 1, 2007.
NOTE 8 RELATED PARTY TRANSACTIONS
The Company provides
telecommunication services to a member, which amounted to $3,275,214 or 6.5% of revenues for the period January 1 to July 1, 2007. The accounts
receivable balance for this member was $843,825 as of July 1, 2007.
The Company has an agreement with
a related party to provide services to unrelated parties using, in part, assets owned by yet another related party. As a result of this agreement, the
Company has recorded deferred revenue of $231,412 from an unrelated party as of July 1, 2007. This deferred revenue is earned ratably over twenty years
beginning October 2003.
NOTE 9 CONTINGENCIES
The Company is subject to various
claims and legal proceedings covering a range of matters that arise in the ordinary course of its business activities. Management believes that any
liability that may ultimately result from the resolutions of these matters will not have a material effect on the Companys financial position,
results of operations or cash flows.
F-65
FIRST COMMUNICATIONS, LLC
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 10 MAJOR CARRIERS
The Company has agreements with
various carriers to permit the Companys customers to use their networks. If these carriers decide not to continue those agreements due to a
change in ownership or other circumstances, this could cause a loss of service in certain areas and possible loss of customers.
The Company purchases network
access from three major carriers comprised 65.4% (35.1%, 19.4%, and 10.8%) of cost of facilities for the period January 1 to July 1,
2007.
NOTE 11 PROFIT SHARING PLAN
The Company has a contributory
401(k) profit-sharing plan covering substantially all employees. Generally, employees must have at least one-half year of service and be twenty-one
years of age to be eligible to participate in the plan. Employees are able to contribute up to 15% of their compensation to the plan with employer
matching contributions of up to 4% of employee compensation. Total employer contributions made under the plan equaled $56,800 for period January 1 to
July 1, 2007.
NOTE 12 ACCOUNTING CHANGES
During 2007, the Company detected
an error on the calculations of its deferred revenues. Revenues associated with certain commercial non-local telephone lines had not been deferred due
to an error in the coding within the Companys billing system. The error occurred as a result of certain system codes not having been included in
the initial calculations of deferred revenue. The Company subsequently corrected the coding error and began deferring revenues consistent with the
terms of the contracts with each commercial customer in accordance with U.S. generally accepted accounting principles consistently applied. Also, on
January 1, 2007, the Company changed its method of accounting for customer installation costs in order to conform to industry standards. These customer
installation costs, which were previously expensed when incurred, are now amortized on a straight-line basis over the estimated average customer
lifecycle. The Company believes that capitalizing these costs results in a closer matching of costs and revenues. The impacts of the above accounting
changes on the financial statements are as follows:
STATEMENT OF INCOME
For the Period of January 1, 2007
to July 1, 2007
|
|
|
|
As Computed
Under Old
Method
|
|
As Reported
Under New
Method
|
|
Effect
of Change
|
Cost of
Facilities
|
|
|
|
$
|
34,220,701
|
|
|
$
|
33,797,971
|
|
|
$
|
(422,730
|
)
|
Depreciation
and Amortization
|
|
|
|
|
1,961,821
|
|
|
|
2,268,510
|
|
|
|
306,689
|
|
Income from
Operations
|
|
|
|
|
2,918,732
|
|
|
|
3,034,773
|
|
|
|
116,041
|
|
Net Income
|
|
|
|
|
2,468,511
|
|
|
|
2,584,552
|
|
|
|
116,041
|
|
BALANCE SHEET
July 1, 2007
|
|
|
|
As Computed
Under Old
Method
|
|
As Reported
Under New
Method
|
|
Effect
of Change
|
Other Assets
|
|
|
|
$
|
31,084,828
|
|
|
$
|
33,016,854
|
|
|
$
|
1,932,026
|
|
Current
Liabilities
|
|
|
|
|
41,507,631
|
|
|
|
43,439,657
|
|
|
|
1,932,026
|
|
Members
Equity
|
|
|
|
|
11,332,694
|
|
|
|
11,448,735
|
|
|
|
116,041
|
|
F-66
FIRST COMMUNICATIONS, LLC
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
BALANCE SHEET
January 1, 2007
|
|
|
|
As Computed
Under Old
Method
|
|
As Reported
Under New
Method
|
|
Effect
of Change
|
Other Assets
|
|
|
|
$
|
14,026,862
|
|
|
$
|
15,842,847
|
|
|
$
|
1,815,985
|
|
Current
Liabilities
|
|
|
|
|
4,231,017
|
|
|
|
6,047,002
|
|
|
|
1,815,985
|
|
Members
Equity
|
|
|
|
|
8,873,016
|
|
|
|
8,873,016
|
|
|
|
|
|
NOTE 13 SUBSEQUENT EVENT
On July 2, 2007, First
Communications, Inc. acquired all of the issued and outstanding membership units of the Company for $59.2 million in cash which included $29.5 million
for the repayment of its debt and the issuance of 13,176,000 shares of common stock having a value, based on the $5 per share IPO price, of
approximately $65.9 million.
F-67
XTENSION SERVICES, INC.
FINANCIAL STATEMENTS AS OF
DECEMBER 31, 2006, 2005 AND 2004 AND
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
F-68
Independent Auditors Report
Board of Directors
Xtension Services, Inc.
Tampa,
Florida
We have audited the accompanying
balance sheet of Xtension Services, Inc. (the Company) as of December 31, 2006, 2005 and 2004 and the related statements of income, retained earnings
and cash flows for the years then ended. These financial statements are the responsibility of the Companys management. Our responsibility is to
express an opinion on these 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 audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal
control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial
statements referred to above present fairly, in all material respects, the financial position of Xtension Services, Inc. as of December 31, 2006, 2005
and 2004, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in
the United States of America.
St. Louis, Missouri
March 28, 2007
F-69
BALANCE SHEET
Assets
|
|
|
|
December 31,
|
|
|
|
|
|
2006
|
|
2005
|
|
2004
|
Current
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
|
|
$
|
2,283,597
|
|
|
$
|
1,172,484
|
|
|
$
|
773,643
|
|
Accounts
receivable net of allowance for doubtful accounts of $90,354, $25,865, and $40,070 in 2006, 2005 and 2004, respectively (Note 5)
|
|
|
|
|
2,063,257
|
|
|
|
1,933,443
|
|
|
|
1,352,519
|
|
Other assets
|
|
|
|
|
73,596
|
|
|
|
4,889
|
|
|
|
|
|
Total
Current Assets
|
|
|
|
|
4,420,450
|
|
|
|
3,110,816
|
|
|
|
2,126,162
|
|
|
Property
And Equipment (Note 2)
|
|
|
|
|
39,183
|
|
|
|
63,614
|
|
|
|
79,855
|
|
|
|
|
|
|
$
|
4,459,633
|
|
|
$
|
3,174,430
|
|
|
$
|
2,206,017
|
|
|
Liabilities And Stockholders Equity
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable (Note 4)
|
|
|
|
$
|
1,973,946
|
|
|
$
|
1,718,668
|
|
|
$
|
1,212,898
|
|
Accrued
expenses
|
|
|
|
|
1,312,635
|
|
|
|
264,616
|
|
|
|
415,145
|
|
Customer
deposits
|
|
|
|
|
324,736
|
|
|
|
159,771
|
|
|
|
156,104
|
|
Total
Current Liabilities
|
|
|
|
|
3,611,317
|
|
|
|
2,143,055
|
|
|
|
1,784,147
|
|
|
Commitments And Contingencies (Note 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
(1,500 shares, no par value, authorized, 1,000 shares issued and outstanding)
|
|
|
|
|
1,000
|
|
|
|
1,000
|
|
|
|
1,000
|
|
Retained
earnings
|
|
|
|
|
847,316
|
|
|
|
1,030,375
|
|
|
|
420,870
|
|
Total
Stockholders Equity
|
|
|
|
|
848,316
|
|
|
|
1,031,375
|
|
|
|
421,870
|
|
|
|
|
|
|
$
|
4,459,633
|
|
|
$
|
3,174,430
|
|
|
$
|
2,206,017
|
|
F-70
STATEMENTS OF INCOME AND RETAINED
EARNINGS
Statement Of Income
|
|
|
|
For The Years Ended December 31,
|
|
|
|
|
|
2006
|
|
2005
|
|
2004
|
Net
Revenue (Note 5)
|
|
|
|
$
|
34,382,017
|
|
|
$
|
19,305,038
|
|
|
$
|
15,662,835
|
|
|
Cost Of
Revenue (Note 4)
|
|
|
|
|
24,210,619
|
|
|
|
13,787,860
|
|
|
|
9,638,083
|
|
Gross
Profit
|
|
|
|
|
10,171,398
|
|
|
|
5,517,178
|
|
|
|
6,024,752
|
|
|
Operating
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative
|
|
|
|
|
5,082,863
|
|
|
|
3,347,615
|
|
|
|
3,270,810
|
|
Depreciation
|
|
|
|
|
29,823
|
|
|
|
31,727
|
|
|
|
28,809
|
|
Total
Operating Expenses
|
|
|
|
|
5,112,686
|
|
|
|
3,379,342
|
|
|
|
3,299,619
|
|
|
Income
From Operations
|
|
|
|
|
5,058,712
|
|
|
|
2,137,836
|
|
|
|
2,725,133
|
|
|
Other Income
|
Interest
income
|
|
|
|
|
208,229
|
|
|
|
61,669
|
|
|
|
104,677
|
|
|
Net Income
|
|
|
|
$
|
5,266,941
|
|
|
$
|
2,199,505
|
|
|
$
|
2,829,810
|
|
|
Statement Of Retained Earnings
|
|
Retained
Earnings Beginning Of Year
|
|
|
|
$
|
1,030,375
|
|
|
$
|
420,870
|
|
|
$
|
811,063
|
|
|
Net
Income
|
|
|
|
|
5,266,941
|
|
|
|
2,199,505
|
|
|
|
2,829,810
|
|
|
Distributions
|
|
|
|
|
(5,450,000
|
)
|
|
|
(1,590,000
|
)
|
|
|
(3,220,003
|
)
|
|
Retained
Earnings End Of Year
|
|
|
|
$
|
847,316
|
|
|
$
|
1,030,375
|
|
|
$
|
420,870
|
|
F-71
STATEMENT OF CASH FLOWS
|
|
|
|
For The Years Ended December 31,
|
|
|
|
|
|
2006
|
|
2005
|
|
2004
|
Cash Flows From Operating Activities
|
Net income
|
|
|
|
$
|
5,266,941
|
|
|
$
|
2,199,505
|
|
|
$
|
2,829,810
|
|
Adjustments
to reconcile net income to net cash provided by operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
|
|
29,823
|
|
|
|
31,727
|
|
|
|
28,809
|
|
Change in
assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Increase)
decrease in accounts receivable
|
|
|
|
|
(129,814
|
)
|
|
|
(580,924
|
)
|
|
|
427,925
|
|
(Increase)
decrease in other assets
|
|
|
|
|
(68,707
|
)
|
|
|
(4,889
|
)
|
|
|
377
|
|
Increase in
accounts payable
|
|
|
|
|
255,278
|
|
|
|
505,770
|
|
|
|
232,601
|
|
Increase
(decrease) in accrued expenses
|
|
|
|
|
1,048,019
|
|
|
|
(150,529
|
)
|
|
|
(131,864
|
)
|
Increase
(decrease) in customer deposits
|
|
|
|
|
164,965
|
|
|
|
3,667
|
|
|
|
(13,592
|
)
|
Net Cash
Provided By Operating Activities
|
|
|
|
|
6,566,505
|
|
|
|
2,004,327
|
|
|
|
3,374,066
|
|
|
Net Cash Used In Investing Activities
|
Purchases of
equipment
|
|
|
|
|
(5,392
|
)
|
|
|
(15,486
|
)
|
|
|
(19,689
|
)
|
|
Net Cash
Used In Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
distributions to stockholders
|
|
|
|
|
(5,450,000
|
)
|
|
|
(1,590,000
|
)
|
|
|
(3,220,003
|
)
|
|
Net
Increase In Cash And Cash Equivalents
|
|
|
|
|
1,111,113
|
|
|
|
398,841
|
|
|
|
134,374
|
|
|
Cash And
Cash Equivalents Beginning Of Year
|
|
|
|
|
1,172,484
|
|
|
|
773,643
|
|
|
|
639,269
|
|
|
Cash And
Cash Equivalents End Of Year
|
|
|
|
$
|
2,283,597
|
|
|
$
|
1,172,484
|
|
|
$
|
773,643
|
|
F-72
XTENSION SERVICES, INC.
NOTES TO FINANCIAL
STATEMENTS
1.
|
|
Summary Of Accounting Policies
|
Organization
Xtension Services, Inc. (the
Company) is a Delaware corporation incorporated March 1, 2000. The Company is a full service, nationwide reseller of comprehensive voice, internet and
data communication services.
Revenue Recognition
The Company records as revenue
the amount of communications services rendered. Revenue is recognized as service is provided to customers.
Use Of Estimates
The preparation of the
Companys financial statements in conformity with accounting principles generally accepted in the United States of America requires the
Companys management to make estimates and assumptions that affect the amounts reported in these financial statements and accompanying notes.
Actual results could differ from those estimates.
Financial Instruments And Credit Risk
Concentration
Financial instruments, which
potentially subject the Company to concentrations of credit risk, consist primarily of accounts receivable. Concentrations of credit risk with respect
to receivables are limited due to generally short payment terms.
Not all customers are required to
post deposits. The Company requires customers to provide a cash deposit to secure payment for services provided under the telecommunications services
agreement between the customer and the Company. Upon termination of the telecommunications services agreement, the deposit or any unused portion of the
deposit, is returned to the customer.
The Companys customers are
located throughout the United States.
Cash And Cash Equivalents
For purposes of the statement of
cash flows, the Company considers cash and all highly liquid investments purchased with an original maturity of three months or less to be cash
equivalents. The Federal Deposit Insurance Corporation (FDIC) guarantees balances up to $100,000 per bank. The Company had cash with various
institutions in excess of this amount throughout the year.
Accounts Receivable
Accounts receivable are stated at
the amount management expects to collect from outstanding balances. Management provides for probable uncollectible amounts through a charge to earnings
and a credit to the allowance for doubtful accounts 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 allowance for doubtful accounts and a
credit to accounts receivable.
Property And Equipment
Property and equipment are
recorded at cost and depreciated over the estimated useful life of the asset (ranging from three to five years) using the straight-line
method.
F-73
XTENSION SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
Income Taxes
The Company is an electing S
Corporation; accordingly, liability for income taxes is the obligation of the individual stockholders.
2.
|
|
Property And Equipment
|
Major classes of property and
equipment at December 31 consists of the following:
|
|
|
|
2006
|
|
2005
|
|
2004
|
Software
|
|
|
|
$
|
44,872
|
|
|
$
|
44,872
|
|
|
$
|
44,872
|
|
Office
equipment
|
|
|
|
|
98,409
|
|
|
|
93,017
|
|
|
|
77,531
|
|
|
|
|
|
|
143,281
|
|
|
|
137,889
|
|
|
|
122,403
|
|
Less:
Accumulated depreciation
|
|
|
|
|
104,098
|
|
|
|
74,275
|
|
|
|
42,548
|
|
|
Net property
and equipment
|
|
|
|
$
|
39,183
|
|
|
$
|
63,614
|
|
|
$
|
79,855
|
|
Depreciation expense for the
years ended December 31, 2006, 2005 and 2004 amounted to $29,823, $31,727, and $28,809, respectively.
During April 2006, the Company
entered into a three-year, $36,000,000 agreement with its major provider. The agreement requires the Company to purchase $12,000,000, $24,000,000 and
$36,000,000 of telecommunication services, cumulatively, by April 30, 2007, 2008 and 2009, respectively. The provider can terminate the contract and
cease providing services if the Company fails to meet the purchase commitments. At December 31, 2006, the Company had fulfilled $10,700,000 of its
commitment under the agreement.
The Company entered into a
carrier services agreement with a telecommunications services provider in February 2002. The agreement provides for automatic monthly renewals beyond
the expiration of the initial terms in February 2004. The agreement can be terminated by either party, upon providing 90-days notice. There are no
minimum purchase requirements and the Company has provided the provider with a security interest in the Companys contract rights, accounts
receivable and general intangibles.
In August 2004, the Company
entered into a services agreement with a telecommunications services provider. The agreement can be terminated by either party, upon providing 30-days
notice. Minimum purchase requirements under the agreement require the Company to maintain switched services measured usage charges per T1 circuit of
not less than an average of $500.
Approximately 75%, 82% and 94% of
the Companys cost of revenue for the years ended December 31, 2006, 2005 and 2004, respectively, was generated from a single telecommunication
provider. As of December 31, 2006, 2005 and 2004, the Company owed this provider approximately $1,076,000 $1,037,000 and $1,000,000,
respectively.
During the years ended December
31, 2006, 2005 and 2004, two customers accounted for approximately 36%, 33% and 30%, respectively, of total net revenue. At December 31, 2006, 2005 and
2004, the total amount due from these customers was approximately $485,000, $547,000 and $357,000, respectively.
F-74
XTENSION SERVICES, INC.
FINANCIAL STATEMENTS AS OF JULY
1, 2007 AND
FOR THE PERIOD JANUARY 1, 2007 TO JULY 1, 2007
F-75
INDEPENDENT AUDITORS REPORT
To the Audit Committee
First Communications, Inc.
Akron, OH
We have audited the balance sheet
of Xtension Services, Inc. (the Company) as of July 1, 2007, and the statements of income and retained earnings, and cash flows for the
period January 1, 2007 to July 1, 2007. These financial statements are the responsibility of the Companys management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in
accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial
statements referred to above present fairly, in all material respects, the financial position of Xtension Services, Inc. as of July 1, 2007, and the
results of its operations and its cash flows for the period January 1, 2007 to July 1, 2007 in conformity with accounting principles generally accepted
in the United States of America.
/s/ BOBER, MARKEY, FEDOROVICH & COMPANY
Akron, Ohio
September 15, 2008
F-76
XTENSION SERVICES, INC.
BALANCE SHEET
July 1,
2007
ASSETS
CURRENT
ASSETS
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
|
|
$
|
460,392
|
|
Accounts
receivable net of allowance for doubtful accounts of $25,500
|
|
|
|
|
1,502,738
|
|
Other assets
|
|
|
|
|
19,962
|
|
|
TOTAL CURRENT
ASSETS
|
|
|
|
|
1,983,092
|
|
|
PROPERTY AND
EQUIPMENT
|
|
|
|
|
|
|
Software
|
|
|
|
|
44,872
|
|
Office
equipment
|
|
|
|
|
102,570
|
|
|
|
|
|
|
147,442
|
|
Less:
Accumulated depreciation
|
|
|
|
|
112,927
|
|
|
NET PROPERTY
AND EQUIPMENT
|
|
|
|
|
34,515
|
|
|
TOTAL ASSETS
|
|
|
|
$
|
2,017,607
|
|
LIABILITIES AND SHAREHOLDERS
EQUITY
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
Accounts
payable
|
|
|
|
$
|
1,680,680
|
|
Accrued
expenses
|
|
|
|
|
168,187
|
|
Customer
deposits
|
|
|
|
|
144,825
|
|
|
TOTAL CURRENT
LIABILITIES
|
|
|
|
|
1,993,692
|
|
|
SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
Common Stock,
no par value; 1,500 shares authorized, 1,000 shares issued and outstanding
|
|
|
|
|
1,000
|
|
Retained
earnings
|
|
|
|
|
22,915
|
|
|
TOTAL
SHAREHOLDERS EQUITY
|
|
|
|
|
23,915
|
|
|
TOTAL
LIABILITIES AND SHAREHOLDERS EQUITY
|
|
|
|
$
|
2,017,607
|
|
The accompanying notes are an integral part of these
financial statements.
F-77
STATEMENT OF INCOME AND RETAINED EARNINGS
For the
Period January 1, 2007 to July 1, 2007
REVENUES, NET
|
|
|
|
$
|
15,723,325
|
|
|
COST OF
FACILITIES, exclusive of depreciation and amortization stated below
|
|
|
|
|
12,628,595
|
|
|
GROSS PROFIT
|
|
|
|
|
3,094,730
|
|
|
SELLING,
GENERAL AND ADMINISTRATIVE EXPENSES
|
|
|
|
|
1,931,507
|
|
|
DEPRECIATION
AND AMORTIZATION
|
|
|
|
|
8,828
|
|
|
OPERATING
INCOME
|
|
|
|
|
1,154,395
|
|
|
INTEREST
INCOME, NET
|
|
|
|
|
58,204
|
|
|
NET INCOME
|
|
|
|
|
1,212,599
|
|
|
RETAINED
EARNINGS JANUARY 1, 2007
|
|
|
|
|
847,316
|
|
|
DISTRIBUTIONS
TO SHAREHOLDERS
|
|
|
|
|
(2,037,000
|
)
|
|
RETAINED
EARNINGS JULY 1, 2007
|
|
|
|
$
|
22,915
|
|
The accompanying notes are an integral part of these
financial statements.
F-78
XTENSION SERVICES, INC.
STATEMENT OF CASH FLOWS
For
the Period January 1, 2007 to July 1, 2007
CASH FLOWS
FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
Net income
|
|
|
|
$
|
1,212,599
|
|
Adjustments
to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
|
|
8,828
|
|
Changes in
operating assets and liabilities:
|
|
|
|
|
|
|
Accounts
receivable, net
|
|
|
|
|
560,519
|
|
Other assets
|
|
|
|
|
53,634
|
|
Accounts
payable
|
|
|
|
|
(293,266
|
)
|
Accrued
expenses
|
|
|
|
|
(1,144,448
|
)
|
Customer
deposits
|
|
|
|
|
(179,911
|
)
|
|
NET CASH
PROVIDED BY OPERATING ACTIVITIES
|
|
|
|
|
217,955
|
|
|
CASH FLOWS
FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
Purchases of
property and equipment
|
|
|
|
|
(4,160
|
)
|
|
NET CASH USED
IN INVESTING ACTIVITIES
|
|
|
|
|
(4,160
|
)
|
|
CASH FLOWS
FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
Cash
distributions to owners
|
|
|
|
|
(2,037,000
|
)
|
|
NET CASH USED
IN FINANCING ACTIVITIES
|
|
|
|
|
(2,037,000
|
)
|
|
NET DECREASE
IN CASH AND CASH EQUIVALENTS
|
|
|
|
|
(1,823,205
|
)
|
|
CASH AND CASH
EQUIVALENTS, BEGINNING OF PERIOD
|
|
|
|
|
2,283,597
|
|
|
CASH AND CASH
EQUIVALENTS, END OF PERIOD
|
|
|
|
$
|
460,392
|
|
The accompanying notes are an integral part of these
financial statements.
F-79
XTENSION SERVICES, INC.
NOTES TO FINANCIAL
STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Nature of Operations
Xtension Services, Inc (the
Company) is a full service, nationwide reseller of comprehensive voice, internet and data communication services.
Cash and Cash Equivalents
For purposes of the statement of
cash flows, the Company considers cash and all highly liquid investments purchased with an original maturity of three months or less to be cash
equivalents. The Federal Deposit Insurance Corporation (FDIC) guarantees balances up to $100,000 per bank. The Company had cash with various
institutions in excess of this amount throughout the year.
Accounts Receivable
Accounts receivable are stated at
the amount management expects to collect from outstanding balances. Management provides for probable uncollectible amounts through a charge to earnings
and a credit to the allowance for doubtful accounts 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 allowance for doubtful accounts and a
credit to accounts receivable.
Property and Equipment
Property and equipment are
recorded at cost and depreciated over the estimated useful life of the asset (ranging from three to five years) using the straight-line
method.
Income Taxes
The Company has elected to be
taxed under the provisions of Subchapter S of the Internal Revenue Code for both Federal and state income tax reporting. Accordingly, taxable income of
the Company will be reported at the shareholder level for Federal and state income tax purposes.
Revenue Recognition
The Company records as revenue
the amount of communications services rendered. Revenue is recognized as service is provided to customers.
Concentration of Credit Risk
Financial instruments, which
potentially subject the Company to concentrations of credit risk, consist primarily of accounts receivable. Concentrations of credit risk with respect
to receivables are limited due to generally short payment terms. Not all customers are required to post deposits. The Company requires customers to
provide a cash deposit to secure payment for services provided under the telecommunications services agreement between the customer and the Company.
Upon termination of the telecommunications services agreement, the deposit or any unused portion of the deposit is returned to the
customer.
Accounting Estimates
The preparation of financial
statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those
estimates.
F-80
XTENSION SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 2 MAJOR CARRIERS AND
CUSTOMERS
Approximately 74% or $10,392,000
of the Companys cost of facilities for the period ended July 1, 2007 was generated from two telecommunication providers. As of July 1, 2007, the
Company owed these providers approximately $820,000.
During the period ended July 1,
2007 one customer accounted for approximately 36% or $5,629,000 of total net revenue. At July 1, 2007, the total amount due from this customer was
approximately $584,000.
NOTE 3 COMMITMENTS
During April 2006, the Company
entered into a three-year, $36,000,000 agreement with its major provider. The agreement requires the Company to purchase $12,000,000, $24,000,000 and
$36,000,000 of telecommunication services, cumulatively, by April 30, 2007, 2008 and 2009, respectively. The provider can terminate the contract and
cease providing services if the Company fails to meet the purchase commitments. At July 1, 2007, the Company had fulfilled $18,900,000 of its
cumulative commitment under the agreement.
NOTE 4 SUBSEQUENT EVENTS
On July 2, 2007, the Company was
acquired by First Communications, Inc. for $11 million cash and the issuance of 2,400,000 shares of common stock having a value, based on the $5 IPO
price, of approximately $12 million.
F-81
GCI GLOBALCOM HOLDINGS, INC.
CONSOLIDATED FINANCIAL
STATEMENTS AS OF DECEMBER 31, 2007 AND
FOR THE YEAR ENDED DECEMBER 31, 2007
AND AS OF SEPTEMBER 30, 2008 AND 2007
AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 2008 AND 2007
F-82
Independent Auditors Report
To the Board of Directors
GCI Globalcom Holdings, Inc.
We have audited the accompanying
consolidated balance sheet of GCI Globalcom Holdings, Inc. as of December 31, 2007 and the related consolidated statements of operations,
stockholders deficit, and cash flows for the year then ended. These consolidated financial statements are the responsibility of the
Companys management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in
accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provide a
reasonable basis for our opinion.
In our opinion, the consolidated
financial statements referred to above present fairly, in all material respects, the consolidated financial position of GCI Globalcom Holdings, Inc. at
December 31, 2007 and the consolidated results of its operations, stockholders deficit, and its cash flows for the year then ended, in conformity
with accounting principles generally accepted in the United States of America.
As discussed in Note 14 to the
consolidated financial statements, on September 30, 2008, the Corporation executed an agreement and plan of merger to sell all of the
Corporations outstanding stock.
Chicago, Illinois
October 17, 2008
F-83
GCI GLOBALCOM HOLDINGS, INC.
Consolidated Balance
Sheet
|
|
|
|
September 30,
2008
|
|
September 30,
2007
|
|
December 31,
2007
|
|
|
|
|
(unaudited)
|
|
(unaudited)
|
|
Assets
|
Current
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
|
$
|
1,069,712
|
|
|
$
|
961,965
|
|
|
$
|
2,450,530
|
|
Accounts
receivable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade
|
|
|
|
|
4,672,745
|
|
|
|
4,250,185
|
|
|
|
3,249,722
|
|
Unbilled
|
|
|
|
|
942,581
|
|
|
|
1,205,688
|
|
|
|
1,689,657
|
|
Other current
assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax
receivable
|
|
|
|
|
710,804
|
|
|
|
885,804
|
|
|
|
710,804
|
|
Deferred tax
assets
|
|
|
|
|
1,060,227
|
|
|
|
909,470
|
|
|
|
757,705
|
|
Other current
assets
|
|
|
|
|
710,994
|
|
|
|
441,412
|
|
|
|
465,804
|
|
Total current
assets
|
|
|
|
|
9,167,063
|
|
|
|
8,654,524
|
|
|
|
9,324,222
|
|
Property
and Equipment
Net
|
|
|
|
|
13,342,718
|
|
|
|
10,994,539
|
|
|
|
12,102,070
|
|
Total assets
|
|
|
|
$
|
22,509,781
|
|
|
$
|
19,649,063
|
|
|
$
|
21,426,292
|
|
|
Liabilities, Redeemable Preferred Stock, and Stockholders Deficit
|
Current
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade accounts
payable
|
|
|
|
$
|
3,149,342
|
|
|
$
|
3,261,285
|
|
|
$
|
4,466,284
|
|
Revolving
credit facility
|
|
|
|
|
3,625,000
|
|
|
|
4,150,000
|
|
|
|
4,150,000
|
|
Current
portion of notes payable
|
|
|
|
|
2,437,000
|
|
|
|
627,750
|
|
|
|
1,237,000
|
|
Accrued and
other current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
compensation and commissions
|
|
|
|
|
1,038,294
|
|
|
|
316,131
|
|
|
|
362,021
|
|
Deferred
revenue
|
|
|
|
|
920,836
|
|
|
|
910,230
|
|
|
|
686,796
|
|
Accrued
telecommunications taxes
|
|
|
|
|
813,613
|
|
|
|
999,929
|
|
|
|
644,204
|
|
Accrued
telecommunications expense
|
|
|
|
|
684,875
|
|
|
|
426,296
|
|
|
|
461,350
|
|
Accrued
related party management service expense
|
|
|
|
|
1,225,806
|
|
|
|
|
|
|
|
|
|
Other accrued
liabilities
|
|
|
|
|
1,017,913
|
|
|
|
854,173
|
|
|
|
776,098
|
|
Total current
liabilities
|
|
|
|
|
14,912,679
|
|
|
|
11,545,794
|
|
|
|
12,783,753
|
|
Notes
Payable
Long-term portion
|
|
|
|
|
5,909,628
|
|
|
|
5,231,182
|
|
|
|
5,273,718
|
|
Deferred
Rent Liability
|
|
|
|
|
472,663
|
|
|
|
350,389
|
|
|
|
390,498
|
|
Deferred
Income Taxes
|
|
|
|
|
95,495
|
|
|
|
486,436
|
|
|
|
565,301
|
|
Total
liabilities
|
|
|
|
|
21,390,465
|
|
|
|
17,613,801
|
|
|
|
19,013,270
|
|
|
Redemption
Value of Preferred Stock
Class A, $.001 par value, 25,000,000 shares authorized; 3,030,303 shares issues and outstanding at September 30,
2008, September 30, 2007, and December 31, 2007 (liquidation preference of $8,100,000, $7,700,000, and $7,800,000 at September 30, 2008, September 30,
2007, and December 31, 2007, respectively)
|
|
|
|
|
8,100,000
|
|
|
|
7,700,000
|
|
|
|
7,800,000
|
|
|
Stockholders Equity (Deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
$0.001 par value:
|
|
|
|
|
55,500
|
|
|
|
55,500
|
|
|
|
55,500
|
|
100,000,000
shares authorized; 55,500,000 shares issued and outstanding at September 30, 2008, September 30, 2007, and December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
deficit
|
|
|
|
|
(7,036,184
|
)
|
|
|
(5,720,238
|
)
|
|
|
(5,442,478
|
)
|
Total
stockholders deficit
|
|
|
|
|
(6,980,684
|
)
|
|
|
(5,664,738
|
)
|
|
|
(5,386,978
|
)
|
Total
liabilities, redeemable preferred stock and stockholders deficit
|
|
|
|
$
|
22,509,781
|
|
|
$
|
19,649,063
|
|
|
$
|
21,426,292
|
|
See Notes to Consolidated Financial
Statements.
F-84
GCI GLOBALCOM HOLDINGS, INC.
Consolidated Statement of
Operations
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
September 30,
2008
|
|
September 30,
2007
|
|
Year Ended
December 31,
2007
|
|
|
|
|
(unaudited)
|
|
(unaudited)
|
|
Net Revenue
|
|
|
|
$
|
41,829,723
|
|
|
$
|
41,484,819
|
|
|
$
|
55,918,480
|
|
Cost of
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Network
carrier charges
|
|
|
|
|
18,949,584
|
|
|
|
19,193,886
|
|
|
|
25,107,572
|
|
Salaries and
benefits Sales representatives
|
|
|
|
|
2,543,660
|
|
|
|
2,149,482
|
|
|
|
3,065,002
|
|
Commissions
Outside sales representatives
|
|
|
|
|
3,185,951
|
|
|
|
2,510,834
|
|
|
|
3,410,916
|
|
Depreciation
|
|
|
|
|
1,638,958
|
|
|
|
1,597,646
|
|
|
|
2,159,261
|
|
Total cost of
revenue
|
|
|
|
|
26,318,153
|
|
|
|
25,451,848
|
|
|
|
33,742,751
|
|
|
Gross
Profit
|
|
|
|
|
15,511,570
|
|
|
|
16,032,971
|
|
|
|
22,175,729
|
|
|
Operating
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales, general
and administrative
|
|
|
|
|
15,048,933
|
|
|
|
14,182,236
|
|
|
|
19,475,966
|
|
Related party
management service expense
|
|
|
|
|
1,225,806
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
|
|
754,942
|
|
|
|
252,681
|
|
|
|
471,437
|
|
Total
operating expenses
|
|
|
|
|
17,029,681
|
|
|
|
14,434,917
|
|
|
|
19,947,403
|
|
|
Operating
(Loss) Income
|
|
|
|
|
(1,518,111
|
)
|
|
|
1,598,054
|
|
|
|
2,228,326
|
|
|
Nonoperating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
|
|
(529,577
|
)
|
|
|
(707,699
|
)
|
|
|
(928,006
|
)
|
Other
(expense) income
|
|
|
|
|
|
|
|
|
(89,158
|
)
|
|
|
113,526
|
|
Total
nonoperating expenses
|
|
|
|
|
(529,577
|
)
|
|
|
(796,857
|
)
|
|
|
(814,480
|
)
|
|
(Loss)
Income
Before income tax expense
|
|
|
|
|
(2,047,688
|
)
|
|
|
801,197
|
|
|
|
1,413,846
|
|
|
Income Tax
(Recovery) Expense
|
|
|
|
|
(753,982
|
)
|
|
|
311,311
|
|
|
|
546,200
|
|
|
Net (Loss)
Income
|
|
|
|
$
|
(1,293,706
|
)
|
|
$
|
489,886
|
|
|
$
|
867,646
|
|
See Notes to Consolidated Financial
Statements.
F-85
GCI GLOBALCOM HOLDINGS, INC.
Consolidated Statement of
Stockholders Equity (Deficit)
|
|
|
|
Common
Stock
|
|
Accumulated
Deficit
|
|
Total
|
Balance
January 1, 2007
|
|
|
|
$
|
55,500
|
|
|
$
|
(5,910,124
|
)
|
|
$
|
(5,854,624
|
)
|
Net Income
Unaudited
|
|
|
|
|
|
|
|
|
489,886
|
|
|
|
489,886
|
|
Accreted
dividends on redeemable preferred stock
|
|
|
|
|
|
|
|
|
(300,000
|
)
|
|
|
(300,000
|
)
|
|
Balance
September 30, 2007
|
|
|
|
|
55,500
|
|
|
|
(5,720,238
|
)
|
|
|
(5,664,738
|
)
|
Net income
|
|
|
|
|
|
|
|
|
377,760
|
|
|
|
377,760
|
|
Accreted
dividends on redeemable preferred stock
|
|
|
|
|
|
|
|
|
(100,000
|
)
|
|
|
(100,000
|
)
|
|
Balance
December 31, 2007
|
|
|
|
|
55,500
|
|
|
|
(5,442,478
|
)
|
|
|
(5,386,978
|
)
|
Net loss
Unaudited
|
|
|
|
|
|
|
|
|
(1,293,706
|
)
|
|
|
(1,293,706
|
)
|
Accreted
dividends on redeemable preferred stock
|
|
|
|
|
|
|
|
|
(300,000
|
)
|
|
|
(300,000
|
)
|
|
Balance
September 30, 2008 Unaudited
|
|
|
|
$
|
55,500
|
|
|
$
|
(7,036,184
|
)
|
|
$
|
(6,980,684
|
)
|
See Notes to Consolidated Financial
Statements.
F-86
GCI GLOBALCOM HOLDINGS, INC.
Consolidated Statement of
Cash Flows
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
September 30,
2008
|
|
September 30,
2007
|
|
Year Ended
December 31,
2007
|
|
|
|
|
(unaudited)
|
|
(unaudited)
|
|
Cash Flows
from Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)
income
|
|
|
|
$
|
(1,293,706
|
)
|
|
$
|
489,886
|
|
|
$
|
867,646
|
|
Adjustments to
reconcile net (loss) income to net cash from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
|
|
2,393,900
|
|
|
|
1,831,061
|
|
|
|
2,630,698
|
|
Bad debt
expense
|
|
|
|
|
1,045,480
|
|
|
|
336,066
|
|
|
|
735,095
|
|
Deferred
income tax provision
|
|
|
|
|
(772,328
|
)
|
|
|
310,579
|
|
|
|
541,209
|
|
Changes in
operating assets and liabilities which provided (used) cash:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
|
|
(1,721,427
|
)
|
|
|
127,706
|
|
|
|
245,171
|
|
Other current
assets
|
|
|
|
|
(245,190
|
)
|
|
|
(549,278
|
)
|
|
|
(398,670
|
)
|
Trade accounts
payable
|
|
|
|
|
(1,316,942
|
)
|
|
|
(634,982
|
)
|
|
|
570,017
|
|
Accrued and
other current liabilities
|
|
|
|
|
2,770,868
|
|
|
|
580,357
|
|
|
|
4,067
|
|
Deferred rent
liability
|
|
|
|
|
82,165
|
|
|
|
205,492
|
|
|
|
245,601
|
|
Net cash
provided by operating activities
|
|
|
|
|
942,820
|
|
|
|
2,696,887
|
|
|
|
5,440,834
|
|
|
Cash Flows
from Investing Activities
Purchase of property and equipment
|
|
|
|
|
(3,634,548
|
)
|
|
|
(2,490,471
|
)
|
|
|
(4,397,639
|
)
|
|
Cash Flows
from Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from
notes payable
|
|
|
|
|
2,463,660
|
|
|
|
5,859,000
|
|
|
|
1,150,000
|
|
Payments on
notes payable
|
|
|
|
|
(627,750
|
)
|
|
|
(7,003,642
|
)
|
|
|
(1,117,856
|
)
|
Payments on
revolving credit facility
|
|
|
|
|
(525,000
|
)
|
|
|
|
|
|
|
(525,000
|
)
|
Net cash
provided by (used in)
financing activities
|
|
|
|
|
1,310,910
|
|
|
|
(1,144,642
|
)
|
|
|
(492,856
|
)
|
|
Net
(Decrease) Increase in Cash
|
|
|
|
|
(1,380,818
|
)
|
|
|
(938,226
|
)
|
|
|
550,339
|
|
|
Cash
Beginning of period
|
|
|
|
|
2,450,530
|
|
|
|
1,900,191
|
|
|
|
1,900,191
|
|
|
Cash
End of period
|
|
|
|
$
|
1,069,712
|
|
|
$
|
961,965
|
|
|
$
|
2,450,530
|
|
|
Supplemental Disclosure of Cash Flow Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid
for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
|
$
|
571,554
|
|
|
$
|
727,302
|
|
|
$
|
925,818
|
|
Income taxes
|
|
|
|
|
20,727
|
|
|
|
340,000
|
|
|
|
340,000
|
|
See Notes to Consolidated Financial
Statements.
F-87
GCI GLOBALCOM HOLDINGS, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
September 30, 2008 (unaudited), September 30, 2007 (unaudited) and December 31, 2007
NOTE 1 NATURE OF BUSINESS AND BASIS OF
PRESENTATION
GCI Globalcom Holdings, Inc. (the
Corporation) is the parent and sole stockholder of Globalcom, Inc. (the Company), which is primarily engaged as a provider of
local, long-distance, data, and internet access services to customers throughout the United States. The Corporation maintains its corporate
headquarters in Chicago, Illinois.
Principles of
Consolidation
The consolidated financial statements include the accounts of GCI Globalcom Holdings, Inc. and its wholly owned
subsidiary, Globalcom, Inc. All material intercompany accounts and transactions have been eliminated in consolidation.
As discussed in Note 14, 100
percent of the Corporations stock was sold to First Communications, Inc. on September 30, 2008. The consolidated financial statements of GCI
Globalcom Holdings, Inc. as of September 30, 2008, included herein, are presented pre-close and do not reflect any adjustments resulting from the sale
transaction.
NOTE 2 SIGNIFICANT ACCOUNTING
POLICIES
Use of
Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States
of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
Revenue
Recognition
End user revenue is recognized in the month in which service is provided and is recorded net of federal, state, and
local taxes. The Company bills certain charges in advance of when the actual service is provided. Charges billed in advance are recorded as deferred
revenue until the service is provided.
Usage charges are billed in
arrears on a monthly basis. Accrued usage revenue was approximately $943,000, $1,206,000, and $1,690,000 at September 30, 2008, September 30, 2007, and
December 31, 2007, respectively. Service expenses are recognized when incurred.
The Company makes claims to other
carriers for recovery of certain amounts related to other carrier access. Realization of these claims is not reasonably assured until cash collection
occurs. As a result of this uncertainty, the Company recognizes this revenue in the period in which collection occurs. Accordingly, there are no
accounts receivable related to carrier access at September 30, 2008, September 30, 2007, and December 31, 2007.
When the Company bills customers
for installation revenues, fees received are deferred and amortized into revenue over the expected customer relationship period of three years.
Third-party installation costs are deferred to the extent of the related deferred revenue. These costs are amortized over the expected customer
relationship period of three years. Costs incurred in excess of the up-front fees are recorded as an expense in the period incurred.
Universal Service Fund Revenue
Recognition
The Company participates as a contributor to the Federal Universal Service Fund (USF). The USF is administered by the
Universal Service Administrative Company, an independent, not-for-profit corporation designated as the administrator of the USF by the Federal
Communications Commission. The USF collects surcharges from telecommunications providers and uses the proceeds to promote telecommunications services
to rural areas and low-income subscribers.
The Company recognizes USF
amounts collected and remitted on a gross basis as a component of revenue and expense. The gross USF revenues and expenses were approximately
$1,678,000 for the nine months ended September 30, 2008, $1,629,000 for the nine months ended September 30, 2007, and $2,064,000 for the year ended
December 31, 2007, respectively.
Accounts
Receivable
Accounts receivable are stated at net invoice amount. The Company maintains a reserve against end-user accounts
receivable that is estimated based on customer aging, analysis of historical collections, and identification of accounts that the Company determines
are not collectible. The allowance for
F-88
GCI GLOBALCOM HOLDINGS, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
September 30, 2008 (unaudited), September 30, 2007 (unaudited) and December 31, 2007
doubtful accounts was
approximately $1,100,000, $276,000, and $477,000 at September 30, 2008, September 30, 2007, and December 31, 2007, respectively.
Property and
Equipment
Property and equipment are recorded at cost. Depreciation is computed on a straight-line basis over the useful lives of
the assets, generally three to eight years. Leasehold improvements are depreciated over the shorter of the life of the asset or the life of the
associated lease.
Income
Taxes
A current tax liability or asset is recognized for the estimated taxes payable or refundable on tax returns for the year.
Deferred tax liabilities or assets are recognized for the estimated future tax effects of temporary differences between financial reporting and tax
accounting. Deferred tax assets and liabilities are classified as current or noncurrent based on the classification of the related asset or liability.
Deferred tax assets related to income tax carryforwards are classified according to the expected reversal date.
Effective January 1, 2008, the
Company adopted FASB Interpretation No. 48 (FIN 48),
Accounting for Uncertainty in Income Taxes
. FIN 48 clarifies the guidance for the
recognition and measurement of income tax benefits related to uncertain tax positions in accordance with SFAS No. 109,
Accounting for Income
Taxes
. Management has assessed the impact of this interpretation and has determined that there is no significant impact of adopting FIN 48 on the
consolidated financial statements.
The Company recognizes interest
and penalties related to uncertain tax positions in income tax expense. There were no interest or penalties related to income tax matters recognized in
the accompanying consolidated financial statements as of September 30, 2008, September 30, 2007, and December 31, 2007.
Redeemable Preferred
Stock
The Company accounts for redeemable preferred stock in accordance with Emerging Issues Task Force (EITF) Topic D-98,
Classification and Measurement of Redeemable Securities
. In accordance with EITF D-98, the value of preferred stock with redemption features
outside of the Companys control are classified outside of permanent equity at its redemption value. The preferred stock was initially recorded at
its fair value at the date of issuance of $5,000,000. Increases to the redemption value are primarily related to accrued but undeclared dividends and
are reflected as charges to retained earnings (accumulated deficit).
Stock Option
Plan
The Company accounts for stock options under FAS 123(R),
Share-based Payment
. The standard was adopted using the
prospective-transition method whereby only new or modified awards are accounted for under the provisions of FAS 123(R). No options were granted or
modified during the nine months ended September 30, 2008 and September 30, 2007 or the year ended December 31, 2007; therefore, no compensation expense
was recognized in relation to the stock option plan.
Severance
Agreement
The Company entered into a severance arrangement with a former employee and stockholder during the period ended
September 30, 2008. Under the terms of the arrangement, the former employee will receive $155,777 to be paid through March 2009. Included in
administrative salaries expense on the consolidated financial statements is a provision for the full severance cost related to this
arrangement.
Reclassification
Certain 2007 amounts have been reclassified to conform to the 2008 presentation.
F-89
GCI GLOBALCOM HOLDINGS, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
September 30, 2008 (unaudited), September 30, 2007 (unaudited) and December 31, 2007
NOTE 3 PROPERTY AND
EQUIPMENT
Property and equipment at
September 30, 2008, September 30, 2007, and December 31, 2007 are summarized as follows:
|
|
|
|
September 30,
2008
|
|
September 30,
2007
|
|
December 31,
2007
|
|
|
|
|
(unaudited)
|
|
(unaudited)
|
|
Fiber network
|
|
|
|
$
|
370,177
|
|
|
$
|
370,177
|
|
|
$
|
370,177
|
|
Network
equipment
|
|
|
|
|
20,574,935
|
|
|
|
17,525,425
|
|
|
|
18,993,901
|
|
Transportation
equipment
|
|
|
|
|
44,912
|
|
|
|
44,912
|
|
|
|
44,912
|
|
Furniture and
fixtures
|
|
|
|
|
669,866
|
|
|
|
666,803
|
|
|
|
669,866
|
|
Computer
equipment and software
|
|
|
|
|
6,827,957
|
|
|
|
4,505,189
|
|
|
|
4,933,790
|
|
Leasehold
improvements
|
|
|
|
|
538,220
|
|
|
|
317,033
|
|
|
|
355,943
|
|
Total
cost
|
|
|
|
|
29,026,067
|
|
|
|
23,429,539
|
|
|
|
25,368,589
|
|
Accumulated
depreciation
|
|
|
|
|
15,683,349
|
|
|
|
12,435,000
|
|
|
|
13,266,519
|
|
Net property
and equipment
|
|
|
|
$
|
13,342,718
|
|
|
$
|
10,994,539
|
|
|
$
|
12,102,070
|
|
Depreciation and amortization
expense was approximately $2,394,000 and $1,850,000 for the nine months ended September 30, 2008 and September 30, 2007, respectively, and $2,631,000
for the year ended December 31, 2007.
NOTE 4 REVOLVING CREDIT
FACILITY
The Company has a revolving
credit facility with a financial institution that matures and is due on June 30, 2009. The facility had an original maximum available amount of
$4,325,000, is collateralized by substantially all assets of the Company and is subject to certain financial covenants (see Note 5). Beginning October
1, 2007, the maximum amount available is reduced by $175,000 each quarter until the maximum amount available is reduced to $2,700,000. At September 30,
2008, September 30, 2007, and December 31, 2007, the maximum available amount on the revolving note is $3,625,000, $4,325,000 and $4,150,000,
respectively. The interest rate is prime (5.00 percent, 7.75 percent, and 7.25 percent at September 30, 2008, September 30, 2007, and December 31,
2007, respectively) . This facility was paid in full in connection with the sale of the Corporations common stock on September 30, 2008 (see Note
14).
F-90
GCI GLOBALCOM HOLDINGS, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
September 30, 2008 (unaudited), September 30, 2007 (unaudited) and December 31, 2007
NOTE 5 NOTES PAYABLE
Notes payable at September 30,
2008, September 30, 2007, and December 31, 2007 are as follows:
|
|
|
|
September 30,
2008
|
|
September 30,
2007
|
December 31,
2007
|
|
|
|
|
|
(unaudited)
|
|
(unaudited)
|
Term note
payable to a financial institution due in quarterly repayment amounts of $209,250, plus accrued interest, with a balloon payment of $1,534,968 due on
September 30, 2012. The interest rate is prime plus an applicable margin, as defined in the agreement (6.75%, 9.5%, and 9% at September 30, 2008,
September 30, 2007, and December 31, 2007, respectively). The note is collateralized by substantially all assets of the Company. The term note was paid
in full in connection with the sale of the Corporations common stock on September 30, 2008
|
|
|
|
$
|
4,882,968
|
|
|
$
|
5,858,932
|
|
$5,510,718
|
|
|
CapEx
facility payable to a financial institution due in quarterly principal payments beginning October 1, 2008 calculated on the outstanding balance at that
date. The facility is due on September 30, 2012. The interest rate is split with LIBOR plus an applicable margin, as defined in the agreement for
$1,000,000 of the outstanding balance (8.97% and 8.3% at September 30, 2008 and December 31, 2007, respectively) and prime plus an applicable margin,
as defined in the agreement for the remaining outstanding balance (6.75% and 7.88% at September 30, 2008 and December 31, 2007, respectively). Accrued
interest is payable quarterly. The note is collateralized by substantially all assets of the Company. The CapEx facility note was paid in full in
connection with the sale of the Corporations common stock on September 30, 2008
|
|
|
|
|
3,463,660
|
|
|
|
|
|
$1,000,000
|
|
Total
|
|
|
|
|
8,346,628
|
|
|
|
5,858,932
|
|
6,510,718
|
|
Less current
portion
|
|
|
|
|
2,437,000
|
|
|
|
627,750
|
|
1,237,000
|
|
Long-term
portion
|
|
|
|
$
|
5,909,628
|
|
|
$
|
5,231,182
|
|
$5,273,718
|
|
F-91
GCI GLOBALCOM HOLDINGS, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
September 30, 2008 (unaudited), September 30, 2007 (unaudited) and December 31, 2007
The balance of the above debt
matures as follows:
Years Ending
September 30
|
|
|
|
Amount
|
2009
|
|
|
|
$
|
2,437,000
|
|
2010
|
|
|
|
|
2,437,000
|
|
2011
|
|
|
|
|
1,100,660
|
|
2012
|
|
|
|
|
2,371,968
|
|
Total
|
|
|
|
$
|
8,346,628
|
|
Interest expense was
approximately $530,000, $708,000, and $968,000 for the nine months ended September 30, 2008, September 30, 2007, and the year ended December 31, 2007,
respectively.
Under the agreements with the
financial institution, the Company is subject to various financial covenants. At September 30, 2007, the Company was in compliance with the covenants.
At December 31, 2007, certain covenants were not met by the Company. On May 16, 2008, the Company further amended its credit agreement with the bank,
including a modification of certain covenant terms and a retroactive waiver of the debt covenant violations as of December 31, 2007.
All debt was paid in full in
connection with the sale of the Corporations common stock on September 30, 2008 (see Note 14).
NOTE 6 LEASE COMMITMENTS
The Company leases certain
facilities under operating lease agreements that expire at various dates through 2017. Total rent expense under these leases was approximately $897,000
and $775,000 for the nine months ended September 30, 2008, and September 30, 2007, respectively, and approximately $1,085,000 for the year ended
December 31, 2007. The leases require fixed incremental annual rent payments over the lease terms. The Company recognizes rent expense on the
straight-line basis over the terms of the leases. The deferred rent liability of $472,663, $350,389, and $390,498 at September 30, 2008, September 30,
2007, and December 31, 2007, respectively, represents the difference between the rent expense recognized on the straight-line basis and amounts paid in
accordance with the lease agreements.
The future annual minimum lease
payments under the various lease commitments are as follows:
Years Ending
September 30
|
|
|
|
Amount
|
2009
|
|
|
|
$
|
969,564
|
|
2010
|
|
|
|
|
1,115,606
|
|
2011
|
|
|
|
|
1,144,646
|
|
2012
|
|
|
|
|
1,175,365
|
|
2013
|
|
|
|
|
1,172,175
|
|
Thereafter
|
|
|
|
|
1,796,184
|
|
Total
|
|
|
|
$
|
7,373,540
|
|
As of September 30, 2008, the
Company was contingently liable for letters of credit under these leases totaling $404,703.
F-92
GCI GLOBALCOM HOLDINGS, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
September 30, 2008 (unaudited), September 30, 2007 (unaudited) and December 31, 2007
NOTE 7 INCOME TAXES
The components of the September
30, 2008 interim, September 30, 2007 interim, and December 31, 2007 year end income tax provision benefit included in the consolidated statement of
operations are as follows:
|
|
|
|
September 30,
2008
|
|
September 30,
2007
|
|
December 31,
2007
|
|
|
|
|
(unaudited)
|
|
(unaudited)
|
|
Federal
income taxes
|
|
|
|
$
|
(2,381
|
)
|
|
$
|
(6,909
|
)
|
|
$
|
(6,909
|
)
|
State income
taxes
|
|
|
|
|
20,727
|
|
|
|
7,641
|
|
|
|
11,900
|
|
Deferred
income taxes
|
|
|
|
|
(772,328
|
)
|
|
|
310,579
|
|
|
|
541,209
|
|
Total income
tax (recovery) expense
|
|
|
|
$
|
(753,982
|
)
|
|
$
|
311,311
|
|
|
$
|
546,200
|
|
The interim 2008 and 2007 income
tax expense differs from the expense that would result from applying the federal statutory rate of 34 percent to income before income taxes due to
certain nondeductible expenses, state income taxes, and changes in estimates from prior years.
The details of the net deferred
tax asset are as follows at September 30, 2008, September 30, 2007, and December 31, 2007:
|
|
|
|
September 30,
2008
|
|
September 30,
2007
|
|
December 31,
2007
|
|
|
|
|
(unaudited)
|
|
(unaudited)
|
|
Deferred tax
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
|
$
|
433,159
|
|
|
$
|
809,755
|
|
|
$
|
580,067
|
|
Net operating
loss carryforwards
|
|
|
|
|
1,652,301
|
|
|
|
1,061,165
|
|
|
|
1,067,300
|
|
Accrued
liabilities
|
|
|
|
|
627,068
|
|
|
|
99,715
|
|
|
|
92,638
|
|
Total
|
|
|
|
|
2,712,528
|
|
|
|
1,970,635
|
|
|
|
1,740,005
|
|
Deferred tax
liabilities Property and equipment
|
|
|
|
|
(1,747,796
|
)
|
|
|
(1,547,601
|
)
|
|
|
(1,547,601
|
)
|
Net deferred
tax asset
|
|
|
|
$
|
964,732
|
|
|
$
|
423,034
|
|
|
$
|
192,404
|
|
The details of the deferred tax
assets and liabilities at September 30, 2008 are as follows:
|
|
|
|
Deferred
Tax Assets
|
|
Deferred
Tax
Liabilities
|
|
Total
|
Current
|
|
|
|
$
|
1,060,227
|
|
|
$
|
|
|
|
$
|
1,060,227
|
|
Long term
|
|
|
|
|
1,652,301
|
|
|
|
(1,747,796
|
)
|
|
|
(95,495
|
)
|
Total
|
|
|
|
$
|
2,712,528
|
|
|
$
|
(1,747,796
|
)
|
|
$
|
964,732
|
|
The details of the deferred tax
assets and liabilities at September 30, 2007 are as follows:
|
|
|
|
Deferred
Tax Assets
|
|
Deferred
Tax
Liabilities
|
|
Total
|
Current
|
|
|
|
$
|
909,470
|
|
|
$
|
|
|
|
$
|
909,470
|
|
Long term
|
|
|
|
|
1,061,165
|
|
|
|
(1,547,601
|
)
|
|
|
(486,436
|
)
|
Total
|
|
|
|
$
|
1,970,635
|
|
|
$
|
(1,547,601
|
)
|
|
$
|
423,034
|
|
F-93
GCI GLOBALCOM HOLDINGS, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
September 30, 2008 (unaudited), September 30, 2007 (unaudited) and December 31, 2007
The details of the deferred tax
assets and liabilities at December 31, 2007 are as follows:
|
|
|
|
Deferred
Tax Assets
|
|
Deferred
Tax
Liabilities
|
|
Total
|
Current
|
|
|
|
$
|
757,705
|
|
|
$
|
|
|
|
$
|
757,705
|
|
Long term
|
|
|
|
|
982,300
|
|
|
|
(1,547,601
|
)
|
|
|
(565,301
|
)
|
Total
|
|
|
|
$
|
1,740,005
|
|
|
$
|
(1,547,601
|
)
|
|
$
|
192,404
|
|
Realization of deferred tax
assets is primarily dependent on generating sufficient taxable income prior to the expiration of loss carryforwards. The Company has loss carryforwards
for tax purposes of approximately $4,000,000 (unaudited) that expire through 2026. Although realization is not assured, management believes it is more
likely than not that all of the deferred tax asset will be realized. The amount of the deferred tax asset considered realizable, however, could change
in the near term if estimates of future taxable income during the carryforward period are reduced.
At September 30, 2008, September
30, 2007, and December 31, 2007, there were no significant unrecognized tax benefits.
NOTE 8 SERIES A REDEEMABLE PREFERRED NONVOTING
STOCK
In 2000, the Corporation issued
3,030,303 shares of $0.001 par value, 8 percent cumulative, Series A Redeemable Preferred Nonvoting Stock to Nortel Networks (Nortel) at an original
issue price of $5,000,000. These shares are redeemable at the option of the holder, subject to limitations based on the legal availability of funds to
finance such redemptions, or upon certain events of liquidation or a change in control of the Corporation.
The preferred shares are
convertible into common stock on a 1:1 basis and have a conversion value of $1.65 per share. Dividends accrue at 8 percent ($400,000) per year and are
accrued to the redemption value of the shares. Series A holders have certain additional rights, preferences, and restrictions as set forth in the
certificate of designations, Series A certificates, stockholders agreement dated December 29, 2000, and securities purchase agreement dated
December 29, 2000. Those rights, preferences, and restrictions include liquidation preferences and restrictions on transfers.
As part of the Nortel securities
purchase agreement, Nortel received common stock warrants to purchase 650,376 shares of GCI Globalcom Holdings, Inc.s common stock at $0.01 each.
These warrants expire in 2010.
A summary of the changes in
redemption value of preferred stock is as follows:
|
|
|
|
Par Value
|
|
Dividends
|
|
Redemption
Value
|
|
Total
Redemption
Value
|
Balance
January 1, 2007
|
|
|
|
$
|
3,030
|
|
|
$
|
2,400,000
|
|
|
$
|
4,996,970
|
|
|
$
|
7,400,000
|
|
Accretion
(unaudited)
|
|
|
|
|
|
|
|
|
300,000
|
|
|
|
|
|
|
|
300,000
|
|
Balance
September 30, 2007
|
|
|
|
|
3,030
|
|
|
|
2,700,000
|
|
|
|
4,996,970
|
|
|
|
7,700,000
|
|
Accretion
(unaudited)
|
|
|
|
|
|
|
|
|
100,000
|
|
|
|
|
|
|
|
100,000
|
|
Balance
December 31, 2007
|
|
|
|
|
3,030
|
|
|
|
2,800,000
|
|
|
|
4,996,970
|
|
|
|
7,800,000
|
|
Accretion
(unaudited)
|
|
|
|
|
|
|
|
|
300,000
|
|
|
|
|
|
|
|
300,000
|
|
Balance
September 30, 2008 (unaudited)
|
|
|
|
$
|
3,030
|
|
|
$
|
3,100,000
|
|
|
$
|
4,996,970
|
|
|
$
|
8,100,000
|
|
On September 30, 2008, the
Corporation sold all of its common stock. The preferred stockholders were paid approximately $8,100,000 which represents the redemption value of
the preferred stock and all unpaid dividends through September 30, 2008.
F-94
GCI GLOBALCOM HOLDINGS, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
September 30, 2008 (unaudited), September 30, 2007 (unaudited) and December 31, 2007
NOTE 9 STOCK OPTION PLAN
The Company has a nonqualified
stock option plan available to all employees. Under this plan, the Company may grant options for the purchase of up to 4,500,000 shares of common stock
through December 28, 2010. The options vest at the end of five years from the date of grant and expire in 2010 if not exercised. No new options were
granted during the nine months ended September 30, 2008, September, 30, 2007, and the year ended December 31, 2007 and all options were fully vested as
of December 31, 2006. The exercise price of the options range from $.01 to $5.00 and may be exercised on a 1:1 basis for new issuances of common stock.
Options may only be exercised upon the initial public offering of the Companys common stock or upon a discretionary act of the board of directors
and the option holders have no interest until such time. The number of options outstanding at September 30, 2008, September 30, 2007, and December 31,
2007 was 1,354,550. No options were forfeited during the nine months ended September 30, 2008.
On September 30, 2008, the
Corporation sold all of its common stock and cancelled all of the outstanding stock options (see Note 14).
NOTE 10 RETIREMENT PLANS
The Company sponsors a 401(k)
plan for substantially all employees. The plan provides for the Company to make a discretionary matching contribution. There were no employer
contributions during the nine months ended September 30, 2008, September 30, 2007, and the year ended December 31, 2007.
During 2008, the Company filed
with the Internal Revenue Service under the Employees Plan Compliance Resolution System (EPCRS) to correct certain operational failures of the plan.
The costs related to this correction are the responsibility of the Company, therefore, management has estimated the liability at approximately $55,000,
which is included in the other accrued liabilities on the consolidated balance sheet at September 30, 2008.
NOTE 11 RELATED PARTY TRANSACTIONS
The Company is party to an
agreement with Nortel to purchase equipment from Nortel through December 31, 2011. The Company purchased approximately $169,000, $198,000, and $750,000
of equipment during the nine months ended September 30, 2008, September 30, 2007, and the year ended December 31, 2007, respectively. The remaining
purchase commitment outstanding as of September 30, 2008 was approximately $4,880,000. The Company anticipates financing these purchases through use of
its CapEx debt facility (see Note 5). In connection with the merger (see Note 14), Nortel agreed to waive any future purchase commitments and liability
associated with this agreement.
As of September 30, 2008,
September 30, 2007, and December 31, 2007, the Company had, respectively, approximately $25,000, $35,000, and $169,000 of accounts payable outstanding
with Nortel.
The company entered into a
management services agreement in connection with the sale of the Companys stock (see Note 13).
NOTE 12 LITIGATION
The Company is a defendant in a
lawsuit filed by a former employee requesting enforcement of the former employees right to exercise stock options granted to the employee in
April 2000. The suit demands damages totaling $60,000 and the exercise of 450,000 options. Effective with the sale of the Corporations stock on
September 30, 2008 (see Note 14), this matter was settled with no material impact on the consolidated financial statements of the Company. The 450,000
options are included in the outstanding stock options disclosed in Note 9.
The Company is in disputes with
AT&T over pricing for unbundled loops and transport network elements. The Company is currently negotiating to resolve the disputes and does not
expect the resolution to have
F-95
GCI GLOBALCOM HOLDINGS, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
September 30, 2008 (unaudited), September 30, 2007 (unaudited) and December 31, 2007
aretrospective impact on the
consolidated financial statements, as any pricing adjustments are expected to be prospective.
The Company is named a party to a
number of lawsuits in the normal course of business. In the opinion of management, the resolution of these lawsuits will not have a material adverse
effect on the Companys financial position or results of operations.
NOTE 13 MANAGEMENT SERVICE
AGREEMENT
Effective with the merger
agreement on July 18, 2008, the company entered into a Management Service Agreement, whereby the buyer provided management services to the Company for
the period from July 18, 2008 to the period of the closing of the merger agreement at a cost of $500,000 per month. In the nine-month period ended
September 30, 2008, the Company accrued approximately $1,250,000 for the management services. The amounts have not been paid as of September 30, 2008
and are included in the September 30, 2008 consolidated statement of operations.
NOTE 14 SALE OF CORPORATION STOCK
On September 30, 2008, the
Corporation closed an agreement and plan of merger to sell 100 percent of the Corporations stock to First Communications, Inc. The agreement and
plan of merger includes the following provisions:
In accordance with the
certificate of designations of the Corporations preferred stock, the holders of the Corporations preferred stock received the conversion
value of the Corporations preferred stock ($5,000,000), plus all accrued and unpaid dividends of approximately $3,100,000. The Corporations
preferred stock was allocated a percentage share of the remaining merger consideration (after payment of funded debt and other transaction-related
expenses) on an as converted to common share basis at a rate of 1:1. The preferred stockholder also cancelled its warrants in exchange for $333,110 of
merger consideration.
All current employee holders (as
of the date of the merger agreement) of employee stock options forfeited their stock option agreements and any rights, if any, thereto, in exchange for
a cash bonus payment equal to the number of common shares underlying such stock option agreement multiplied by the closing per common share amount
subject to certain adjustments, as further set forth in the merger agreement.
Debt under the long-term credit
facility of approximately $12,000,000 was paid from merger consideration by the buyer at closing from the total merger consideration.
F-96
GCI GLOBALCOM HOLDINGS, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
September 30, 2008 (unaudited), September 30, 2007 (unaudited) and December 31, 2007
RENAISSANCE ACQUISITION CORP.
FINANCIAL STATEMENTS AS
OF DECEMBER 31, 2007 AND 2006
AND FOR THE YEAR ENDED DECEMBER 31, 2007,
THE PERIOD FROM APRIL 17, 2006 (INCEPTION) TO DECEMBER 31, 2006,
AND THE PERIOD FROM APRIL 17, 2006 (INCEPTION) TO DECEMBER 31, 2007
F-97
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To the Board of Directors and Stockholders of
Renaissance Acquisition Corp.
We have audited the accompanying
balance sheet of Renaissance Acquisition Corp. (a development stage company) (the Company) as of December 31, 2006 and 2007, and the
related statements of operations, stockholders equity and cash flows for the period from April 17, 2006 (inception) to December 31, 2006, the
year ended December 31, 2007 and the period from April 17, 2006 (inception) to December 31, 2007. These financial statements are the responsibility of
the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in
accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit
of the Companys internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness
of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial
statements referred to above present fairly, in all material respects, the financial position of Renaissance Acquisition Corp. as of December 31, 2006
and 2007, and the results of its operations and its cash flows for the period from April 17, 2006 (inception) to December 31, 2006, the year ended
December 31, 2007 and the period from April 17, 2006 (inception) to December 31, 2007 in conformity with United States generally accepted accounting
principles.
/s/ Eisner LLP
New York, New York
March 28, 2008
F-98
RENAISSANCE ACQUISITION CORP.
(A Development Stage
Company)
BALANCE SHEETS
|
|
|
|
December 31,
2006
|
|
December 31,
2007
|
ASSETS
|
Current
assets:
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
|
$
|
60,165
|
|
|
$
|
1,410,028
|
|
Prepaid
expenses
|
|
|
|
|
|
|
|
|
19,213
|
|
Investment
income receivable
|
|
|
|
|
|
|
|
|
8,374
|
|
Total current
assets
|
|
|
|
|
60,165
|
|
|
|
1,437,615
|
|
Deferred
offering costs
|
|
|
|
|
327,727
|
|
|
|
|
|
Cash
equivalents held in trust account
|
|
|
|
|
|
|
|
|
105,364,922
|
|
Fixed assets,
net of accumulated depreciation
|
|
|
|
|
|
|
|
|
1,097
|
|
Total assets
|
|
|
|
$
|
387,892
|
|
|
$
|
106,803,634
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
Accounts
payable
|
|
|
|
$
|
|
|
|
$
|
42,078
|
|
Accrued
expenses
|
|
|
|
|
1,917
|
|
|
|
80,250
|
|
Accrued
offering costs
|
|
|
|
|
212,493
|
|
|
|
|
|
Notes payable
to stockholder
|
|
|
|
|
150,000
|
|
|
|
|
|
Total current
liabilities
|
|
|
|
|
364,410
|
|
|
|
122,328
|
|
Long-term
obligations:
|
|
|
|
|
|
|
|
|
|
|
Accrued
underwriting costs
|
|
|
|
|
|
|
|
|
3,051,240
|
|
Total
liabilities
|
|
|
|
|
364,410
|
|
|
|
3,173,568
|
|
Common stock
subject to possible conversion, 3,586,206 shares at conversion value
|
|
|
|
|
|
|
|
|
20,819,153
|
|
Interest
income attributable to common stock subject to conversion
|
|
|
|
|
|
|
|
|
245,203
|
|
Commitments and contingencies (Note C, E and F):
|
Stockholders equity:
|
Preferred
stock $.0001 par value, none authorized at December 31, 2006; 1,000,000 shares authorized and none outstanding at December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
Common stock
$.0001 par value, 6,000,000 shares authorized; 3,900,000 issued and outstanding as of December 31, 2006; 72,000,000 shares authorized,
21,840,000 issued and outstanding (including 3,586,206 shares subject to possible conversion) as of December 31, 2007
|
|
|
|
|
390
|
|
|
|
2,184
|
|
Additional
paid-in capital
|
|
|
|
|
24,610
|
|
|
|
80,508,869
|
|
(Deficit)
earnings accumulated during the development stage
|
|
|
|
|
(1,518
|
)
|
|
|
2,054,657
|
|
Total
stockholders equity
|
|
|
|
|
23,482
|
|
|
|
82,565,710
|
|
|
|
|
|
$
|
387,892
|
|
|
$
|
106,803,634
|
|
See notes to the financial statements.
F-99
RENAISSANCE ACQUISITION CORP.
(A Development Stage
Company)
STATEMENTS OF OPERATIONS
|
|
|
|
April 17, 2006
(inception) to
December 31,
2006
|
|
For the
year ended
December 31,
2007
|
|
April 17, 2006
(inception) to
December 31,
2007
|
General and
administrative expenses
|
|
|
|
$
|
1,998
|
|
|
$
|
847,558
|
|
|
$
|
849,556
|
|
|
Operating
loss
|
|
|
|
|
(1,998
|
)
|
|
|
(847,558
|
)
|
|
|
(849,556
|
)
|
Other income
(expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
|
|
|
|
|
|
(5,263
|
)
|
|
|
(5,263
|
)
|
Interest
income
|
|
|
|
|
480
|
|
|
|
53,108
|
|
|
|
53,588
|
|
Interest
income trust account
|
|
|
|
|
|
|
|
|
4,113,933
|
|
|
|
4,113,933
|
|
|
(Loss) income
before provision for income taxes
|
|
|
|
|
(1,518
|
)
|
|
|
3,314,220
|
|
|
|
3,312,702
|
|
Provision for
income taxes
|
|
|
|
|
|
|
|
|
(1,012,842
|
)
|
|
|
(1,012,842
|
)
|
|
Net (loss)
income
|
|
|
|
$
|
(1,518
|
)
|
|
|
2,301,378
|
|
|
|
2,299,860
|
|
Less:
interest attributable to common stock subject to
possible conversion
|
|
|
|
|
|
|
|
|
(245,203
|
)
|
|
|
(245,203
|
)
|
|
Net income
attributable to common stock not
subject to possible conversion
|
|
|
|
|
(1,518
|
)
|
|
|
2,056,175
|
|
|
|
2,054,657
|
|
|
Total net (loss) income per share:
|
Basic
|
|
|
|
$
|
(0.00
|
)
|
|
$
|
0.11
|
|
|
|
|
|
Diluted
|
|
|
|
$
|
(0.00
|
)
|
|
$
|
0.10
|
|
|
|
|
|
|
Total weighted average shares outstanding:
|
Basic
|
|
|
|
|
3,900,000
|
|
|
|
20,220,164
|
|
|
|
|
|
Diluted
|
|
|
|
|
3,900,000
|
|
|
|
23,294,978
|
|
|
|
|
|
|
Net (loss)
income per share attributable to common stock not subject to conversion:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
$
|
(0.00
|
)
|
|
|
0.12
|
|
|
|
|
|
Diluted
|
|
|
|
$
|
(0.00
|
)
|
|
|
0.11
|
|
|
|
|
|
Weighted average shares outstanding:
|
Basic
|
|
|
|
|
3,900,000
|
|
|
|
16,957,763
|
|
|
|
|
|
Diluted
|
|
|
|
|
3,900,000
|
|
|
|
19,417,922
|
|
|
|
|
|
|
Shares subject to possible conversion:
|
Weighted
average number of shares
|
|
|
|
|
|
|
|
|
3,262,401
|
|
|
|
|
|
|
Income per
share amount:
|
|
|
|
|
|
|
|
$
|
0.18
|
|
|
|
|
|
See notes to the financial statements.
F-100
RENAISSANCE ACQUISITION CORP.
(A Development Stage
Company)
STATEMENTS OF STOCKHOLDERS EQUITY
|
|
|
|
Common Stock
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Additional
Paid-In
Capital
|
|
(Deficit)/Earnings
Accumulated
During the
Development
Stage
|
|
Total
Stockholders
Equity
|
Balance at
April 17, 2006 (inception)
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Sale of
common stock to founding stockholders (April 17, 2006 at $0.006 per share)
|
|
|
|
|
3,900,000
|
|
|
|
390
|
|
|
|
24,610
|
|
|
|
|
|
|
|
25,000
|
|
Net loss for
the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,518
|
)
|
|
|
(1,518
|
)
|
Balance as of
December 31, 2006
|
|
|
|
|
3,900,000
|
|
|
|
390
|
|
|
|
24,610
|
|
|
|
(1,518
|
)
|
|
|
23,482
|
|
Sale of
private placement warrants (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
2,100,000
|
|
|
|
|
|
|
|
2,100,000
|
|
Sale of
15,600,000 units, net of offering expenses (2)
|
|
|
|
|
15,600,000
|
|
|
|
1,560
|
|
|
|
86,005,946
|
|
|
|
|
|
|
|
86,007,506
|
|
Sale of
2,340,000 units for over-allotment (3)
|
|
|
|
|
2,340,000
|
|
|
|
234
|
|
|
|
13,197,366
|
|
|
|
|
|
|
|
13,197,600
|
|
Proceeds
subject to possible conversion of 3,586,206 shares
|
|
|
|
|
|
|
|
|
|
|
|
|
(20,819,153
|
)
|
|
|
|
|
|
|
(20,819,153
|
)
|
Sale of unit
purchase option (February 1, 2007)
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
|
|
|
|
|
|
|
100
|
|
Accretion of
trust account relating to common stock subject to possible conversion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(245,203
|
)
|
|
|
(245,203
|
)
|
Net income
for the year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,301,378
|
|
|
|
2,301,378
|
|
Balance as of
December 31, 2007
|
|
|
|
|
21,840,000
|
|
|
$
|
2,184
|
|
|
$
|
80,508,869
|
|
|
$
|
2,054,657
|
|
|
$
|
82,565,710
|
|
(1)
|
|
(January 29, 2007 at $0.45 per warrant)
|
(2)
|
|
(February 1,2007 at $6.00 per unit)
|
(3)
|
|
(February 16,2007 at $6.00 per unit)
|
See notes to the financial statements.
F-101
RENAISSANCE ACQUISITION CORP.
(A Development Stage
Company)
STATEMENTS OF CASH FLOWS
|
|
|
|
April 17, 2006
(inception) to
December 31,
2006
|
|
For the
year ended
December 31,
2007
|
|
April 17, 2006
(inception) to
December 31,
2007
|
Cash flows from operating activities:
|
Net (loss)
income
|
|
|
|
$
|
(1,518
|
)
|
|
$
|
2,301,378
|
|
|
$
|
2,299,860
|
|
Adjustments
to reconcile net (loss) to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
|
|
|
|
|
|
219
|
|
|
|
219
|
|
Changes in
operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid
expenses
|
|
|
|
|
|
|
|
|
(19,213
|
)
|
|
|
(19,213
|
)
|
Interest
income receivable
|
|
|
|
|
|
|
|
|
(8,374
|
)
|
|
|
(8,374
|
)
|
Accounts
payable and accrued liabilities
|
|
|
|
|
1,917
|
|
|
|
120,411
|
|
|
|
122,328
|
|
Net cash
provided by operating activities
|
|
|
|
|
399
|
|
|
|
2,394,421
|
|
|
|
2,394,820
|
|
Cash flows from investing activities:
|
Proceeds
invested in trust account
|
|
|
|
|
|
|
|
|
(105,364,922
|
)
|
|
|
(105,364,922
|
)
|
Acquisition
of fixed assets
|
|
|
|
|
|
|
|
|
(1,316
|
)
|
|
|
(1,316
|
)
|
Net cash used
by investing activities
|
|
|
|
|
0
|
|
|
|
(105,366,238
|
)
|
|
|
(105,366,238
|
)
|
Cash flows from financing activities:
|
Proceeds from
(repayment of) note payable to stockholder
|
|
|
|
|
150,000
|
|
|
|
(150,000
|
)
|
|
|
0
|
|
Proceeds from
sale of units, net
|
|
|
|
|
|
|
|
|
102,371,680
|
|
|
|
102,256,446
|
|
Proceeds from
issuance of warrants
|
|
|
|
|
|
|
|
|
2,100,000
|
|
|
|
2,100,000
|
|
Proceeds from
sale of common stock to initial stockholder
|
|
|
|
|
25,000
|
|
|
|
|
|
|
|
25,000
|
|
Payment of
accrued offering costs
|
|
|
|
|
(115,234
|
)
|
|
|
|
|
|
|
|
|
Net cash
provided by financing activities
|
|
|
|
|
59,766
|
|
|
|
104,321,680
|
|
|
|
104,381,446
|
|
Net increase
in cash
|
|
|
|
|
60,165
|
|
|
|
1,349,863
|
|
|
|
1,410,028
|
|
Cash at
beginning of period
|
|
|
|
|
0
|
|
|
|
60,165
|
|
|
|
0
|
|
Cash at end
of period
|
|
|
|
|
60,165
|
|
|
$
|
1,410,028
|
|
|
$
|
1,410,028
|
|
Supplemental disclosures of cash flow information:
|
Cash paid during the period for:
|
Interest
|
|
|
|
$
|
0
|
|
|
$
|
5,263
|
|
|
$
|
5,263
|
|
Income taxes
|
|
|
|
$
|
0
|
|
|
$
|
1,022,000
|
|
|
$
|
1,022,000
|
|
Supplemental disclosures of noncash operating and financing activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrual of
deferred offering costs
|
|
|
|
$
|
212,493
|
|
|
|
|
|
|
|
(212,493
|
)
|
Accrued
deferred underwriting fees
|
|
|
|
|
|
|
|
$
|
3,051,240
|
|
|
$
|
3,051,240
|
|
Accrued
insurance installment loan
|
|
|
|
|
|
|
|
$
|
47,282
|
|
|
$
|
47,282
|
|
F-102
RENAISSANCE ACQUISITION CORP.
NOTES TO FINANCIAL
STATEMENTS
Note A. Organization and Business Operations; Going Concern
Consideration
Renaissance Acquisition Corp.
(the Company) was incorporated in Delaware on April 17, 2006. The Company was formed to serve as a vehicle for the acquisition of an
operating company through a merger, capital stock exchange, asset acquisition and/or other similar transaction. As of December 31, 2007, the Company
has not commenced any operations. The Company is considered to be in the development stage and is subject to the risks associated with activities of
development stage companies. As such, the Companys operating results through December 31, 2007 relate to early stage organizational activities,
and its ability to begin planned operations is dependent upon the completion of a financing. The Company has selected December 31 as its fiscal year
end.
The Companys management has
broad discretion with respect to the specific application of the net proceeds of the initial public offering of its Units (as described in Note C
Initial Public Offering), although substantially all of the net proceeds of the Offering are intended to be generally applied toward acquiring
an operating company (Acquisition). Furthermore, there is no assurance that the Company will be able to successfully effect an Acquisition.
At closing of the Offering, approximately $5.82 per Unit sold in the Offering is held in a trust account (Trust Account) and invested in
government securities within the meaning of Section 2(a)(16) of the Investment Company Act of 1940 having a maturity of 180 days or less or
in money market funds meeting certain conditions under Rule 2a-7 promulgated under the Investment Company Act of 1940 until the earlier of (i) the
consummation of its first Acquisition or (ii) the distribution of the Trust Account as described below. The remaining proceeds, along with up to
$1,875,000 of interest income on the Trust Account has been released to the Company, is being used to pay for business, legal and accounting due
diligence on prospective acquisitions and continuing general and administrative expenses. The Company, after signing a definitive agreement for the
Acquisition, will submit such transaction for stockholder approval. In the event that holders of 20% or more of the shares issued in the Offering vote
against the Acquisition and exercise their conversion rights, the Acquisition will not be consummated.
The Companys Amended and
Restated Certificate of Incorporation provides that the Company will continue in existence only until 24 months from the Effective Date of the Offering
(the Acquisition Period). If the Company has not completed a Business Combination by such date, its corporate existence will cease and it
will dissolve and liquidate for the purposes of winding up its affairs and the proceeds held in the Trust Account will be distributed to the
Companys stockholders, excluding the persons who were stockholders prior to the Offering (the Founding Stockholders) to the extent of
their common stock held prior to the Offering. However, the Founding Stockholders will participate in any liquidation distribution with respect to any
shares of the Companys common stock (the Common Stock) acquired in connection with or following the Offering. In the event of such
distribution, it is likely that the per share value of the residual assets remaining available for distribution (including Trust Account assets) will
be less than the initial public offering price per share in the IPO (assuming no value is attributed to the Warrants contained in the Units offered in
the Offering discussed in Note C).
Note B. Summary of Significant Accounting
Policies
[1] Cash equivalents
The Company considers highly
liquid investments with maturities of three months or less, when purchased, to be cash equivalents. Cash equivalents held in the Trust Account (see
Note A) are to be held to maturity, and accordingly, are stated at cost. Funds held in the Trust Account are restricted (see Note A).
[2] Net (loss) income per share
Net (loss) income per share is
computed by dividing net income or loss applicable to common stockholders by the weighted average number of common shares outstanding for the period.
The per share effects of net potential shares of Common Stock such as warrants and options, aggregating 3,074,814 (after application of the treasury
stock method), have been included in the year ended December 31, 2007. Potential shares of Common Stock in connection with the underwriters
purchase option (see Note C) aggregating 1,950,000 and the insider warrants aggregating 4,666,667 have not been included because the effect would be
anti-dilutive.
F-103
RENAISSANCE ACQUISITION CORP.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
[3] Use of estimates
The preparation of financial
statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates.
[4] Income taxes
Deferred income taxes are
provided for the difference between the bases of assets and liabilities for financial reporting and income tax purposes. A valuation allowance is
established when necessary to reduce deferred tax assets to the amount expected to be realized.
[5] Accrued underwriting costs
Underwriting fees of $3,051,240
accrued in connection with the Companys IPO are payable if and when the Company effects a business combination (see Note C).
[6] Adoption of new accounting
pronouncements
In September 2006, the Financial
Accounting Standards Board (the FASB) issued Interpretation No. (FIN) 48,
Accounting for Uncertainty in Income Taxes
, an
interpretation of FASB Statement No. 109. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprises financial
statements in accordance with Statement of Financial Accounting Standards (SFAS) No. 109 and prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48
also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. We adopted
FIN 48 effective January 1, 2007, which had no material effect on our financial statements. The only year for which we have filed income taxes is 2006,
and is open to examination by the major taxing jurisdictions to which we are subject. The Company will account for penalties and interest associated
with any tax audits as an operating expense. Any subsequent change in classification of such interest and penalties will be treated as a change in
accounting principle subject to the requirements of SFAS No. 154, accounting changes and error connections.
[7] Impact of Recently Issued Accounting
Pronouncements
In December 2007, the FASB issued
SFAS No. 141(R), Business Combinations (Revised 2007) (SFAS 141(R)). SFAS No. 141(R) replaces SFAS No. 141 (Business
Combinations) and establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, any non controlling interest in the acquiree and the goodwill acquired. SFAS 141(R) also establishes
disclosure requirements which will enable users to evaluate the nature and financial effects of the business combination. This standard is effective
for fiscal years beginning after December 15, 2008, which will require the Company to adopt these provisions for business combinations occurring in
fiscal year 2009 and thereafter. Early adoption of SFAS 141(R) is not permitted.
In September 2006, the FASB
issued Statement No. 157, Fair Value Measurements (SFAS No. 157). SFAS No. 157 provides guidance for using fair value to measure assets and
liabilities. This statement clarifies the principle that fair value should be based on the assumptions that market participants would use when pricing
the asset or liability. SFAS No. 157 establishes a fair value hierarchy, giving the highest priority to quoted prices in active markets and the lowest
priority to unobservable data. SFAS No. 157 applies whenever other standards require assets or liabilities to be measured at fair value. This statement
is effective in fiscal years beginning after November 15, 2007. The Company believes that the adoption of SFAS No. 157 will not have a significant
effect on the Companys financial statements.
In February 2007, FASB issued
Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS No. 159). SFAS No. 159 provides a Fair
Value Option under which a company may
F-104
RENAISSANCE ACQUISITION CORP.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
irrevocably elect fair value
as the initial and subsequent measurement attribute for certain financial assets and liabilities. SFAS No. 159 will be available on a
contract-by-contract basis with changes in fair value recognized in earnings as those changes occur. SFAS No. 159 is effective for fiscal years after
November 15, 2007. SFAS No. 159 also allows early adoption provided that the entity also adopts the requirements of SFAS No. 157. The Company does not
believe the adoption of SFAS No. 159 will have a material impact, if any, on its financial statements.
In December 2007, the FASB issued
Statement of Financial Accounting Standards No. 160,
Noncontrolling Interests in Consolidated Financial Statements-an amendment of ARB No. 51
(FAS 160). This standard establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. The guidance will become effective as of the beginning of the Companys fiscal year beginning after December 15,
2008. The Company is currently assessing what the impact of the adoption of FAS 160 will be on the Companys financial position and results of
operations.
Management does not believe that
any recently issued, but not yet effective, accounting standards, if currently adopted, would have a material effect on the accompanying financial
statements.
Note C. Initial Public Offering
On February 1, 2007, the Company
issued and sold 15,600,000 units (Units) in its IPO, and on February 16, 2007, the Company issued and sold an additional 2,340,000 Units
that were subject to the underwriters over-allotment option. Each Unit consists of one share of common stock and two warrants. Each warrant
entitles the holder to purchase from the Company one share of common stock at an exercise price of $5.00 commencing the later of (a) one year from the
effective date of the IPO or (b) the completion of an acquisition. The Warrants will expire four years from the effective date of the IPO. The Warrants
will be redeemable at a price of $.01 per Warrant upon 30 days notice after the Warrants become exercisable, only in the event that the last sale
price of the common stock is at least $8.50 per share for any 20 trading days within a 30 trading day period ending on the third day prior to the date
on which notice of redemption is given.
The public offering price of each
Unit was $6.00, and the gross proceeds of the IPO were $107,640,000 (including proceeds from the exercise of the over-allotment option). Of the gross
proceeds: (i) $102,047,840 was deposited into the Trust Account, which amount included $3,051,240 of deferred underwriting fees; (ii) the underwriters
received $4,811,160 as underwriting fees (excluding the deferred underwriting fees); and (iii) the Company retained $781,000 for offering expenses. In
addition, the Company deposited into the Trust Account the $2,100,000 that it received from the issuance and sale of 4,666,667 Warrants (exercisable at
$6.00 per share) to RAC Partners LLC, an entity controlled by Barry Florescue, our Chairman and Chief Executive Officer, and to Charles Miersch and
Morton Farber, two of our Directors, on February 1, 2007.
In connection with the IPO, the
Company sold to the representative of the underwriters for $100 an option to purchase 650,000 units for $7.50 per Unit. These units are identical to
the Units issued in the IPO. This option may be exercised for cash or on a cashless basis and expires February 1, 2012.
Barry W. Florescue, chairman and
chief executive officer of the Company, has entered into an agreement with Ladenburg Thalmann & Co. Inc., the representative of the underwriters in
the IPO, which is intended to comply with Rule 10b5-1 under the Exchange Act, pursuant to which he, or an entity or entities he controls, will place
limit orders for $12 million of the Companys common stock commencing ten business days after the Company files its Current Report on Form 8-K
announcing its execution of a definitive agreement for a business combination and ending on the business day immediately preceding the record date for
the meeting of stockholders at which such business combination is to be approved. Mr. Florescue has agreed that he will not sell or transfer any shares
of common stock purchased by him pursuant to this agreement until one year after the Company has completed an Acquisition. It is intended that these
purchases will comply with Rule 10b-18 under the Exchange Act. These purchases will be made at a price equal to the per share amount held in the
Companys trust account as reported in such Form 8-K and will be made by Ladenburg Thalmann or another broker dealer mutually agreed upon by Mr.
Florescue and Ladenburg Thalmann in such amounts and at such times as Ladenburg Thalmann or such
F-105
RENAISSANCE ACQUISITION CORP.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
other broker dealer may
determine, in its sole discretion, so long as the purchase price does not exceed the above-referenced per share purchase price. Mr. Florescue has
agreed to make available to Ladenburg Thalmann monthly statements confirming that Mr. Florescue has sufficient funds to satisfy these
transactions.
All shares of common stock owned
by the Founding Stockholders prior to the closing of the IPO (the Initial Shares) and the Insider Warrants were placed into an escrow
account maintained by Continental Stock Transfer & Trust Company, acting as escrow agent. The Initial Shares will not be released from escrow until
30 days after the consummation of an Acquisition.
The foregoing restrictions are
subject to certain limited exceptions such as transfers to family members and trusts for estate planning purposes, upon death of an escrow depositor,
transfers to an estate or beneficiaries, or other specified transfers. Even if transferred under these circumstances, the Initial Shares or Insider
Warrants will remain in the escrow account. The Initial Shares and Initial Warrants are releasable from escrow prior to the above dates only if,
following an Acquisition, the Company consummates a transaction in which all of the stockholders of the combined entity have the right to exchange
their shares of common stock for cash, securities or other property or if the Company liquidates or dissolves
Note D. Note Payable to Founding
Stockholder
On April 30, 2006, the Company
issued a $150,000 unsecured promissory note to Barry W. Florescue, the Companys Chairman and Chief Executive Officer (the Note). The
Note was non-interest bearing and was payable on the earlier of April 30, 2007 or the consummation of the Offering. The Note was repaid with the
proceeds of the IPO on February 1, 2007.
Note E. Related Party Transactions
The Company pays BMD Management
Company, Inc., an affiliate of the Company, Chairman, Chief Executive Officer and Secretary, a fee of $8,000 per month for office space and general and
administrative services pursuant to an agreement between the Company and BMD Management Company with a term beginning on January 29, 2007 and ending on
the effective date of the acquisition of a target business. Through December 31, 2007, $88,774 had been incurred with respect to this
agreement.
The Company engages and proposes
to continue to engage in ordinary course banking relationships on customary terms with Century Bank including the investment of excess operating funds
in short term certificates of deposit. The Companys Chairman and Chief Executive Officer is the Chairman and owner of the bank and two of the
Companys Directors are directors of the bank. Such amounts at December 31, 2006 and 2007 total $60,165 and $1,410,028,
respectively.
The Companys Chairman and
Chief Executive Officer, pursuant to an agreement with the Company and the underwriter, has agreed that if the Company liquidates prior to the
consummation of a business combination, he will be personally liable to pay debts and obligations to target businesses or vendors or other entities
that are owed money by the Company for services rendered or contracted for or products sold to the Company in excess of the net proceeds of the IPO not
held in the trust account.
The Companys Chairman and
Chief Executive Officer has also entered into an agreement with Ladenburg Thalmann, the lead underwriter for the IPO, pursuant to which he, or an
entity or entities he controls, will place limit orders for $12 million of the Companys common stock commencing ten business days after the
Company files its Current Report on Form 8-K announcing its execution of a definitive agreement for a business combination and ending on the business
day immediately preceding the record date for the meeting of stockholders at which such business combination is to be approved.
F-106
RENAISSANCE ACQUISITION CORP.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
Note F. Commitments and Other Matters
The underwriting fee in
connection with the IPO was 6% of the gross proceeds of the Initial Offering and a non-accountable expense allowance of 1.5% of the gross proceeds of
the IPO (the underwriting fee, but not the non-accountable expense allowance, includes the proceeds from the over-allotment units). However, the
underwriters have agreed that a 1.60% portion of the underwriting discounts and commissions and $1,329,000 of the non-accountable expense allowance
will not be payable unless and until the Company completes an Acquisition and have waived their right to receive such payment upon the Companys
liquidation if it is unable to complete an Acquisition (see Note B[5]).
The Company issued on February 1,
2007, a five-year unit purchase option, for $100, to Ladenburg Thalmann & Co. Inc. (Ladenburg), the representative of the underwriters
in the IPO, to purchase 650,000 units at an exercise price of $7.50 per unit. The units issuable upon exercise of this purchase option are identical to
the Units to be sold in the IPO. The Company is accounting for the fair value of the unit purchase option, inclusive of the receipt of the $100 cash
payment, as an expense of the IPO resulting in a charge directly to stockholders equity. Accordingly, there is no net impact on the
Companys financial position or results of operations, except for the recording of the $100 proceeds from the sale. The option was valued at the
date of issuance, at approximately $2,333,500 ($3.59 per unit) using a Black-Scholes option-pricing model. The fair value of the unit purchase option
granted to Ladenburg is estimated as of the date of grant using the following assumptions: (1) expected volatility of 73.53%, (2) risk-free interest
rate of 4.59% and (3) expected life of 5 years. However, because the units do not have a trading history, the volatility assumption is based on
information currently available to management. The volatility calculation of 73.53% is based on a sample of blank check companies that completed a
business combination and have a subsequent trading history because the Companys management believes that this volatility is a reasonable
benchmark to use in estimating the expected volatility for its common stock. The unit purchase option may be exercised for cash or on a
cashless basis, at the holders option, such that the holder may use the appreciated value of the unit purchase option (the difference
between the exercise prices of the unit purchase option and the underlying warrants and the market price of the Units and underlying securities) to
exercise the unit purchase option without the payment of any cash. The Company will have no obligation to cash settle or net cash settle the exercise
of the unit purchase option or the warrants underlying the unit purchase option. The holder of the unit purchase option will not be entitled to
exercise the unit purchase option or the warrants underlying the unit purchase option unless a registration statement covering the securities
underlying the unit purchase option is effective or an exemption from registration is available. If the holder is unable to exercise the unit purchase
option or underlying warrants, the unit purchase option or Warrants, as applicable, will expire worthless.
Note G. Capital Stock
On May 16, 2006, the Board of
Directors approved a change in the Companys authorized shares and par value from 1,000 shares with a par value of $.01 per share to 6,000,000
shares with a par value of $.0001 per share, and the Company effected a 5,000-for-1 stock split of the Companys common stock. On July 11, 2006,
the Company effected a 1-for-1.1153846 reverse stock split of the Companys common stock. The accompanying financial statements give retroactive
effect to these stock splits for the period presented. On January 29, 2007, the Company effected a stock dividend of one share for every five shares
outstanding. The accompanying financial statements have been retroactively restated to reflect this transaction. The Company also approved a change in
its authorized shares of common stock from 6,000,000 shares to 72,000,000 shares.
Note H. Concentrations of Credit Risk
The Company maintains its cash in
bank deposit accounts that, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts. The Company
believes it is not exposed to any significant credit risk on its cash balances. The Company did have cash on deposit exceeding the insured limit as of
December 31, 2007. The balance is held in a money market fund account.
F-107
RENAISSANCE ACQUISITION CORP.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
Note I. Installment Loan
The Company has an installment
loan from First Insurance Funding Corp. of N.Y. for the sole purpose of financing its insurance policy for directors and officers
liability. The loan requires 21 installment payments of $4,898 beginning on February 28, 2007. As of December 31, 2007, $47,282 was outstanding,
excluding accrued interest.
The installment loan bears
interest at 7.75% per annum and is payable from operating funds, including the funds transferred from earnings of the Trust Account, which funds will
be distributed to the Public Stockholders if the Company does not consummate the initial Business Combination within the required time periods (see
Note A).
Note J. Preferred Stock
As of January 29, 2007, the
Company is authorized to issue 1,000,000 shares of preferred stock with such designations, voting and other rights and preferences as may be determined
from time to time by the Board of Directors.
Note K. Income Taxes
The Companys provision for
income taxes consists of:
Current
|
|
|
|
|
|
|
Federal
|
|
|
|
$
|
794.963
|
|
State
|
|
|
|
|
217,879
|
|
Total current
|
|
|
|
$
|
1,012,842
|
|
The variance between the
Companys effective income tax rate and the 34% federal statutory rate is as follows:
|
|
|
|
December 31,
2007
|
Statutory
federal income tax rate
|
|
|
|
|
34.0
|
%
|
Increase in
valuation allowance
|
|
|
|
|
8.7
|
%
|
State taxes
|
|
|
|
|
5.5
|
%
|
Impact of
permanent differences
|
|
|
|
|
(17.7
|
%)
|
Other
|
|
|
|
|
.1
|
%
|
Effective
income tax rate
|
|
|
|
|
30.6
|
%
|
The Company is considered in the
development stage for income tax reporting purposes. Federal income tax regulations require that the Company defer certain expenses for tax purposes.
Therefore, the Company has recorded a deferred income tax asset of $288,652. The Company concluded that it is not more likely than not that the Company
will be able to utilize the benefit of the deferred tax asset; it has recorded a valuation allowance for the full amount.
Note L. Summarized Quarterly Data
(unaudited)
Following is a summary of the
quarterly results of operations for the periods from January 1, 2007 through December 31, 2007.
|
|
|
|
Fiscal Quarter Ended
|
|
|
|
|
|
March 31,
2007
|
|
June 30,
2007
|
|
September 30,
2007
|
|
December 31,
2007
|
Net income
|
|
|
|
$
|
486,782
|
|
|
$
|
671,121
|
|
|
$
|
274,894
|
|
|
$
|
868,581
|
|
Net (loss)
income per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
$
|
.03
|
|
|
$
|
.03
|
|
|
$
|
.01
|
|
|
$
|
.04
|
|
Diluted
|
|
|
|
$
|
.03
|
|
|
$
|
.03
|
|
|
$
|
.01
|
|
|
$
|
.03
|
|
F-108
RENAISSANCE ACQUISITION CORP.
UNAUDITED FINANCIAL
STATEMENTS FOR SEPTEMBER 30, 2008 AND
FOR THE PERIOD OF THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008
F-109
RENAISSANCE ACQUISITION CORP.
(A Development Stage
Company)
CONDENSED BALANCE SHEETS
|
|
|
|
December 31,
2007
|
|
September 30,
2008
|
|
|
|
|
|
|
(unaudited)
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
|
$
|
1,410,028
|
|
|
$
|
870,793
|
|
Prepaid
expenses
|
|
|
|
|
19,213
|
|
|
|
89,857
|
|
Investment
income receivable
|
|
|
|
|
8,374
|
|
|
|
|
|
Total current
assets
|
|
|
|
|
1,437,615
|
|
|
|
960,650
|
|
Cash
equivalents held in trust account
|
|
|
|
|
105,364,922
|
|
|
|
106,407,992
|
|
Fixed assets,
net of accumulated depreciation
|
|
|
|
|
1,097
|
|
|
|
3,397
|
|
|
|
|
|
$
|
106,803,634
|
|
|
$
|
107,372,039
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
|
$
|
42,078
|
|
|
$
|
855,375
|
|
Accrued
expenses
|
|
|
|
|
80,250
|
|
|
|
69,000
|
|
Total current
liabilities
|
|
|
|
|
122,328
|
|
|
|
924,375
|
|
Long-term
obligations:
|
|
|
|
|
|
|
|
|
|
|
Accrued
underwriting costs
|
|
|
|
|
3,051,240
|
|
|
|
3,051,240
|
|
Total
liabilities
|
|
|
|
|
3,173,568
|
|
|
|
3,975,615
|
|
Common stock
subject to possible conversion, 3,586,206 shares at conversion value
|
|
|
|
|
20,819,153
|
|
|
|
20,819,153
|
|
Interest
income attributable to common stock subject to conversion,
net of tax
|
|
|
|
|
245,203
|
|
|
|
453,705
|
|
|
Commitments
and contingencies (Note 3 and 7):
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock $.0001 par value, 1,000,000 shares authorized
and none outstanding at December 31, 2007 and September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
Common stock
$.0001 par value, 72,000,000 shares authorized,
21,840,000 issued and outstanding (including 3,586,206 shares subject to possible
conversion) as of December 31, 2007 and September 30, 2008
|
|
|
|
|
2,184
|
|
|
|
2,184
|
|
Additional
paid-in capital
|
|
|
|
|
80,508,869
|
|
|
|
80,508,869
|
|
Earnings
accumulated during the development stage
|
|
|
|
|
2,054,657
|
|
|
|
1,612,513
|
|
Total
stockholders equity
|
|
|
|
|
82,565,710
|
|
|
|
82,123,566
|
|
|
|
|
|
$
|
106,803,634
|
|
|
$
|
107,372,039
|
|
See notes to the financial statements.
F-110
RENAISSANCE ACQUISITION CORP.
(A Development Stage
Company)
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
|
|
|
|
Three Months
Ended
September 30,
2007
|
|
Three Months
Ended
September 30,
2008
|
|
Nine Months
Ended
September 30,
2007
|
|
Nine Months
Ended
September 30,
2008
|
|
April 17, 2006
(inception) to
September 30,
2008
|
|
General and
administrative expenses
|
|
|
|
$
|
466,888
|
|
|
$
|
994,357
|
|
|
$
|
761,264
|
|
|
$
|
1,323,749
|
|
|
$
|
2,173,305
|
|
Operating
loss
|
|
|
|
|
(466,888
|
)
|
|
|
(994,357
|
)
|
|
|
(761,264
|
)
|
|
|
(1,323,749
|
)
|
|
|
(2,173,305
|
)
|
Other income
(expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
|
|
(1,352
|
)
|
|
|
(281
|
)
|
|
|
(4,175
|
)
|
|
|
(1,664
|
)
|
|
|
(6,927
|
)
|
Interest
income
|
|
|
|
|
20,263
|
|
|
|
6,073
|
|
|
|
33,234
|
|
|
|
29,690
|
|
|
|
83,279
|
|
Interest
income trust account
|
|
|
|
|
1,268,684
|
|
|
|
407,398
|
|
|
|
2,788,458
|
|
|
|
1,676,380
|
|
|
|
5,790,312
|
|
Income (loss)
before provision for income taxes
|
|
|
|
|
820,707
|
|
|
|
(581,167
|
)
|
|
|
2,056,253
|
|
|
|
380,657
|
|
|
|
3,693,359
|
|
Provision for
income taxes
|
|
|
|
|
(542,803
|
)
|
|
|
(146,783
|
)
|
|
|
(623,456
|
)
|
|
|
(614,299
|
)
|
|
|
(1,627,141
|
)
|
Net income
(loss)
|
|
|
|
$
|
277,904
|
|
|
$
|
(727,950
|
)
|
|
$
|
1,432,797
|
|
|
$
|
(233,642
|
)
|
|
$
|
2,066,218
|
|
Less:
Interest attributable to common stock subject to possible conversion, net of tax
|
|
|
|
|
(57,972
|
)
|
|
|
(48,993
|
)
|
|
|
(57,972
|
)
|
|
|
(208,502
|
)
|
|
|
(453,705
|
)
|
Net income
(loss) attributable to common stock not subject to possible conversion
|
|
|
|
$
|
219,932
|
|
|
$
|
(776,943
|
)
|
|
$
|
1,374,825
|
|
|
$
|
(442,144
|
)
|
|
$
|
1,612,513
|
|
Maximum
number of shares subject to possible conversion:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding subject to possible conversion
|
|
|
|
|
3,586,206
|
|
|
|
3,586,206
|
|
|
|
3,153,280
|
|
|
|
3,586,206
|
|
|
|
|
|
Income per
share amount:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and
diluted
|
|
|
|
$
|
.02
|
|
|
$
|
.01
|
|
|
$
|
.02
|
|
|
$
|
.06
|
|
|
|
|
|
Weighted
average shares outstanding not subject to possible conversion:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and
diluted
|
|
|
|
|
18,253,794
|
|
|
|
18,253,794
|
|
|
|
16,521,006
|
|
|
|
18,253,794
|
|
|
|
|
|
Pro forma
diluted
|
|
|
|
|
21,999,710
|
|
|
|
23,037,729
|
|
|
|
19,468,103
|
|
|
|
22,601,153
|
|
|
|
|
|
Net income
(loss) per share attributable to common stock not subject to conversion:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and
diluted
|
|
|
|
$
|
.01
|
|
|
$
|
(.04
|
)
|
|
$
|
.08
|
|
|
$
|
(.02
|
)
|
|
|
|
|
Pro forma
diluted
|
|
|
|
$
|
.01
|
|
|
$
|
(.03
|
)
|
|
$
|
.07
|
|
|
$
|
(.02
|
)
|
|
|
|
|
See notes to the financial statements.
F-111
RENAISSANCE ACQUISITION CORP.
(A Development Stage
Company)
CONDENSED STATEMENTS OF STOCKHOLDERS EQUITY
|
|
|
|
Common Stock
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Additional
Paid-In
Capital
|
|
(Deficit)/Earnings
Accumulated
During the
Development
Stage
|
|
Total
Stockholders
Equity
|
Balance at
April 17, 2006 (inception)
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Sale of
common stock to founding stockholders at $.0064 per share (April 17, 2006)
|
|
|
|
|
3,900,000
|
|
|
|
390
|
|
|
|
24,610
|
|
|
|
|
|
|
|
25,000
|
|
Net loss for
the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,518
|
)
|
|
|
(1,518
|
)
|
Balance as of
December 31, 2006
|
|
|
|
|
3,900,000
|
|
|
|
390
|
|
|
|
24,610
|
|
|
|
(1,518
|
)
|
|
|
23,482
|
|
Sale of
private placement warrants at $0.45 per warrant
|
|
|
|
|
|
|
|
|
|
|
|
|
2,100,000
|
|
|
|
|
|
|
|
2,100,000
|
|
Sale of
17,940,000 units net of offering expenses at $6.00 per unit (February 1, 2007)
|
|
|
|
|
17,940,000
|
|
|
|
1,794
|
|
|
|
99,203,312
|
|
|
|
|
|
|
|
99,205,106
|
|
Proceeds
subject to possible conversion of 3,586,206 shares
|
|
|
|
|
|
|
|
|
|
|
|
|
(20,819,153
|
)
|
|
|
|
|
|
|
(20,819,153
|
)
|
Sale of unit
purchase option
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
|
|
|
|
|
|
|
100
|
|
Accretion of
trust account relating to common stock subject to possible conversion, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(245,203
|
)
|
|
|
(245,203
|
)
|
Net income
for the year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,301,378
|
|
|
|
2,301,378
|
|
Balance as of
December 31, 2007
|
|
|
|
|
21,840,000
|
|
|
|
2,184
|
|
|
|
80,508,869
|
|
|
|
2,054,657
|
|
|
|
82,565,710
|
|
Accretion of
trust account relating to common stock subject to possible conversion, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(208,502
|
)
|
|
|
(208,502
|
)
|
Net loss for
the nine months ending September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(233,642
|
)
|
|
|
(233,642
|
)
|
Balance as of
September 2008 (unaudited)
|
|
|
|
|
21,840,000
|
|
|
$
|
2,184
|
|
|
$
|
80,508,869
|
|
|
$
|
1,612,513
|
|
|
$
|
82,123,566
|
|
See notes to the financial statements.
F-112
RENAISSANCE ACQUISITION CORP.
(A Development Stage
Company)
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
|
|
Nine Months
Ended
September 30,
2007
|
|
Nine Months
Ended
September 30,
2008
|
|
April 17, 2006
(inception) to
September 30,
2008
|
Cash flows
from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
(loss)
|
|
|
|
$
|
1,432,797
|
|
|
$
|
(233,642
|
)
|
|
$
|
2,066,218
|
|
Adjustments
to reconcile net income (loss) to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
|
|
142
|
|
|
|
376
|
|
|
|
596
|
|
Changes in
operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid
expenses
|
|
|
|
|
(9,843
|
)
|
|
|
(70,644
|
)
|
|
|
(704,156
|
)
|
Interest
income receivable
|
|
|
|
|
(9,360
|
)
|
|
|
8,374
|
|
|
|
|
|
Accounts
payable and accrued liabilities
|
|
|
|
|
985,029
|
|
|
|
802,047
|
|
|
|
1,538,674
|
|
Net cash
provided by operating activities
|
|
|
|
|
2,398,765
|
|
|
|
506,511
|
|
|
|
2,901,332
|
|
|
Cash flows
from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
invested in trust account
|
|
|
|
|
(105,061,449
|
)
|
|
|
(1,043,070
|
)
|
|
|
(106,407,992
|
)
|
Acquisition
of fixed assets
|
|
|
|
|
(1,316
|
)
|
|
|
(2,676
|
)
|
|
|
(3,993
|
)
|
Net cash used
by investing activities
|
|
|
|
|
(105,062,765
|
)
|
|
|
(1,045,746
|
)
|
|
|
(106,411,985
|
)
|
|
Cash flows
from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from/(repayment of) note payable
to stockholder
|
|
|
|
|
(150,000
|
)
|
|
|
|
|
|
|
|
|
Proceeds from
sale of units, net
|
|
|
|
|
102,371,680
|
|
|
|
|
|
|
|
102,256,446
|
|
Proceeds from
issuance or warrants
|
|
|
|
|
2,100,000
|
|
|
|
|
|
|
|
2,100,000
|
|
Proceeds from
sale of common stock to
initial stockholder
|
|
|
|
|
|
|
|
|
|
|
|
|
25,000
|
|
Net cash
provided by financing activities
|
|
|
|
|
104,321,680
|
|
|
|
0
|
|
|
|
104,381,446
|
|
Net increase
(decrease) in cash
|
|
|
|
|
1,657,680
|
|
|
|
(539,235
|
)
|
|
|
870,793
|
|
Cash at
beginning of period
|
|
|
|
|
60,165
|
|
|
|
1,410,028
|
|
|
|
0
|
|
Cash at end
of period
|
|
|
|
$
|
1,717,845
|
|
|
$
|
870,793
|
|
|
$
|
870,793
|
|
|
Supplemental cash flow disclosures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid
for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
|
$
|
(4,175
|
)
|
|
$
|
(1,664
|
)
|
|
$
|
(6,927
|
)
|
Income taxes
|
|
|
|
$
|
0
|
|
|
$
|
632,810
|
|
|
$
|
1,655,310
|
|
|
Non-cash
operating and financing activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrual of
deferred offering costs
|
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
(212,493
|
)
|
Accrued
deferred underwriting fees
|
|
|
|
|
3,051,240
|
|
|
|
0
|
|
|
|
3,051,240
|
|
Accrued
insurance installment loan
|
|
|
|
$
|
60,833
|
|
|
$
|
0
|
|
|
$
|
4,864
|
|
See notes to the financial statements.
F-113
RENAISSANCE ACQUISITION CORP.
NOTES TO CONDENSED FINANCIAL
STATEMENTS
AS OF AND FOR THE PERIOD ENDED SEPTEMBER 30, 2008
(UNAUDITED)
Note 1. Organization and Business
Operations
Renaissance Acquisition Corp.
(the Company) was incorporated in Delaware on April 17, 2006 for the purpose of effecting a merger, capital stock exchange, asset
acquisition or other similar business combination with one or more operating businesses. The Companys fiscal year-end is December
31.
As of September 30, 2008, the
Company had not yet commenced any operations. All activity through September 30, 2008 relates to the Companys formation, its initial public
offering of its securities (the IPO) which was completed in February 2007, activities to identify an operating business to acquire and
negotiating and entering into an agreement to acquire an operating business. See Notes 3 and 9.
Note 2. Summary of Significant Accounting
Policies
Basis of Presentation
The financial statements have
been prepared by the Company without audit on the accrual basis of accounting in accordance with U.S. generally accepted accounting principles
(GAAP). Pursuant to the rules and regulations of the Securities and Exchange Commission (SEC), certain information and footnote
disclosures normally included in financial statements prepared in accordance with GAAP have been omitted or condensed. It is managements belief
that the disclosures made are adequate to make the information presented not misleading and reflect all significant adjustments (consisting primarily
of normal recurring adjustments) necessary for a fair presentation of financial position and results of operations for the periods presented. The
results of operations for the nine months ended September 30, 2008 are not necessarily indicative of the operating results for the full year. It is
recommended that these financial statements be read in conjunction with the financial statements and notes thereto as of December 31, 2007 and for the
year ended December 31, 2007 filed with the SEC and included in the Companys Form 10-K filed with the SEC on March 31, 2008.
Use of Estimates
The preparation of financial
statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the
reporting period. Actual results may differ from those estimates.
Fair Value Measurements
The fair values of the
Companys financial instruments reflect the estimates of amounts that would be received from selling an asset in an orderly transaction between
market participants at the measurement date. The fair value estimates presented in this report are based on information available to the Company as of
September 30, 2008 and December 31, 2007.
In accordance with Statement of
Financial Accounting Standards (SFAS) No. 157,
Fair Value Measurements
(SFAS 157), the Company applies a fair value
hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair
value. The three levels are the following:
Level
I
|
|
Quoted prices in active markets for identical assets or
liabilities.
|
Level
2
|
|
Inputs other than Level I that are observable, either directly
or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are
observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
|
F-114
RENAISSANCE ACQUISITION CORP.
NOTES TO CONDENSED FINANCIAL
STATEMENTS
AS OF AND FOR THE PERIOD ENDED SEPTEMBER 30, 2008
(UNAUDITED) (CONTINUED)
Level
3
|
|
Unobservable inputs that are supported by little or no market
activity and that are significant to the fair value of the assets or liabilities.
|
The fair value of cash and
investments held in the trust account were estimated using Level I inputs and the carrying value approximates the fair value because of their nature
and respective duration.
Cash Equivalents
The Company considers highly
liquid investments with maturities of three months or less, when purchased, to be cash equivalents. Cash equivalents held in the Trust Account (see
Note 3) are to be held to maturity, and accordingly, are stated at cost. Funds held in the Trust Account are restricted (see Note 3).
Accrued Underwriting Fees
Accrued underwriting fees of
$3,051,240 accrued in connection with the Companys IPO are payable if and when the Company effects a business combination (see Note
3).
Deferred Taxes
The Company has recorded a
deferred tax asset of $759,846 which arises from the differing book and tax treatments of expenses during the development stage. Because management has
determined that it is not more likely than not that the Company will be able to utilize the benefit of the deferred tax asset, it has recorded a
valuation allowance for the full amount.
Common Stock Subject to Possible
Conversion
Common stock subject to possible
conversion represents 19.99% of the proceeds from the IPO placed in trust, interest income earned on the trust, net of tax, in excess of the $1,875,000
that has been released to the Company for operating expenses and due diligence and the estimated tax liability associated with interest income earned
on the funds held in trust (see Note 3). Such amount is payable on a pro-rata basis upon consummating a business combination to Public Stockholders
(see Note 3) who vote against a business combination and elect conversion.
Derivative Financial Instruments
Potential derivative financial
instruments consist of warrants issued as part of the IPO and a unit purchase option that was sold to the representative of the underwriters as
described in Note 3. In accordance with the warrant agreements relating to the warrants issued as part of the IPO and the unit purchase option, the
Company is only required to use its best efforts to maintain the effectiveness of the registration statement covering the shares underlying the
warrants and the unit purchase option. The Company will not be obligated to deliver securities, and there are no contractual penalties for failure to
deliver securities, if a registration statement is not effective at the time of exercise. Additionally, in the event that a registration is not
effective at the time of exercise, the warrant holder shall not be entitled to exercise such warrant and in no event (whether in the case of a
registration statement not being effective or otherwise) will the Company be required to cash settle or net cash settle the warrant exercise.
Consequently, the warrants and unit purchase option may expire unexercised and unredeemed.
Based on Emerging Issues Task
Force Issue No. 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Companys Own Stock, the issuance
of the warrants and the sale of the unit purchase option were not required to be recorded as derivative liabilities and are reported in
stockholders equity. Accordingly, there is no impact on the Companys financial position and results of operations, except for the $100 in
proceeds from the sale of the unit purchase option. Subsequent changes in the fair value will not be recognized as long as the warrants and unit
purchase option continue to be classified as equity instruments.
At the date of issuance, the
Company determined the unit purchase option had a fair market value of approximately $2,333,500 using a Black-Scholes pricing model.
F-115
RENAISSANCE ACQUISITION CORP.
NOTES TO CONDENSED FINANCIAL
STATEMENTS
AS OF AND FOR THE PERIOD ENDED SEPTEMBER 30, 2008
(UNAUDITED) (CONTINUED)
Net Income (Loss) Per Share
The weighted average number of
shares used in the basic and diluted net income (loss) per share for shares outstanding not subject to possible conversion are as
follows:
Net income
(loss) per share for all periods is computed by dividing the earnings applicable to common stockholders by the weighted average number of common shares
outstanding for the period. Warrants issued by the Company in the IPO and sponsor warrants are contingently exercisable upon consummation of a business
combination. Hence these are presented in the pro forma diluted net income (loss) per share. Pro forma diluted net income (loss) per share reflects the
potential dilution assuming common shares were issued upon the exercise of outstanding in the money warrants and the proceeds thereof were used to
purchase common shares at the then average market price during the period.
The
Companys statements of operations include a presentation of net income (loss) per share for common stock subject to possible conversion in a
manner similar to the two-class method of earnings per share. Basic and diluted net income (loss) per share amount for the maximum number of shares
subject to possible conversion is calculated by dividing the net interest income attributable to common shares subject to conversion ($57,972 and
$48,993 for the three months ended September 30, 2007 and 2008, respectively, and $57,972 and $208,502 for the nine months ended September 30, 2007 and
2008, respectively) by the weighted average number of shares subject to possible conversion. Basic and diluted net income (loss) per share amount for
the shares outstanding not subject to possible conversion is calculated by dividing the net income (loss) exclusive of the net interest income
attributable to common shares subject to conversion by the weighted average number of shares not subject to possible conversion.
|
|
|
|
For the Three
Months Ended
September 30,
2007
|
|
For the Three
Months Ended
September 30,
2008
|
|
For the Nine
Months Ended
September 30,
2007
|
|
For the Nine
Months Ended
September 30,
2008
|
Weighted
average number of shares outstanding as used in computation of basic and diluted net income (loss) per share
|
|
|
|
|
18,253,794
|
|
|
|
18,253,794
|
|
|
|
16,521,006
|
|
|
|
18,253,794
|
|
Effect of
diluted securities warrants
|
|
|
|
|
3,745,916
|
|
|
|
4,783,935
|
|
|
|
2,947,097
|
|
|
|
4,347,359
|
|
Shares used
in computation of pro forma diluted net income (loss) per shares
|
|
|
|
|
21,999,710
|
|
|
|
23,037,729
|
|
|
|
19,468,103
|
|
|
|
22,601,153
|
|
At September 30, 2007 and 2008,
the Company had outstanding warrants to purchase 35,880,000 shares of common stock, which were included in the calculation of pro forma diluted shares.
For the nine months ended September 30, 2007 and September 30, 2008, potential common shares in connection with the underwriters purchase option
(see Note 3) aggregating 1,950,000 and the insider warrants aggregating 4,666,667 have not been included because the effect would be
anti-dilutive.
Adoption of New Accounting Pronouncements
In September 2006, the Financial
Accounting Standards Board (FASB) issued Interpretation No. (FIN) 48,
Accounting for Uncertainty in Income Taxes
, an
interpretation of FASB Statement No. 109, which clarifies the accounting for uncertainty in income taxes recognized in an enterprises financial
statements in accordance with SFAS No. 109 and prescribes a recognition threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest
and penalties, accounting in interim periods, disclosure and transition. We adopted FIN 48 effective January 1, 2007, which had no material effect on
our financial statements. The only year for which we have filed income tax returns is 2006, and such tax returns are open to examination by the major
taxing jurisdiction to which we are subject. The Company has elected to record interest and penalties recognized in accordance with FIN 48 in the
financial statements as income taxes. Any subsequent change in
F-116
RENAISSANCE ACQUISITION CORP.
NOTES TO CONDENSED FINANCIAL
STATEMENTS
AS OF AND FOR THE PERIOD ENDED SEPTEMBER 30, 2008
(UNAUDITED) (CONTINUED)
classification of such
interest and penalties will be treated as a change in accounting principle subject to the requirements of SFAS No. 154,
Accounting Changes and Error
Corrections
.
In September 2006, the FASB
issued SFAS No. 157,
Fair Value Measurements
(SFAS 157), which defines fair value, establishes a framework for measuring fair value
in GAAP and expands disclosures about fair value measurements. SFAS 157 is effective in fiscal years beginning after November 15, 2007. We adopted SFAS
157 effective January 1, 2008, which had no material effect on our financial statements.
In October 2008, the FASB issued
FASB Staff Position (FSP) FAS 157-3,
Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not
Active
. This FSP clarifies the application of SFAS 157 in a market that is not active and applies to financial assets within the scope of
accounting pronouncements that require or permit fair value measurements in accordance with SFAS 157. The FSP is effective upon issuance, including
prior periods for which financial statements have not been issued. Accordingly, the Company adopted this guidance effective July 1, 2008. The
Companys adoption of this guidance did not have a material effect on the Companys financial position or results of
operations.
In February 2007, the FASB issued
SFAS No. 159,
The Fair Value Option for Financial Assets and Financial Liabilities
(SFAS 159), which permits entities to choose to
measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. SFAS 159 is
effective for fiscal years beginning after November 15, 2007. We adopted SFAS 159 effective January 1, 2008, which had no material effect on our
financial statements.
Impact of Recently Issued Accounting
Pronouncements
In December 2007, the FASB,
issued SFAS No. 141 (revised 2007),
Business Combinations
(FAS 141R). FAS 141R replaces SFAS No. 141,
Business
Combinations
(FAS 141), although it retains the fundamental requirement in FAS 141 that the acquisition method of accounting be
used for all business combinations. FAS 141R establishes principles and requirements for how the acquirer in a business combination (a) recognizes and
measures the assets acquired, liabilities assumed and any non-controlling interest in the acquiree, (b) recognizes and measures the goodwill acquired
in a business combination or a gain from a bargain purchase and (c) determines which information to disclose regarding the business combination. FAS
141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of our 2009 fiscal year. We are
currently assessing the potential effect of FAS 141R on our financial statements.
In December 2007, the FASB issued
SFAS No. 160,
Noncontrolling Interests in Consolidated Financial Statements-an amendment of ARB No. 51
(FAS 160). This standard
establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. The
guidance will become effective as of the beginning of the Companys fiscal year beginning after December 15, 2008. The Company is currently
assessing the impact of the adoption of FAS 160 on the Companys financial position and results of operations.
In May 2008, the FASB issued SFAS
No. 162,
The Hierarchy of Generally Accepted Accounting Principles
, (SFAS 162). SFAS 162 sets forth the sources of accounting
principles and the framework, or hierarchy, for selecting principles to be used in financial statement preparation. Prior to the issuance of SFAS 162,
the GAAP hierarchy was defined in the American Institute of Certified Public Accountants Statement on Auditing Standards No. 69,
The Meaning of
Present Fairly in Conformity With Generally Accepted Accounting Principles
(SFAS 162). SFAS 162 will be effective following approval by
the Securities and Exchange Commission (SEC). The FASB does not expect the issuance of SFAS 162 to result in a change in current practice.
The Company is currently evaluating the impact, if any, that SFAS 162 will have on its financial position and results of operations.
Management does not believe that
any other recently issued, but not yet effective, accounting standards, if currently adopted, would have a material effect on the accompanying
financial statements.
F-117
RENAISSANCE ACQUISITION CORP.
NOTES TO CONDENSED FINANCIAL
STATEMENTS
AS OF AND FOR THE PERIOD ENDED SEPTEMBER 30, 2008
(UNAUDITED) (CONTINUED)
Note 3. Initial Public Offering
On February 1, 2007, the Company
issued and sold 15,600,000 units (Units) in its IPO, and on February 16, 2007, the Company issued and sold an additional 2,340,000 Units
that were subject to the underwriters over-allotment option. Each Unit consists of one share of common stock and two warrants
(Warrants). Each Warrant entitles the holder to purchase from the Company one share of common stock at an exercise price of $5.00
commencing the later of (a) one year from the effective date of the IPO or (b) the completion of an acquisition. The Warrants will expire four years
from the effective date of the IPO. The Warrants will be redeemable at a price of $.01 per Warrant upon 30 days notice after the Warrants become
exercisable, only in the event that the last sale price of the common stock is at least $8.50 per share for any 20 trading days within a 30 trading day
period ending on the third day prior to the date on which notice of redemption is given.
The public offering price of each
Unit was $6.00, and the gross proceeds of the IPO were $107,640,000 (including proceeds from the exercise of the over-allotment option). Of the gross
proceeds: (i) $102,047,840 was deposited into a trust account (the Trust Account), which amount included $3,051,240 of deferred
underwriting fees; (ii) the underwriters received $4,811,160 in underwriting fees (excluding the deferred underwriting fees); and (iii) the Company
retained $781,000 for offering expenses. In addition, the Company deposited into the Trust Account $2,100,000 that it received from the issuance and
sale of 4,666,667 Warrants (exercisable at $6.00 per share) to RAC Partners LLC, an entity controlled by Barry Florescue, our Chairman and Chief
Executive Officer, and Charles Miersch and Morton Farber, two of our Directors, on February 1, 2007.
In connection with the IPO, the
Company sold to the representative of the underwriters for $100 an option to purchase 650,000 Units for $7.50 per Unit. These units are identical to
the Units issued in the IPO. This option may be exercised for cash or on a cashless basis and expires February 1, 2012.
The funds in the Trust Account
will be distributed to the Company (subject to stockholder claims described below) upon consummation of a business combination with one or more
operating businesses (the Business Combination) whose collective market value is at least 80% of the Companys net assets at the time
of the acquisition. The Company may use the funds in the Trust Account to complete the Business Combination or for such purposes as the Company
determines following the Business Combination. If the Company does not consummate a Business Combination by January 29, 2009, the funds in the Trust
Account will be distributed to the stockholders then holding the shares issued in the IPO (the Public Stockholders). Pending distribution
to the Company or the Public Stockholders, the funds in the Trust Account may be invested in government securities and certain money market funds.
Interest earned on the Trust Account, up to $1,875,000, net of taxes, has been released to the Company for due diligence and general and administrative
expenses. Through September 30, 2008, approximately $5,790,000 of interest had been earned on the trust account, of which $1,875,000 has been released
to the Company to fund its working capital requirements.
The Company accreted $208,502 of
interest to the common stock subject to possible conversion for the nine months ended September 30, 2008, and $453,705 for the period from April 17,
2006 (inception) through September 30, 2008. The interest is derived from the sum of the trust income less the provision for income taxes and working
capital allocation, then applying the percent of common shares subject to possible conversion.
The Company has agreed to submit
the Business Combination for approval of its stockholders even if the nature of the transaction would not require stockholder approval under applicable
state law. The Company will not consummate the Business Combination unless it is approved by a majority of the Public Stockholders, and the Public
Stockholders owning less than 20% of the shares issued in the IPO vote against the Business Combination and exercise the conversion rights described
below. The Companys stockholders prior to the consummation of the IPO (the Pre-IPO Stockholders) agreed to vote their shares of
common stock owned prior to the IPO in accordance with the vote of the majority in interest of the Public Stockholders. These voting provisions will
not be applicable after the consummation of the first Business Combination.
F-118
RENAISSANCE ACQUISITION CORP.
NOTES TO CONDENSED FINANCIAL
STATEMENTS
AS OF AND FOR THE PERIOD ENDED SEPTEMBER 30, 2008
(UNAUDITED) (CONTINUED)
With respect to a Business
Combination that is approved and consummated, any Public Stockholder who voted against the Business Combination may demand that the Company convert his
or her shares into cash. The per share conversion price will equal the amount in the Trust Account inclusive of any interest subject to the amounts
allocable for due diligence, general and administrative expenses and income taxes described above (calculated as of two business days prior to the
consummation of the proposed Business Combination), divided by the number of shares of common stock held by Public Stockholders at the consummation of
the IPO. Accordingly, a Business Combination may be consummated with Public Stockholders holding 19.99% of the aggregate number of shares owned by all
Public Stockholders converting such shares into cash from the Trust Account. Such Public Stockholders are entitled to receive their per-share interest
in the Trust Account computed without regard to the shares held by the Pre-IPO Stockholders.
The Companys Certificate of
Incorporation provides for mandatory liquidation of the Company in the event that the Company does not consummate a Business Combination prior to
January 29, 2009.
Note 4. Concentrations of Credit Risk
The Company maintains its cash in
bank deposit accounts that, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts. The Company
believes it is not exposed to any significant credit risk on its cash balances. The Company did have cash on deposit exceeding the insured limit as of
September 30, 2008. The balance is held in a money market fund account.
Note 5. Installment Loan
The Company has an installment
loan from First Insurance Funding Corp. of N.Y. for the sole purpose of financing its insurance policy for directors and officers
liability. The loan requires 21 installment payments of $4,898 beginning on February 28, 2007. As of September 30, 2008, $4,864 was outstanding,
excluding accrued interest.
The installment loan bears
interest at 7.75% per annum and is payable from the funds transferred from earnings of the Trust Account, which funds will be distributed to the Public
Stockholders if the Company does not consummate the initial Business Combination within the required time periods.
Note 6. Note Payable to Founding
Stockholder
On April 30, 2006, the Company
issued a $150,000 unsecured promissory note to Barry W. Florescue, the Companys Chairman and Chief Executive Officer (the Note). The
Note was non-interest bearing and was payable on the earlier of April 30, 2007 or the consummation of the IPO. The Note was repaid with the proceeds of
the IPO on February 1, 2007.
Note 7. Related Party Transactions
The Company pays BMD Management
Company, Inc. a fee of $8,000 per month for office space and general and administrative services pursuant to an agreement between the Company and BMD
Management Company, Inc. with a term beginning on January 29, 2007 and ending on the effective date of the acquisition of a target business. Through
September 30, 2008, $160,774 had been incurred with respect to this agreement. As of September 30, 2008, there were no outstanding management fees
payable to BMD Management Company, Inc.
The Company engages and proposes
to continue to engage in ordinary course banking relationships on customary terms with Century Bank including the investment of excess operating funds
in short term certificates of deposit. The Companys Chairman and Chief Executive Officer is the Chairman and owner of the bank and two of the
Companys Directors are directors of the bank.
The Companys Chairman and
Chief Executive Officer, pursuant to an agreement with the Company and the underwriter, has agreed that if the Company liquidates prior to the
consummation of a business combination, he
F-119
RENAISSANCE ACQUISITION CORP.
NOTES TO CONDENSED FINANCIAL
STATEMENTS
AS OF AND FOR THE PERIOD ENDED SEPTEMBER 30, 2008
(UNAUDITED) (CONTINUED)
will be personally liable to
pay debts and obligations to target businesses or vendors or other entities that are owed money by the Company for services rendered or contracted for
or products sold to the Company in excess of the net proceeds of the IPO not held in the Trust Account.
The Companys Chairman and
Chief Executive Officer has also entered into an agreement with Ladenburg Thalmann & Co. Inc., the lead underwriter for the IPO, pursuant to which
he, or an entity or entities he controls, will place limit orders for $12 million of the Companys common stock commencing ten business days after
the Company files its Current Report on Form 8-K announcing its execution of a definitive agreement for a business combination and ending on the
business day immediately preceding the record date for the meeting of stockholders at which such business combination is to be approved. If he
purchases shares of common stock pursuant to this agreement, he will be entitled to vote such shares as he chooses on a proposal to approve a business
combination which may influence whether or not a business combination is approved.
Note 8. Preferred Stock
The Company is authorized to
issue 1,000,000 shares of preferred stock with such designations, voting and other rights and preferences as may be determined from time to time by the
Board of Directors.
Note 9. Entry Into Definitive Merger
Agreement
On September 13, 2008, the
Company entered into an Agreement and Plan of Merger (the Merger Agreement) to effect a reverse acquisition of First Communications, Inc.
(First Communications). If the Merger is consummated, First Communications shareholders will receive an aggregate of 18,460,000 shares of
our common stock and the right to receive up to an aggregate of an additional (i) 9,950,000 shares of our common stock if certain conditions relating
to EBITDA are satisfied (as further described in the following paragraph) and (ii) 8,500,000 shares of our common stock if the last sales price of our
common stock has been at least $8.50 per share on 20 trading days within any 30 trading day period ending on January 28, 2011 (Warrant
Condition). In addition, holders of First Communications preferred stock would receive an aggregate of $15.0 million in cash consideration,
together with an accrued dividend of 12% per annum, pro rated and calculated from September 28, 2008, in exchange for their shares. If the Companye
does not consummate this transaction by January 29, 2009, it will be required by its governing documents to liquidate.
F-120
ANNEX A
AGREEMENT AND PLAN OF MERGER
dated as of September 13, 2008
among
RENAISSANCE ACQUISITION CORP.,
FCI MERGER SUB I, INC.,
FCI MERGER SUB II, LLC,
FIRST COMMUNICATIONS, INC.
and
THE STOCKHOLDERS REPRESENTATIVE NAMED HEREIN
A-1
[THIS PAGE INTENTIONALLY LEFT BLANK]
A-2
TABLE OF CONTENTS
|
|
|
|
I.
|
DEFINITIONS
|
A-8
|
II.
|
THE MERGERS
|
A-17
|
|
2.1.
|
Effective Times of the Mergers
|
A-17
|
|
2.2.
|
Closing
|
A-17
|
|
2.3.
|
Effects of the Mergers
|
A-17
|
|
2.4
|
Governing Documents
|
A-18
|
|
2.5
|
Directors and Officers
|
A-18
|
III.
|
CONVERSION OF SECURITIES
|
A-18
|
|
3.1
|
Effect on Capital Stock; Merger Consideration
|
A-18
|
|
3.2
|
Fractional Shares
|
A-20
|
|
3.3
|
Appraisal Rights
|
A-20
|
|
3.4
|
Payment of Merger Consideration; Surrender of Certificates
|
A-21
|
|
3.5
|
Escrow
|
A-23
|
IV.
|
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
|
A-23
|
|
4.1
|
Organization, Qualification, and Corporate Power
|
A-23
|
|
4.2
|
Subsidiaries
|
A-23
|
|
4.3
|
Capitalization
|
A-23
|
|
4.4
|
Validity and Execution; Stockholder Approval
|
A-24
|
|
4.5
|
Real and Tangible Personal Properties
|
A-24
|
|
4.6
|
No Litigation
|
A-25
|
|
4.7
|
Noncontravention
|
A-25
|
|
4.8
|
Tax Matters
|
A-25
|
|
4.9
|
Financial Statements
|
A-26
|
|
4.10
|
Undisclosed Liabilities
|
A-27
|
|
4.11
|
Material Contracts
|
A-27
|
|
4.12
|
Intellectual Property
|
A-27
|
|
4.13
|
Insurance
|
A-28
|
|
4.14
|
Employees
|
A-28
|
|
4.15
|
Employee Benefits
|
A-28
|
|
4.16
|
Environmental Matters
|
A-30
|
A-3
TABLE OF CONTENTS
(continued)
|
|
|
|
|
|
|
Page
|
|
4.17
|
Compliance with Laws
|
A-30
|
|
4.18
|
Accounts Receivable
|
A-30
|
|
4.19
|
No Brokers
|
A-30
|
|
4.20
|
No Material Changes
|
A-30
|
|
4.21
|
Permits and Licenses
|
A-32
|
|
4.22
|
Warranties
|
A-32
|
|
4.23
|
Major Suppliers and Customers
|
A-32
|
|
4.24
|
Related Party Transactions
|
A-32
|
|
4.25
|
Prohibited Payments
|
A-33
|
|
4.26
|
Books and Records
|
A-33
|
|
4.27
|
Proxy Statement
|
A-33
|
|
4.28
|
Disclaimer
|
A-33
|
V.
|
REPRESENTATIONS AND WARRANTIES OF PARENT AND THE MERGER SUBS
|
A-34
|
|
5.1
|
Organization of Parent and the Merger Subs
|
A-34
|
|
5.2
|
Validity and Execution
|
A-34
|
|
5.3
|
Noncontravention
|
A-34
|
|
5.4
|
No Litigation
|
A-34
|
|
5.5
|
No Brokers
|
A-34
|
|
5.6
|
Disclosure
|
A-34
|
|
5.7
|
SEC Filings
|
A-34
|
|
5.8
|
Capitalization
|
A-35
|
|
5.9
|
Undisclosed Liabilities
|
A-36
|
|
5.10
|
Material Contracts
|
A-36
|
|
5.11
|
Intellectual Property
|
A-36
|
|
5.12
|
Compliance with Laws
|
A-36
|
|
5.13
|
Related Party Transactions
|
A-36
|
|
5.14
|
Tax Matters
|
A-36
|
|
5.15
|
Business Activities
|
A-36
|
|
5.16
|
Title to Property
|
A-37
|
A-4
TABLE OF CONTENTS
(continued)
|
|
|
|
|
|
|
Page
|
|
5.17
|
Indebtedness
|
A-37
|
|
5.18
|
Trust Funds
|
A-37
|
|
5.19
|
No Material Changes
|
A-37
|
|
5.20
|
Board Approval
|
A-37
|
VI.
|
COVENANTS
|
A-37
|
|
6.1
|
Mutual Joint Covenants
|
A-37
|
|
6.2
|
Companys Covenants
|
A-42
|
|
6.3
|
Parent Covenants
|
A-46
|
|
6.4
|
Proxies and Dissent Rights
|
A-48
|
|
6.5
|
Stock Symbol
|
A-48
|
|
6.6
|
Further Assurances
|
A-48
|
VII.
|
CONDITIONS TO EACH PARTYS OBLIGATION TO EFFECT THE MERGER
|
A-48
|
|
7.1
|
Parent Stockholder Approval
|
A-48
|
|
7.2
|
Parent Common Stock
|
A-48
|
|
7.3
|
Effectiveness of Registration Statement
|
A-48
|
|
7.4
|
NASDAQ Listing Approval
|
A-48
|
|
7.5
|
No Litigation
|
A-48
|
|
7.6
|
Hart-Scott-Rodino Act; Governmental Approvals
|
A-49
|
|
7.7
|
Board Composition and Parent Officers
|
A-49
|
|
7.8
|
Frustration of Closing Conditions
|
A-49
|
VIII.
|
ADDITIONAL CONDITIONS TO OBLIGATIONS OF PARENT AND THE MERGER SUB
|
A-49
|
|
8.1
|
Representations True
|
A-49
|
|
8.2
|
Consents Obtained
|
A-49
|
|
8.3
|
Performance of Obligations
|
A-49
|
|
8.4
|
Dissenting Stockholders
|
A-49
|
|
8.5
|
Receipt of Documents by Parent
|
A-49
|
|
8.6
|
No Material Adverse Effect
|
A-50
|
|
8.7
|
Credit Agreement Amendment
|
A-50
|
|
8.8
|
GCI Merger
|
A-50
|
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TABLE OF CONTENTS
(continued)
|
|
|
|
|
|
Page
|
IX.
|
CONDITIONS PRECEDENT TO OBLIGATIONS OF COMPANY
|
A-50
|
|
9.1
|
Representations True
|
A-50
|
|
9.2
|
Performance of Obligations
|
A-50
|
|
9.3
|
Consents Obtained
|
A-50
|
|
9.4
|
Merger Consideration
|
A-50
|
|
9.5
|
Parent Stockholder Consent
|
A-50
|
|
9.6
|
Receipt of Documents
|
A-51
|
|
9.7
|
SEC Compliance
|
A-51
|
|
9.8
|
No Material Adverse Effect
|
A-51
|
X.
|
SURVIVAL OF REPRESENTATIONS AND WARRANTIES
|
A-51
|
|
10.1
|
Nonsurvival of Representations and Warranties
|
A-51
|
XI.
|
TERMINATION
|
A-51
|
|
11.1
|
Termination
|
A-51
|
|
11.2
|
Effect of Termination
|
A-52
|
XII.
|
MISCELLANEOUS
|
A-52
|
|
12.1
|
Applicable Law
|
A-52
|
|
12.2
|
Construction; Entire Agreement; Amendment
|
A-52
|
|
12.3
|
Assignment
|
A-52
|
|
12.4
|
Binding Effect
|
A-52
|
|
12.5
|
Interpretation
|
A-52
|
|
12.6
|
Waiver
|
A-52
|
|
12.7
|
Counterparts
|
A-52
|
|
12.8
|
Severability
|
A-53
|
|
12.9
|
Notices
|
A-53
|
|
12.10
|
Consent to Jurisdiction
|
A-54
|
|
12.11
|
WAIVER OF JURY TRIAL
|
A-54
|
|
12.12
|
Specific Performance
|
A-54
|
|
12.13
|
Expenses
|
A-54
|
|
12.14
|
Stockholders Representative
|
A-54
|
A-6
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER
(this
Agreement
) is entered into as of this 13th day of September, 2008 by and among RENAISSANCE ACQUISITION CORP., a Delaware corporation (
Parent
), FCI MERGER SUB I, INC., a Delaware corporation and wholly owned subsidiary of Parent (
Merger Sub I
), FCI MERGER SUB II, LLC, a Delaware limited liability company and wholly owned subsidiary of Parent (
Merger Sub II
, and, together with the Merger Sub I, collectively, the
Merger Subs
), FIRST COMMUNICATIONS, INC., a Delaware corporation (the
Company
) and The Gores Group LLC, solely in its capacity as the exclusive representative of the stockholders of the Company (
Stockholders Representative
).
RECITALS:
A. The parties hereto desire to effect a business combination of Parent and the Company by means of (i) the merger (the
First Merger
) of Merger Sub I with and into the Company, with the Company continuing as the surviving corporation of the First Merger (the
First Merger Surviving Corporation
), and (ii) immediately following the effectiveness of the First Merger, and as part of the same plan of merger and reorganization, the merger (the
Second Merger
and, together with the First Merger, collectively, the
Mergers
) of the First Merger Surviving Corporation with and into Merger Sub II, with Merger Sub II continuing as the surviving entity of the Second Merger (the
Second Merger Surviving Entity
).
B. The boards of directors of each of the parties hereto (or in the case of Merger Sub II, Parent, as its sole managing member) have determined that this Agreement and the Mergers and such other transactions contemplated hereby (collectively, the
Transactions
) are fair to and in the best interests of their respective stockholders or members, as applicable, and have declared it advisable and approved this Agreement and the Transactions on the terms and conditions set forth in this Agreement.
C. The holders of a majority of the outstanding shares of the Companys Series A Preferred Stock have approved this Agreement and the Transactions on the terms and conditions set forth in this Agreement. The holders of T1 Warrants have delivered irrevocable notices of exercise of their warrant contingent upon the consummation of the Transactions and all the holders of the T2 Warrants and certain of the holders of the T3 Warrants have entered into an exchange agreement for the exercise of their warrants in the form attached hereto as
Exhibit A
(the
Exchange Agreement
).
D. Simultaneously with the execution and delivery of this Agreement, the Company shall obtain a voting agreement (the
Voting Agreement
) in the form attached hereto as
Exhibit B
executed by the holders of at least 75% of Company Common Stock whereby each holder irrevocably agrees to vote all of its voting shares of Company Common Stock (as defined herein) held by it in favor of delisting the Company Common Stock from the Alternative Investment Market on the London Stock Exchange (the
AIM
).
E. Immediately following and within forty-eight (48) hours of the execution and delivery of this Agreement, the Company shall obtain the affirmative written consent of the holders of at least a majority of Company Common Stock (as defined herein) to approve this Agreement and the First Merger.
F. The Company, First Global Telecom, Inc., GCI Globalcom Holdings, Inc. (
GCI
) and M. Gavin McCarty, as stockholders representative, have entered into an Agreement and Plan of Merger, dated July 18, 2008 (the
GCI Merger Agreement
), pursuant to which the Company has agreed to acquire all of the outstanding capital stock of GCI (the
GCI Acquisition
).
G. The Company shall effect the consummation of the GCI Acquisition prior to the Mergers.
H. For United States federal income tax purposes, the parties hereto intend that the Mergers qualify as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the
Code
) and the regulations promulgated thereunder.
A-7
NOW, THEREFORE, in exchange for the mutual promises contained herein, and other good and valuable consideration, the receipt, adequacy and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows:
I.
DEFINITIONS
Acquired Companies
means the Company and the Company Subsidiaries.
Acquisition
means the purchase by the Company or following the Second Merger, the Second Merger Surviving Entity, outside of the ordinary course of business, of another company or any of its assets, securities or business by means of a merger, consolidation, joint venture, exchange offer or purchase or sale of stock or assets.
Additional Warrant Stock
shall have the meaning set forth in Section 3.1(c)(ii)(2).
Affiliate
means, with respect to any specified Person: (1) any other Person which, directly or indirectly, owns or controls, is under common ownership or control with, or is owned or controlled by, such specified Person; and (2) any immediate family member of the specified Person. For these purposes, an immediate family member shall mean a natural Persons spouse, parents or children.
Aggregate Consideration
means the total cash amount and other consideration received (which shall be deemed to include amounts paid into escrow) by the target and/or its shareholders upon the consummation of an Acquisition (including payments made in installments), inclusive of cash, securities, notes, consulting agreements and agreements not to compete, plus the total value of liabilities assumed and to the extent such Aggregate Consideration is paid in stock, then the Fair Market Value of such stock.
Agreement
has the meaning set forth in the preamble.
AIM
has the meaning set forth in the recitals.
Businesses
means the business and operations carried out by the Company and the Company Subsidiaries.
Business Day
means any day other than a Saturday, Sunday or other day on which commercial banks in New York, New York are authorized or required to remain closed.
Cash Merger Consideration
shall have the meaning set forth in Section 3.1(a)(ii).
Certificates
shall have the meaning set forth in Section 3.4(b).
Closing
shall have the meaning set forth in Section 2.2.
Closing Date
shall have the meaning set forth in Section 2.2.
Closing Form 8-K
shall have the meaning set forth in Section 6.1(g)(ii).
Closing Press Release
shall have the meaning set forth in Section 6.1(g)(ii).
Closing Price
for each day shall be the last reported sales price regular way on that day or, in case no such reported sale takes place on such day, the reported closing bid price regular way, in either case as reported on a national securities exchange or other public exchange on which the stock is admitted to trading or listed, or if not so listed or admitted to trading, the last quoted bid price or, if not quoted, the average of the high bid and the low asked prices in the over-the-counter market or such other system then in use.
Closing Stock Payment
shall have the meaning set forth in Section 3.1(a)(iii)(1)(x).
A-8
Code
has the meaning set forth in the recitals.
Common Stock Merger Consideration
shall have the meaning set forth in Section 3.1(a)(iii)(1)(2).
Company
has the meaning set forth in the preamble.
Company Audit
shall have the meaning set forth in Section 4.9.
Company Common Stock
shall have the meaning set forth in Section 3.1.
Company Financial Statements
shall have the meaning set forth in Section 4.9.
Company Group
shall have the meaning set forth in Section 6.1(i)(ii).
Company Preferred Stock
shall have the meaning set forth in Section 3.1.
Company Stock
shall have the meaning set forth in Section 3.1.
Company Subsidiaries
means all Subsidiaries of the Company.
Companys Knowledge
means the actual knowledge of Ray Hexamer, Joe Morris, Jessica Newman, Rick Buyens, Ryan Wiegner and Frank Lomanno, in each case, after a reasonable investigation and inquiry, only with respect to the period of time each such person was employed by the Company.
Company Third Party Acquisition
means (I) any sale of 15% or more of the consolidated assets of the Company and its subsidiaries, or 15% or more of the equity or voting securities of the Company or any subsidiary whose assets, individually or in the aggregate, constitute 15% or more of the consolidated assets of the Company (each, a
Material Subsidiary
), (II) any tender offer or exchange offer that, if consummated, would result in a third party beneficially owning 15% or more of the equity or voting securities of the Company or of any Material Subsidiary, (III) a merger, consolidation, business combination, share exchange, sale of substantially all the assets, reorganization, recapitalization, liquidation, dissolution or other similar transaction involving the Company or any Material Subsidiary, in each such case in this clause (III) that would result in either (x) a third party beneficially owning 15% or more of any class of equity or voting securities of the Company or any Material Subsidiary, or 15% or more of the consolidated assets of the Company or (y) the stockholders of the Company receiving securities traded in the U.S. on any nationally-recognized exchange or over-the-counter market; Company Third Party Acquisition shall
not
include the GCI Acquisition or any other transaction pursuant to which the Company or a Material Subsidiary is the acquiring party, provided that, except in the case of the GCI Acquisition, such purchase shall not materially impede the consummation of the Acquisition.
Contract
means with respect to any Person, any agreement, indenture, debt instrument, contract, guarantee, loan, note, mortgage, license, lease, purchase order, delivery order, commitment or other arrangement, understanding or undertaking, whether written or oral, including all amendments, modifications and options thereunder or relating thereto, to which such Person is a party, by which it is bound, or to which any of its assets or properties is subject.
Credit Agreement
means that certain that certain Amended and Restated Loan and Security Agreement, dated as of March 7, 2008 among the Company and JPMorgan Chase Bank, National Association.
Debt
means, as at any date of determination thereof (without duplication), all obligations or liabilities (other than intercompany obligations between the Acquired Companies) of the Acquired Companies in respect of: (a) any borrowed money or funded indebtedness or issued in substitution for or exchange for borrowed money or funded indebtedness (including obligations with respect to principal, accrued interest, and any applicable prepayment charges or premiums) including, without limitation, the aggregate principal balance of, and all accrued and unpaid interest on, the loans outstanding under the Credit Agreement as of the Closing Date, together with all other indebtedness, fees, liabilities, obligations, covenants and duties of the Company of every kind, nature and
A-9
description under or in respect of the Credit Agreement; (b) any indebtedness evidenced by any note, bond, debenture or other debt security; (c) capital lease obligations; (d) any indebtedness guaranteed by the Acquired Companies (excluding intercompany debt and letters of credit and guarantees by one Acquired Company of performance obligations of another Acquired Company); (e) any obligations with respect to any interest rate hedging or swap agreements; (f) any obligations for the deferred purchase price of property or services (including, without limitation, deferred purchase price liabilities from past acquisitions); (g) any commitment by which an Acquired Company assures a creditor against loss (including contingent reimbursement obligations with respect to letters of credit); (h) any liabilities of an Acquired Company under conditional sale or other title retention agreements; (i) any liabilities of an Acquired Company under or in connection with letters of credit (whether or not drawn), bankers acceptances or similar items; (j) any liabilities with respect to vendor advances or any other advances made to an Acquired Company; (k) any indebtedness or liabilities secured by a Lien on an Acquired Companys assets; (1) any amounts owed by an Acquired Company to any Person or entity under any noncompetition, consulting or deferred compensation arrangements; and (m) any success fees or bonuses, change in control or severance payments arising from or otherwise triggered by the Transactions, and any amounts payable to offset any excise Taxes imposed under Section 4999 of the Code and any related income Taxes.
Delaware LLC Act
shall have the meaning set forth in Section 2.3(b).
DGCL
shall have the meaning set forth in Section 2.3(b).
Disclosing Party
shall have the meaning set forth in Section 6.1(c).
Dissenting Shares
shall have the meaning set forth in Section 3.3.
EBITDA
means for the applicable fiscal quarter, using results taken from the unaudited reviewed financial statements of the Second Merger Surviving Entity, the following calculation: income before provision for income taxes, plus interest expense, less interest income, plus depreciation and amortization, plus amortization of intangible assets, plus any expenses arising solely from the First Merger and the Second Merger charged to income in such fiscal quarter and any subsequent acquisition or transaction costs expensed in connection with FASB Rule No. 141R charged to income in such fiscal quarter.
EBITDA Condition
shall have the meaning set forth in Section 3.1(a)(iii)(2).
EBITDA Escrow Release Date
shall have the meaning set forth in Section 3.5.
EBITDA Stock
shall have the meaning set forth in Section 3.1(a)(iii)(1)(y).
EBITDA Target
shall mean $50 million plus the sum of any Target Increases.
Environmental Laws
shall mean all Laws, including all common law, orders, judgments, and all other provisions having the force or effect of law, concerning occupational health or safety, pollution or the protection of the environment, including any laws governing the presence, use, production, generation, handling, transportation, treatment, storage, disposal, distribution, labeling, testing, processing, discharge, release, threatened release, control or cleanup of, or exposure to, any Hazardous Materials.
ERISA
means the Employee Retirement Income Security Act of 1974, as amended.
ERISA Affiliate
means any corporation or trade or business (whether or not incorporated) which is treated with any of the Acquired Companies as a single employer within the meaning of Section 414 of the Code.
Escrow Account
shall have the meaning set forth in Section 3.5.
Escrow Agent
shall have the meaning set forth in Section 3.5.
Escrow Agreement
shall have the meaning set forth in Section 3.5.
A-10
Escrowed Stock
shall have the meaning set forth in Section 3.5.
Exchange Act
means the Securities Exchange Act of 1934, as amended.
Exchange Agent
shall have the meaning set forth in Section 3.4(a).
Exchange Agreement
has the meaning set forth in the recitals.
Exchange Fund
shall have the meaning set forth in Section 3.4(a).
Exclusivity Period
shall have the meaning set forth in Section 6.1(i).
Fair Market Value
" means at any date, the average of the daily Closing Prices (as defined below) for such share of stock for the five (5) consecutive Trading Days immediately preceding the date of the closing of the Acquisition or if the stock is not publicly held or so listed or traded, the fair market value per share shall be as determined in good faith by the board of directors of the Second Merger Surviving Entity, whose determination shall be conclusive absent manifest abuse or error, and described in a resolution of the board of directors of the Second Merger Surviving Entity certified by the secretary of the Second Merger Surviving Entity.
FCC
means the Federal Communications Commission.
FCC Consents
means the applications, notices, reports, registrations and other filings and/or consents required to be filed with or obtained from the FCC in connection with the consummation of the Transactions.
First Merger
shall have the meaning set forth in the recitals.
First Merger Certificate of Merger
shall have the meaning set forth in Section 2.1(a).
First Merger Effective Time
shall have the meaning set forth in Section 2.1(a).
First Merger Surviving Corporation
shall have the meaning set forth in the recitals.
First Merger Surviving Corporation Common Stock
has the meaning set forth in Section 3.1(a)(i).
GAAP
means generally accepted accounting principles as applied in the United States of America.
GCI
has the meaning set forth in the recitals.
GCI Acquisition
shall have the meaning set forth in the recitals.
GCI Merger Agreement
shall have the meaning set forth in the recitals.
GCI Subsidiaries
means GCIs two wholly-owned subsidiaries, Globalcom, Inc., an Illinois corporation, and Globalcom Equipment, Inc., a Delaware corporation.
Governmental Authority
means any federal, state, local or foreign government or any political subdivision thereof or any department, commission, board, bureau, agency, court, panel or other instrumentality of any kind of any of the foregoing.
Governmental Prohibition
shall have the meaning set forth in Section 7.5.
Hazardous Material
means any chemical, substance, waste, material, pollutant, or contaminant, the exposure to, presence of, release of, use of, or storage, disposal, treatment or transportation of which may give rise to liability under, is regulated under, or is defined by any Law, including any Environmental Law, including petroleum and petroleum products.
A-11
Intellectual Property
means any of the following in any jurisdiction throughout the world: (a) patents, patent applications, patent disclosures and inventions, including any provisionals, continuations, divisionals, continuations-in-part, renewals and reissues for any of the foregoing; (b) Internet domain names, trademarks, service marks, trade dress, trade names, logos, slogans and corporate names and registrations and applications for registration thereof together with all of the goodwill associated therewith; (c) copyrights (registered or unregistered) and copyrightable works and registrations and applications for registration thereof; (d) mask works and registrations and applications for registration thereof; (e) software, data, data bases and documentation thereof; (f) trade secrets and other confidential information (including ideas, formulas, compositions, inventions (whether patentable or unpatentable and whether or not reduced to practice), know-how, manufacturing and production processes and techniques, research and development information, drawings, specifications, designs, plans, proposals, technical data, copyrightable works, financial and marketing plans and customer and supplier lists and information); and (g) copies and tangible embodiments thereof (in whatever form or medium).
Interim Company Financial Statements
shall have the meaning set forth in Section 4.9.
Law
means all applicable laws of any country or any political subdivision thereof, including, without limitation, all foreign, federal, state and local statutes, regulations, ordinances, codes, orders or decrees or any other laws, common law theories or reported decisions of any court thereof.
Leased Real Property
shall have the meaning set forth in Section 4.5(a).
Leases
shall have the meaning set forth in Section 4.5(a).
Lien
means any charge, claim, right of first refusal, restriction on transfer, mortgage, security deed, deed to secure debt, deed of trust, title defect, mechanics lien, judgment lien or other similar lien (except for any lien for Taxes not yet due and payable), pledge, assessment, security interest or other encumbrance.
Material Adverse Effect
means (x) as to any Person, a material adverse effect on the business, assets, results of operations or financial condition of such Person, and (y) as to any Acquired Company, a material adverse effect on the business, assets, results of operations or financial condition of the Acquired Companies taken as a whole; provided, however, that none of the following shall be deemed, either alone or in combination, to constitute, and none of the following shall be taken into account in determining whether there has been or would be, a Material Adverse Effect with respect to any Person (including any Acquired Company): any facts, changes, developments, events, occurrences, actions, omissions or effects (i) generally affecting (A) the economy, or financial or capital markets, in the United States or elsewhere in the world, to the extent that they do not disproportionately affect such Person in relation to other companies in the industry in which such Person primarily operates or (B) the industry in which such Person operates to the extent that they do not disproportionately affect such Person in relation to other companies in the industry in which such Person primarily operates, or (ii) arising out of, resulting from or attributable to (1) changes (after the date of this Agreement) in Law or in generally accepted accounting principles or in accounting standards or (2) any decline in the market price, or change in trading volume, of the capital stock of such Person or any failure to meet publicly announced revenue or earnings projections or internal projections (it being understood that, without limiting the applicability of the provisions contained in clause (i) or (ii) above, the cause or causes of any such decline, change or failure may be deemed to constitute, in and of itself and themselves, a Material Adverse Effect and may be taken into consideration when determining whether a Material Adverse Effect has occurred).
Material Contract
means the agreements of the following types to which any Person is a party (which is effective and binding on such Person) or by which any material assets of any Person is bound or are subject:
(a)
Contracts or group of related Contracts which involve commitments to make capital expenditures or which provide for the purchase of assets, goods or services by such Person from any one Person under which the undelivered balance of such goods or services has a purchase price in excess of $300,000 in any consecutive twelve (12) month period after the date hereof or which are not terminable by such Person without a penalty;
A-12
(b)
Contracts or group of related Contracts which provide for the sale of goods or services by such Person and under which the undelivered balance of such goods or services has a sale price in excess of $150,000 in any consecutive twelve (12) month period after the date hereof or which are not terminable by such Person without penalty;
(c)
joint venture agreements, partnership agreements, and limited liability company agreements and each similar type of Contract (however named) involving a sharing of profits, losses, costs or liabilities with any other Person;
(d)
Contracts that involve the material acquisition or disposition, directly or indirectly, by merger, consolidation or acquisition of stock or assets, between such Person and any another Person;
(e)
employment, non-competition, non-solicitation and profit-sharing plan agreements with any officer or director of such Person;
(f)
Contracts which presently limit in any material respect the freedom of any Acquired Company to engage in any business anywhere in the world or compete with any Person;
(g)
Contracts pursuant to which such Person is a lessor or a lessee of any personal or real property (including the Leases), or holds or operates any tangible personal property owned by another Person, except for any such Leases under which the aggregate annual rent or lease payments do not exceed $50,000 or which are terminable by such Person without penalty;
(h)
Contracts not included in subsection (e) providing for severance (including contractual notice of termination or pay in lieu thereof), retention, deferred compensation, change in control or other similar payments;
(i)
Contracts with any stockholder, officer or director of such Person, or any Affiliate of any of the foregoing, or in the case of any individual, any immediate family member of any of the foregoing;
(j)
Contracts with material dealers, distributors or sales representatives;
(k)
Contracts under which such Person has made material advances or loans to any other Person, other than expense re-imbursement done in the Ordinary Course of Business;
(l)
Contracts regarding interconnection and carrier agreements with telecommunication and data service providers;
(m)
Contracts relating to material Debt; or
(n)
any settlement or similar agreements relating to any material litigation to which an Acquired Company was a party.
Merger Consideration
means the Cash Merger Consideration and the Common Stock Merger Consideration.
Mergers
shall have the meaning set forth in the recitals.
Merger Sub I
has the meaning set forth in the preamble.
Merger Sub II
has the meaning set forth in the preamble.
Merger Subs
has the meaning set forth in the preamble.
Most Recent Company Balance Sheet
shall have the meaning set forth in Section 4.9.
A-13
New Warrant
shall have the meaning set forth in Section 3.1(c)(ii)(1).
Ordinary Course of Business
means the ordinary course of business of an applicable Person consistent with past custom and practice (including with respect to quantity and frequency).
Other Filings
shall have the meaning set forth in Section 6.1(e)(i).
Outside Date
shall have the meaning set forth in Section 11.1(b).
Owned Intellectual Property
shall have the meaning set forth in Section 4.12.
Owned Real Property
shall have the meaning set forth in Section 4.5(a).
Parent
has the meaning set forth in the preamble.
Parent Common Stock
means the common stock, par value $0.0001 per share, of Parent.
Parent Group
shall have the meaning set forth in Section 6.1(i)(i).
Parent Knowledge
means the actual knowledge of Barry Florescue, Mark Seigel and Richard Bloom, in each case after a reasonable investigation and inquiry.
Parent Preferred Stock
shall have the meaning set forth in Section 5.8(a).
Parent SEC Documents
shall have the meaning set forth in Section 5.7.
Parent Stock Options
shall have the meaning set forth in Section 5.8(b).
Parent Stockholder Approval
shall have the meaning set forth in Section 6.1(e)(i).
Parent Stockholders Meeting
shall have the meaning set forth in Section 4.27.
Parent Third Party Acquisition
means: (I) any purchase of 15% or more of the consolidated assets of a third party and its subsidiaries, or 15% or more of the equity or voting securities of a third party or a Material Subsidiary (as defined in Company Third Party Acquisition definition) thereof, (II) any tender offer or exchange offer that, if consummated, would result in Parent beneficially owning 15% or more of a third partys equity or voting securities or any Material Subsidiary thereof, (III) a merger, consolidation, business combination, share exchange, purchase of substantially all the assets, reorganization, recapitalization, liquidation, dissolution or other similar transaction involving the Parent and any third party, in each such case in this clause (III) that would result in Parent beneficially owning 15% or more of any class of equity or voting securities of such third party or any Material Subsidiary thereof, or 15% or more of the consolidated assets of such third party.
Parent Warrants
shall have the meaning set forth in Section 5.8(b).
Permit
means a license, permit or other authorization or registration required by any Governmental Authority or applicable Law to carry out a Business, other than those licenses, permits or other authorizations or registrations the absence of which would not cause a Material Adverse Effect with respect to such Business.
Permitted Liens
shall mean (a) liens for Taxes not yet due and payable or that are being contested in good faith through appropriate proceedings and for which adequate reserves are reflected in the Company Financial Statements in accordance with GAAP, (b) with respect to any Acquired Company asset, encumbrances, imperfections of title and title defects that will not materially interfere with the use of such asset or materially impair the value thereof, including mechanics liens, materialmens liens and other inchoate liens, provided that the obligations in respect of which such encumbrances were created are not delinquent, (c) all rights-of-way, licenses, easements, encroachments, covenants, reservations, restrictions, conditions, Leases, tenancies and other
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encumbrances of record that do not materially interfere with the existing use of the Businesses or materially impair the value thereof, provided that the obligations in respect of which such encumbrances are not delinquent, (d) unrecorded easements, Leases, tenancies, license agreements, covenants, rights-of-way and other encumbrances and similar restrictions on the Real Property that do not materially interfere with the existing use thereof, provided that the obligations in respect of which such encumbrances were created are not delinquent, (e) deposits or pledges made in connection with, or to secure payment of, workers compensation, unemployment insurance, old age pension programs mandated under applicable laws or other social security regulations, and (f) all zoning, building, subdivision and other statutory or regulatory conditions and restrictions relating to the use of real property.
Person
means any individual, corporation, proprietorship, joint venture, firm, partnership, trust, limited liability company, association or other entity.
Plans
shall have the meaning set forth in Section 4.15(a).
Pre-Closing Tax Period
means any taxable period ending on or before the Closing Date and the portion of any Straddle Period ending on the Closing Date.
Proxy Statement
shall have the meaning set forth in Section 4.27.
Real Property
shall have the meaning set forth in Section 4.5(a).
Receiving Party
shall have the meaning set forth in Section 6.1(c).
Registration Statement
shall have the meaning set forth in Section 4.27.
Replacement Company Financial Statements
shall have the meaning set forth in Section 6.2(e).
Company Audit
shall have the meaning set forth in Section 4.9.
Schedule Update
shall have the meaning set forth in Section 6.2(e).
SEC
means the U.S. Securities and Exchange Commission.
Second Merger
shall have the meaning set forth in the recitals.
Second Merger Certificate of Merger
shall have the meaning set forth in Section 2.1(b).
Second Merger Effective Time
shall have the meaning set forth in Section 2.1(b).
Second Merger Surviving Entity
shall have the meaning set forth in the recitals.
Securities Act
means the Securities Act of 1933, as amended.
Signing Form 8-K
shall have the meaning set forth in Section 6.1(g)(i).
Signing Press Release
shall have the meaning set forth in Section 6.1(g)(i).
State PUC
means any state or local public service or public utilities commission having regulatory authority over the Acquired Companies, in any given jurisdiction.
State PUC Consents
means the applications, notices, reports, registrations and other filings and/or consents to be filed with or obtained from any State PUC in connection with the consummation of the Transactions or the Credit Agreement.
Straddle Period
means any taxable period that includes but does not end on the Closing Date.
Stockholders Representative
shall have the meaning set forth in the preamble.
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Subsidiary
means, with respect to any Person, any other Person of which equity securities or other ownership interests having ordinary power to elect a majority of the board of directors or other persons performing similar functions are at any time directly or indirectly owned or controlled by such Person.
Target Increase
with respect to any Acquisition is
equal to 1/7 of the Aggregate Consideration paid by the Company or the Second Merger Surviving Entity, as applicable, for any Acquisition consummated between the date hereof and June 30, 2011, other than the GCI Acquisition, provided, however, for determining whether the EBITDA Condition has been satisfied for the fiscal quarter during which such Acquisition is consummated the Target Increase shall be 1/7 of such Aggregate Consideration multiplied by a fraction (A) the numerator of which shall be the number of days beginning on the date of the consummation of such Acquisition and ending on the last day of such fiscal quarter and (B) the denominator of which shall be the total number of days in such fiscal quarter. By way of example, if the Company purchases a target company for $70 million, the Target Increase with respect to such Acquisition shall be $10 million ($70 million divided by 7). If such Acquisition is consummated on the 30
th
day of a 90-day fiscal quarter, the Target Increase for such quarter will be $6.7 million ($10 million multiplied by 2/3) and for all subsequent quarters will be $10 million.
T1 Warrant
shall mean the warrants to purchase a total of 5,333,333 shares of the Company Common Stock at an exercise price of $0.05 per share and with an expiration date of five years from the date of issuance.
T2 Warrant
shall mean the warrants to purchase a total of 8,000,000 shares of the Company Common Stock at an exercise price of $7.50 per share and with an expiration date of three years following the redemption of all the Series A Preferred Stock held by the holder of such warrant.
T3 Warrant
shall mean the warrants to purchase a total of 2,000,000 shares of the Company Common Stock at an exercise price of $7.50 per share and with an expiration date of three years following the redemption of all the Series A Preferred Stock.
Tax
means any taxes, assessments, fees and other governmental charges imposed by any Governmental Authority, including income, gross receipts, license, payroll, employment, excise, severance, stamp, occupation, premium, windfall profits, environmental, customs duties, capital stock, franchise, profits, withholding, social security (or similar), unemployment, disability, workers compensation, real property, personal property, sales, use, transfer, registration, value added, alternative, or add-on minimum, estimated, or other tax of any kind whatsoever, including any interest, penalty, or addition thereto, whether disputed or not.
Tax Returns
means any report, return, declaration or other information required to be supplied to any Governmental Authority in connection with Taxes (including any attached schedules thereto and any amendments thereof), including, without limitation, any information return, claim for refund, amended return and declaration of estimated Tax.
Taxing Authority
means any domestic, foreign, federal, state, county or municipal or other local government, any subdivision, agency, commission or authority thereof, or any quasi-governmental body exercising Tax regulatory authority.
Trading Day
shall be any day on which the principal national securities exchange on which the stock is admitted to trading or listed is open or, if the stock is not so admitted to trading or so listed, any day except Saturday, Sunday, a legal holiday or any day on which banking institutions in the City of New York are obligated or authorized to close.
Transactions
shall have the meaning set forth in the recitals.
Treasury Regulations
means the regulations promulgated under the Code from time to time, as amended.
Trust Fund
shall have the meaning set forth in Section 5.8.
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Voting Agreement
has the meaning set forth in the recitals.
Warrants
shall have the meaning set forth in Section 3.1(a)(iii)(3).
Warrant Agreement
shall have the meaning set forth in Section 3.1(a)(iii)(3).
Warrant Condition
shall have the meaning set forth in Section 3.1(a)(iii)(3).
Warrant Escrow Release Date
shall have the meaning set forth in Section 3.5.
Warrant Stock
shall have the meaning set forth in Section 3.1(a)(iii).
II.
THE MERGERS
2.1.
Effective Times of the Mergers
.
(a)
On the terms and subject to the conditions of this Agreement, the parties hereto shall cause the First Merger to be consummated at the Closing by the filing of a certificate of merger (the
First Merger Certificate of Merger
) in a form mutually acceptable to Parent and the Company with the Secretary of State of Delaware as required by, and executed in accordance with, the relevant provisions of the DGCL. The
First Merger shall become effective at the time of the filing of the First Certificate of Merger with the Secretary of State of the State of Delaware or at such time thereafter which the parties hereto shall have agreed upon as is provided in the Certificate of Merger (the
First Merger Effective Time
).
(b)
Immediately following the First Merger Effective Time, Parent shall cause the Board of Directors of the First Merger Surviving Corporation to adopt this Agreement and approve the Second Merger (and shall adopt this Agreement and approve the Second Merger as sole shareholder of the Second Merger Surviving Entity). Immediately following such approval, the parties hereto shall cause the Second Merger to be effected by the filing of a certificate of merger (the
Second Merger Certificate of Merger
) in a form that is mutually acceptable to Parent and the Company with the Secretary of State of Delaware as required by, and executed in accordance with, the relevant provisions of the Delaware LLC Act. The Second Merger shall become effective at the time of the filing of the Second Certificate of Merger with the Secretary of State of the State of Delaware or at such time thereafter which the parties hereto shall have agreed upon as is provided in the Second Certificate of Merger (the
Second Merger Effective Time
).
2.2.
Closing
. Upon the terms and subject to the conditions of this Agreement, the closing of the Transactions (the
Closing
) will take place remotely via the exchange of documents and signatures on the date that is two (2) Business Days following the satisfaction or waiver of all conditions to the Closing set forth in Articles VII, VIII and IX (such date, the
Closing Date
).
2.3.
Effects of the Mergers
.
(a)
Upon the terms and subject to the conditions of this Agreement, at the First Merger Effective Time, Merger Sub I shall be merged with and into the Company and the separate existence of Merger Sub I shall cease and the Company shall continue as the First Merger Surviving Corporation Upon the terms and subject to the conditions of this Agreement, at the Second Merger Effective Time and as part of the same plan of merger and reorganization, the First Merger Surviving Corporation shall be merged with an into Merger Sub II, the separate corporate existence of the First Merger Surviving Corporation shall cease and Merger Sub II shall continue as the Second Merger Surviving Entity under a name that shall be mutually agreeable to Parent and the Company.
(b)
The First Merger shall have the effects set forth in this Agreement, the First Merger Certificate of Merger and the applicable provisions of the Delaware General Corporation Law (
DGCL
). The Second Merger shall have the effects set forth in this Agreement, the Second Merger Certificate of Merger and the applicable provisions of the Delaware Limited Liability Company Act (
Delaware LLC Act
).
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2.4.
Governing Documents
. The certificate of incorporation of the Company as in effect immediately prior to the First Merger Effective Time shall be the certificate of incorporation of the First Merger Surviving Corporation. The initial certificate of formation and limited liability company operating agreement of Merger Sub II shall be the certificate of formation and limited liability company operating agreement of the Second Merger Surviving Entity.
2.5.
Directors and Officers
.
The directors and officers of the Company immediately prior to the Effective Time shall be the directors and officers of the First Merger Surviving Corporation as of the First Merger Effective Time. Merger Sub II shall take all actions necessary so that the directors and officers of the First Merger Surviving Corporation immediately prior to the Second Merger Effective Time shall be the initial directors and officers of the Second Merger Surviving Entity.
III.
CONVERSION OF SECURITIES
3.1.
Effect on Capital Stock; Merger Consideration
.
(a)
First Merger
. At the First Merger Effective Time, by virtue of the First Merger and without any action on the part of the holders of any shares of common stock of the Company, par value $0.001 per share (
Company Common Stock
), Series A Preferred Stock of the Company, par value $0.001 per share (
Company Preferred Stock
and together with the Company Common Stock, the
Company Stock
), or any shares of capital stock of Merger Sub I, said shares shall be converted as follows, and the Merger Consideration to be paid to the holders of Company Stock shall be as follows:
(i)
Capital Stock of the Merger Sub
. Each issued and outstanding share of the capital stock of Merger Sub I shall be converted into and become one fully paid and nonassessable share of common stock, $.001 par value per share, of First Merger Surviving Corporation (
First Merger Surviving Corporation Common Stock
), so that after the First Merger Effective Time, Parent shall be the holder of all of the issued and outstanding shares of the First Merger Surviving Corporation.
(ii)
Company Preferred Stock
. Each issued and outstanding share of Company Preferred Stock shall, by virtue of the First Merger and without any action on the part of the holder thereof, be converted into the right to receive, in cash, an amount equal to the Company Redemption Price as set forth in the Certificate of the Designations, Powers, Preferences and Rights of the Company Preferred Stock (the
Cash Merger Consideration
).
(iii)
Company Common Stock
. Each issued and outstanding share of Company Common Stock (other than any Dissenting Shares) shall, by virtue of the First Merger and without any action on the part of the holder thereof, be converted into the right to receive:
(1)
(x) 0.57361 of a single validly issued, fully paid and nonassessable share of Parent Common Stock (
Closing Stock Payment
),
plus
(y) the proportionate share amount of 9,950,000 shares of Parent Common Stock issuable pursuant to Section 3.1(a)(iii)(2) below, if any, which such amount shall be deposited into the Escrow Account pursuant to Section 3.5 hereof (
EBITDA Stock
),
plus
(z) the proportionate share amount of 8,500,000 shares of Parent Common Stock issuable pursuant to Section 3.1(a)(iii)(3) below, if any, which such amount shall be deposited into the Escrow Account pursuant to Section 3.5 hereof (
Warrant Stock
, which, together with the Closing Stock Payment and EBITDA Stock, shall be referred to collectively, as the
Common Stock Merger Consideration
);
(2)
If, for any fiscal quarter from the date hereof through June 30, 2011, the Second Merger Surviving Entity has an annualized adjusted EBITDA (i.e., the actual quarterly EBITDA multiplied by four (4)) equal to or greater than the EBITDA Target, Parent shall cause the Escrow Agent to release from the Escrow Account, in accordance with this Section
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3.1(a)(iii)(2), Section 3.5 hereof and the Escrow Agreement, 9,950,000 shares of Parent Common Stock (reduced by the number of shares that would have been issuable to holders of Dissenting Shares in respect of such Dissenting Shares if the stockholder holding such Dissenting Shares had not exercised its appraisal rights pursuant to Section 3.3) (the
EBITDA Condition
). If the EBITDA Condition is satisfied, the holders of Company Common Stock shall be entitled to receive that number of shares of Parent Common Stock equal to (x) 9,950,000 (reduced by the number of shares that would have been issuable to holders of Dissenting Shares in respect of such Dissenting Shares if the stockholder holding such Dissenting Shares had not exercised its appraisal rights pursuant to Section 3.3). If the EBITDA Condition is not satisfied by June 30, 2011, then Parent and the Stockholders Representative shall deliver joint written instructions to the Escrow Agent to release the remaining shares held in Escrow pursuant to the EBITDA Condition to the Company on August 31, 2011 and such securities shall be cancelled in accordance with Section 3.5.
(3)
If Parent shall have the right to redeem the warrants (the
Warrants
) issued pursuant to its Warrant Agreement dated September 19, 2006, by and between Parent and Continental Stock Transfer & Trust Company (the
Warrant Agreement
), Parent shall cause the Escrow Agent to release from the Escrow Account, in accordance with this Section 3.1(a)(iii)(3), Section 3.5 hereof and the Escrow Agreement, 8,500,000 shares of Parent Common Stock (reduced by the number of shares that would have been issuable to holders of Dissenting Shares in respect of such Dissenting Shares if the stockholder holding such Dissenting Shares had not exercised its appraisal rights pursuant to Section 3.3) (the
Warrant Condition
). Subject to the terms and conditions of the Warrant Agreement, Parent has the right to redeem the Warrants at any time prior to their exercise and at any time after the Warrants become exercisable if the last sale price of the Parent Common Stock has been at least $8.50 per share, on each of twenty (20) trading days within any thirty (30) trading day period ending on January 28, 2011. For the avoidance of doubt, even if all Warrants are exercised prior to the date the Warrant Condition is satisfied, Parent remains obligated to pay such 8,500,000 shares of Parent Common Stock (other than any shares that would otherwise be payable in respect of the Dissenting Shares) upon satisfaction of the Warrant Condition. If the Warrant Condition is not satisfied by January 28, 2011, then on or prior to January 31, 2011, Parent and the Stockholders Representative shall deliver joint written instructions to the Escrow Agent to release all the shares subject to the Warrant Condition deposited into the Escrow Account to Parent and such securities shall be cancelled in accordance with Section 3.5.
(4)
If either the EBITDA Condition or the Warrant Condition has been met, Parent shall notify the Stockholders Representative in writing within five (5) Business Days.
(5)
All such shares of Company Stock (other than any Dissenting Shares (as defined in Section 3.3 hereof)), when so converted, shall no longer be outstanding and shall automatically be canceled and retired and shall cease to exist, and each holder of a certificate representing any such shares shall cease to have any rights with respect thereto, except the right to receive a portion of the Merger Consideration as determined pursuant to the calculation principles set forth in Section 3.1 payable with respect thereto, when and as provided herein upon the surrender of such certificate in accordance with Section 3.3.
(b)
Second Merger
. Upon the terms and subject to the conditions of this Agreement, at the Second Merger Effective Time, by virtue of the Second Merger and without any action on the part of any holder of First Merger Surviving Corporation Common Stock or any holder of membership interests of Merger Sub II (the
Merger Sub Interests
):
(i)
First Merger Surviving Corporation Common Stock
. Each share of First Merger Surviving Corporation Common Stock issued and outstanding immediately prior to the Second Merger Effective Time shall be cancelled and cease to exist and no consideration shall be payable in respect thereof.
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(ii)
Merger Sub II Membership Interests
. The issued and outstanding Merger Sub II Interests (all of which shall be held by Parent) shall remain as the membership interests of the Second Merger Surviving Entity.
(c)
Company Warrants
.
(i)
T1 Warrants
. Each of the holders of the T1 Warrants has agreed pursuant to a separate agreement irrevocably to make a cashless exercise of their T1 Warrants, immediately prior to the Closing of the Transactions contingent upon the Closing of the Transactions. The Company Common Stock shall have a fair market value of $5.00 for purposes of such cashless exercise. Each such share of Company Common Stock received upon the exercise of the T1 Warrant without any further action on the part of the holder thereof shall be converted into the Merger Consideration pursuant to Section 3.1(a)(iii).
(ii)
T2 Warrants and T3 Warrants
. Certain holders of the T2 Warrants and T3 Warrants have entered into Exchange Agreements in the form attached hereto as
Exhibit A
providing for the exchange of their T2 Warrants and T3 Warrants for:
(1)
for each share of Company Common Stock for which such T2 Warrant or T3 Warrant is currently exercisable (A) a warrant in the form attached hereto as
Exhibit C
(the
New Warrant
), providing that such holder shall have the right to receive a warrant to acquire 0.25 shares of Parent Common Stock exercisable at $9.00 per share expiring on January 28, 2011 for a total number of New Warrants not to exceed 2,500,000 in the aggregate and (B) the right to receive 1/10
th
of a share of Parent Common Stock upon the satisfaction of the Warrant Condition for a total number of shares of Parent Common Stock not to exceed 1,000,000 in the aggregate.
(2)
Parent shall deposit into the Escrow Account up to 1,000,000 shares of Parent Common Stock pursuant to Section 3.5 hereof to satisfy its obligations under (B) above (
Additional Warrant Stock
). If the Warrant Condition is not satisfied by January 28, 2011, then on January 31, 2011, all the shares of Additional Warrant Stock deposited into the Escrow Account shall be released to Parent and cancelled pursuant to Section 3.5.
(iii) The Company shall use its reasonable efforts to cause all remaining holders of the T3 Warrants who have not previously exercised their T3 Warrants, to exchange their T3 Warrants on the same terms and conditions as the exchanging holders pursuant to the Exchange Agreement. To the extent such holders still do not exercise their rights, such T3 Warrants shall remain outstanding in accordance with their terms.
3.2.
Fractional Shares
. No fraction of a share of Parent Common Stock will be issued by virtue of the First Merger, but in lieu thereof Parent shall pay to each holder of shares of Company Common Stock who would otherwise be entitled to a fraction of a share of Parent Common Stock (after aggregating all fractional shares of Parent Common Stock that otherwise would be received by such holder (other than those that would be received pursuant to Section 3.1 hereof)), upon surrender of such holders Certificate(s), an amount of cash (rounded to the nearest whole cent), without interest, equal to the product of: (i) such fraction, multiplied by (ii) six dollars ($6.00).
3.3.
Appraisal Rights
. Shares of Company Common Stock outstanding immediately prior to the First Effective Time and held by a holder who has not voted in favor of the Mergers or consented thereto in writing and who has demanded appraisal for such shares in accordance with the DGCL (collectively, the
Dissenting Shares
) shall not be converted into a right to receive Parent Common Stock, unless such holder fails to perfect, withdraws or otherwise loses such holders right to appraisal under the DGCL. If, after the First Merger Effective Time, such holder fails to perfect, withdraws or otherwise loses such holders right to appraisal, each such share shall be treated as if it has been converted as of the First Merger Effective Time into a right to receive Parent Common Stock as set forth in Section 3.1(a)(iii)(1). The Company shall give Parent (i) prompt notice of (A) any demands for appraisal pursuant to the DGCL received by the Company, (B) withdrawals of such demands, and (C) any other instruments served pursuant to the DGCL and received by the Company in connection with such demands and (ii) the opportunity to participate in all negotiations and proceedings with respect to demands for appraisal under the DGCL
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prior to the First Merger Effective Time. The Company shall not, except with the prior written consent of Parent, which shall not be unreasonably withheld, conditioned or delayed, or as otherwise required by any applicable law, make any payment with respect to any such demands for appraisal or offer to settle or settle any such demands and shall not distribute any portion of the Common Stock Merger Consideration to any holder that has not lost its appraisal rights.
3.4.
Payment of Merger Consideration; Surrender of Certificates
.
(a)
At or prior to the First Merger Effective Time, Parent shall engage a nationally-recognized financial institution reasonably satisfactory to the Company to act as exchange agent in connection with the Merger (the
Exchange Agent
). At the First Merger Effective Time, Parent shall deposit with the Exchange Agent, in trust for the benefit of the holders of shares of Company Common Stock immediately prior to the First Merger Effective Time, for exchange in accordance with this Article III, through the Exchange Agent, certificates representing the shares of Parent Common Stock issuable pursuant to the Closing Stock Payment pursuant to Section 3.1(a)(iii)(1)(x) (other than any Dissenting Shares) and for the benefit of the holders of Company Preferred Stock immediately prior to the First Merger Effective Time, for exchange in accordance with Article III, through the Exchange Agent, the Cash Merger Consideration. In addition, Parent shall make available by depositing with the Exchange Agent, as necessary from time to time after the First Merger Effective Time, cash in an amount sufficient to make the payments in lieu of fractional shares pursuant to Section 3.2 and any dividends or distributions to which holders of shares of Company Common Stock may be entitled pursuant to Section 3.4(c). All cash and Parent Common Stock deposited with the Exchange Agent shall hereinafter be referred to as the
Exchange Fund
.
(b)
Promptly after the First Merger Effective Time, Parent shall cause the Exchange Agent to mail to each holder of record of a certificate or certificates which immediately prior to the First Merger Effective Time represented outstanding shares of Company Stock (other than any Dissenting Shares) (the
Certificates
), which at the First Merger Effective Time were converted into the right to receive the Merger Consideration pursuant to Section 3.1(a)(ii) or (iii) hereof, (i) a letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to the Certificates shall pass, only upon delivery of the Certificates to the Exchange Agent and shall be in such form and have such other provisions as Parent may reasonably specify) and (ii) instructions for use in effecting the surrender of the Certificates in exchange for the Merger Consideration, cash in lieu of any fractional shares pursuant to Section 3.2 and any dividends or other distributions payable pursuant to Section 3.4(c). Upon surrender of Certificates for cancellation to the Exchange Agent or to such other agent or agents as may be appointed by Parent, together with such letter of transmittal, duly completed and validly executed in accordance with the instructions thereto, and such other documents as may reasonably be required by the Exchange Agent, the holder of such Certificates shall be entitled to receive in exchange therefor Cash Merger Consideration to which such holder is entitled pursuant to Section 3.1(a)(ii) and a certificate or certificates representing that number of whole shares of Parent Common Stock (after taking into account all Certificates surrendered by such holder) to which such holder is entitled pursuant to Section 3.1(a)(iii) (which shall be in uncertificated book entry form unless a physical certificate is requested), payment in lieu of fractional shares which such holder is entitled to receive pursuant to Section 3.2 and any dividends or distributions payable pursuant to Section 3.4(c), and the Certificates so surrendered shall forthwith be cancelled. In the event of a transfer of ownership of Company Common Stock which is not registered in the transfer records of the Company, certificates representing the proper number of shares of Parent Common Stock may be issued to a Person other than the Person in whose name the Certificate so surrendered is registered, if such Certificate shall be properly endorsed or otherwise be in proper form for transfer and the Person requesting such issuance shall pay any transfer or other taxes required by reason of the issuance of shares of Parent Common Stock to a Person other than the registered holder of such Certificate or establish to the satisfaction of Parent that such tax has been paid or is not applicable. Until surrendered as contemplated by this Section 3.4(b), each Certificate shall be deemed at any time after the First Merger Effective Time to represent only the right to receive the Merger Consideration pursuant to Section 3.1(a)(iii) hereof (and any amounts to be paid pursuant to Section 3.2 or Section 3.4(c)) upon such surrender. No interest shall be paid or shall accrue on any amount payable pursuant to Section 3.2 or Section 3.4(c).
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(c)
No dividends or other distributions with respect to Parent Common Stock with a record date after the First Merger Effective Time shall be paid to the holder of any unsurrendered Certificate with respect to the shares of Parent Common Stock represented thereby, and no cash payment in lieu of fractional shares shall be paid to any such holder pursuant to Section 3.2 hereof, until such Certificate has been surrendered in accordance with this Article III. Subject to applicable Law, following surrender of any such Certificate, there shall be paid to the recordholder thereof, without interest, (i) promptly after such surrender, the number of whole shares of Parent Common Stock issuable in exchange therefor pursuant to this Article III, together with any cash payable in lieu of a fractional share of Parent Common Stock to which such holder is entitled pursuant to Section 3.2 and the amount of dividends or other distributions with a record date after the First Merger Effective Time theretofore paid with respect to such whole shares of Parent Common Stock and (ii) at the appropriate payment date, the amount of dividends or other distributions with a record date after the First Merger Effective Time and a payment date subsequent to such surrender payable with respect to such whole shares of Parent Common Stock, less the amount of any withholding Taxes that may be required thereon.
(d)
All shares of Parent Common Stock, issued upon the surrender for exchange of Certificates in accordance with the terms of this Article III and any cash paid pursuant to Section 3.1(a)(ii), Section 3.2 or Section 3.4(c) and all shares of Parent Common Stock placed into Escrow shall be deemed to have been issued (and paid) in full satisfaction of all rights pertaining to the shares of Company Stock previously represented by such Certificates. At the First Merger Effective Time, the stock transfer books of the Company shall be closed and there shall be no further registration of transfers on the stock transfer books of the First Merger Surviving Corporation of the shares of Company Stock which were outstanding immediately prior to the First Merger Effective Time. If, after the First Merger Effective Time, Certificates are presented to the First Merger Surviving Corporation or the Exchange Agent for any reason, they shall be cancelled and exchanged as provided in this Article III.
(e)
Any portion of the Exchange Fund (other than any shares of Parent Common Stock held in Escrow) which remains undistributed to the holders of Certificates six months after the First Merger Effective Time shall be delivered to the Second Merger Surviving Entity, upon demand, and any holders of Certificates who have not theretofore complied with this Article III (other than Dissenting Shares) shall thereafter look only to the Surviving Corporation for payment of their claim for the Merger Consideration, any cash in lieu of fractional shares of Parent Common Stock pursuant to Section 3.2 and any dividends or distributions pursuant to Section 3.4(c).
(f)
None of Parent, Merger Subs, the Company or the Exchange Agent or any of their respective directors, officers, employees and agents shall be liable to any Person in respect of any shares of Parent Common Stock (or dividends or distributions with respect thereto), or cash from the Exchange Fund delivered to a public official pursuant to any applicable abandoned property, escheat or similar law. If any Certificate shall not have been surrendered prior to five years after the First Merger Effective Time, or immediately prior to such earlier date on which any shares of Parent Common Stock, any cash in lieu of fractional shares of Parent Common Stock, or any dividends or distributions with respect to Parent Common Stock issuable in respect of such Certificate would otherwise escheat to or become the property of any Governmental Authority, any such shares, cash, dividends or distributions in respect of such Certificate shall, to the extent permitted by applicable Law, become the property of the Surviving Corporation, free and clear of all claims or interests of any Person previously entitled thereto.
(g)
The Exchange Agent shall invest any cash included in the Exchange Fund as directed by Parent on a daily basis; provided that no such investment or loss thereon shall affect the amounts payable to former stockholders of the Company after the First Merger Effective Time pursuant to this Article III. Any interest and other income resulting from such investment shall become a part of the Exchange Fund, and any amounts in excess of the amounts payable pursuant to this Article III shall promptly be paid to Parent.
(h)
Parent and the Exchange Agent shall be entitled to deduct and withhold from any consideration payable pursuant to this Agreement to any Person who was a holder of Company Stock immediately prior to the First Merger Effective Time such amounts as Parent or the Exchange Agent may be required to deduct and withhold with respect to the making of such payment under the Code or any other
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provision of federal, state, local or foreign tax law. To the extent that amounts are so withheld by Parent or the Exchange Agent, such withheld amounts shall be treated for all purposes of this Agreement as having been paid to the Person to whom such consideration would otherwise have been paid.
(i)
In the event any Certificates shall have been lost, stolen or destroyed, the Exchange Agent shall issue in exchange for such lost, stolen or destroyed Certificates, upon the making of an affidavit (without the posting of a bond) of that fact by the holder thereof, such shares of Parent Common Stock as may be required pursuant to Section 3.4(b), cash for fractional shares pursuant to Section 3.2 and any dividends or distributions payable pursuant to Section 3.4(c); provided, however, that Parent may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed Certificates to deliver an agreement of indemnification in form reasonably satisfactory to Parent, or a bond in such sum as Parent may reasonably direct as indemnity against any claim that may be made against Parent or the Exchange Agent in respect of the Certificates alleged to have been lost, stolen or destroyed.
3.5.
Escrow
. At the Closing, Parent, the Stockholders Representative and the escrow agent (
Escrow Agent
) shall enter into an escrow agreement in the form attached hereto as
Exhibit D
(the
Escrow Agreement
), pursuant to which the EBITDA Stock and Warrant Stock portions of the Common Stock Merger Consideration (other than portions in respect of the Dissenting Shares) and Additional Warrant Stock (such amount being defined as the
Escrowed Stock
) shall be deposited into escrow (the
Escrow Account
), shall be subject in all events to the provisions of this Agreement and the Escrow Agreement and shall be distributed to the holders of Company Common Stock as follows: (i) an amount equal to EBITDA Stock of the Escrowed Stock on or prior to the EBITDA Escrow Release Date (as defined below) shall be distributed to the holders of Company Common Stock in the percentages set forth in Schedule 3.1(a)(iii) hereof within 60 days following the end of a fiscal quarter in which the EBITDA Condition has been satisfied (the
EBITDA Escrow Release Date
), and (ii) an amount equal to Warrant Stock of the Escrowed Stock on or prior to the Warrant Escrow Release Date (as defined below) shall be distributed to the holders of Company Common Stock in the percentages set forth in Schedule 3.1(a)(iii) hereof within 30 days following the satisfaction of the Warrant Condition (the
Warrant Escrow Release Date
), all as more specifically set forth in the Escrow Agreement.
IV.
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
As an inducement to Parent and the Merger Subs to enter into this Agreement, the Company represents and warrants to Parent and the Merger Subs that:
4.1.
Organization, Qualification, and Corporate Power
. Each of the Acquired Companies is a corporation duly organized, validly existing and in good standing under the laws of the state of its incorporation, with full power and authority to conduct its business as owned and conducted on the date hereof and at the Closing. Each of the Acquired Companies is duly qualified or licensed to do business as a foreign corporation in, and is in good standing in, each jurisdiction in which the nature of its business or its ownership of its properties requires it to be so qualified or licensed, except where the failure to be so qualified or licensed would not have a Material Adverse Effect. Each of the Acquired Companies has all requisite organizational power and authority and all Permits from Governmental Authorities and from all other Persons that are necessary and/or appropriate to carry on its Business and to own and use the properties owned and used by it, except for such Permits the absence of which would not result in a Material Adverse Effect.
4.2.
Subsidiaries
. Except for the Company Subsidiaries, the Company does not have has any subsidiaries nor does it own any securities issued by any other Person except temporary investments in the ordinary course of business.
4.3.
Capitalization
. The authorized capital stock of each of the Acquired Companies and the number and kind of issued and outstanding shares of each of the Acquired Companies and, other than with respect to the Company Common Stock, the holders of record thereof are set forth on
Schedule 4.3
and were validly issued, fully paid and nonassessible and were issued in compliance with all applicable federal and state securities laws and any preemptive rights or rights of first refusal of any Person. Except as set forth in
Schedule 4.3
: (A) to the Companys
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Knowledge, there are no voting trusts, proxies, or other agreements or understandings with respect to the voting of any shares of capital stock of the Acquired Companies; (B) there does not exist nor is there outstanding any right or security granted to, issued to, or entered into with, any Person to cause the Acquired Companies to issue, grant or sell any shares of capital stock of the Acquired Companies to any Person (including any warrant, stock option, call, preemptive right, convertible or exchangeable obligation, subscription for stock or securities convertible into or exchangeable for stock of the Acquired Companies, or any other similar right, security, instrument or agreement), and there is no commitment or agreement to grant or issue any such right or security; (C) there is no obligation, contingent or otherwise, of the Acquired Companies to: (1) repurchase, redeem or otherwise acquire any share of the capital stock or other equity interests of the Acquired Companies; or (2) provide funds to, or make any investment in (in the form of a loan, capital contribution or otherwise), or provide any guarantee with respect to the obligations of any other Person (other than the other Acquired Companies); and (D) there are no bonds, debentures, notes or other indebtedness which have the right to vote (or are convertible into, or exchangeable for, securities having the right to vote) on any matters on which the Companys stockholders are entitled to vote.
4.4.
Validity and Execution; Stockholder Approval
. The Company has the right, power and authority to enter into this Agreement and perform its obligations hereunder. All necessary corporate action of the Company has been taken to authorize the Company to execute and deliver this Agreement and to consummate the Transactions. The board of directors (including any required committee or subgroup thereof) and stockholders of the Company have, as of the date of this Agreement, duly approved this Agreement and the Transactions. This Agreement constitutes the legal, valid and binding obligation of the Company enforceable against it in accordance with its terms, subject only to applicable bankruptcy, insolvency, reorganization, moratorium or other Laws of general application affecting enforcement of creditors rights. The execution, delivery and performance by the Company of this Agreement and all other instruments, agreements, certificates and documents contemplated hereby: (a) do not, and will not, violate or conflict with any provision of the Companys certificate of incorporation or bylaws; (b) do not, and will not, violate or constitute a default under any Law or any contract to which any Acquired Company is a party, or by which it or any Company Stock or equity interests in any Acquired Company is bound; and (c) do and will not result in the creation of any Lien, other than Permitted Liens.
4.5.
Real and Tangible Personal Properties
.
(a)
Schedule 4.5(a)
identifies (i) all of the real property, including all, land, buildings, towers, structures, improvements and fixtures located thereon, and all easements and other rights and interests appurtenant thereto, owned by any of the Acquired Companies (collectively, the
Owned Real Property
); and (ii) all of the real property devised by leases, subleases, licenses, concessions, co-locations and other agreements (written or oral) (collectively, the
Leases
) pursuant to which the Acquired Companies hold any leased real property (collectively, the
Leased Real Property
, and together with the Owned Real Property, the
Real Property
).
(b)
Each Acquired Company (i) has good and marketable indefeasible fee simple title to the Owned Real Property, free and clear of all Liens, except for Permitted Liens, (ii) has not leased or otherwise granted to any Person the right to use or occupy such Owned Real Property or any portion thereof, (iii) has not granted any outstanding options, rights of first offer or rights of first refusal to purchase such Owned Real Property or any portion thereof or interest therein, and (iv) is not a party to any agreement or option to purchase any real property or interest therein.
(c)
Each applicable Acquired Company holds a valid and existing leasehold interest under each of the Leases to which it is a party for the terms set forth therein.
Schedule 4.5(a)
contains a true and complete listing of all of the Leases, and the Acquired Companies have made available to Parent a complete and accurate copy of each of the Leases, and in the case of any oral Lease, a written summary of the material terms of such Lease, including all amendments, extensions, renewals and other agreements with respect thereto. With respect to each of the Leases and except as set forth in
Schedule 4.5(c)
: (i) the applicable Acquired Company has not subleased, licensed or otherwise granted any Person the right to use or occupy such Leased Real Property or any portion thereof; (ii) such Lease is legal, valid, binding, enforceable against such Acquired Company and in full force and effect, subject to proper authorization and execution of such Lease by the other party thereto and the application of any bankruptcy or other creditors rights Laws; (iii) such Acquired Company is not in breach or default under such Lease and no event has occurred or circumstances exist which, with the delivery of notice, the passage of time or both, would constitute such a breach or default, except to the extent such breach or default would not have a Material Adverse Effect; (iv) such Acquired Company has not collaterally assigned or granted any other security interest in such Lease or any interest therein; and (v) there are no Liens or encumbrances on the estate or interest created by such Lease.
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(d)
The Acquired Companies own or have a valid leasehold interest in each of the items of tangible personal property reflected on the Most Recent Balance Sheets, or acquired thereafter (except for assets reflected thereon or acquired thereafter that have been disposed of in the Ordinary Course of Business since the date of the Most Recent Balance Sheets), free and clear of all Liens, except for Permitted Liens, and such tangible personal property constitutes all material equipment, machinery, fixtures, improvements and other tangible personal property used in or necessary for the conduct of each of the Businesses of the Acquired Companies as it is currently conducted by the Acquired Companies. All of the tangible personal property, equipment, machinery, fixtures, improvements and other tangible assets (whether owned or leased) owned by the Acquired Companies are in good condition and repair (ordinary wear and tear excepted).
4.6.
No Litigation
. Except as set forth on
Schedule 4.6
, there is no litigation, claim, investigation or proceeding pending, or to the Companys Knowledge, threatened, against or relating to any Acquired Company or its Business, nor to the Companys Knowledge is there any reasonable basis for any such litigation, claim, investigation or proceeding. No Acquired Company is named in any order, judgment, decree, stipulation or consent of or with any court or other Governmental Authority that affects or may affect the Company Stock or the Transactions.
4.7.
Noncontravention
. Except for the FCC Consents and PUC Consents and as set forth on
Schedule 4.7
, neither the execution and the delivery of this Agreement by the Company, nor the consummation of the Transactions by any of the Acquired Companies, will: (i) violate any material applicable Law or any injunction, judgment, order, decree, ruling, charge, or other restriction of any Governmental Authority to which any Acquired Company or a Business is subject or any provision of any Acquired Companys certificate of incorporation, bylaws, or other governing instrument, as amended, or (ii) conflict with, result in a breach of, constitute a default under, result in the acceleration of, create in any Person the right to accelerate, terminate, modify, or cancel, or require any notice under any material agreement, contract, lease, license, instrument, or other arrangement to which any Acquired Company is a party or by which it is bound or to which any of its assets is subject (or result in the imposition of any Lien upon any capital stock or assets of any Acquired Company). Except as set forth on
Schedule 4.7
and except where failure to meet such requirement would not result in a Material Adverse Effect, no Acquired Company is required to give any notice to, make any filing with, or obtain any authorization, consent, or approval of any Governmental Authority in order for the parties to consummate the Transactions.
4.8.
Tax Matters
. Except as set forth on
Schedule 4.8
:
(a)
All income, franchise and all material other Tax Returns required to have been filed by or with respect to the Acquired Companies have been timely filed (taking into account applicable extensions of time to file) and all such Tax Returns (including information provided therewith or with respect thereto) are true, accurate and complete in all material respects. All income Taxes and all other Taxes of the Acquired Companies, whether or not shown as due on any Tax Returns, have been timely paid, other than Taxes that are not yet due and payable or that are being contested in good faith by appropriate proceedings (and are so identified on Schedule 4.8) and for which adequate reserves are reflected in the Company Financial Statements in accordance with GAAP.
(b)
Each of the Acquired Companies has complied in all material respects with all applicable Laws, rules and regulations relating to the withholding of Taxes and has duly and timely withheld and paid over to the appropriate Taxing Authorities all amounts required to be so withheld and paid over for all periods under all applicable Laws. No deficiency for any material amount of Taxes has been assessed with respect to any of the Acquired Companies that has not been abated or paid in full or adequately provided for in the Company Financial Statements.
(c)
There are no Tax claims, audits, examinations, disputes, investigations, administrative or judicial proceedings by any Taxing Authority pending, or threatened in writing, or as to which any of the Acquired Companies has Knowledge in connection with any Taxes due from or with respect to the Acquired Companies, including without limitation, any claim made by a Taxing Authority in a jurisdiction where any of the Acquired Companies does not file a particular Tax Return such that it is or may be subject to taxation by that jurisdiction.
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(d)
There are not currently in force any (i) waivers of any statute of limitations with respect to Taxes or agreements binding upon any of the Acquired Companies for the extension of time for the assessment, reassessment, deficiency or payment of any Tax for any taxable period, and no request for any such waiver or extension is currently pending, (ii) any power of attorney with respect to any Tax matter, or (iii) any Tax allocation or Tax sharing agreement, or any similar agreement pursuant to which any Acquired Company could have an obligation with respect to Taxes of another person or entity following the Closing.
(e)
There are no Liens for Taxes (other than Taxes not yet due and payable or that are being contested in good faith) upon any of the assets of the Acquired Companies.
(f)
None of the Acquired Companies is or has been a United States real property holding corporation within the meaning of Section 897(c)(2) of the Code during the applicable period specified in Section 897(c)(1)(A)(ii) of the Code.
(g)
None of the Acquired Companies has been the distributing corporation or the controlled corporation (in each case, within the meaning of Section 355(a)(1) of the Code) with respect to a transaction described in Section 355 or Section 361 of the Code (i) within the three (3)-year period ending as of the date of this Agreement or (ii) in a distribution that could otherwise constitute part of a plan or series of related transactions (within the meaning of Section 355(e) of the Code) that includes the Transactions.
(h)
None of the Acquired Companies (1) has been a member of any affiliated group filing a consolidated federal income Tax Return (other than a group the common parent of which was the Company) or of any affiliated, consolidated, combined, or unitary group, as defined under applicable state, local or foreign Law (other than a group the common parent of which was the Company) or (2) has any liability for the Taxes of any Person (other than the Acquired Companies) under Section 1.1502-6 of the Treasury Regulations (or any predecessor or successor thereof or any similar provision of state, local or foreign Law), as a transferee or successor, by contract, assumption, operation of Law or otherwise.
(i)
None of the Acquired Companies nor any other Person on behalf of the Acquired Companies has (i) agreed to or is required to make any adjustments pursuant to Section 481(a) of the Code or any similar provision of state, local or foreign Law by reason of a change in accounting method and no Taxing Authority has proposed any such adjustment or change in accounting method, or has any application pending with any Taxing Authority requesting permission for any changes in accounting methods, (ii) executed or entered into a closing agreement pursuant to Section 7121 of the Code or any predecessor provision thereof or any similar provision of state, local or foreign Law that would have continuing effect after the Closing, or (iii) been the subject of a Tax ruling that would have continuing effect after the Closing.
(j)
None of the Acquired Companies is a party to any agreement, contract, arrangement or plan that has resulted in, or in connection with the transactions contemplated by this Agreement or the GCI Merger Agreement could result in, the payment of any excess parachute payment within the meaning of Section 280G of the Code (or any similar provision of state, local or foreign Tax law, including without limitation, by reason of (i) the execution and delivery of this Agreement or the GCI Merger Agreement or (ii) the consummation of (y) the Transactions or (z) the transactions contemplated by the GCI Merger Agreement). None of the Acquired Companies has engaged in any reportable transaction as defined in Treasury Regulation Section 1.6011-4(b).
4.9.
Financial Statements
. The Company has previously provided to Parent true and accurate copies of the unaudited consolidated financial statements of the Company as of and for the six (6) month period ended June 30, 2008 (the
Interim Company Financial Statements
) and (b) the balance sheet of the Company as of December 31, 2007 (the
Most Recent Company Balance Sheet
) and the balance sheets of the Company as of December 31, 2006 and December 31, 2005 and the related statements of income and cash flows for the fiscal years then ended, audited and certified by the Companys Accountants (together with the Interim Financial and including, with respect to the audited balance sheets and related statements of income and cash flows, any notes and schedules thereto, the
Company Financial Statements
). Except as otherwise indicated in the Company Financial Statements or in
Schedule 4.9
, the Company Financial Statements (x) have been prepared in accordance with GAAP consistently applied throughout the relevant periods, other than, with respect to the Interim Company Financial Statements, the absence of normal year-end adjustments and the absence of footnotes; and (y) present
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fairly, in all material respects, the financial position, the results of operations and cash flows of the Company as of the dates and for the periods presented therein,
provided, however, that as of the date of this Agreement, the Company is completing an audit of its financial statements as of and for the six month period ended December 31, 2007 (the
Company Audit
) and that the Company Audit may result in the restatement of one or more items in the financial statements as of and for the fiscal year ended December 31, 2007.
4.10.
Undisclosed Liabilities
. There are no material liabilities relating to the Acquired Companies, whether known or unknown, whether asserted or unasserted, whether absolute or contingent, whether accrued or unaccrued, whether liquidated or unliquidated, and whether due or to become due, including any liability for Taxes, except for: (a) liabilities set forth on the face of the Most Recent Balance Sheets, (b) liabilities which have arisen after the date of the Most Recent Balance Sheets in the Ordinary Course of Business, (c) liabilities and obligations not required by GAAP to be reflected on an audited balance sheet, or (d) liabilities and obligations set forth on
Schedule 4.10(d)
.
4.11.
Material Contracts
. The Company has delivered to or otherwise made available to Parent a correct and complete copy of each Material Contract, each of which is listed on
Schedule 4.11
hereto. With respect to each Material Contract: (a) such Material Contract is legal, valid and binding, enforceable, and in full force and effect, (b) neither the Company nor, to the Companys Knowledge, any other party to such Material Contract is in material breach or default, and no event has occurred which, with notice or lapse of time, would constitute such a breach or default by any Acquired Company or, to the Companys Knowledge, any other party to such a Material Contract, or permit termination, material modification, or acceleration under the Material Contract, and (c) the Company has not, and to the Companys Knowledge, no other party to a Material Contract has repudiated any material provision of any Material Contract.
Schedule 4.11
sets forth a list of the Material Contracts which require the prior consent of or require prior notice to the counterparty to such Material Contract to the consummation of the Transactions. Notwithstanding anything to the contrary contained herein,
Schedule 4.11
shall be updated by the Company prior to the Closing Date to reflect any changes required as a result of the passage of time between the date of this Agreement and the First Merger Effective Time, provided that any such changes shall be consistent and in all respects in accordance with Section 6.2.
4.12.
Intellectual Property
.
(a)
Schedule 4.12(a)
sets forth a listing of all of the following Intellectual Property: (i) registered or patented Intellectual Property and all pending applications therefor owned by any Acquired Company; (ii) material unregistered trademarks, material unregistered copyrights and material software and (iii) material licenses with respect to the Intellectual Property owned or used by any Acquired Company.
(b)
The Acquired Companies own and possess all right, title and interest in or have a valid right or license to use the Intellectual Property set forth on
Schedule 4.12(a)
and all the Intellectual Property that is material to any Business.
(c)
Except for the Permitted Liens, the Intellectual Property owned by any Acquired Company (the
Owned Intellectual Property
) is not subject to any Liens and is not subject to any restrictions or limitations regarding use or disclosure other than pursuant to the written license agreements disclosed on
Schedule 4.11
.
(d)
None of the material Owned Intellectual Property is expired or has been cancelled or abandoned. Each Acquired Company has taken all commercially reasonable actions to maintain and protect all of the Company Intellectual Property.
(e)
Except as set forth on
Schedule 4.12(e)
, none of the Acquired Companies has received in the past three (3) years any notice regarding the infringement, misappropriation or other violation by any Acquired Company of any Intellectual Property of any third party (including any demands or unsolicited offers to license any Intellectual Property from any third party) that has not yet been formally and finally resolved. To the Companys Knowledge, neither the conduct of the business of any Acquired Company nor sale of any products or provision of any services by any Acquired Company has infringed, misappropriated or otherwise violated, or infringes, misappropriates or otherwise violates, any Intellectual Property of any third party.
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(f)
To the Companys Knowledge, no third party is infringing, misappropriating or violating, or has infringed, misappropriated or otherwise violated, any of the Company Intellectual Property. No such claims have been brought or, to the Companys Knowledge, threatened against any third party by any of the Acquired Companies.
(g)
To the Companys Knowledge, all current or former employees, consultants, or contractors who have participated in the creation or development of any Intellectual Property owned or purported to be owned by the Company, including the Intellectual Property listed on
Schedule 4.12(a)
, have executed and delivered to such Acquired Company a valid and enforceable agreement (i) providing for the non-disclosure by such current or former employee, consultant, or contractor of any confidential information of such Acquired Company, and (ii) providing for the assignment by such current or former employee, consultant, or contractor to such Acquired Company of any Intellectual Property arising out of such employees, consultants, or contractors employment by, engagement by, or contract with such Acquired Company.
4.13.
Insurance
. The Company has furnished to Parent true and complete copies of all insurance policies and fidelity bonds covering the Acquired Companies or any Business and the employees of any Business, each of which is listed on
Schedule 4.13
hereto. Except as set forth on
Schedule 4.13
hereto, there is no claim by any Acquired Company pending under any of such policies or bonds as to which coverage has been questioned, denied or disputed by the underwriters of such policies or bonds. All premiums payable under all such policies and bonds which are due and payable have been paid and each Acquired Company is otherwise in material compliance with the terms and conditions of all such policies and bonds. No Acquired Company has received written notice from any underwriter that any such policy of insurance or bond is not in full force and effect.
4.14.
Employees
. Except as disclosed on
Schedule 4.14(a)
, each employee of each Acquired Company is an employee at will and the employment of each employee of each Acquired Company is terminable at will without advance notice. To the Companys Knowledge, no officer of any Acquired Company has indicated his or her intent in writing to terminate his or her employment with such Acquired Company. No Acquired Company is a party to or bound by any collective bargaining agreement, nor has it experienced any strikes, grievances, claims of unfair labor practices, or other collective bargaining disputes. To the Companys Knowledge, no organizational effort is presently being made or threatened by or on behalf of any labor union with respect to employees of any Acquired Company. No Acquired Company has received written notice of any alleged violation of federal, state, or local labor, employment or health and safety Law, rule, order, regulation or ordinance.
Schedule 4.14(b)
sets forth: (i) all present employees (including any leased or temporary employees) and independent contractors of each Acquired Company; (ii) each employees or independent contractors current rate of compensation; and (iii) each such employees accrued vacation, if applicable.
Schedule 4.14(c)
sets forth a list of all employment agreements containing any severance payments. Except as set forth on
Schedule 4.14(d)
, there are no unpaid wages, bonuses or commissions owed to any employees or independent contractors (other than those not yet due and that have been accrued in the financial books and records of the Company). Except as set forth on
Schedule 4.14(e)
there are no written or oral employment agreements with any of the employees.
4.15.
Employee Benefits
.
(a)
Schedule 4.15
contains a list of (i) each employee benefit plan, as defined in Section 3(3) of ERISA, (ii) all other pension, retirement, supplemental retirement, equity, equity incentive, severance, change in control, bonus, incentive, retention and deferred compensation plans, programs and arrangements and (iii) all other material plans, programs or arrangements (including vacation, death benefit and fringe benefit plans, programs or arrangements) maintained, contributed to, or required to be contributed to, by any of the Acquired Companies or any ERISA Affiliate for the benefit of any employee, former employee, director, officer or independent contractor of any of the Acquired Companies or under which any of the Acquired Companies or any ERISA Affiliate has any liability with respect to any employee, former employee, director, officer or independent contractor of any of the Acquired Companies (the
Plans
). The Company has made available to Parent true, complete and correct copies of (i) the current document constituting each Plan, each current summary plan description and each summary of material modifications, if any (or, if a written Plan document does not exist, a written summary of the terms of such Plan), (ii) the most recent annual report on Form 5500 (with all applicable attachments) filed with respect to each Plan (if any such report was required) and (iii) any related trust agreements, investment management contracts, custodial agreements and insurance contracts, as applicable, with respect to each Plan.
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(b) Except as set forth on
Schedule 4.15(b)
:
(i) none of the Plans is (A) a multiemployer plan (as defined in Sections 3(37) or 4001(a)(3) of ERISA), (B) a multiple employer welfare arrangement (as defined in Section 3(40) of ERISA), (C) a multiple employer plan to which Section 413(c) of the Code applies, or (D) subject to Title IV of ERISA or Sections 412 or 430 of the Code;
(ii) none of the Acquired Companies (A) has incurred, or as the result of an ERISA Affiliate will incur, any liability under Title IV of ERISA or Sections 412 or 430 of the Code or (B) is subject to any Lien under ERISA or the Code, and to the Companys Knowledge, there is no basis for the imposition of any such Lien;
(iii) each Plan (and its related trust, insurance contract or other funding vehicle, if any) has been maintained, operated and administered in all material respects in compliance with (A) its terms, (B) the terms, if applicable, of any related funding instrument, and (C) all applicable Laws;
(iv) with respect to each Plan that is intended to be tax-qualified under Section 401(a) of the Code, the Acquired Companies have received a favorable determination letter or opinion letter (which has been made available to Parent) from the Internal Revenue Service that each such Plan is so qualified in form and the related trust is exempt from taxation under Section 501(a) of the Code, and no such determination letter or opinion letter has been revoked (nor, to the Companys Knowledge, has revocation been threatened), and to the Companys Knowledge, no event has occurred since the date of the most recent determination letter or application therefore relating to any such Plan or trust (including any amendment to, or failure to amend, any such Plan) that could reasonably be expected to adversely affect the qualification of any such Plan or the exemption of any such trust;
(v) the Acquired Companies and each ERISA Affiliate have, with respect to each group health plan (as such term is defined in Section 5000(b)(1) of the Code) that is maintained by any such entity, (A) complied in all material respects with the applicable requirements of Section 4980B of the Code and the regulations thereunder and all similar state Laws, as applicable, and (B) complied with the applicable provisions of the Health Insurance Portability and Accountability Act of 1996 and the regulations issued thereunder;
(vi) all contributions, premiums or payments under or with respect to each Plan (A) have been made within the time periods prescribed by ERISA, the Code and all other applicable Laws and (B) which are due on or before the Closing Date have been paid;
(vii) neither the execution and delivery of this Agreement nor the consummation of the Transactions, will: (A) result in any payment (including, without limitation, severance, unemployment compensation, parachute payments (as such term is defined in Section 280G of the Code) or otherwise) becoming due to any director, officer or any employee of the Acquired Companies under any Plan or otherwise (except for payments due under arrangements that become effective on or after the date hereof between any such director, officer or employee and Parent or any of the Merger Subs); (B) increase the amount payable, or trigger any funding (through a grantor trust or otherwise), pursuant to any Plan; or (C) result in any acceleration of the time of payment or vesting of any compensation or benefits;
(viii) none of the Plans provide, nor do any of the Acquired Companies or any ERISA Affiliate have an obligation to provide (whether through a promise or guarantee or through a policy or otherwise), any post-employment medical benefits or any other post-employment welfare benefits to any employee, former employee, director, officer or independent contractor of any of the Acquired Companies, except as required by applicable Law (including Section 4980B of the Code or applicable state Laws);
(ix) with respect to each Plan or other arrangement (including employment agreements) to which any of the Acquired Companies is a party that constitutes a nonqualified deferred compensation plan subject to Section 409A of the Code, each such nonqualified deferred compensation plan has been maintained and operated in good faith compliance with the requirements of Sections 409A of the Code and the applicable Internal Revenue Service guidance issued thereunder; and
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(x) the Acquired Companies have, for purposes of each Plan, correctly classified all individuals performing services for each such Acquired Company as common law employees, independent contractors or agents, as applicable.
4.16.
Environmental Matters
. Except as set forth in
Schedule 4.16
, with respect to the Acquired Companies:
(a)
There is and has been no generation, treatment, storage, release, disposal or transport of, or exposure to any Hazardous Material at, on, under, or from any of the Real Property or by or relating to any Acquired Companies except in material compliance with all applicable Environmental Laws;
(b)
The Acquired Companies have complied with and are in compliance with all applicable Environmental Laws. No Acquired Company has received any written notice, order or other communication from any Governmental Authority or other Person claiming that the Acquired Companies are, or may be, liable under, or violated any, Environmental Laws, including any liability or violation relating to any personal injury or property damage or any other costs or expenses or damages or liabilities arising from any release, treatment, storage or disposal transport of, or exposure to, any Hazardous Material;
(c)
The Acquired Companies have not owned or operated any property or facility upon which, to or from there has been a release of any Hazardous Material and to the Companys Knowledge, none of the Real Property has had a release of any Hazardous Material, in each case as would give rise to any current or future liabilities under Environmental Laws;
(d)
The Acquired Companies have not assumed or undertaken or provided an indemnity with respect to any liability of any other Person relating to Environmental Laws or Hazardous Materials;
(e)
None of the Acquired Companies, nor, to the Companys Knowledge, any predecessor or affiliate for which any Acquired Company would have liability, has any liability, contingent or otherwise, with respect to the presence or alleged presence of Hazardous Materials in any product or item or at or upon any property or facility; and
(f)
The Company has furnished to Parent all environmental audits, assessment and reports and all other documents materially bearing on environmental, health or safety liabilities, in each case relating to the Acquired Companies or any affiliates or predecessors, including any of their current or prior properties, facilities or operations, to the extent such documents are in the possession or under the reasonable control of the Acquired Companies.
4.17.
Compliance with Laws
. The Acquired Companies have complied with all applicable material Laws and orders of all Governmental Authorities (including, without limitation, Laws and orders relating to Taxes, employee benefits and the environment, the Acquired Companies compliance with which, however, is governed exclusively by Sections 4.8, 4.15 and 4.16, respectively) and no Acquired Company is in material default under or in violation of any such applicable Laws and orders of all Governmental Authorities.
4.18.
Accounts Receivable
. All accounts receivable shown on the Company Financial Statements and all such receivables arising after the date of the Most Recent Company Balance Sheets and now held by the Company are valid obligations arising from sales actually made or services actually performed in the Ordinary Course of Business and, to the Companys Knowledge, were not and are not subject to any off-set, defense or counterclaim (other than customary bad debt reserves for uncollectible accounts receivable).
4.19.
No Brokers
. None of the Acquired Companies has retained any broker or finder pursuant to any contract or arrangement in connection with the Merger under which such broker or finder could be entitled to a fee or commission from the Company or Parent.
4.20.
No Material Changes
. Except as otherwise disclosed on
Schedule 4.20
, since December 31, 2007:
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(a)
the Acquired Companies have not issued any stock or equity interests, notes or other corporate securities or granted any options, warrants or rights calling for the issue thereof;
(b)
the Acquired Companies have not entered into any contract or agreement other than in the Ordinary Course of Business;
(c)
there has been no theft, damage, destruction or other casualty loss to or forfeiture of any portion of the property or assets of the Acquired Companies, after giving effect to payments under applicable insurance policies, which has had a Material Adverse Effect;
(d)
there has been no increase in, or plan or commitment to increase, the compensation payable or to become payable to any of the Acquired Companies officers or employees other than: (i) increases in the Ordinary Course of Business to non-officer employees; or (ii) increases required by employment contracts disclosed to Parent and listed on
Schedule 4.20
nor any increases in benefits provided under any employee benefit plan or arrangement (including, without limitation, any severance policies or practices), and the Acquired Companies have not amended nor terminated any existing employee benefit plan or arrangement or adopted any new employee benefit plan or arrangement;
(e)
there has been no guarantee or any indebtedness incurred or committed to by the Acquired Companies, (i) other than guarantees or indebtedness incurred or committed to in the Ordinary Course of Business under existing credit facilities
as set forth on
Schedule 4.11
or (iii) other than indebtedness in an aggregate amount not exceeding $500,000 and none of the Acquired Companies has canceled any debt owed to it or released any claim possessed by it other than in the Ordinary Course of Business;
(f)
the Acquired Companies have undertaken no capital expenditures or commitments to make capital expenditures, other than capital expenditures or commitments in the Ordinary Course of Business or that have been otherwise disclosed to and approved by, solely with respect to the period beginning on the date of this Agreement and ending on the Closing Date, Parent;
(g)
the Acquired Companies have not entered into or amended any employment, consulting or similar agreement, or any agreement with any labor union or association representing any employee or any material employee benefit plan or arrangement;
(h)
the Acquired Companies have not acquired, nor disposed, nor encumbered (nor has any Acquired Company agreed to acquire, dispose or encumber) any substantial assets or property, real or personal, of an Acquired Company other than in the Ordinary Course of Business, or delivered or paid any dividend on or made any other distribution in respect of its capital stock;
(i)
there has not been any material change in the accounting policies or practices of an Acquired Company, including practices with respect to the payment of accounts payable or the collection of accounts receivable;
(j)
the Acquired Companies have not permitted or allowed any of their assets or properties (real, personal or mixed, tangible or intangible) to become subject to any Liens, other than Permitted Liens;
(k)
the Acquired Companies did not file any amended Tax Return, settle any Tax claim or assessment, enter into any closing agreement with respect to Taxes, surrender any right to claim a refund of Taxes, consent to any extension or waiver of the limitation period applicable to any Tax claim or assessment relating to any Acquired Company or take any similar action if the effect was to increase the Tax liability of any Acquired Company after the Closing Date; and
(l)
the Acquired Companies have not agreed or offered, in writing or otherwise, to take any of the actions referred to in clauses (a) through (k) above.
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4.21.
Permits and Licenses
. The Acquired Companies hold all Permits (each of which is in full force and effect) necessary for the lawful ownership of the Acquired Companies assets or the operation of the Businesses as presently conducted, and no other Permits are necessary for the lawful ownership of the Acquired Companies assets or the operation of the Businesses as presently conducted by the Acquired Companies. The Acquired Companies have heretofore conducted the Businesses in compliance in all material respects with the requirements of such Permits, and the Acquired Companies have not received written notice of any default or violation in respect of or under any of such Permits. No Permit is subject to any requirement or condition that is not generally imposed on a similar license or permit. The Acquired Companies have not received written notice of termination, revocation or modification of any material Permit and are not delinquent in the filing of any material reports or in the payment of any Taxes or fees with respect to such Permits.
Schedule 4.21
contains a true, accurate and complete list of any Permits which require a third partys consent for the consummation of the Transactions. No event has occurred which permits the revocation or termination of any of Permit or the imposition of any restriction thereon, or that would prevent any Permit from being renewed on a routine basis or in the ordinary course.
4.22.
Warranties
. The Acquired Companies do not provide guaranties, warranties or indemnities with respect to the performance or integrity of any of the services sold by the Acquired Companies, except for those written standard warranties that are included in the copies of the Material Contracts that have been previously made available to Parent and similar warranties included in non-Material Contracts that are included in the copies of non-Material Contracts that have previously been made available to Parent.
4.23.
Major Suppliers and Customers
.
(a)
Except as set forth on
Schedule 4.23(a)
, to the Companys Knowledge, no Acquired Company has received written notice that any supplier that in the Acquired Companys most recently concluded fiscal year accounted for more than $300,000 of supplies purchased annually by the Acquired Company in the conduct of the Businesses or any sole supplier will not sell raw materials, supplies, merchandise and other goods and services to the Acquired Company or to any buyer of a Business within the one (1) year period after the date of this Agreement on terms and conditions substantially similar to those used in its current sales to the Acquired Company, subject only to price increases and/or market conditions, unless comparable supplies, merchandise or other goods are readily available from other sources on comparable terms and conditions.
(b)
Except as set forth on
Schedule 4.23(b)
, to the Companys Knowledge, no Acquired Company has received written notice from any customer that in the Acquired Companys most recently concluded fiscal year accounted for $300,000 or greater of the annual sales of a Business or any single contract with total payments in excess of $500,000 terminating its business relations with the Acquired Company within the one (1) year period after the date of this Agreement.
(c)
Except as set forth on
Schedule 4.23(c)
, to the Companys Knowledge, no Acquired Company has received written notice that any distributors, sales representatives, sales agents, or other third party sellers that in an Acquired Companys most recently concluded fiscal year accounted for more than $50,000 of monthly new sales of a Business, will not sell or market the products or services of a Business within the one (1) year period after the date of this Agreement on terms and conditions substantially similar to those used in the current sales and distribution contracts of the Acquired Company.
4.24.
Related Party Transactions
. Except as set forth on
Schedule 4.24
:
(a)
there is no Debt between any Acquired Company and any officer, director or employee of any Former Company Stockholder or its Affiliates;
(b)
no Former Company Stockholder owns, in whole or in part, or provides or causes to be provided, and no Affiliate, officer, director or employee of any Former Company Stockholder owns, in whole or in part, or provides or causes to be provided, to any Acquired Company, any material assets, services or facilities of the Acquired Company; and
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(c)
no Acquired Company beneficially owns, directly or indirectly, any investment in or issued by a Former Company Stockholder or such officer, director, employee or Affiliate of a Former Company Stockholder or the Company (other than in another Subsidiary of the Company).
4.25.
Prohibited Payments
. No Acquired Company or any director, officer, employee, or to the Companys Knowledge, any agent or other Person acting for or on behalf of any Acquired Company has (a) used any funds for unlawful contributions, gifts, entertainment or other unlawful expenses related to political activity, (b) made any unlawful payments to foreign or domestic government officials or employees or to foreign or domestic political parties or campaigns or violated any provision of the Foreign Corrupt Practices Act of 1977, as amended, (c) made any other unlawful payment, (d) other than rebates made to customers in the Ordinary Course of Business, made any bribe, rebate, payoff, influence payment, kickback or other payment to any Person, private or public, regardless of form, whether in money, property, or services (i) to obtain favorable treatment in securing business, (ii) to obtain favorable treatment for business secured or (iii) to obtain special concessions or for special concessions already obtained, for or in respect of any Acquired Company or any of its Affiliates or (e) established or maintained any fund or asset that has not been recorded in the books and records of such Acquired Company and which is required to be so recorded under GAAP.
4.26.
Books and Records
. The books of account, minute books, stock record books, and other records of the Company, all of which have been made available to Parent, are complete and correct and have been maintained in accordance with sound business practices. The minute books of the Company contain accurate and complete records of all meetings held of, and corporate action taken by, the stockholders, the boards of directors and committees of the boards of directors, of the Company, and no meetings of any such stockholders, board of directors or committees of boards of directors have been held for which minutes have not been prepared and are not contained in such minute books. At the Closing, all of those books and records will be in the possession of the Company.
4.27.
Proxy Statement
. The information to be supplied in writing by the Company for inclusion in Parents prospectus/proxy statement (such prospectus/proxy statement as amended or supplemented is referred to herein as the
Proxy Statement
), which shall be included in Parents Registration Statement on Form S-4 (the
Registration Statement
) shall not at the time the Proxy Statement is first mailed, at the time of the meeting of Parents stockholders to consider the approval of this Agreement (the
Parent Stockholders Meeting
) and at the time of the filing with the SEC, 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 not misleading. If at any time prior to the Closing, any event relating to any Acquired Company or its officers or directors should be discovered by the Company which should be set forth in a supplement to the Proxy Statement, the Company shall promptly inform Parent. Notwithstanding the foregoing, the Company makes no representation or warranty with respect to any information supplied by Parent or any Person other than the Company which is contained in the Proxy Statement.
4.28.
Disclaimer
. Parent and Merger Subs acknowledge and agree that they are entering into and consummating this Agreement and the Transactions without, and are not relying upon, any representation or warranty, express or implied, at Law or in equity, by the Company or any Former Company Stockholder or any of their respective representatives, except as expressly set forth in this Agreement (and subject to such limitations and qualifications as are expressly contained herein and the disclosure schedules hereto). In furtherance of the foregoing, and not in limitation thereof, Parent and Merger Subs acknowledge and agree that except for the representations and warranties contained in this Agreement, none of the Company or any Former Company Stockholder, any of their respective representatives or any other Person has made any express or implied representation or warranty on behalf of the Company or any Former Company Stockholder or any of their respective representatives, and Parent and Merger Subs hereby waive any and all other representations and warranties, whether express or implied (by statute, common law or otherwise). Parent and Merger Subs acknowledge and agree that any financial projection or forecast delivered to Parent and Merger Subs with respect to the revenues or profitability that may arise from the Acquired Companies and the Business after the Closing Date, shall not in and of itself form the basis of any claim against the Company, any Former Company Stockholder or any of their respective representatives. With respect to any projection or forecast delivered by or on behalf of the Company to Parent and Merger Subs, Parent and Merger Subs acknowledge and agree that (w) there are uncertainties inherent in attempting to make such projections and forecasts, (x) the accuracy and correctness of such projections and forecasts may be affected by information that may become available through discovery or otherwise after the date of such projections and forecasts, (y) such projections and forecasts have not been independently verified, reflect various assumptions
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and may not prove to be correct, and (z) they are familiar with each of the foregoing. The preceding notwithstanding, nothing in this Section 4.30 shall be deemed to limit or affect in any way any of the representations or warranties expressly made by the Acquired Companies under this Agreement.
V.
REPRESENTATIONS AND WARRANTIES OF PARENT AND THE MERGER SUBS
As an inducement to the Company to enter into this Agreement, Parent and the Merger Subs jointly and severally represent and warrant to the Company as follows:
5.1.
Organization of Parent and the Merger Subs
. Each of Parent and Merger Sub I is a corporation duly incorporated, validly existing and in good standing under the laws of Delaware and has all requisite corporate power and lawful authority to enter into this Agreement and to perform its obligations hereunder. Merger Sub II is a limited liability company duly organized, validly existing and in good standing under the laws of Delaware and has all requisite limited liability company power and lawful authority to enter into this Agreement and to perform its obligations hereunder.
5.2.
Validity and Execution
. Each of Parent, Merger Sub I and Merger Sub II has the full corporate or limited liability company power and authority to enter into this Agreement and to perform its obligations hereunder. All necessary corporate or limited liability company action of each of Parent, Merger Sub I and Merger Sub II has been taken to authorize each of Parent, Merger Sub I and Merger Sub II to execute and deliver this Agreement, and this Agreement constitutes the valid and binding obligation of each of Parent, Merger Sub I and Merger Sub II enforceable in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium or other Laws of general application affecting enforcement of creditors rights.
5.3.
Noncontravention
. Neither the execution and the delivery of this Agreement by Parent or the Merger Subs, nor the consummation of the Transactions, will: (i) violate any constitution, statute, regulation, rule, injunction, judgment, order, decree, ruling, charge, or other restriction of any applicable Law or any injunction, judgment, order, decree, ruling change or other restriction of any Governmental Authority to which Parent and/or either Merger Sub is subject or any provision of the certificate of incorporation or bylaws of Parent and/or Merger Sub I, the certificate of formation or limited liability company agreement of Merger Sub II, or any other governing instrument, as amended, or (ii) conflict with, result in a breach of, constitute a default under, result in the acceleration of, create in any Person the right to accelerate, terminate, modify, or cancel, or require any notice under any agreement, contract, lease, license, instrument, or other arrangement to which Parent and/or either Merger Sub is a party or by which it is bound or to which any of its assets is subject (or result in the imposition of any security interest upon any of its assets). Except as set forth on
Schedule 5.3
, neither Parent nor any Merger Sub needs to give any notice to, make any filing with, or obtain any authorization, consent, or approval of any Governmental Authority in order for the parties to consummate the Transactions.
5.4.
No Litigation
. There is no litigation or proceeding pending, or to Parents Knowledge, threatened to which Parent or either Merger Sub is subject that is material to Parents or the Merger Subs ability to perform its obligations under this Agreement, or that is reasonably likely to prevent, restrict or materially delay the performance of the Transactions.
5.5.
No Brokers
. Other than Jefferies & Company, Inc., neither Parent nor either Merger Sub has retained any broker or finder pursuant to any contract or arrangement in connection with the Merger under which such broker or finder could be entitled to a fee or a commission from the Company.
5.6.
Disclosure
. No representation or warranty made by Parent, Merger Sub I or Merger Sub II in this Agreement contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained therein, in light of the circumstances under which made, not misleading.
5.7.
SEC Filings
. Parent has filed and furnished all required reports, schedules, forms, prospectuses and registration, proxy and other statements required to be filed or furnished by it with or to the SEC since May 24, 2006 (collectively, and in each case including all schedules thereto and documents incorporated by reference therein, the
Parent SEC Documents
). As of their respective effective dates (in the case of Parent SEC Documents that are
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registration statements filed pursuant to the requirements of the Securities Act) and as of the respective dates of the last amendment filed with the SEC (in the case of all other Parent SEC Documents), the Parent SEC Documents complied in all material respects with the requirements of the Exchange Act and the Securities Act, as the case may be, and the rules and regulations of the SEC promulgated thereunder, each as in effect on the applicable date referred to above, applicable to such Parent SEC Documents, and none of the Parent SEC Documents as of such respective dates contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. Parent maintains effective disclosure controls and procedures pursuant to Rule 13a-15 under the Exchange Act and such disclosure controls and procedures are designed to ensure that all material information concerning Parent is made known on a timely basis to the individuals responsible for the preparation of Parents filings with the SEC and other public disclosure documents.
5.8.
Capitalization
.
(a)
As of the date of this Agreement, the authorized capital stock of Parent consists of 72,000,000 shares of Parent Common Stock and 1,000,000 shares of preferred stock, par value $0.0001 per share (the
Parent Preferred Stock
), of which 21,840,000 shares of Parent Common Stock and no shares of the Parent Preferred Stock are issued and outstanding, all of which are validly issued, fully paid and nonassessable.
(b)
Except as described in the Parent SEC Documents, (i) no shares of Parent Common Stock or Parent Preferred Stock are reserved for issuance upon the exercise of outstanding options to purchase Parent Common Stock or Parent Preferred Stock granted to employees of Parent or other parties (the
Parent Stock Options
) and there are no outstanding Parent Stock Options; (ii) no shares of Parent Common Stock or Parent Preferred Stock are reserved for issuance upon the exercise of outstanding warrants to purchase Parent Common Stock or Parent Preferred Stock (the
Parent Warrants
) and there are no outstanding Parent Warrants; and (iii) no shares of Parent Common Stock or Parent Preferred Stock are reserved for issuance upon the conversion of the Parent Preferred Stock or any outstanding convertible notes, debentures or securities. All shares of Parent Common Stock and Parent Preferred Stock subject to issuance as aforesaid, upon issuance on the terms and conditions specified in the instrument pursuant to which they are issuable, will be duly authorized, validly issued, fully paid and nonassessable. All outstanding shares of Parent Common Stock and all outstanding Parent Warrants have been issued and granted in compliance with all applicable securities laws.
(c)
The shares of Parent Common Stock to be issued by Parent pursuant to this Agreement have been duly reserved for issuance by Parent from Parents authorized but unissued shares of Parent Common Stock or treasury shares and, upon issuance in accordance with the terms of this Agreement, will be duly authorized and validly issued and such shares of Parent Common Stock will be fully paid and nonassessable.
(d)
Except as contemplated by this Agreement or the Parent SEC Documents, there are no registrations rights, and there is no voting trust, proxy, rights plan, agreement to repurchase or redeem, anti-takeover plan or other agreements or understandings to which Parent is a party or by which Parent is bound with respect to any equity security of any class of Parent.
(e)
Except as provided for in this Agreement and except as set forth in
Schedule 5.8(e)
, as a result of the consummation of the Transactions, no shares of capital stock, warrants, options or other securities of Parent are issuable and no rights in connection with any shares, warrants, options or other securities of Parent accelerate or otherwise become triggered (whether as to vesting, exercisability, convertibility or otherwise).
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5.9.
Undisclosed Liabilities
. Other than expenses incurred in connection with the negotiation and consummation of the Transactions, there are no material liabilities relating to Parent or Merger Sub, whether known or unknown, whether asserted or unasserted, whether absolute or contingent, whether accrued or unaccrued, whether liquidated or unliquidated, and whether due or to become due, including any liability for Taxes, except as otherwise disclosed in Parent SEC Documents.
5.10.
Material Contracts
. Except as set forth on
Schedule 5.10
, there are no Material Contracts of Parent, other than those that are exhibits to the Parent SEC Documents. With respect to each Material Contract: (a) such Material Contract is legal, valid and binding, enforceable, and in full force and effect, (b) neither Parent nor, to Parents Knowledge, is any other party to such Material Contract is in material breach or default, and no event has occurred which, with notice or lapse of time, would constitute such a breach or default by Parent or, to the Parents Knowledge, any other party to such a Material Contract, or permit termination, material modification, or acceleration under the Material Contract, and (c) Parent has not, and to the Parents Knowledge, no other party to a Material Contract has repudiated any material provision of any Material Contract.
5.11.
Intellectual Property
. Parent does not own, license or otherwise have any material right, title or interest in any Intellectual Property.
5.12.
Compliance with Laws
. Parent has complied with all applicable material Laws and Parent is not in material default under or in violation of any such applicable Laws.
5.13.
Related Party Transactions
. Except as set forth in the parent SEC Documents filed prior to the date of this Agreement, (a) there is no Debt between Parent and any officer, director, employee or stockholder of Parent and (b) to Parents Knowledge, none of such individuals provides or causes to be provided, to Parent, any material assets, services or facilities that will be material to the combined companies following the Transaction.
5.14.
Tax Matters
. Except as set forth on
Schedule 5.14
:
(a)
all income, franchise and all material other Tax Returns required to have been filed by or with respect to Parent have been timely filed (taking into account applicable extensions of time to file) and all such Tax Returns (including information provided therewith or with respect thereto) are true, accurate and complete in all material respects;
(b)
all income Taxes and all other Taxes of Parent, whether or not shown as due on any Tax Returns, have been timely paid, other than Taxes that are not yet due and payable or that are being contested in good faith by appropriate proceedings (and are so identified on
Schedule 5.14
);
(c)
there is no action, suit, investigation, audit, claim or assessment pending or proposed or threatened in writing with respect to Taxes of Parent;
(d)
Parent has not waived or requested to waive any statute of limitations in respect of Taxes which waiver is currently in effect; and
(e)
Parent has complied in all material respects with all applicable Laws, rules and regulations relating to the withholding of Taxes and has duly and timely withheld and paid over to the appropriate Taxing Authorities all amounts required to be so withheld and paid over for all periods under all applicable Laws.
5.15.
Business Activities
. Since its organization, Parent has not conducted any business activities other than activities directed toward the accomplishment of a business combination. Except as set forth in Parents Certificate of Incorporation, there is no agreement, commitment, judgment, injunction, order or decree binding upon Parent or to which Parent is a party which has or could reasonably be expected to have the effect of prohibiting or materially impairing any business practice of Parent, any acquisition of property by Parent or the conduct of business by Parent as currently conducted other than such effects as would not individually or in the aggregate reasonably be expected to have a Material Adverse Effect.
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5.16.
Title to Property
. Parent does not own or lease any real property or personal property. Except as set forth on
Schedule 5.16
, there are no options or other contracts under which Parent has a right or obligation to acquire or lease any interest in real property or personal property.
5.17.
Indebtedness
. Except as set forth on
Schedule 5.17
, Parent has no Debt.
5.18.
Trust Funds
. As of the date hereof and at the Closing Date, Parent has and will have no less than $104,147,820 invested in United States Government securities or in money market funds meeting certain conditions under Rule 2a-7 promulgated under the Investment Company Act of 1940 in a trust account administered by Continental Stock Transfer & Trust Company (the
Trust Fund
), less such amounts, if any, as Parent is required to pay (i) to stockholders who elect to have their shares converted to cash in accordance with the provisions of Parents Certificate of Incorporation and By-Laws, (ii) deferred underwriters compensation in connection with Parents initial public offering and (iii) third parties (e.g., professionals) who have rendered services to Parent in connection with its efforts to effect a business combination, including the Mergers.
5.19.
No Material Changes
.
(a)
No conditions, circumstances or facts exist, and since June 30, 2008, there have not been any events, occurrences, changes, developments or circumstances, which would have a Parent Material Adverse Effect.
(b)
Parent and the Merger Subs have not since June 30, 2008 and prior to the date of this Agreement taken any action of the type referred to in Section 6.3(b) except in the Ordinary Course of Business
5.20.
Board Approval
. The board of directors of Parent has, as of the date of this Agreement, unanimously (i) declared the advisability of and approved the Merger in accordance with the terms and conditions of this Agreement, (ii) determined that the Merger is in the best interests of the stockholders of Parent, and (iii) determined that the fair market value of Company is equal to at least 80% of Parents net assets.
VI.
COVENANTS
6.1.
Mutual Joint Covenants
.
(a)
FCC Applications; State PUC Applications.
(i) Within five (5) Business Days after the date hereof, the parties hereto shall commence preparing the necessary applications (including any notices, reports, registrations and other filings) with the FCC seeking the FCC Consents set forth on
Schedule 6.1(a)(i)
, and such submissions shall be filed with the applicable authorities as soon as reasonably practicable thereafter (but in no event later than thirty (30) days after the date hereof). Each party shall provide the other party with all information necessary for the preparation of such applications on a timely basis, including those portions of such applications which are required to be completed by each party.
(ii) Within five (5) Business Days after the date hereof, the parties hereto shall commence preparing the necessary applications (including any notices, reports, registrations and other filings) with the State PUCs seeking the State PUC Consents set forth on
Schedule 6.1(a)(ii)
, and such submissions shall be filed with the applicable authorities as soon as reasonably practicable (but in no event later than thirty (30) days after the date hereof). Each party shall provide the other parties with all information necessary for the preparation of such applications on a timely basis, including those portions of such applications which are required to be completed by the first party. In addition, the parties hereto shall cooperate to make any notice or ownership filings required in connection with this matter on a timely basis and to assist in the process of obtaining approvals for the Transactions from the FCC and State PUCs (including any related approvals required in connection with the financing contemplated by the Credit Agreement).
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(iii) Subject to the terms and conditions of this Agreement, each of the parties hereto shall use its reasonable best efforts to prosecute the FCC applications and the State PUC applications in good faith and with due diligence before the FCC and the State PUCs and in connection therewith shall take such actions as may be necessary or reasonably required in connection with the FCC applications and the State PUC applications, including furnishing to the FCC and the State PUCs any documents, materials, or other information requested by the FCC and the State PUCs in order to obtain the FCC Consents and the State PUC Consents as expeditiously as practicable. In addition, to the extent practicable, the parties hereto shall use their reasonable best efforts to (i) promptly notify the other parties of any material communication to that party from the FCC, any State PUC or any other party with respect to the FCC applications or the State PUC applications, as applicable, (ii) permit a representative of the other parties reasonably acceptable to the first party to attend and participate in substantive meetings (telephonic or otherwise) with the FCC or any State PUC and (iii) permit the other party to review in advance, as reasonable, any proposed written communication to the FCC or any State PUC. No party hereto shall, without the written consent of the other parties, knowingly take, or fail to take, any action if the intent or reasonably anticipated consequence of such action or failure to act is, or would be, to cause or materially increase the probability of the FCC or any State PUC not to grant approval of any FCC application or of any State PUC application or materially delay either such approval, to the material detriment of the other parties. In the event there are any petitions for reconsideration, appeals or similar filings made seeking to overturn the grant of the FCC Consent or grant of any of the State PUC Consents, or if the FCC or a State PUC seeks to reconsider such grant on its own motion, then the parties shall use their reasonable best efforts to defend the applicable grants against such actions. The filing fees and the Companys costs and expenses associated with obtaining any such State PUC or FCC Consents (including the Companys attorneys fees) shall be paid by the Company. Parent shall be responsible for payment of its own attorneys fees and related costs and expenses associated with obtaining any such State PUC or FCC Consents.
(b)
Tax Matters; Books and Records
.
(i) The Parent shall prepare or cause to be prepared and file or cause to be filed all Tax Returns for the Acquired Companies that are required to be filed after the Closing Date (taking into account applicable extensions) including, without limitation, the final federal income Tax Return of the consolidated group that includes the Acquired Companies for the taxable period including the Closing Date. To the extent that such Tax Returns relate to a Pre-Closing Tax Period, Parent shall prepare such Tax Returns consistently with the past practice and custom of the Acquired Companies in filing their Tax Returns unless a different treatment of any item is required by an intervening change in Law.
(ii) All tax-sharing agreements or similar agreements with respect to or involving the Acquired Companies shall be terminated as of the Closing Date and, after the Closing Date, the Acquired Companies shall not be bound thereby or have any liability thereunder.
(iii) On or prior to the Closing Date, the boards of directors of each of Parent, Merger Sub, and the Company shall adopt this Agreement as a Plan of Reorganization within the meaning of Treasury Regulation Section 1.368-3(a).
(iv) On or prior to the Closing, the Stockholders' Representative shall deliver to Parent a properly executed statement in a form reasonably acceptable to Parent for purposes of permitting Parent not to withhold tax as provided for under the Treasury regulations promulgated under Section 1445 of the Code (it being understood and agreed by the parties that the failure to provide such statement shall result in the Parent and/or the Merger Subs withholding (or causing to be withheld) under Section 1445 of the Code).
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(c)
Confidentiality
. From the date hereof until the First Merger Effective Time, the parties hereto, their respective members, directors, officers, employees, agents and representatives (collectively, the
Receiving Party
) shall use reasonable good faith efforts to hold in confidence, and shall not use for their own benefit, any and all proprietary and non-public documents and information concerning the other parties (the
Disclosing Party
), as may be furnished to the Receiving Party by or on behalf of the Disclosing Party or otherwise obtained in connection with the Transactions and that are marked with a confidential or similar legend or that should be reasonably understood to be confidential, except that: (i) the Receiving Party may disclose such documents and information to any Governmental Authority reviewing the Transactions, including in any filing with the SEC such as the Proxy Statement and Registration Statement or otherwise as may be required by applicable Law or the rules of any stock exchange; (ii) the Receiving Party may disclose such documents and information to its respective affiliates; (iii) the Receiving Party may disclose such documents and information to its accountants, attorneys, investment bankers, and permitted assignees and to other individuals or entities, with a genuine need to know of such existence, for reasons including preparation for the consummation of the Transactions, on the condition that such disclosure is effected on a confidential basis; and (iv) the Receiving Party may disclose (A) such information that was, at the time of disclosure, in the public domain, (B) such information that has been disclosed by the Disclosing Party or any of its affiliates to others without any obligation of confidentiality or such information became part of the public domain by publication or otherwise without a breach of the provisions of this Agreement, (C) such information that was known by the Receiving Party at the time of disclosure without any obligation of confidentiality and (D) such information that was disclosed to the Receiving Party by a third party without breach of any obligation of confidentiality. If the Transactions shall not be consummated, the Receiving Party shall maintain such confidence, and all documents and information provided to the Receiving Party by or on behalf of the Disclosing Party (and all copies thereof or any documents, spreadsheets, analyses, etc. prepared on the basis of such documents or information) shall promptly be returned to the Disclosing Party by the Receiving Party.
(d)
Efforts
. Subject to the terms and conditions herein provided, the Parent and the Company agree to, and the Company shall cause the other Acquired Companies to, use their commercially reasonable 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 consummate and make effective as promptly as practicable the Transactions, including, but not limited to (i) the taking of all reasonable acts necessary to cause the conditions precedent set forth in Article XI to be satisfied, (ii) the obtaining of all necessary actions, waivers, consents, approvals, orders and authorizations from Governmental Authorities and the making of all necessary registrations, declarations and filings (including registrations, declarations and filings with Governmental Authorities, if any) and the taking of all reasonable steps as may be necessary to avoid any suit, claim, action, investigation or proceeding by any Governmental Authorities, (iii) the obtaining of all consents, approvals or waivers from third parties required as a result of the Transactions, (iv) the defending of any suits, claims, actions, investigations or proceedings, whether judicial or administrative, challenging this Agreement or the consummation of the Transactions, including seeking to have any stay or temporary restraining order entered by any court or other Governmental Authority vacated or reversed and (v) the execution or delivery of any additional instruments reasonably necessary to consummate the Transactions, and to fully carry out the purposes of, this Agreement. In furtherance, and not in limitation of the foregoing, the Parent agrees to use its reasonable good faith efforts to obtain the Parent Stockholder Approval and the conversion of less than 20% of the Parent Common Stock.
(e)
Preparation of SEC Documents; Parent Stockholders Meeting
.
(i) As promptly as practicable after the execution of this Agreement, Parent will prepare and file the Proxy Statement and Registration Statement with the SEC. In connection with the Proxy Statement and Registration Statement, the Company shall deliver to Parent requisite annual audited financial statements and interim unaudited financial statements which meet the applicable requirements of Regulation S-X promulgated by the SEC for inclusion in the Proxy Statement and Registration Statement and (ii) provide information reasonably required to prepare the disclosures relating to the Businesses. The Company and its counsel shall be given a reasonable opportunity to review and comment on the Proxy Statement and Registration Statement prior to filing with the SEC. Parent will respond to any comments of the SEC and Parent will use
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its reasonable best efforts to obtain an order of effectiveness from the SEC and to mail the Proxy Statement to its stockholders at the earliest practicable time. As promptly as practicable after the execution of this Agreement, the Company and Parent will prepare and file any other filings required under the Securities Act or any other federal, foreign or Blue Sky laws relating to the Transactions (collectively, the
Other Filings
). Each party will notify the other party promptly upon the receipt of any comments from the SEC or its staff and of any request by the SEC or its staff or any other governmental officials for amendments or supplements to the Proxy Statement, the Registration Statement or any Other Filing or for additional information and will supply the other party with copies of all correspondence between such party or any of its representatives, on the one hand, and the SEC, or its staff or other government officials, on the other hand, with respect to the Proxy Statement, the Registration Statement, the Merger or any Other Filing. The Proxy Statement, the Registration Statement and the Other Filings will comply in all material respects with all applicable requirements of Law and the rules and regulations promulgated thereunder. Whenever any event occurs which is required to be set forth in an amendment or supplement to the Proxy Statement, the Registration Statement or any Other Filing, the Company or Parent, as the case may be, will promptly inform the other party of such occurrence and cooperate in filing with the SEC or its staff or any other government officials, and/or mailing to stockholders of the Company and Parent, such amendment or supplement. The Proxy Statement will be sent to the stockholders of Parent as described in Section 6.1(e)(ii) for the purpose of soliciting proxies from holders of Parent Common Stock to vote at the Parent Stockholders Meeting in favor of: (i) the adoption of this Agreement and the approval of the First Merger (
Parent Stockholder Approval
); (ii) the issuance and sale of shares of Parent Common Stock to the extent that such issuance requires stockholder approval; (iii) the amendment to Parents charter to, among other things, increase the number of authorized shares; (iv) the adoption of an equity incentive plan; and (v) such other matters as Parent deems reasonably necessary or appropriate in connection with the consummation of the Transactions.
(ii) As soon as practicable following effectiveness of the Registration Statement by the SEC, Parent shall distribute the Proxy Statement to the holders of Parent Common Stock and, pursuant thereto, shall call the Parent Stockholders Meeting in accordance with the DGCL and, subject to the other provisions of this Agreement, solicit proxies from such holders to vote in favor of the adoption of this Agreement and the approval of the First Merger and the other matters presented to the stockholders of Parent for approval or adoption at the Parent Stockholders Meeting, including, without limitation, the matters described Section 6.1(e)(i).
(iii) Parent shall comply with all applicable provisions of and rules under the Securities Act, Exchange Act and all applicable provisions of the DGCL in the preparation, filing and distribution of the Proxy Statement and Registration Statement, the solicitation of proxies thereunder, and the calling and holding of the Parent Stockholders Meeting. Without limiting the foregoing, Parent shall ensure that the Proxy Statement does not, as of the date on which it is distributed to the holders of Parent Common Stock, and as of the date of the Parent Stockholders Meeting, contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading (provided that Parent shall not be responsible for the accuracy or completeness of any information relating to the Company or any other information furnished in writing by the Company explicitly for inclusion in the Proxy Statement).
(iv) Parent, acting through its board of directors, shall include in the Proxy Statement the recommendation of its board of directors (and any committee thereof) that the holders of Parent Common Stock vote in favor of the adoption of this Agreement and the approval of the First Merger.
(v) The Company agrees to provide, and will cause its directors, officers and employees to provide, all cooperation reasonably necessary in connection with obtaining the approval of the First Merger by Parents stockholders.
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(f)
HSR Act
. If required pursuant to the HSR Act, as promptly as practicable after the date of this Agreement, Parent and the Company shall each prepare and file the notification required of it thereunder in connection with the Transactions and shall promptly and in good faith respond to all information requested of it by the Federal Trade Commission and Department of Justice in connection with such notification and otherwise cooperate in good faith with each other and such Governmental Authorities. Parent and the Company shall (a) promptly inform the other of any communication to or from the Federal Trade Commission, the Department of Justice or any other Governmental Authority regarding the Transactions, (b) give the other prompt notice of the commencement of any action, suit, litigation, arbitration, proceeding or investigation by or before any Governmental Authority with respect to such transactions and (c) keep the other reasonably informed as to the status of any such action, suit, litigation, arbitration, proceeding or investigation. Filing fees with respect to the notifications required under the HSR Act shall be divided equally between the Company and Parent.
(g)
Other Actions
.
(i) As promptly as practicable after execution of this Agreement and in any event within four (4) Business Days, Parent will prepare and file a Current Report on Form 8-K pursuant to the Exchange Act to report the execution of this Agreement (the
Signing Form 8-K
), which the Company may review and comment upon prior to filing. Any language included in the Signing Form 8-K that reflects the Companys comments, as well as any text as to which the Company has not commented upon after being given a reasonable opportunity to comment, shall be deemed to have been approved by the Company and may henceforth be used by Parent in other filings made by it with the SEC and in other documents distributed by Parent in connection with the Transactions without further review or consent of the Company. Promptly after the execution of this Agreement, Parent and the Company shall also issue a mutually agreeable joint press release announcing the execution of this Agreement (the
Signing Press Release
).
(ii) At least five (5) days prior to the Closing Date, Parent shall prepare together with the Company a draft Form 8-K announcing the Closing, together with, or incorporating by reference, the financial statements prepared by the Company and its accountant, and such other information that may be required to be disclosed with respect to the Merger in any report or form to be filed with the SEC (the
Closing Form 8-K
), which shall be in a form reasonably acceptable to the Company. Prior to Closing, Parent and the Company shall prepare a mutually agreeable joint press release announcing the consummation of the Mergers hereunder (the
Closing Press Release
). Concurrently with the Closing, Parent shall issue the Closing Press Release. Concurrently with the Closing, or as soon as practicable thereafter and in any event within four (4) Business Days, Parent shall file the Closing Form 8-K with the Commission.
(h)
Required Information
. In connection with the preparation of the Signing Form 8-K, the Signing Press Release, the Registration Statement, the Proxy Statement, the Closing Form 8-K and the Closing Press Release, or any other statement, filing, notice or application made by or on behalf of Parent and/or the Company to any Governmental Authority or other third party in connection with the Transactions, and for such other reasonable purposes, the Company and Parent each shall, upon request by the other, furnish the other with all information concerning themselves, their respective directors, officers and stockholders and such other matters as may be reasonably necessary or advisable in connection with the Merger. Each party warrants and represents to the other party that all such information shall be true and correct in all material respects and shall not 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 contained therein, in light of the circumstances under which they were made, not misleading.
(i)
No Shop; Non-Solicit
.
(i) From and after the date hereof until the earlier of the (x) termination of this Agreement in accordance with its terms or (y) consummation of this Agreement and the Transactions (
Exclusivity Period
): (A) Parent shall not, and shall cause its stockholders, officers, directors, affiliates, representatives and advisors (collectively, with Parent, the
Parent
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Group
) not to enter into any written agreement with any other person or entity (whether or not such written agreement is absolute, contingent or conditional) regarding a Parent Third Party Acquisition other than the transactions contemplated by this Agreement, (B) Parent shall not and shall cause the other members of the Parent Group not to solicit, offer, initiate, knowingly encourage, conduct or engage in any discussions, investigations or negotiations or enter into any agreement with any other person or entity (whether or not such agreement or understanding is absolute, revocable, contingent or conditional) regarding a Parent Third Party Acquisition and (C) Parent agrees that during the Exclusivity Period it shall promptly, after obtaining knowledge thereof, advise the Company of any inquiry or proposal regarding a Parent Third Party Acquisition that is received by any member of the Parent Group, including the terms of the proposal and the identity of the inquirer or offeror; and
(ii) During the Exclusivity Period: (A) the Company shall not, and shall cause its stockholders, officers, directors, affiliates, representatives and advisors (collectively, with the Company, the
Company Group
) not to enter into any written agreement with any other person or entity (whether or not such written agreement is absolute, contingent or conditional) regarding a Company Third Party Acquisition other than the transactions contemplated by this Agreement; (B) the Company shall not and shall cause the other members of the Company Group not to solicit, offer, initiate, knowingly encourage, conduct or engage in any discussions, investigations or negotiations or enter into any agreement or understanding with any other person or entity (whether or not such agreement or understanding is absolute, revocable, contingent or conditional) regarding a Company Third Party Acquisition, other than the transactions contemplated in this Agreement; and (C) the Company agrees that during the Exclusivity Period it shall promptly, after obtaining knowledge thereof, advise the Parent of any inquiry or proposal regarding a Company Third Party Acquisition that is received by any member of the Company Group, including the terms of the proposal and the identity of the inquirer or offeror.
6.2.
Companys Covenants
.
(a)
Access to Information
. Prior to the Closing, the Company shall (i) give Parent, its counsel, financial advisors, auditors and other authorized representatives reasonable access to the offices, properties, books and records of the Acquired Companies relating to the Acquired Companies and the Businesses, (ii) furnish to Parent, its counsel, financial advisors, auditors and other authorized representatives such financial and operating data and other information relating to the Acquired Companies and the Businesses as such Persons may reasonably request, and (iii) instruct the employees, counsel and financial advisors of the Company to cooperate with Parent in its investigation of the Acquired Companies and the Businesses; provided, however, that any investigation pursuant to this section shall be conducted in such manner as not to interfere unreasonably with the conduct of the business of the Acquired Companies. Any information provided under this Section 6.2(a) shall be deemed confidential information for purposes of Section 6.1(c). The Company hereby appoints Parent as its authorized representative to access the offices, properties, auditors, books and records of GCI and agrees to use commercially reasonable efforts to assist Parent in obtaining information relating to GCI and the GCI Subsidiaries.
(b)
Restrictions
. Prior to the Closing, except as required by Law, as contemplated by the GCI Merger Agreement or with the prior written consent of Parent (which consent shall not be unreasonably withheld or delayed), (i) the Company shall, and shall cause each Acquired Company to (A) conduct the Businesses only in the Ordinary Course of Business, in substantially the manner in which the Businesses and operations have been previously conducted during the period covered by the Company Financial Statements and consistently with those practices, policies, customs and usages which were in effect from time to time throughout that period and (B) upon request, report periodically to Parent concerning the status of the business, operations, and finances of the Acquired Companies, and (ii) the Company shall not, and shall not permit any Acquired Company to:
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(A)
make, amend or rescind any election relating to Taxes, settle any litigation, audit or controversy relating to Taxes in excess of amounts reserved therefor in the Financial Statements, file any amended Tax Return or claim for refund, change any method of accounting or make any other change in its accounting or Tax policies or procedures, agree to an extension of any statute of limitations related to any Tax, enter into a closing agreement related to any Tax, or surrender any right to claim a Tax refund, except as required by applicable Law or GAAP;
(B)
enter into any new line of business;
(C)
fail to pay any Taxes when they become due and payable, other than Taxes being contested in good faith through appropriate proceedings and for which adequate reserves are reflected in the Company Financial Statements in accordance with GAAP;
(D)
issue any additional shares of capital stock (other than shares of Company Stock issued in connection with existing warrants or upon exercise of outstanding options by persons who are stockholders of the Company as of the date of this Agreement) or any options, warrants or other rights to purchase, or securities convertible into or exchangeable for, shares of stock in the Company;
(E)
declare, set aside or pay any dividends or other distribution in respect of any Company Stock;
(F)
split, combine or reclassify any shares of its capital stock;
(G)
amend or propose to amend its certificate of incorporation or bylaws;
(H)
adopt a plan or effect any complete or partial liquidation or adopt resolutions providing for or authorizing such liquidation or adopt a plan of or effect any dissolution, merger, consolidation, restructuring, recapitalization or reorganization;
(I)
(1) create, incur, assume, forgive or make any changes to the terms or collateral of any debt or receivables (other than trade payables and receivables in the Ordinary Course of Business consistent in type and amount with prior practice), or any employee or officer loans or advances, except incurrences that constitute a refinancing of existing obligations on terms that are no less favorable to the Acquired Company than the existing terms; (2) assume, guarantee, endorse or otherwise become liable or responsible (whether directly, indirectly, contingently or otherwise) for the obligations of any Person except to the extent permitted by the Credit Agreement; (3) make any capital expenditures other than in accordance with the Acquired Companys budgeted capital expenditures and to the extent permitted by the Credit Agreement; (4) make any loans, advances or capital contributions to, or investments in, any other Person (other than customary travel, relocation or business advances to employees consistent with past practices); (5) acquire stock or assets of, or merge or consolidate with, any other Person; (6) incur any material liability or obligation (absolute, accrued, contingent or otherwise) other than trade payables except to the extent permitted by the Credit Agreement; (7) sell, transfer, mortgage, pledge, lease, encumber or otherwise dispose of, or agree to sell, transfer, mortgage, pledge, lease, encumber or otherwise dispose of, any assets or properties (real, personal or mixed, tangible or intangible) other than inventory held for sale or the disposition and replacement of obsolete personal property in the Ordinary Course of Business, or to secure debt permitted under subclause (1) of this clause (I) or (8) incur any indebtedness other than under existing credit facilities
as set forth on
Schedule 4.11
or other Ordinary Course of Business indebtedness except to the extent permitted by the Credit Agreement;
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(J)
(1) increase the wages, salaries, bonus, compensation or other benefits of any of its officers or employees (other than non-material increases granted to retain employees, other than officers, who have been offered employment by another Person) or enter into, establish, amend or terminate any Plan or other employment, consulting, retention, change in control, collective bargaining, bonus or incentive compensation, profit sharing, health, welfare, stock option, equity, pension, retirement, vacation, severance, termination, deferred compensation or other compensation or benefit plan, policy, agreement, trust, fund or other arrangement with, for or in respect of any officer, director or employee other than as required by applicable Law or pursuant to the terms of agreements in effect on the date of this Agreement or in the Ordinary Course of Business with employees (other than officers) of such Acquired Company, (2) hire any employees except in the Ordinary Course of Business or (3) fail to make contributions to any Plan in accordance with the terms thereof or with past practice;
(K)
(1) commence or settle any litigation or other proceedings with any Governmental Authority or other Person in excess of amounts reserved for such litigation on the Most Recent Balance Sheet or excess of $2 million, (2) make, amend or rescind any election relating to Taxes, settle any litigation, audit or controversy relating to Taxes in excess of amounts reserved therefor in the Financial Statements, file any amended Tax Return or claim for refund, change any method of accounting or make any other change in its accounting or Tax policies or procedures, agree to an extension of any statute of limitations related to any Tax, enter into a closing agreement related to any Tax, or surrender any right to claim a Tax refund, except as required by applicable Law or GAAP or (3) waive the benefits of, agree to modify in any manner, terminate, release any Person from or knowingly fail to enforce any material confidentiality or similar agreement to which an Acquired Company is a party or of which an Acquired Company is a beneficiary outside the Ordinary Course of Business;
(L)
(1) enter into or amend any contract or agreement with any Affiliate of the Company or (2) unless such actions would not reasonably be expected to have a Material Adverse Effect on the Company, enter into any agreement or group of related agreements which would be considered a Material Contract, modify, amend or terminate any Material Contract, or waive, release or assign any rights or claims thereunder, or enter into any agreement that if entered into prior to the date hereof would be a Material Contract;
(M)
knowingly or intentionally take any action that results or is reasonably likely to result in any of the representations and warranties of the Company hereunder being untrue in any material respect or any condition in Article VII, VIII and IX not to be satisfied;
(N)
take or omit to take any action, the taking or omission of which could reasonably be expected to have a Material Adverse Effect; or
(O)
agree to do, or take any action in furtherance of, any of the foregoing.
Nothing in this Section 6.2(b) shall be interpreted as prohibiting or restricting the Company in any way from complying with the terms and conditions of any Material Contracts as such exist as of the date hereof.
(c)
Maintenance of Insurance
. The Company shall use reasonable efforts to continue to carry its existing insurance upon substantially similar terms with substantially similar coverage.
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(d)
Notification of Certain Matters
.
(i) The Company shall give prompt notice to Parent if any of the following occur after the date of this Agreement: (A) there has been a material failure of the Company to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by it hereunder, (B) receipt of any notice or other communication in writing from any third party alleging that the consent of such third party is or may be required in connection with the Transactions, (C) receipt of any notice or other written communication from any Governmental Authority which relates to the consummation of the Transactions, (D) the occurrence of an event which could reasonably be expected to have a Material Adverse Effect, or (E) the commencement or threat, in writing, of any litigation against any Acquired Companies which relates to the consummation of the Transactions.
(ii) Parent shall give prompt notice to the Company if any of the following occur after the date of this Agreement: (A) there has been a material failure of Parent to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by it hereunder, (B) receipt of any notice or other communication in writing from any third party alleging that the consent of such third party is or may be required in connection with the Transactions, (C) receipt of any notice or other written communication from any Governmental Authority which relates to the consummation of the Transactions, (D) the occurrence of an event which could reasonably be expected to have a Material Adverse Effect, or (E) the commencement or threat, in writing, of any litigation against Parent which relates to the consummation of the Transactions.
(e)
Update of Schedules
. From time to time prior to the Closing, subject to the reasonable approval of Parent, the Acquired Companies shall be entitled to update, amend or supplement the disclosure schedules attached hereto (each, a
Schedule Update
) (x) to reflect the GCI Acquisition or (y) to the extent information contained therein, which was true, complete and accurate as of the date of this Agreement, becomes untrue, incomplete or inaccurate after the date of this Agreement as a result of occurrences after the date of this Agreement but prior to the Closing (provided that such occurrences do not constitute or were not caused by a violation by an Acquired Company of Section 6.2(b)), by delivering such Schedule Update to the Buyer; provided further, that any such Schedule Update delivered to Parent shall be deemed to be amended unless Parent provides written notice to the Company within ten (10) Business Days after delivery to Parent of such Schedule Update that such Schedule Update is not reasonably satisfactory to Parent. Parent shall not be obligated to approve any change or changes to the disclosure schedules attached hereto made pursuant to subsection (x) above that materially differs from the final schedules to the GCI Merger Agreement, to the Companys material detriment, or pursuant to subsection (y) above that would have, or that would reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect on the Acquired Companies following the Closing. Any such Schedule Update, to the extent practicable, shall be marked to show changes from the disclosure schedules attached hereto, as updated by any prior Schedule Updates. If the Company delivers to Parent one or more Schedule Updates, all references in this Agreement to the disclosure schedules attached hereto shall thereafter mean the disclosure schedules attached hereto as updated by each such Schedule Update to the extent such Schedule Updates have been consented to by Parent. Notwithstanding anything in this section to the contrary, upon completion of the Company Audit, the Company shall have the right to deliver a replacement version of the financial statements as of and for the fiscal year ended December 31, 2007 delivered on the date of this Agreement (the
Replacement Company Financial Statements
); unless Parent terminates this Agreement pursuant to Section 11.1(h), the disclosure schedules attached hereto, shall be deemed to be amended by the Replacement Company Financial Statements.
(f)
Sarbanes-Oxley Act Compliant
. The Acquired Companies shall use their reasonable good faith efforts to become complaint with all applicable provisions of and rules under the Securities Act, Exchange Act, and Sarbanes-Oxley Act of 2002 within the time frame and waiver periods permitted by the SEC with respect to all its SEC filings and system of internal accounting controls.
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(g)
No Claim Against Trust Fund
. Notwithstanding anything else in this Agreement, the Company acknowledges that it has read Parents final prospectus dated January 29, 2007 and understands that Parent has established the Trust Fund for the benefit of Parents public stockholders and that, subject to the limited exceptions described therein, Parent may disburse monies from the Trust Fund only (a) to Parents public stockholders in the event they elect to convert their shares into cash in accordance with Parents certificate of incorporation and/or the liquidation of Parent or (b) to Parent after it consummates a business combination. The Company further acknowledges that, if the Transactions, or, upon termination of this Agreement, another business combination, are not consummated by January 29, 2009, Parent shall be obligated to return to its stockholders the amounts being held in the Trust Fund. Accordingly, the Company, for itself and each of its subsidiaries, affiliated entities, directors, officers, employees, stockholders, representatives, advisors and all other associates and affiliates, hereby waive all rights, title, interest or claim of any kind against Parent to collect from the Trust Fund any monies that may be owed to them by Parent for any reason whatsoever, including but not limited to a breach of this Agreement by Parent or any negotiations, agreements or understandings with Parent (whether in the past, present or future), and shall not seek recourse against the Trust Fund at any time for any reason whatsoever. This paragraph shall survive this Agreement and shall not expire and may not be altered in any way without the express written consent of Parent.
(h)
AIM Delisting
. The Company shall use reasonable best efforts to take, or cause to be taken, all actions, and do or cause to be done all things, reasonably necessary, proper or advisable on its part under applicable Laws and rules and policies of the AIM to enable the delisting by the Company of the Company Common Stock.
6.3.
Parent Covenants
.
(a)
Access to Information
. Prior to the Closing, Parent shall (i) give the Company, its counsel, financial advisors, auditors and other authorized representatives reasonable access to the offices, properties, books and records of Parent, (ii) furnish to the Company, its counsel, financial advisors, auditors and other authorized representatives such financial and operating data and other information relating to Parent as such Persons may reasonably request, and (iii) instruct the employees, counsel and financial advisors of Parent to cooperate with the Company in its investigation of Parent; provided, however, that any investigation pursuant to this section shall be conducted in such manner as not to interfere unreasonably with the conduct of the business of Parent. Any information provided under this Section 6.3(a) shall be deemed confidential information for purposes of Section 6.1(c).
(b)
Restrictions
. Prior to the Closing, except as required by Law or with the prior written consent of the Company (which consent shall not be unreasonably withheld or delayed), (i) Parent shall conduct its business and operations only in the Ordinary Course of Business, in substantially the manner in which its business and operations have been previously conducted during the period covered by the Parent Financial Statements and consistently with those practices, policies, customs and usages which were in effect from time to time throughout that period, and (ii) Parent shall not (A) make or change any election, change an annual accounting period, adopt or change any material accounting principle, method or practice, file any amended Tax Return, settle any Tax claim or assessment, enter into any closing agreement with respect to Taxes, surrender any right to claim a refund of Taxes, consent to any extension or waiver of the limitation period applicable to any Tax claim or assessment relating to Parent or take any similar action if the effect would be to increase Parents Tax liability after the Closing Date, (B) enter into any new line of business, (C) fail to pay any Taxes when they become due and payable, other than Taxes being contested in good faith, (D) issue any additional shares of capital stock (other than shares of Parent Common Stock or Parent Preferred Stock issued in connection with existing warrants or upon exercise of outstanding options by persons who are stockholders of Parent as of the date of this Agreement) or any options, warrants or other rights to purchase, or securities convertible into or exchangeable for, shares of stock in Parent, (E) declare, set aside or pay any dividends or other distribution in respect of any shares of its capital stock, (F) split, combine or reclassify any shares of its capital stock, (G) knowingly or intentionally take any action that results or is reasonably likely to result in any of the representations and warranties of Parent hereunder being untrue in any material respect or any condition in Article VII, VIII and IX not to be satisfied, (H) take or omit to take any action, the taking or omission of which could reasonably be expected to have a
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Material Adverse Effect, or (I) agree to do, or take any action in furtherance of, any of the foregoing. Nothing in this Section 6.3(b) shall be interpreted as prohibiting or restricting Parent in any way from complying with the terms and conditions of any Material Contracts as such exist as of the date hereof.
(c)
Registration of Shares
. Parent shall file as soon as possible after the Closing, and use its best efforts to become effective within 12 months after the Closing Date, a registration statement under the Securities Act with respect to shares of Parent Common Stock issued pursuant to this Agreement prior to the expiration of such 12-month period, including EBITDA Stock issued pursuant to Section 3.1(c)(ii) and Warrant Stock issued pursuant to Section 3.1(c)(iii), to those stockholders of the Company who are listed on
Schedule 6.3(c)
.
(d)
Director and Officer Liability
. Parent shall cause the Surviving Corporation, and the Surviving Corporation hereby agrees, to do the following:
(i) For six (6) years after the First Merger Effective Time, the Surviving Corporation shall indemnify and hold harmless each present and former officer, director, employee and representative of the Company and Parent in respect of acts and omissions occurring prior to the First Merger Effective Time to the fullest extent permitted by the DGCL or any other Law or provided under the Companys or Parents certificate of incorporation and bylaws, as applicable, in effect immediately prior to the First Merger Effective Time; provided that such indemnification shall be subject to any limitation imposed by such certificate of incorporation or bylaws (as in effect immediately prior to the First Merger Effective Time) or from time to time by Law.
(ii) For six (6) years after the First Merger Effective Time, the Surviving Corporation shall provide each present and former officer, director, employee and representative of the Company and Parent with tail insurance in respect of acts or omissions occurring prior to the First Merger Effective Time covering each such Person currently covered by the Companys officers and directors liability insurance policy on terms with respect to coverage and amount not materially less favorable than those of such policy in effect on the date hereof. Without limiting the generality of the foregoing (and not withstanding any other provision of this Agreement), prior to the First Merger Effective Time, and with the prior consent of Parent, Company and Parent shall be entitled to obtain prepaid insurance policies providing for the coverage contemplated by this Section 6.3(d). If such prepaid policies are obtained prior to the First Merger Effective Time, Parent shall not cancel such policies or permit such policies to be cancelled.
(iii) The certificate of formation and the operating agreement of the Second Merger Surviving Entity shall include provisions for exculpation of director and officer liability and indemnification on the same basis as set forth in the Companys and Parents certificate of incorporation and bylaws, as applicable, in effect immediately prior to the First Merger Effective Time. For six (6) years after the First Merger Effective Time, the Surviving Corporation shall maintain in effect the provisions in its certificate of incorporation and bylaws providing for indemnification of such persons with respect to the facts or circumstances occurring at or prior to the First Merger Effective Time to the fullest extent permitted from time to time under the DGCL, which provisions shall not be amended except as required by changes in Law or except to make changes permitted by Law that would enlarge the scope of such persons indemnification rights thereunder.
(iv) The provisions of this Section 6.3(d) (x) are intended to be for the benefit of, and will be enforceable by, each indemnified party, his or her heirs and his or her representatives and (y) are in addition to, and not in substitution for, any other rights to indemnification or contribution that any such Person may have by contract or otherwise. It is the intention of the parties to constitute the Company as trustee for the indemnified parties of the rights and benefits of this Section 6.3(d) and the Company agrees to accept such trust and to hold the rights and benefits of this Section 6.3(d) in trust for and on behalf of the indemnified parties. The obligations of Parent and the Surviving Corporation under this Section 6.3(d) shall not be terminated or
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modified in such a manner as to adversely affect the rights of any indemnified party to whom this Section 6.3(d) applies unless (x) such termination or modification is required by applicable Law or (y) the affected indemnified party shall have consented in writing to such termination or modification.
(e)
Prior to the Effective Time, Parent shall (i) adopt an equity incentive plan in form and substance reasonably satisfactory to the Company, (ii) reserve 3,000,000 shares of Parent Common Stock for issuance pursuant to such equity incentive plan and (iii) contingent upon the approval of such equity incentive plan by the holders of Parent Common Stock, approve each of the option grants set forth on
Schedule 6.3(e)
.
6.4.
Proxies and Dissent Rights
. Parent shall advise the Company, as reasonably requested, and on a daily basis on each of the last seven (7) Business Days prior to the Parent Stockholders meeting, as to the aggregate tally of proxies and votes received in respect of such special meeting and the number of shares of Parent Common Stock for which notices of conversion have been delivered to Parent.
6.5.
Stock Symbol
. As of and after the First Merger Effective Time, Parent shall (i) change the name of Parent to First Communications, Inc. and (ii) cause the symbol under which the Parent Common Stock and any warrants to purchase Parent Common Stock are traded on the NASDAQ to change to a symbol as determined by the Company that, if available, is reasonably representative of the corporate name or business of the Company.
6.6.
Further Assurances
. The parties shall execute such further documents, and perform such further acts, as may be necessary to effect the Merger on the terms herein contained, and to otherwise comply with the terms of this Agreement and consummate the Transactions.
VII.
CONDITIONS TO EACH PARTYS OBLIGATION TO EFFECT THE MERGER
The respective obligations of each party to this Agreement to effect the Mergers shall be subject to the satisfaction prior to the Closing Date of the following conditions:
7.1.
Parent Stockholder Approval
. The Parent Stockholder Approval shall have been obtained by Parent in accordance with the DGCL and Parents certificate of incorporation. An executed copy of an amendment to Parents certificate of incorporation shall have been filed with the Secretary of State of the State of Delaware to be effective as of the Closing. The Trust Fund containing at least $81,000,000 shall have been disbursed to Parent.
7.2.
Parent Common Stock
. Holders of twenty percent (20%) or more of the shares of Parent Common Stock issued in Parents initial public offering of securities and outstanding immediately before the Closing shall not have exercised their rights to convert their shares into a pro rata share of the Trust Fund in accordance with Parents certificate of incorporation.
7.3.
Effectiveness of Registration Statement
. The SEC shall have declared the Registration Statement effective and no stop order suspending the effectiveness of the Registration Statement or any part thereof shall have been issued by the SEC and no proceeding for that purpose shall have been initiated or, to the knowledge of Parent or the Company, threatened by the SEC.
7.4.
NASDAQ Listing Approval
. The shares of Parent Common Stock to be issued in the Merger shall have been approved for listing on the NASDAQ Stock Market, subject to official notice of issuance.
7.5.
No Litigation
. No Governmental Authority of competent jurisdiction shall have enacted, issued, promulgated, enforced or entered any Law, rule, injunction, judgment, order, decree, ruling or charge (whether temporary, preliminary or permanent) that is in effect and (a) restrains, enjoins or otherwise prohibits or challenges the validity or legality of the Transactions, (b) limits or otherwise adversely affects the right of Parent to own and control the Acquired Companies, or to operate all or any material portion of either the business or the assets of the Acquired Companies or any material portion of the business or the assets of Parent or (c) compels Parent or any of its Affiliates to dispose of all or any material portion of either the Business or the assets of any Acquired Company
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(each, a
Governmental Prohibition
), and no Person shall have instituted or overtly threatened any action, suit or proceeding that would be reasonably expected to, result in any Governmental Prohibition.
7.6.
Hart-Scott-Rodino Act; Governmental Approvals
. All applicable waiting periods (and any extension thereof) under the HSR Act shall have expired or otherwise been terminated and all notices, reports, registrations and other filings with, and all consents, approvals and authorizations set forth on
Schedule 6.1(a)(i)
or
Schedule 6.1(a)(ii)
shall have been made or obtained, as the case may be.
7.7.
Board Composition and Parent Officers
. The stockholders of Parent shall have voted to elect to Parent's board of directors the individuals named on
Schedule 7.7
in the classes set forth opposite their names, effective immediately after the Closing, and Parent shall have appointed the individuals named on
Schedule 7.7
to the offices set forth opposite their names, effective immediately after the Closing.
7.8.
Frustration of Closing Conditions
. None of the Company, Parent or the Merger Sub may rely on the failure of any condition set forth in Articles VII, VIII or IX, as the case may be, to be satisfied if such failure was caused by such partys breach of Section 6.1(d) or any other provision of this Agreement.
VIII.
ADDITIONAL CONDITIONS TO OBLIGATIONS OF PARENT AND THE MERGER SUB
The obligations of Parent and Merger Sub to effect the Mergers are subject to satisfaction of the following conditions at or prior to the date indicated (any of which may be waived in whole or in part by Parent in writing):
8.1.
Representations True
. The Companys representations and warranties set forth in this Agreement and the exhibits and schedules attached hereto and any certificates delivered pursuant to this Agreement shall be true and correct in all material respects (except representations which, as written, are already qualified by materiality or Material Adverse Effect, in which case such representations and warranties shall be true and correct in all respects) as of the date hereof and, except to the extent such representations and warranties speak as of an earlier date, as of the First Merger Effective Time as if made at the First Merger Effective Time.
8.2.
Consents Obtained
. All necessary third party approvals or consents shall have been obtained from all foreign, local, state and federal departments and agencies, from all other commissions, boards, agencies and from any other Person or entity whose approval or consent is necessary to consummate the Transactions including, without limitation, the approval of the Companys board of directors and stockholders, State PUC Consents and FCC Consents.
8.3.
Performance of Obligations
. The Company shall have performed in all material respects all obligations, covenants and agreements undertaken by the Company in this Agreement and shall have complied in all material respects with all terms and conditions applicable to it under this Agreement to be performed and complied with on or before the Closing Date.
8.4.
Dissenting Stockholders
. Stockholders holding not more than ten percent (10%) of the outstanding shares of Company Common Stock shall have exercised or shall have continuing rights to exercise dissenters rights under the DGCL with respect to the transactions contemplated by this Agreement.
8.5.
Receipt of Documents by Parent
. Parent shall have received:
(a)
a certificate, dated the Closing Date, signed by the President and Secretary of the Company, certifying as to the fulfillment of the matters contained in Sections 8.1, 8.2 and 8.3;
(b)
certified copies of resolutions duly adopted by the board of directors and stockholders of the Company approving this Agreement and the Transactions;
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(c)
certificates of good standing dated within five Business Days of the Closing Date certifying the due incorporation or formation, good standing and continued corporate existence of each of the Acquired Companies issued by the jurisdiction of incorporation of such Acquired Company and by each jurisdiction where such Acquired Company is required to qualify to do business as a foreign corporation; and
(d)
the Escrow Agreement attached hereto as
Exhibit D
, executed by the Stockholders Representative and the Escrow Agent.
8.6.
No Material Adverse Effect
. Since the date of this Agreement there shall not have been any occurrence, event, change, effect or development that, individually or in the aggregate, has had or is reasonably expected to have a Material Adverse Effect on the Company.
8.7.
Credit Agreement Amendment
. The Company shall have obtained an amendment to the JPMorgan Credit Agreement waiving the change of control provision.
8.8.
GCI Merger
. The Company shall have consummated the GCI Acquisition substantially on the terms and conditions set forth in the GCI Merger Agreement.
IX.
CONDITIONS PRECEDENT TO OBLIGATIONS OF COMPANY
The obligation of the Company to effect the Merger is subject to satisfaction of the following conditions at or prior to the date indicated (any of which may be waived in whole or in part by the Company in writing):
9.1.
Representations True
. Parent and the Merger Subs representations and warranties set forth in this Agreement and the exhibits and schedules attached hereto and any certificates delivered pursuant to this Agreement shall be true and correct in all material respects (except representations which, as written, are already qualified by materiality or Material Adverse Effect, in which case such representations and warranties shall be true and correct in all respects) as of the date hereof and, except to the extent such representations and warranties speak as of an earlier date, as of the First Merger Effective Time as if made at the First Merger Effective Time.
9.2.
Performance of Obligations
. Parent and each Merger Sub shall have duly performed in all material respects all obligations, covenants and agreements undertaken by them in this Agreement and shall have complied in all material respects with all the terms and conditions applicable to them under this Agreement to be performed or complied with on or before the Closing Date.
9.3.
Consents Obtained
. All necessary third party approvals or consents, assuming the Acquired Companies compliance with Section 6.2 with respect to those third party consents that are the subject of such section, shall have been obtained from all foreign, local, state and federal departments and agencies, from all other commissions, boards, agencies and from any other Person or entity whose approval or consent is necessary to consummate the Transactions including, without limitation, the approval of the board of directors of each of Parent and the Merger Subs, State PUC Consents and FCC Consents.
9.4.
Merger Consideration
. Parent shall have confirmed that it is prepared to deposit the Merger Consideration with the Exchange Agent and the Escrow Agent, as applicable.
9.5.
Parent Stockholder Consent
. Parent shall have received approval from the stockholders of Parent in a manner consistent with Parents final prospectus dated January 29, 2007 and delivered such approval to the Company;
provided
,
however
, if Parent fails to obtain such stockholder approval and all of the other foregoing conditions in Sections 7.3-7.6 and 8.1-8.8 shall have been satisfied, then Parent shall pay the Company all of its excess working capital funds available outside of the Trust Fund which remain after Parents expenses are paid or accrued for and reasonable liquidation reserves are established.
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9.6.
Receipt of Documents
. The Company shall have received:
(a)
a certificate, dated the Closing Date, signed by the President and Secretary of each of Parent and each Merger Sub certifying as to the fulfillment of the matters contained in Sections 9.1, 9.2, 9.3, 9.4, 9.5, 9.7 and 9.8;
(b)
certified copies of resolutions duly adopted by the board of directors of each of Parent and each Merger Sub approving this Agreement and the Transactions; and
(c)
the Escrow Agreement duly executed by the Parent and the Escrow Agent.
9.7.
SEC Compliance
. Immediately prior to the Closing, Parent shall be in compliance with the reporting requirements under the Exchange Act.
9.8.
No Material Adverse Effect
. Since the date of this Agreement there shall not have been any occurrence, event, change, effect or development that, individually or in the aggregate, has had or is reasonably expected to have a Material Adverse Effect on Parent.
X.
SURVIVAL OF REPRESENTATIONS AND WARRANTIES
10.1.
Nonsurvival of Representations and Warranties
. None of the representations and warranties in this Agreement or in any certificate or instruments delivered pursuant to this Agreement shall survive the Closing. This Section 10.1 shall not limit any covenant or agreement of the parties which by its terms contemplates performance after the Closing.
XI.
TERMINATION
11.1.
Termination
. This Agreement may be terminated at any time prior to Closing, as follows:
(a)
By mutual written consent of Parent and the Company;
(b)
By either Parent or the Company, if the Transactions shall not have been consummated on or before January 29, 2009 (the
Outside Date
);
(c)
By either Parent or the Company, if a Governmental Authority shall have enacted, issued, promulgated, enforced or entered any statute, rule, regulation, executive order, decree, injunction or other order, in each case which has become final and non-appealable, and which permanently restrains, enjoins or otherwise prohibits the Transactions;
(d)
By either Parent or the Company, if within forty-eight (48) hours of the execution and delivery of this Agreement, the Company does not obtain the affirmative written consent of a majority of the stockholders of the Company approving this Agreement and the Transactions;
(e)
By either Parent or the Company, if, at the Parent Stockholders Meeting (including any adjournments thereof), this Agreement and the Transactions shall fail to be approved and adopted by the affirmative vote of the holders of Parent Common Stock required under Parents certificate of incorporation, or the holders of 20% or more of the number of shares of Parent Common Stock issued in Parents initial public offering and outstanding as of the record date of the Parent Stockholders Meeting exercise their rights to convert the shares of Parent Common Stock held by them into cash in accordance with Parents certificate of incorporation;
(f)
By Parent, if it is not in material breach of its obligations under this Agreement and if (i) at any time any of the representations and warranties of the Company herein become untrue or inaccurate such that Section 8.1 would not be satisfied (treating such time as if it were the Closing Date for purposes of this Section 11.1(f)); or (ii) there has been a breach on the part of the Company of any of its covenants or agreements contained in this Agreement such that Section 8.3 would not be satisfied (treating such time as if it were the Closing Date for purposes of this Section 11.1(f)), and, in both cases (i) and (ii), such breach has not been cured within thirty (30) days after written notice to the Company, if curable; or
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(g) By the Company, if it is not in material breach of its obligations under this Agreement, and if (i) at any time any of the representations and warranties of Parent herein become untrue or inaccurate such that Section 9.1 would not be satisfied (treating such time as if it were the Closing Date for purposes of this Section 11.1(g)); or (ii) there has been a breach on the part of Parent of any of its covenants or agreements contained in this Agreement such that Section 9.2 would not be satisfied (treating such time as if it were the Closing Date for purposes of this Section 11.1(g)), and, in both cases (i) and (ii), such breach has not been cured within thirty (30) days after written notice to Parent, if curable.
(h)
By Parent within forty-eight (48) hours of the delivery by the Company to Parent of Replacement Company Financial Statements, if such Replacement Company Financial Statements contain restated items that adversely affect the Companys financial results as of and for the fiscal year ended December 31, 2007.
11.2.
Effect of Termination
. If this Agreement is terminated as permitted by Section 11.1, this Agreement shall have no further force and effect, except that the provisions of Sections 6.1(c), 6.2(g), 12.1, 12.2, 12.5, 12.8, 12.9, 12.10, 12.11, 12.12, 12.13 and this Section 11.2 shall survive any such termination and except for any breach by a party of its obligations hereunder prior to the time of such termination.
XII.
MISCELLANEOUS
12.1.
Applicable Law
. This Agreement shall be construed and enforced in accordance with the internal, substantive laws of the State of Delaware.
12.2.
Construction; Entire Agreement; Amendment
. The captions preceding the Articles and Sections in this Agreement have been inserted for convenience only and shall not be used to modify, expand or construe any of the provisions of this Agreement. This Agreement, which includes the exhibits and schedules hereto and the other documents, agreements and instruments executed and delivered pursuant to or in connection with this Agreement, constitutes the entire Agreement between the parties hereto with respect to the subject matter contained herein, and it supersedes all prior and contemporaneous agreements, representations and understandings of the parties, express or implied, oral or written. This Agreement may not be amended or modified in any way except in a writing signed by each of the parties hereto and except as provided in Section 6.2(e).
12.3.
Assignment
. The rights and obligations of a party under this Agreement shall not be assignable by such party without prior, express written consent of all other parties.
12.4.
Binding Effect
. This Agreement shall be binding upon, and inure to the benefit of, the legal representatives, heirs, successors and permitted assigns of the respective parties.
12.5.
Interpretation
. Words used herein, regardless of the number and gender specifically used, shall be deemed and construed to include any other number, singular or plural, and any other gender, masculine, feminine, or neuter, as the context requires.
12.6.
Waiver
. Any provision of this Agreement may be waived in writing at any time by the party which is entitled to the benefit of such provision. Neither any failure nor any delay by any party in exercising any right, power, or privilege under this Agreement or any of the documents referred to in this Agreement shall operate as a waiver of such right, power or privilege, and no single or partial exercise of such right, power or privilege shall preclude any other or further exercise of such right, power or privilege or the exercise of any other right, power or privilege.
12.7.
Counterparts
. This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same Agreement, and shall become effective when one or more counterparts have been signed by each of the parties to this Agreement. Electronic or facsimile signatures shall be deemed to be original signatures.
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12.8.
Severability
. The parties agree that if any part, term, or provision of this Agreement shall be found illegal and unenforceable by any court of law, the remaining provisions shall be severable, valid, and enforceable in accordance with their terms.
12.9.
Notices
. Notice from a party to another party hereto relating to this Agreement shall be deemed effective if made in writing and delivered to the recipients address or facsimile number set forth below by any of the following means: (i) hand delivery, (ii) registered or certified mail, postage prepaid, with return receipt requested, (iii) Federal Express, Airborne Express, or like overnight courier service, or (iv) facsimile showing the date of transmission thereon and followed by regular mail delivery of a copy thereof. Notice made in accordance with this Section 12.9 shall be deemed delivered on receipt if delivered by hand or transmission if sent by facsimile on the third Business Day after mailing if mailed by registered or certified mail, or the next Business Day after deposit with an overnight courier service if delivered for next day delivery.
(a)
If to the Company or the Stockholders Representative prior to the Closing, as follows:
First Communications, Inc.
3340 West Market Street
Akron, Ohio 44333
Attn: Joseph Morris
Fax: (330) 835-2330
With a copy to:
Bingham McCutchen LLP
One Federal Street
Boston, MA 02110
Attn: John J. Concannon III, Esq.
Fax: (617) 951-8736
(b)
If to Parent or the Merger Sub or following the Closing, the Company, as follows:
Renaissance Acquisition Corp.
50 East Sample Road
Pompano Beach, Florida
Attn: Barry W. Florescue
Fax: (954) 784-0534
and
Renaissance Acquisition Corp.
15652 Woodvale Road
Encino, California 91436
Attn: Richard Bloom
Fax: (818) 995-7191
With a copy to:
Dechert LLP
1095 Avenue of the Americas
New York, New York 10036
Attn: Charles I. Weissman, Esq.
Fax: (212) 698-3599
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(c)
If to the Stockholders Representative following the Closing, as follows:
The Gores Group LLC
10877 Wilshire Boulevard
18
th
Floor
Los Angeles, California 90024
Attn: Scott Honour
Fax: (310) 209-3310
Any party may, from time to time, by written notice to the other party, designate a different address, which shall be substituted for the one specified above for such party.
12.10.
Consent to Jurisdiction
. The parties hereto each hereby irrevocably submit to the exclusive jurisdiction of any state or federal court sitting in New Castle County, Delaware for the purposes of any suit, action or other proceeding arising out of or based upon this Agreement or the subject matter hereto brought by any other party hereto. Each party also agrees not to bring any action or proceeding arising out of or relating to this Agreement in any other court. Each party hereto, to the extent permitted by applicable Law, hereby waives and agrees not to assert, by way of motion, as a defense, or otherwise, in any such suit, action or proceeding brought in such courts, any claim that it is not subject personally to the jurisdiction of the above-named courts, that its property is exempt or immune from attachment or execution, that the venue of the suit, action or proceeding is improper or that this Agreement or the subject matter hereof may not be enforced in or by such court. Any party may make service on any other party 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 12.9 above. Nothing in this Section 12.10, however, shall affect the right of any party to serve legal process in any other manner permitted by law or at equity. Each party agrees that a final judgment in any action or proceeding so brought shall be conclusive and may be enforced by suit on the judgment or in any other manner provided by law or at equity.
12.11.
WAIVER OF JURY TRIAL
. TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, THE PARTIES HERETO HEREBY IRREVOCABLY AND EXPRESSLY WAIVE ALL RIGHT TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM (WHETHER BASED UPON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR RELATING TO THIS AGREEMENT, THE OTHER DOCUMENTS AND AGREEMENTS DELIVERED IN CONNECTION HEREWITH, THE TRANSACTIONS OR THE ACTIONS OF ANY PARTY HERETO IN THE NEGOTIATION, ADMINISTRATION, OR ENFORCEMENT HEREOF OR THEREOF.
12.12.
Specific Performance
. The parties hereto agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. Accordingly, the parties further agree that each party shall be entitled to an injunction or restraining order to prevent breaches of this Agreement and to enforce specifically the terms and provisions hereof in any court of the United States or any state having jurisdiction, this being in addition to any other right or remedy to which such party may be entitled under this Agreement, at law or in equity.
12.13.
Expenses
. Except as otherwise provided in this Agreement, whether or not the Closing takes place, each party shall bear its respective expenses incurred in connection with the preparation, execution and performance of this Agreement and the Transactions, including all fees and expenses of representatives, counsel, accountants, brokers and finders.
12.14.
Stockholders Representative
. Subject to the penultimate sentence of this Section 12.14, the Stockholders Representative shall serve as the exclusive agent of the Former Company Stockholders and the holders of T2 Warrants and T3 Warrants for all purposes of this Agreement and the transactions contemplated hereby. Without limiting the generality of the foregoing, the Stockholders Representative shall be authorized (a) to execute all certificates, documents and agreements on behalf of and in the name of any of the Former Company Stockholders and the holders of T2 Warrants and T3 Warrants necessary to effectuate the transactions contemplated hereby, and (b) to negotiate, execute and deliver all amendments, modifications and waivers to this Agreement or any other agreement, document or instrument contemplated by this Agreement. The Stockholders Representative also shall be exclusively authorized to take all actions on behalf of the Former Company Stockholders and holders of T2 Warrants and T3 Warrants in connection with any claims made under this Agreement or in respect of the Transactions contemplated hereby, to bring, prosecute, defend or settle such claims, and to make and receive
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payments in respect of such claims on behalf of the Former Company Stockholders and holders of T2 Warrants and T3 Warrants, and no Former Company Stockholder or holders of T2 Warrants and T3 Warrants shall take any such action without the Stockholders Representatives prior written approval. The Stockholders Representative is serving in the capacity as exclusive agent of the Former Company Stockholders and holders of T2 Warrants and T3 Warrants hereunder solely for purposes of administrative convenience. The Stockholders Representative shall not be liable to any Person for any act done or omitted hereunder as the Stockholders Representative while acting in good faith, and any act done or omitted pursuant to the advice of counsel shall be conclusive evidence of such good faith. The holders of shares of Company Stock outstanding immediately prior to the First Effective Time shall indemnify the Stockholders Representative and hold it harmless against any loss, liability or expense incurred without gross negligence or bad faith on the part of the Stockholders Representative and arising out of or in connection with the acceptance or administration of its duties hereunder. The person serving as Stockholders Representative may resign or be replaced from time to time by the holders of a majority in interest of the Escrowed Stock held in the Escrow Account upon not less than ten (10) days prior written notice to Parent and with Parents written consent, which shall not be unreasonably withheld, conditioned or delayed.
[
Signatures Appear on the Following Page
]
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IN WITNESS WHEREOF, the parties have duly executed this Agreement and Plan of Merger on the date first above written.
PARENT
:
RENAISSANCE ACQUISITION CORP
|
|
|
|
By:
|
/s/ Barry W. Florescue
|
|
|
Name: Barry W. Florescue
|
|
|
Title: Chairman and Chief Executive Officer
|
MERGER SUB I
:
FCI MERGER SUB I, INC.
|
|
|
|
By:
|
/s/ Barry W. Florescue
|
|
|
Name: Barry W. Florescue
|
|
|
Title: President
|
MERGER SUB II
:
FCI MERGER SUB II, LLC
|
|
|
|
By:
|
RENAISSANCE ACQUISITION CORP.
,
|
|
|
as Sole Member
|
|
|
|
|
By:
|
/s/ Barry W. Florescue
|
|
|
Name: Barry W. Florescue
|
|
|
Title: Chairman and Chief Executive Officer
|
THE COMPANY
:
FIRST COMMUNICATIONS, INC.
|
|
|
|
By:
|
/s/ Joseph R. Morris
|
|
|
Name: Joseph R. Morris
|
|
|
Title: Chief Operating Officer
|
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STOCKHOLDERS REPRESENTATIVE:
THE GORES GROUP, LLC
|
|
|
|
By:
|
/s/ Steven G. Eisner
|
|
|
Name: Steven G. Eisner
|
|
|
Title: Vice President
|
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Index of Schedules
Schedule 4.3
|
Capitalization
|
Schedule 4.5
|
Real Property
|
Schedule 4.6
|
Litigation
|
Schedule 4.7
|
Noncontravention
|
Schedule 4.8
|
Taxes
|
Schedule 4.9
|
Financial Statements
|
Schedule 4.10
|
Undisclosed Liabilities
|
Schedule 4.11
|
Material Contracts
|
Schedule 4.12
|
Intellectual Property
|
Schedule 4.13
|
Insurance
|
Schedule 4.14
|
Employees
|
Schedule 4.15
|
Employee Benefits
|
Schedule 4.16
|
Environmental Matters
|
Schedule 4.20
|
Material Changes
|
Schedule 4.21
|
Permits and Licenses
|
Schedule 4.23
|
Major Suppliers and Customers
|
Schedule 4.24
|
Related Party Transactions
|
Schedule 6.1
|
FCC and State PUC Consents
|
Schedule 6.3(c)
|
Registration of Shares
|
Schedule 6.3(e)
|
Proposed Initial Option Grants Under New Incentive Plan
|
Schedule 7.7
|
Directors and Officers
|
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ANNEX A-1
AMENDMENT NO. 1 TO
AGREEMENT AND PLAN OF MERGER
THIS AMENDMENT NO. 1 TO AGREEMENT AND PLAN OF MERGER (this
Amendment
), is made and entered into this 22nd day of December, 2008 by and among RENAISSANCE ACQUISITION CORP., a Delaware corporation (
Parent
), FCI MERGER SUB I, INC., a Delaware corporation and wholly owned subsidiary of Parent (
Merger Sub I
), FCI MERGER SUB II, LLC, a Delaware limited liability company and wholly owned subsidiary of Parent (
Merger Sub II
, and, together with the Merger Sub I, collectively, the
Merger Subs
), FIRST COMMUNICATIONS, INC., a Delaware corporation (the
Company
) and The Gores Group LLC, solely in its capacity as the exclusive representative of the stockholders of the Company (
Stockholders Representative
). Except as otherwise set forth herein, capitalized terms used herein shall have the meanings set forth in the Agreement and Plan of Merger by and among the parties hereto, dated as of September 13, 2008 (the
Agreement
).
WHEREAS, the Agreement provides that, upon consummation of the First Merger, each issued and outstanding share of Company Common Stock (other than any Dissenting Shares) would, by virtue of the First Merger, be converted into the right to receive (x) 0.57361 of a single validly issued, fully paid and nonassessable share of Parent Common Stock (
Closing Stock Payment
),
plus
(y) the proportionate share amount of 9,950,000 shares of Parent Common Stock issuable pursuant to Section 3.1(a)(iii)(2) of the Agreement, if any, which such amount shall be deposited into the Escrow Account pursuant to Section 3.5 of the Agreement (
EBITDA Stock
)
plus
certain additional shares of Parent Common Stock;
WHEREAS, pursuant to the Agreement, 9,950,000 shares of Parent Common Stock constituting the EBITDA Stock would be released from escrow to the former stockholders of the Company upon the occurrence of the EBITDA Condition which, pursuant to the terms of the EBITDA Condition, would be required to have occurred on or before June 30, 2011;
WHEREAS, the parties have determined to (i) decrease the Closing Stock Payment from 0.57361 of a share of Parent Common Stock to 0.44932 of a share of Parent Common Stock, (ii) increase the number of shares of EBITDA Stock from 9,950,000 shares of Parent Common Stock to 13,950,000 shares and (iii) extend the period by which the EBITDA Condition must occur until December 31, 2011;
WHEREAS, RAC Partners, LLC (
Parent Founder
) has agreed that 2,000,000 shares of Parent Common Stock currently in escrow pursuant to the Stock Escrow Agreement, dated as of February 1, 2007, among Parent, Parent Founder, Barry W. Florescue, Logan D. Delany, Jr., Stanley Kreitman, Charles Miersch, Morton Farber and Continental Stock Transfer and Trust Company shall be retained in the escrow account established thereunder to be released upon the occurrence of the EBITDA Condition in accordance with the Amended and Restated Stock Escrow Agreement attached hereto as
Exhibit E
.
WHEREAS, the Board of Directors of the Company have approved this Amendment and the other transactions contemplated hereby upon the terms and subject to the conditions set forth in this Amendment;
WHEREAS, immediately following and within forty-eight (48) hours of the execution and delivery of this Amendment, the Company shall obtain the affirmative written consent of the holders of at least a majority of Company Common Stock to approve this Amendment; and
WHEREAS, the board of directors of Parent and Merger Sub I and the sole member of Merger Sub II have approved this Amendment upon the terms and subject to the conditions set forth in this Amendment.
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements herein contained, the parties agree as set forth below.
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ARTICLE I
AMENDMENTS TO AGREEMENT AND PLAN OF MERGER
(a)
Amendments.
(1)
The following definitions shall be added to Article I of the Agreement:
Parent Founder Escrow Agreement
shall mean the Amended and Restated Stock Escrow Agreement substantially in the form attached hereto as Exhibit E.
Parent Founder
shall mean RAC Partners LLC, a Delaware limited liability company.
(2)
Section 3.1(a)(iii)(1) and (2) shall be amended and restated to read in their entirety as follows:
(1)
(x) 0.44932 of a single validly issued, fully paid and nonassessable share of Parent Common Stock (
Closing Stock Payment
), plus (y) the proportionate share amount of 13,950,000 shares of Parent Common Stock issuable pursuant to Section 3.1(a)(iii)(2) below, if any, which such amount shall be deposited into the Escrow Account pursuant to Section 3.5 hereof (
EBITDA Stock
), plus (z) the proportionate share amount of 8,500,000 shares of Parent Common Stock issuable pursuant to Section 3.1(a)(iii)(3) below, if any, which such amount shall be deposited into the Escrow Account pursuant to Section 3.5 hereof (
Warrant Stock
, which, together with the Closing Stock Payment and EBITDA Stock, shall be referred to collectively, as the
Common Stock Merger Consideration
);
(2)
If, for any fiscal quarter from the date hereof through December 31, 2011, the Second Merger Surviving Entity has an annualized adjusted EBITDA (i.e., the actual quarterly EBITDA multiplied by four (4)) equal to or greater than the EBITDA Target, Parent shall cause the Escrow Agent to release from the Escrow Account, in accordance with this Section 3.1(a)(iii)(2), Section 3.5 hereof and the Escrow Agreement, 13,950,000 shares of Parent Common Stock (reduced by the number of shares that would have been issuable to holders of Dissenting Shares in respect of such Dissenting Shares if the stockholder holding such Dissenting Shares had not exercised its appraisal rights pursuant to Section 3.3) (the
EBITDA Condition
). If the EBITDA Condition is satisfied, the holders of Company Common Stock shall be entitled to receive that number of shares of Parent Common Stock equal to 13,950,000 (reduced by the number of shares that would have been issuable to holders of Dissenting Shares in respect of such Dissenting Shares if the stockholder holding such Dissenting Shares had not exercised its appraisal rights pursuant to Section 3.3). If the EBITDA Condition is not satisfied by December 31, 2011, then Parent and the Stockholders Representative shall deliver joint written instructions to the Escrow Agent to release the remaining shares held in Escrow pursuant to the EBITDA Condition to the Company on February 28, 2012 and such securities shall be cancelled in accordance with Section 3.5.
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(iii)
The following Section 6.1(j) shall be added to the Agreement:
(j)
Parent and the Stockholders Representative hereby agree that, within five (5) Business Days of the satisfaction of the EBITDA Condition, they shall deliver an EBITDA Condition Instruction to the escrow agent under the Parent Founder Escrow Agreement as provided in Section 3.2 thereof.
(iv)
The following Section 9.6(d) shall be added to the Agreement:
(d)
the Parent Founder Escrow Agreement, executed by the Parent Founder and each of the other parties thereto.
ARTICLE II
GENERAL PROVISIONS
2.1
Reference to and Effect on the Agreement
. This Amendment modifies the Agreement to the extent set forth herein, is hereby incorporated by reference into the Agreement and is made a part thereof. Except as specifically amended by this Amendment, the Agreement shall remain in full force and effect and is hereby ratified and confirmed.
2.2
Applicable Law
. This Amendment shall be construed and enforced in accordance with the internal, substantive laws of the State of Delaware.
2.3
Counterparts
. This Amendment may be executed in one or more counterparts, all of which shall be considered one and the same agreement, and shall become effective when one or more counterparts have been signed by each of the parties to this Amendment. Electronic or facsimile signatures shall be deemed to be original signatures.
2.4
Construction; Entire Agreement; Amendment
. The captions preceding the Articles and Sections in this Amendment have been inserted for convenience only and shall not be used to modify, expand or construe any of the provisions of this Amendment. The Agreement, which includes the exhibits and schedules hereto and the other documents, agreements and instruments executed and delivered pursuant to or in connection with this Agreement, when combined with the Agreement and the exhibit thereto, constitutes the entire Agreement between the parties hereto with respect to the subject matter contained herein, and it supersedes all prior and contemporaneous agreements, representations and understandings of the parties, express or implied, oral or written.
2.5
Further Assurances
. The parties shall execute such further documents, and perform such further acts, as may be necessary to effect the terms of this Amendment.
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IN WITNESS WHEREOF, the parties have duly executed this Agreement and Plan of Merger on the date first above written.
PARENT
:
RENAISSANCE ACQUISITION CORP.
By:
/s/ Barry W. Florescue
Name: Barry W. Florescue
Title: Chairman and Chief Executive Officer
MERGER SUB I
:
FCI MERGER SUB I, INC.
By:
/s/ Barry W. Florescue
Name: Barry W. Florescue
Title: President
MERGER SUB II
:
FCI MERGER SUB II, LLC
BY:
RENAISSANCE ACQUISITION CORP.
,
as Sole Member
By:
/s/ Barry W. Florescue
Name: Barry W. Florescue
Title: Chairman and Chief Executive Officer
THE COMPANY
:
FIRST COMMUNICATIONS, INC.
By:
/s/ Joseph R. Morris
Name: Joseph R. Morris
Title: Chief Financial Officer
STOCKHOLDERS REPRESENTATIVE:
THE GORES GROUP, LLC
By:
/s/ Scott Honour
Name: Scott Honour
Title:
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EXHIBIT E
AMENDED AND RESTATED STOCK ESCROW AGREEMENT
AMENDED AND RESTATED STOCK ESCROW AGREEMENT, dated as of January ___, 2009 ("
Agreement
"), by and among FIRST COMMUNICATIONS, INC., formerly known as Renaissance Acquisition Corp., a Delaware corporation ("
Parent
"), RAC Partners LLC (
Founder
), Barry W. Florescue, Logan D. Delany, Jr., Stanley Kreitman, Charles Miersch, and Morton Farber (collectively with the Founder, "
Initial Stockholders
"), THE GORES GROUP LLC, a [Delaware] limited liability company (the Stockholders Representative) and CONTINENTAL STOCK TRANSFER & TRUST COMPANY, a New York corporation ("
Escrow Agent
").
WHEREAS, Parent, FCI Merger Sub I, a Delaware corporation and a wholly-owned subsidiary of Parent (
Merger Sub I
), FCI Merger Sub II, a Delaware limited liability company and a wholly-owned subsidiary of Parent (
Merger Sub II
), First Communications Inc., a Delaware corporation (the
Company
), and the Stockholders Representative have entered into an Agreement and Plan of Merger dated as of September 13, 2008 (as amended, the Merger Agreement), a copy of which is attached hereto as
Exhibit A
, pursuant to which, among other things, (i) Merger Sub I is merging with and into the Company, and the surviving company is then merging with and into Merger Sub II, with Merger Sub II surviving, and (ii) certain stock issuances are to be made to the Company Securityholders (as defined below).
WHEREAS, Parent, the Initial Stockholders, and the Escrow Agent are parties to an escrow agreement, dated as of February 1, 2007 (the
Original Stock Escrow Agreement
), pursuant to which Founder and the Initial Stockholders delivered to the Escrow Agent for deposit into an escrow account established thereunder, certificates representing shares of common stock, par value $0.0001 per share, of Parent (
Parent Common Stock
) in the respective amounts set forth opposite the names of Founder and the Initial Stockholders on Exhibit A attached hereto (the
Escrow Shares
).
WHEREAS, the Merger Agreement requires, among other things, that, at the closing thereunder (the
Closing
), pursuant to this Agreement, certificates representing 2,000,000 shares of Parent Common Stock held by Founder (the
Contingent Escrow Shares
) continue to be held by the Escrow Agent for deposit in the Escrow Account (as defined below). All of the Contingent Escrow Shares are included in the Escrow Shares currently held in escrow pursuant to the Original Stock Escrow Agreement.
WHEREAS, in order to effect certain of the transactions contemplated by the Merger Agreement, Parent, Founder, the Initial Stockholders and the Escrow Agent wish to amend and restate the Original Escrow Agreement and that the Stockholders Representative become a party thereto, and the Stockholders Representative wishes to become a party thereto.
IT IS AGREED:
1.
Appointment of Escrow Agent. The Company and the Initial Stockholders hereby ratify the appointment of, and the Stockholders Representative hereby agrees to appoint, the Escrow Agent to act in accordance with and subject to the terms of this Agreement and the Escrow Agent hereby accepts such appointment and agrees to act in accordance with and subject to such terms.
2.
Deposit of Escrow Shares. Each of the Initial Stockholders has delivered to the Escrow Agent certificates representing his respective Escrow Shares, to be held and disbursed subject to the terms and conditions of this Agreement. Each Initial Stockholder acknowledges that the certificate representing his Escrow Shares is legended to reflect the deposit of such Escrow Shares under this Agreement.
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3.
Disbursement of the Escrow Shares.
3.1
The Escrow Agent shall hold the Escrow Shares until the first anniversary of the date hereof (the period from the date hereof until such date, "
Initial Escrow Period
"), on which date it shall, upon written instructions from each Initial Stockholder, disburse to Founder all of its Escrow Shares other than the Contingent Escrow Shares and each other Initial Stockholder its Escrow Shares (and any applicable stock power).
3.2
The Escrow Agent shall hold the Contingent Escrow Shares until the date on which the Escrow Agent receives a notice executed by each of Parent, Founder and the Stockholders Representative that the EBITDA Condition described in Section 3.1(a)(iii)(2) of the Merger Agreement has occurred (the
EBITDA Condition Instruction
), at which time the Escrow Agent shall disburse to Founder all of the Contingent Escrow Shares; provided, that if the EBITDA Condition Instruction is met prior to the end of the Initial Escrow Period, the Contingent Escrow Shares shall be disbursed to the Founder as soon as practicable after the Initial Escrow Period.
3.3
If by March 15, 2012 (the period beginning on the date hereof through such date, the
Escrow Period
), the Escrow Agent has not received an EBITDA Condition Instruction, the Escrow Agent shall upon written instructions from Parent release all of the Contingent Escrow Shares to Parent.
3.4
Notwithstanding the foregoing, if the Escrow Agent is notified by Parent pursuant to Section 6.7 hereof that Parent is being liquidated at any time during the Initial Escrow Period, then the Escrow Agent shall promptly destroy the certificates representing the Escrow Shares
3.5
If, during the Escrow Period, Parent subsequently consummates a liquidation, merger, stock exchange or other similar transaction which results in all of the stockholders of such entity having the right to exchange their shares of Common Stock for cash, securities or other property, then the Escrow Agent will, upon receipt of a certificate, executed by the Chief Executive Officer of Parent, in form reasonably acceptable to the Escrow Agent, that such transaction is then being consummated, release the Escrow Shares to the Initial Stockholders upon consummation of the transaction so that they can similarly participate. The Escrow Agent shall have no further duties hereunder after the disbursement or destruction of the Escrow Shares in accordance with this Section 3.
4.
Rights of Initial Stockholders in Escrow Shares.
4.1
Voting Rights as a Stockholder. The Initial Stockholders shall retain all of their rights as stockholders of Parent during the Escrow Period, including, without limitation, the right to vote such shares.
4.2
Dividends and Other Distributions in Respect of the Escrow Shares. During the Escrow Period, all dividends payable in cash with respect to the Escrow Shares shall be paid to the Initial Stockholders, but all dividends payable in stock or other non-cash property ("
Non-Cash Dividends
") shall be delivered to the Escrow Agent to hold in accordance with the terms hereof. As used herein, the term "
Escrow Shares
" shall be deemed to include the Non-Cash Dividends distributed thereon, if any.
4.3
Restrictions on Transfer. During the Escrow Period, no sale, transfer or other disposition may be made of any or all of the Escrow Shares except (i) by gift to a member of Initial Stockholder's immediate family or to a trust, the beneficiary of which is an Initial Stockholder or a member of an Initial Stockholder's immediate family, (ii) by virtue of the laws of descent and distribution upon death of any Initial Stockholder, or (iii) pursuant to a qualified domestic relations order; provided, however, that such permissive transfers may be implemented only upon the respective transferee's written agreement to be bound by the terms and conditions of this Agreement and of the Insider Letter signed by the Initial Stockholder transferring the Escrow Shares.
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5.
Concerning the Escrow Agent.
5.1
Good Faith Reliance. The Escrow Agent shall not be liable for any action taken or omitted by it in good faith and in the exercise of its own best judgment, and may rely conclusively and shall be protected in acting upon any order, notice, demand, certificate, opinion or advice of counsel (including counsel chosen by the Escrow Agent), statement, instrument, report or other paper or document (not only as to its due execution and the validity and effectiveness of its provisions, but also as to the truth and acceptability of any information therein contained) which is believed by the Escrow Agent to be genuine and to be signed or presented by the proper person or persons. The Escrow Agent shall not be bound by any notice or demand, or any waiver, modification, termination or rescission of this Agreement unless evidenced by a writing delivered to the Escrow Agent signed by the proper party or parties and, if the duties or rights of the Escrow Agent are affected, unless it shall have given its prior written consent thereto.
5.2
Indemnification. The Escrow Agent shall be indemnified and held harmless by Parent from and against any expenses, including counsel fees and disbursements, or loss suffered by the Escrow Agent in connection with any action, suit or other proceeding involving any claim which in any way, directly or indirectly, arises out of or relates to this Agreement, the services of the Escrow Agent hereunder, or the Escrow Shares held by it hereunder, other than expenses or losses arising from the gross negligence or willful misconduct of the Escrow Agent. Promptly after the receipt by the Escrow Agent of notice of any demand or claim or the commencement of any action, suit or proceeding, the Escrow Agent shall notify the other parties hereto in writing. In the event of the receipt of such notice, the Escrow Agent, in its sole discretion, may commence an action in the nature of interpleader in an appropriate court to determine ownership or disposition of the Escrow Shares or it may deposit the Escrow Shares with the clerk of any appropriate court or it may retain the Escrow Shares pending receipt of a final, non-appealable order of a court having jurisdiction over all of the parties hereto directing to whom and under what circumstances the Escrow Shares are to be disbursed and delivered. The provisions of this Section 5.2 shall survive in the event the Escrow Agent resigns or is discharged pursuant to Sections 5.5 or 5.6 below.
5.3
Compensation. The Escrow Agent shall be entitled to reasonable compensation from Parent for all services rendered by it hereunder. The Escrow Agent shall also be entitled to reimbursement from Parent for all expenses paid or incurred by it in the administration of its duties hereunder including, but not limited to, all counsel, advisors' and agents' fees and disbursements and all taxes or other governmental charges.
5.4
Further Assurances. From time to time on and after the date hereof, Parent and the Initial Stockholders shall deliver or cause to be delivered to the Escrow Agent such further documents and instruments and shall do or cause to be done such further acts as the Escrow Agent shall reasonably request to carry out more effectively the provisions and purposes of this Agreement, to evidence compliance herewith or to assure itself that it is protected in acting hereunder.
5.5
Resignation. The Escrow Agent may resign at any time and be discharged from its duties as escrow agent hereunder by its giving the other parties hereto written notice and such resignation shall become effective as hereinafter provided. Such resignation shall become effective at such time that the Escrow Agent shall turn over to a successor escrow agent appointed by Parent, the Escrow Shares held hereunder. If no new escrow agent is so appointed within the 60 day period following the giving of such notice of resignation, the Escrow Agent may deposit the Escrow Shares with any court it reasonably deems appropriate.
5.6
Discharge of Escrow Agent. The Escrow Agent shall resign and be discharged from its duties as escrow agent hereunder if so requested in writing at any time by the other parties hereto, jointly, provided, however, that such resignation shall become effective only upon acceptance of appointment by a successor escrow agent as provided in Section 5.5.
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5.7
Liability. Notwithstanding anything herein to the contrary, the Escrow Agent shall not be relieved from liability hereunder for its own gross negligence or its own willful misconduct.
6.
Miscellaneous.
6.1
Governing Law. This Agreement shall for all purposes be deemed to be made under and shall be construed in accordance with the laws of the State of New York, without giving effect to conflicts of law principles that would result in the application of the substantive laws of another jurisdiction.
6.2
Intentionally Omitted.
6.3
Entire Agreement. This Agreement contains the entire agreement of the parties hereto with respect to the subject matter hereof and, except as expressly provided herein, may not be changed or modified except by an instrument in writing signed by each party hereto.
6.4
Headings. The headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation thereof.
6.5
Binding Effect. This Agreement shall be binding upon and inure to the benefit of the respective parties hereto and their legal representatives, successors and assigns.
6.6
Notices. Any notice or other communication required or which may be given hereunder shall be in writing and either be delivered personally or be mailed, certified or registered mail, or by private national courier service, return receipt requested, postage prepaid, and shall be deemed given when so delivered personally or, if mailed, two days after the date of mailing, as follows:
If to Parent, to:
First Communications, Inc.
3340 West Market Street
Akron, Ohio 44333
Attn: Joseph Morris
Fax: (330) 835-2330
With a copy to:
Bingham McCutchen LLP
One Federal Street
Boston, MA 02110
Attn: John J. Concannon III, Esq.
Fax: (617) 951-8736
If to Parent Founder, to:
RAC Partners LLC
50 E. Sample Road, Suite 400
Pompano Beach, Florida 33064
Attn: Barry W. Florescue, CEO
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with a copy to:
Dechert LLP
1095 Avenue of the Americas
New York, New York 10036
Attn: Charles I. Weissman, Esq.
If to another Initial Stockholder, to his address set forth in Exhibit A.
If to the Stockholders Representative
The Gores Group LLC
10877 Wilshire Boulevard
18th Floor
Los Angeles, California 90024
Attn: Scott Honour
Fax: (310) 209-3310
If to the Escrow Agent, to:
Continental Stock Transfer & Trust Company
17 Battery Place
New York, New York 10004
Attn: Chairman
The parties may change the persons and addresses to which the notices or other communications are to be sent by giving written notice to any such change in the manner provided herein for giving notice.
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WITNESS the execution of this Agreement as of the date first above written.
FIRST COMMUNICATIONS, INC.
By:
___________________________
Name:
Title:
INITIAL STOCKHOLDERS:
RAC PARTNERS LLC
By:
___________________________
Name: Barry W. Florescue
Title: Managing Member
_________________________________
Barry W. Florescue
_________________________________
Logan D. Delany, Jr.
_________________________________
Stanley Kreitman
_________________________________
Charles Miersch
_________________________________
Morton Farber
STOCKHOLDERS REPRESENTATIVE
THE GORES GROUP, LLC
By:
___________________________
Name:
Title:
CONTINENTAL STOCK TRANSFER
& TRUST COMPANY
By:
___________________________
Name:
Title:
Signature page to Stock Escrow Agreement
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EXHIBIT A
|
|
Name and Address of Initial Stockholder
|
Number of Shares
|
RAC Partners LLC
|
3,574,800
|
Barry W. Florescue
|
30,000
|
Logan D. Delany, Jr.
|
30,000
|
Stanley Kreitman
|
30,000
|
Charles Miersch
|
117,600
|
Morton Farber
|
117,600
|
Signature page to Stock Escrow Agreement
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ANNEX B
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
RENAISSANCE ACQUISITION CORP.
[now known as First Communications, Inc.]
RENAISSANCE ACQUISITION CORP., a corporation existing under the laws of the State of Delaware (the "Corporation"), by its Chief Executive Officer, hereby certifies as follows:
1.
The name of the Corporation is Renaissance Acquisition Corp.
2.
The Corporation's original Certificate of Incorporation was filed in the office of the Secretary of State of Delaware on April 17, 2006, the Certificate of Amendment of Certificate of Incorporation of the Corporation was filed in the office of the Secretary of State of Delaware on May 16, 2006, an additional Certificate of Amendment of Certificate of Incorporation of the Corporation was filed in the office of the Secretary of State of Delaware on July 11, 2006, and an Amended and Restated Certificate of Incorporation was filed in the office of the Secretary of State of Delaware on January 29, 2007.
3.
This Amended and Restated Certificate of Incorporation restates, integrates and amends the original Certificate of Incorporation as amended by the Certificate of Amendment of Certificate of Incorporation.
4.
This Amended and Restated Certificate of Incorporation has been duly adopted in accordance with the applicable provisions of Sections 242 and 245 of the Delaware General Corporation Law by the directors and stockholders of the Corporation.
5.
The text of the Certificate of Incorporation of the Corporation is hereby amended and restated to read in full as follows:
FIRST.
Name. The name of this corporation is FIRST COMMUNICATIONS, INC. (the "Corporation").
SECOND.
Registered Office and Agent. The address of the Corporation's registered office in the State of Delaware is 2711 Centerville Road, Suite 400, in the City of Wilmington, County of New Castle, State of Delaware 19808. The name of the Corporation's registered agent at such address is Corporation Service Company.
THIRD.
Purpose. The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the Delaware General Corporation Law, as amended from time to time (the "DGCL").
FOURTH.
Capital Stock.
Section 4.1.
Authorized Shares. The total number of shares of stock which the Corporation shall have authority to issue is 201,000,000, 200,000,000 of which shall be shares of Common Stock with a par value of $.0001 per share and 1,000,000 of which shall be shares of Preferred Stock with a par value of $.0001 per share.
Section 4.2.
Common Stock. Except as otherwise required by law or as otherwise provided in the terms of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation, the holders of the Common Stock shall exclusively possess all voting power, and each share of Common Stock shall have one vote.
Section 4.3.
Preferred Stock. The Preferred Stock may be issued from time to time in one or more series. The Board of Directors is hereby expressly authorized to provide for the issue of all or any of the remaining shares of the Preferred Stock in one or more series, and to fix the number of shares and to determine or alter for each such series, such voting powers, full or limited, or no voting powers, and such designations, preferences, and relative, participating, optional, or other rights and such qualifications,
B-1
limitations, or restrictions thereof, as shall be stated and expressed in the resolution or resolutions adopted by the Board of Directors providing for the issuance of such shares and as may be permitted by the DGCL. The Board of Directors is expressly authorized to increase or decrease the number of shares of any series of Preferred Stock subsequent to the issuance of shares of that series, but not below the number of shares of such series then outstanding and not above the number of authorized shares of Preferred Stock. In case the number of shares of any series of Preferred Stock shall be decreased in accordance with the foregoing sentence, the shares constituting such decrease shall resume the status that they had prior to the adoption of the resolution originally fixing the number of shares of such series. In all cases, the foregoing provisions of this Section 4.3 shall be subject to any other applicable provisions contained herein.
FIFTH.
Elimination of Certain Liability of Directors. No director shall be personally liable to the Corporation or its stockholders for monetary damages for breach of a fiduciary duty as a director; provided, however, that to the extent required by the provisions of Section 102(b)(7) of the DGCL or any successor statute, or any other laws of the State of Delaware, this provision shall not eliminate or limit the liability of a director (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL, (iv) for any transaction from which the director derived an improper personal benefit, or (v) for any act or omission occurring prior to the date when this Article Fifth becomes effective. If the DGCL hereafter is amended to authorize the further elimination or limitation of the liability of directors, then the liability of a director of the Corporation, in addition to the limitation on personal liability provided herein, shall be limited to the fullest extent permitted by the amended DGCL. Any repeal or modification of this Article Fifth by the stockholders of the Corporation shall be prospective only, and shall not adversely affect any limitation on the personal liability of a director of the Corporation existing as of the time of such repeal or modification.
SIXTH.
Indemnification.
Section 6.1.
Right to Indemnification. Each person who was or is a party or is threatened to be made a party to or is involved in any threatened, pending or completed action, suit, proceeding or alternative dispute resolution procedure, whether (a) civil, criminal, administrative, investigative or otherwise, (b) formal or informal or (c) to the fullest extent permitted by Section 145(b) of the DGCL, as it may be amended from time to time, by or in the right of the Corporation (collectively, a "proceeding"), by reason of the fact that he or she, or a person of whom he or she is the legal representative, is or was a director, officer, employee or agent of the Corporation or is or was serving at the request of the Corporation as a director, manager, officer, partner, trustee, employee or agent of another foreign or domestic corporation or of a foreign or domestic limited liability company, partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, whether the basis of such proceeding is alleged action in an official capacity as such a director, officer, employee or agent of the Corporation or in any other capacity while serving as such other director, manager, officer, partner, trustee, employee or agent, shall be indemnified and held harmless by the Corporation against all judgments, penalties and fines incurred or paid, and against all expenses (including attorneys' fees) and settlement amounts actually and reasonably incurred or paid, in connection with any such proceeding, except in relation to matters as to which the person did not act in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe the person's conduct was unlawful. Until such time as there has been a final judgment to the contrary, a person shall be presumed to be entitled to be indemnified under this Section 6.1. The termination of any proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, either rebut such presumption or create a presumption that (a) the person did not act in good faith and in a manner which the person reasonably believed to be in or not opposed to the best interests of the Corporation, (b) with respect to any criminal action or proceeding, the person had reasonable cause to believe that the person's conduct was unlawful or (c) the person was not successful on the merits or otherwise in defense of the proceeding or of any claim, issue or matter therein. If the DGCL is hereafter amended to provide for indemnification rights broader than those provided by this Section 6.1, then the persons referred to in this Section 6.1 shall be indemnified and held harmless by the Corporation to the fullest extent permitted by the DGCL as so amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than permitted prior to such amendment).
B-2
Section 6.2.
Determination of Entitlement to Indemnification. A determination as to whether a person who is a director or officer of the Corporation at the time of the determination is entitled to be indemnified and held harmless under Section 6.1 shall be made (a) by a majority vote of the directors who are not parties to such proceeding, even though less than a quorum, (b) by a committee of such directors designated by majority vote of such directors, even though less than a quorum, (c) if there are no such directors, or if such directors so direct, by independent legal counsel in a written opinion, or (d) by the stockholders. A determination as to whether a person who is not a director or officer of the Corporation at the time of the determination is entitled to be indemnified and held harmless under Section 6.1 shall be made by or as directed by the Board of Directors of the Corporation.
Section 6.3.
Mandatory Advancement of Expenses. The right to indemnification conferred in this Article Sixth shall include the right to require the Corporation to pay the expenses (including attorneys' fees) actually and reasonably incurred in defending any such proceeding in advance of its final disposition; provided, however, that an advancement of expenses incurred by an indemnitee in his or her capacity as a director or officer of the Corporation (but 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 only upon delivery to the Corporation of an undertaking, by or on behalf of such indemnitee, to repay all amounts so advanced if it shall be finally determined that such indemnitee is not entitled to be indemnified for such expenses under Section 6.1 or otherwise.
Section 6.4.
Non−Exclusivity of Rights. The right to indemnification and the advancement of expenses conferred in this Article Sixth shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, any provision of this Amended and Restated Certificate of Incorporation or of any bylaw, agreement, or insurance policy or arrangement, or any vote of stockholders or disinterested directors, or otherwise. The Board of Directors is expressly authorized to adopt and enter into indemnification agreements with, and obtain insurance for, directors and officers.
Section 6.5.
Effect of Amendment. Neither any amendment, repeal, or modification of this Article Sixth, nor the adoption or amendment of any other provision of this Amended and Restated Certificate of Incorporation or the bylaws of the Corporation inconsistent with this Article Sixth, shall adversely affect any right or protection provided hereby with respect to any act or omission occurring prior to the date when such amendment, repeal, modification, or adoption became effective.
SEVENTH.
Stockholder Action. Any action required or permitted to be taken by stockholders pursuant to this Amended and Restated Certificate of Incorporation or under applicable law may be effected only at a duly called annual or special meeting of stockholders and with a vote thereat, and may not be effected by consent in writing. Except as otherwise required by law and subject to the rights of any series of Preferred Stock, special meetings of the stockholders of the Corporation may be called by the Board of Directors pursuant to a resolution approved by a majority of the members of the Board of Directors, the Chairman of the Board of Directors, the Chief Executive Officer or the President and shall be called by the President or the Secretary upon the written request of the holders of a majority of the outstanding shares of Common Stock of the Corporation.
EIGHTH.
Miscellaneous. The following provisions are inserted for the management of the business and for the conduct of the affairs of the Corporation and for the purpose of creating, defining, limiting and regulating powers of the Corporation and its directors and stockholders:
Section 8.1.
Classification, Election and Term of Office of Directors.
(a)
The Board of Directors shall consist of such number of directors as is determined from time to time by resolution adopted by affirmative vote of a majority of the entire Board of Directors; provided, however, that in no event shall the number of directors be less than one nor more than fifteen.
(b)
The directors shall be divided into three classes, designated Class I, Class II and Class III. Each class shall consist, as nearly as may be possible, of one-third of the total number of directors constituting the entire Board of Directors. The Board of Directors shall designate the initial class of each director currently serving. At the first annual meeting of stockholders following the initial classification of the Board of Directors, the term of office of the initial Class I directors shall expire and successors to the initial Class I directors shall be elected for a three-year term. At the second annual meeting of stockholders
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following such initial classification, the term of office of the initial Class II directors shall expire and successors to the initial Class II directors shall be elected for a three-year term. At the third annual meeting of stockholders following such initial classification, the term of office of the initial Class III directors shall expire and successors to the initial Class III directors shall be elected for a three-year term. At each succeeding annual meeting of shareholders thereafter, successors to the class of directors whose term expires at that annual meeting shall be elected for a three-year term. If the number of directors is changed, any increase or decrease shall be apportioned among the classes so as to maintain the number of directors in each class as nearly equal as possible, and any additional director of any class elected to fill a vacancy resulting from an increase in such class shall hold office for a term that shall coincide with the remaining term of that class, but in no case will a decrease in the number of directors shorten the term of any incumbent director. A director shall hold office until the annual meeting for the year in which his or her term expires and until his or her successor shall be elected and shall qualify. Any vacancy on the Board of Directors for any reason, and any directorships resulting from any increase in the number of directors of the Board of Directors, may be filled by a majority of the Board of Directors then in office, although less than a quorum, and any directors so chosen shall hold office until the next election of the class for which such directors shall have been chosen and until their successors shall be elected and qualified. Notwithstanding the foregoing, whenever the holders of any one or more classes or series of stock issued by the Corporation shall have the right, voting separately by class or series, to elect directors at an annual or special meeting of stockholders, the election, term of office, filling of vacancies and other features of such directorships shall be governed by the terms of this Amended and Restated Certificate of Incorporation applicable thereto, such directors so elected shall not be divided into classes pursuant to this Article Eighth, Section 8.1., and the number of such directors shall not be counted in determining the maximum number of directors permitted under the provisions of Article Eighth, Section 8.1, in each case unless expressly provided by such terms.
Section 8.2.
Manner of Election of Directors. Elections of directors need not be by written ballot unless the bylaws of the Corporation shall so provide.
Section 8.3.
Severability. In the event any provision (or portion thereof) of this Amended and Restated Certificate of Incorporation shall be found to be invalid, prohibited, or unenforceable for any reason, the remaining provisions (or portions thereof) of this Amended and Restated Certificate of Incorporation shall be deemed to remain in full force and effect, and shall be construed as if such invalid, prohibited, or unenforceable provision had been stricken herefrom or otherwise rendered inapplicable, it being the intent of the Corporation and its stockholders that each such remaining provision (or portion thereof) of this Amended and Restated Certificate of Incorporation remain, to the fullest extent permitted by law, applicable and enforceable as to all stockholders, notwithstanding any such finding.
Section 8.4.
Reservation of Right to Amend Certificate of Incorporation. Except as otherwise set forth in this Amended and Restated Certificate of Incorporation, the Corporation reserves the right to amend, alter, change or repeal any provision contained in this Amended and Restated Certificate of Incorporation, in the manner now or hereafter prescribed by statute or herein, and all rights conferred upon stockholders herein are granted subject to this reservation.
[Signature Page Follows]
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IN WITNESS WHEREOF, the Corporation has caused this Amended and Restated
Certificate of Incorporation to be signed by Barry W. Florescue, Chairman of the Board of Directors and Chief Executive Officer, as of the day of .
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By:
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Barry W. Florescue
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Title:
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Chairman of the Board of Directors
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and Chief Executive Officer
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Signature Page to Amended and Restated Certificate of Incorporation
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ANNEX C
RENAISSANCE ACQUISITION CORP.
2008 EQUITY INCENTIVE PLAN
Table of Contents
1.
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Purpose
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C-3
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2.
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Definitions
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C-3
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3.
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Term of the Plan
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C-6
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4.
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Stock Subject to the Plan
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C-6
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5.
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Administration
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C-6
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6.
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Authorization of Grants
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C-7
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7.
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Specific Terms of Awards
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C-7
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8.
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Adjustment Provisions
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C-11
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9.
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Change of Control
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C-13
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10.
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Settlement of Awards
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C-14
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11.
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Reservation of Stock
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C-16
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12.
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Limitation of Rights in Stock; No Special Service Rights
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C-16
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13.
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Unfunded Status of Plan
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C-16
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14.
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Nonexclusivity of the Plan
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C-16
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15.
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Termination and Amendment of the Plan
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C-16
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16.
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Notices and Other Communications
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C-17
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17.
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Governing Law
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C-17
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