20031120Application.pdf

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UTILITiES CQfeij-IISSlON
Telephone
Inc.
November 17, 2003
Idaho Public Utilities Commission
Box 83720
Boise, ill 83720-0074
Dear Commission:
Enclosed please find an Application for Certification for Northwest Telephone, Inc. to
become a Competitive Local Exchange Carrier (CLEC) and interexchange carrier in the State
of Idaho. We believe that we have provided all of the information requested by the Idaho
PUC. However, should you fmd that you need additional information or have any questions
please feel ftee to contact me at the address or phone number shown below.
We look forward to receiving our approval and beginning to provide telecommunications
services in the State ofIdaho.
Robert Howe
Vice President - Finance
Northwest Telephone, Inc.
1630 Wenatchee Avenue, Suite 9
Wenatchee, WA 98801
[phone] --- [phone] Fax
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APPLICA TION FOR CER TIFICA TION 'lnn
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New local telecommunications providers applying for a Certificate of Public con;v;eniyr\c~; i ;, i and Necessity to provide basic local exchange service in Idaho must submitM~lf~J\~I1fID t-~"TI S S J ONinformation:
I. Proposed Services
A narrative description of the telecommunication services provided by the
Applicant and the geographic area and market to be served by the company. Other
items of interest are whether the company is a facilities-based provider or a
reseller, or some combination thereof; what general plans the company has to
build facilities in the future; to which markets the provider will appeal; how the
provider will market its products; whether the company currently provides or has
a history of providing other services in Idaho; how the corporate family is
structured.
Northwest Telephone, Inc. (NT!) is a telecommunications company headquartered
in Wenatchee, Washington. The Company has been in business for nearly five
years and focuses on serving the underserved rural markets of the Western United
States. NT! is a facilities based provider that offers private line connectivity to
wireless carriers and other business and government agencies. The Company also
provides wholesale telecommunications services to Internet Service Providers
(ISPs), DSL and high speed wireless services. NT! also offers switched (and
possibly resold) inter- and intra-LATA, interstate and international, dialed and
operator-assisted telecommunications services procured from interconnection
agreements with Verizon, Qwest and Sprint. NT! intends to offer similar services
in Idaho within the next 12 months.
Northwest Telephone, Inc. currently has a central office in Wenatchee
Washington and facilities based Points of Presence in 15 other cities in Eastern
Washington. The Company intends to expand its operations into Oregon and
Idaho in 2004 with future plans to expand into California, Arizona, Utah, Nevada
and Montana.
Northwest Telephone, Inc. is requesting authority to serve the entire state of Idaho
as both a competitive local exchange carrier and an interexchange carrier.
II. Form of Business
1. Name, Address and Form of Business
a. If the applicant is the sole proprietor
N/A
(1) the name and business address ofthe applicant, and
(2) the business name ofthe sole proprietorship.
b. Ifthe applicant is a partnership,
N/A
(1) a list of the names and business addresses of all the partners
and
(2) the business name of the partnership.
c. If the applicant is a corporation
(1) a short statement of the character of public service in which it
may engage
Northwest Telephone, Inc. is a telecommunications company
formed to provide services to the underserved rural markets of the
Western United States.
(2) the name of the state in which it is incorporated
Washington
(3) its principal business address and its principal business address
within Idaho
Northwest Telephone, Inc., 408 Sherman Avenue, Suite 219
Coeur d' Alene ID 83814 [phone].
(4) a certified copy of its articles of incorporation
***See Attached
(5) if not incorporated in Idaho, a certificate of good standing
issued by the Idaho Secretary of State of Idaho, and
***See Attached
(6) name and address of registered agent for service in Idaho.
CT Corporation System
N. Sixth St., Boise ID 83702
2. If a corporation, the names and addresses of the ten common
stockholders of applicant owning the greatest number of shares of
common stock and the number of such shares owned by each, as follows:
Shares Owned
Andrew Metcalfe 409 481 36.62% ~6.
~~~~~~~:~~~~~~'
Common t
.. .. . '.... ....
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r Elizabeth Devinney I 25 000 38% .38%
~~~~:~1m9~i:
. .
.. Common .
MarkZamalloa 19119 500 19%
. N. Creek Pkwy N., #102 1 --
othel1
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~011 tH
~~ITlITlon H u l "
, ,
16.87%
21.28% 21.28% j
Preferred B-
. ,
:::: A
. 8.97% .
1 8.
97%
pre~::ffi-l r-
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I 5.
43%
.. ~50~000 ..
.. .." ... .
28%
.... .
. 2.28%
preferredB
. ... .. .
~:::: A
.. 190%
Name and Address Percentage of
All Shares
Issued and
Outstanding
Percentage of
Voting Control
19%
Starcrest Partners LLC
5721 Corte Libre
P1easanton, CA 94566
400 000
Eric Cooper
. 4101 April Drive
l Wenatchee
, WA 98801
Wireless Resources LLC
1139 23rd Avenue East
Seattle, W A 98112 ..
WiLan, Inc.
. 300 801 Manning Rd NE
I Calgary, Alberta
, Canada I
. Branko S. KUkO1ja
532 N. 74th Street
Seattle, W A 98103
3. Names and addresses of the officers and directors of applicant.
Name Director Officer
Andrew Metcalfe Director President
6870 Flowery Divide
Cashmere Wa, 98801
Stephen A. Kautz Director
5721 Corte Libre
P1easanton, CA 94566
Randy Cooper Director
4680 Knowles Road
Wenatchee, W A 98801
Robert D. Howe Vice President
1139 23rd Avenue East
Seattle, W A 98112
Jennifer Rickel Secretary
1630 Wenatchee Ave, #9
Wenatchee, WA 98801
4. Name and address of any corporation, association, or similar
organization holding a 5% or greater ownership or a management interest
in the applicant. As to ownership, the amount and character of the interest
must be indicated. A copy of any management agreement must be
attached.
See #3 Above
5. Names and addresses of subsidiaries owned or controlled by applicant.
None.
III. Telecommunication Service
1. The date on which applicant proposes to begin construction or
anticipates it will begin to provide service.
January 1 , 2004
2. A written description of customer classes and customer service( s) that
the applicant proposes to offer to the public.
Private Line services to wireless and other carriers, businesses and
government agencies
Managed Ports, PRI Offload Circuits and Other
Telecommunications Services to ISPs
Inter- and Intra-LATA, interstate and international, dialed and
operator assisted Voice and Data Telephone Services to Non-
Residential Customers using Facilities Based Operations
Wireless Services in Licensed and Unlicensed Frequencies to Non-
Residential Customers
Iv. Service Territory
1. A description sufficient for determining whether service is to be offered
in a particular location; and the names of all incumbent local exchange
corporations with whom the proposed utility is likely to compete.
In general terms, the entire State of Idaho consists entirely of underserved
rural markets. Therefore, Northwest Telephone, Inc. intends to first
expand its current network to include Coeur d' Alene and Boise with the
future intent to connect to the smaller markets based on specific customer
demand. Northwest Telephone, Inc. will provide services which will
compete principally with Verizon, Qwest and Citizens.
2. Written description of the intended manner of service, for example
resold services or facilities based. A general description of the property
owned or controlled by applicant.
Northwest Telephone Inc. intends to develop a fiber optic based network
on lit and dark fiber using its own optical equipment and facilities based
operations with interconnection agreements with the ILECs and other
carriers. The Company will use its own wireless equipment, Internet
modem banks, telephone routing, multiplexers, cross-connect devices
switching equipment and other telecommunications equipment. NTI does
not currently resell any ILEC services.
3. A statement describing with whom the applicant is likely to compete.
Northwest Telephone, Inc. intends to provide a competitive alternative to
traditional LEC services.
4. A description of the property owned by the applicant clarifies the
applicant's proposed services and operation.
Northwest Telephone, Inc. owns Class V and Class IV telephone switches
routers and multiplexers, fiber optic transport equipment, Internet modem
banks, DSL modem banks, wireless equipment and other
telecommunications equipment.
V. Financial Information
1. Current detailed balance sheets, including a detailed income and profit
and loss statements of applicant reflecting current and prior year balances
for the twelve months ended as of the date of the balance sheet, or if not
readily available, for the period since the close of the preceding calendar
year.
*** See Attached
2. If a balance sheet and income statement are not available, the applicant
must submit financial data sufficient to establish that it possesses adequate
financial resources to provide the proposed services.
N/A
VI. "Illustrative" Tariff Filings
Proposed initial tariff and price sheets setting forth rates, rules, terms, and
regulations applicable to the contemplated service.
* * * See Attached
VII. Customer contacts
1. Contact information for the Applicant.
a) The name, address, and telephone number and electronic
mailing addresses (if available) of the person(s) responsible for
consumer inquiries and complaints from the public.
Jennifer Rickel
Northwest Telephone, Inc.
408 Sherman Avenue, Suite 219
Coeur d' Alene ID 83814
[phone] or jrickel(0nw-tel.com
b) A toll- ftee number for customer inquiries and complaints.
[phone]
c) The name, number and electronic mailing addresses (if
available) of the person(s) designated as a contact for the
Commission Staff for resolving complaints, inquiries and matters
concerning rates and price lists or tariffs.
Jennifer Rickel
Northwest Telephone, Inc.
408 Sherman Avenue, Suite 219
Coeur d' Alene, ID 83814
[phone] or jrickel~nw-te1.com
VIII. Interconnection Agreements
1. Statements of whether the applicant has initiated interconnection
negotiations and, if so, when and with whom.
NT! will initiate interconnection negotiations with the LECs and other
carriers upon Commission approval of its Application. NT! has
interconnection agreements in Washington with a number of LECs and
other carriers currently operating in Idaho.
IX. Compliance with Commission Rules
A written statement that the applicant has reviewed all of the Commission
rules and agrees to comply with them, or a request for waiver of those
rules believed to be inapplicable.
Northwest Telephone, Inc. has reviewed all of the Commission rules and
agrees to comply with them.
X. Escrow Account or Security Bond
1. If a company requires advance deposits by its customers, the company
must submit a signed copy of an escrow account with a bonded escrow
agent or a security bond. The escrow or bond shall be sufficient to meet
customer deposit refunds in case of company default.
Agreed.
2. At the Commission s discretion, an additional deposit may be required
to keep customers whole in case of company default.
Agreed.
3. The Commission will review the individual requirement of establishing
an escrow or security account by the Company upon good showing by the
Company for a period of two years.
Agreed.
: ,
1'1 LED
SECRETARY OF STATECERTIFICATE OF OFFICER REGARDING
AMENDED AND RESTATED ARTICLES OF INCORPQRATI~T 1 5 2001OF STATE OF WASHINGTONNORTHWEST TELEPHONE, INC.
Northwest Telephone, Inc., a Washington corporation, by Andrew D. Metcalfe, its duly
elected and qualified President, hereby delivers to the Secretary of State of the State of
Washington for filing Amended and Restated Articles of Incorporation in duplicate, pursuant't'O-
RCW 23B.10.
The name of the corporation is Northwest Telephone, Inc.
2. The Amended and Restated Articles of Incorporation have been amended and
restated in their entirety, to read as set forth on Exhibit A attached hereto.
Such amendments and restatement were adopted by the Board of Directors.
4. Such amendments and restatement were duly approved by the shareholders on
September 30, 2001 in accordance with the provisions of RCW 23B.I0.030, 23B.I0.040 and
238.10.070 of the Washington Business Corporation Act.
The Amended and Restated Articles of Incorporation will be effective upon filing
Dated: October~, 2001.
NORTHWEST TELEPHONE, INc.
Andrew D. Metcalfe, President
" .
Gray CaryISE\9022234.
21 0 1326-9OWOO
Exhibit A
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
NORTHWEST TELEPHONE, INc.
ARTICLE 1
NAME
The name of this corporation is Northwest Telephone, Inc.
ARTICLE 2
DURATION
This corporation is organized under the Washington Business Corporation Act (the
Act") and shall have perpetual existence.
ARTICLE 3
PURPOSE AND POWERS
The purpose and powers ofthis corporation are as follows:
To engage in any lawful business.
To engage in any and all activities that, in the judgment of the board of directors
of this corporation (the "Board"), may at any time be incidental or conducive to the attainment of
the foregoing purpose.
To exercise any and all powers that a corporation formed under the Act, or any
amendment thereto or substitute therefor, is entitled at the time to exercise.
ARTICLE 4
CAPIT AL STOCK
. 4.Authorized Capital. The corporation shall have authority to issue forty million
(40 000 000) shares of stock in the aggregate. Such shares shall be divided into two classes as
follows:
(a)
(b)
Thirty million (30 000 000) shares of Common Stock.
. Ten million (10,000 000) shares of Preferred Stock.
Common Stock. Except to the extent rights, preferences, privileges or
restrictions are granted to Preferred Stock or any series thereof, or as provided below, Common
Stock has unlimited voting rights and is entitled to receive the net assets of this corporation upon
dissolution. The relative rights, preferences, privileges and restrictions granted to or imposed
upon the Common Stock and the holders thereof are as follows:
Gray Cary\SE\9021544.
2101326-900000
(a) Dividend Rights. The holders of record of outstanding shares of Common
Stock shall be entitled to receive, when, as and if declared by the Board, out of any funds of this
corporation legally available therefor, such cash and other dividends as may be declared from
time to time by the Board.
(b) Liquidation Rights. In the event of any liquidation, dissolution or winding
up of the affairs of this corporation, whether voluntary or involuntary, the holders of issued and
outstanding shares of Common Stock shall be entitled to receive ratably, based on the total
number of shares of Common Stock held by each, all the assets and funds of this corporation
available for distribution to its shareholders, whether from capital or surplus, subject, however
to any preferential rights granted to any series of Preferred Stock to first receive such assets and
funds.
(c) Voting Rights. Each holder of Common Stock shall be entitled to one
vote for each share of Common Stock held.
Issuance of Preferred Stock in Series. The authorized shares of Preferred Stock
shall be divided into and issued in series. Certain series of Preferred Stock are presently
designated, and their terms are set forth below. Authority is vested in the Board, subject to the
limitations and procedures prescribed by law, to divide any part or all of such Preferred Stock
into any number of series,. to fix and determine relative rights and preferences of the shares of
any series to be established , to establish any number of series with relative rights and preferences
superior to (except to the extent specifically prohibited by a previously designated and
outstanding series) or on parity or subordinate to other series of Preferred Stock, and to amend
the rights and preferences of the shares of any series that has been established but is wholly
unissued. Within any limits stated in these Articles or in the resolution of the Board establishing
a series, the Board, after the issuance of shares of a series, may amend the resolution establishing
the series to decrease (but not below the number of shares of such series then outstanding) the
number of shares of that series, and the number of shares constituting the decrease shaH
thereafter constitute authorized but undesignated shares. The authority herein granted to theBoard to determine the relative rights and preferences of the Preferred Stock shan be limited to
unissued shares, and no power shall exist to alter or change the rights and preferences of any
shares that have been issued. Preferred Stock, or any series thereof, may have rights that are
identical to those of Common Stock. Unless otherwise expressly provided in the designation of
the rights and preferences of a series of preferred stock, a distribution in redemption or
cancellation of shares of common stock or rights to acquire corrimon stock held by a former
employee or consultant of the corporation or any of its affiliates may, notwithstanding RCW
23B.06.400(2)(b), be made without regard to the preferential rights of holders of shares of that
series of preferred stock.
4.4 Issuance of Certificates. The Board shall have the authority to issue shares of
the capital stock of this corporation and the certificates therefor subject to such transfer
restrictions and other limitations as it may deem necessary to promote compliance with
applicable federal and state securities laws, and to regulate the transfer thereof in such manner as
may be calculated to promote such compliance or to further any other reasonable purpose.
Gray C3ry\SE\9021544.
2101326.900000
ARTICLES
TERMS OF PREFERRED STOCK
The following series of Preferred Stock are hereby designated: (a) one million eighthundred twenty-five thousand (1 825 000) shares, designated and known as "Series A Preferred
Stock" (the "Series A Preferred"), (b) two million five hundred thousand 500 000) shares
designated and known as "Series B Preferred Stock" (the "Series B Preferred") and (c) one
million eight hundred fourteen thousand five hundred forty-six (1,814 546) shares, designated
and known as "Series B 1 Preferred Stock" (the "Series B 1 Preferred"). The shares of these
series are herein referred collectively as the "Designated Preferred". The relative rights
preferences, privileges and restrictions granted to or imposed on the respective shares of each
such series of Designated Preferred, and the holders thereof are as fonows:
Dividends. Holders of Designated Preferred shall have the following rights with
respect to dividends and distributions:
(a) Dividends are payable on the Designated Preferred when, as and
declared by the Board.
(b) No dividends or other distributions shall be made with respect to the
Common Stock, other than dividends payable solely in Common Stock, unless at the same time
an equivalent dividend with respect to the Designated Preferred has been paid or set apart or such
equivalent dividend has been waived by the affirmative vote or written consent of the holders
not less than Sixty-Six and Two-Thirds Percent (66-2/3%) of the outstanding. shares of
Designated Preferred. Any declared but unpaid dividends on the shares of Designated Preferred
shaH be paid upon the conversion of such shares into Common Stock either (at the option of the
corporation) by payment of cash or by the issuance of additional shares of Common Stockbasedupon the fair market value of the Common Stock at the time of conversion, as determined by theBoard.
Liquidation Preference. In the event of any liquidation, dissolution, or winding
up of the corporation, whether voluntarily or involuntarily (a "Liquidation Event"), distributions
shall be made in the following manner:
(a) The holders of the Designated Preferred shall be entitled to receive, priorand in preference to any distribution of any of the assets or surplus funds of the corporation to
the holders of Common Stock or any other series of Preferred Stock with liquidation preferences
subordinate to the Designated Preferred, by reason of their ownership thereof, and subject to therights of any series of Preferred Stock that ranks on liquidation prior to the Designated Preferred
an amount equal to the sum of (i) $0.20 per share of Series A Preferred, $ 1.00 per share of Series
B Preferred, and. $0.50 per share of Series B I Preferred (each, as adjusted for any stock
dividends, combinations, consolidations, subdivisions or splits with respect to such shares), plus
(ii) the respective amounts of all declared but unpaid dividends on each series of DesignatedPreferred. If the assets and funds legally available for distribution among the holders of the
Designated Preferred (and any other series of Preferred Stock entitled to share in suchdistributions on a parity with the Designated Preferred) shall be insufficient to permit the
Gray C:lry\SE\9021544.
2101326.900000
payment to such holders of the full preferential amounts specified in clauses (i) and (ii) of the
preceding sentence, then the entire assets and funds of the corporation legally available for
distribution shall be distributed ratably among the holders of the Designated PrefeITed (and any
other series of PrefeITed Stock entitled to share in such distributions on a parity with the
Designated PrefeITed) in proportion to the full preferential amount each such holder is otherwise
entitled to receive under clauses (i) and (ii) of the preceding sentence.
(b) After payment of the full preferential amounts specified in Section 5.2(a)
above, and of any other distribution that may be required with respect to any other series of
PrefeITed Stock that may from time to time come into existence, the entire remaining assets and
funds of the corporation legally available for distribution shall be distributed ratably among the
holders of Common Stock.
(c) For purposes of this Section 5.2, (i) a consolidation, merger or statutory
share exchange of the corporation with or into any other corporation or corporations pursuant to
which the shareholders of the corporation prior to the merger or similar transaction shall own
less than fifty percent (50%) of the voting securities of the surviving corporation, (ii) a saleconveyance or disposition of all or substantially all of the assets of the corporation, or (iii) the
effectuation by the corporation of a transaction or series of related transactions in which more
than fifty percent (50%) of the voting power of the corporation is disposed of (other than the sale
ofPrefeITed Stock), shallQe deemed to be a Liquidation Event.
(d) In the event of a deemed liquidation as described in Section 5.2(c) above
if the consideration received by the corporation is other than cash, its value will be deemed its
fair market value. Any securities shaH be valued as follows:
(i) Securities not subject to investment letter or other similar
restrictions on free marketability:
(1) If traded on a securities exchange or the Nasdaq Stock
Market, the value shall be deemed to be the average of the closing prices of the securities on
such exchange over the thirty-day period ending three (3) days prior to the closing;
(2) If actively traded over-the-counter, the value shall bedeemed to be the average of the closing bid or sale prices (whichever is applicable) over thethirty-day period ending three (3) days prior to the closing; and
(3) If there is no active public market, the value shall be the
fair market value thereof, .as determined in good faith by the Board.
(ii) The method of valuation of securities subject to investment letter
or other restrictions on free marketability (other than restrictions arising solely by virtue of a
shareholder s status as an affiliate or former affiliate) shall be to make an appropriate discount
from the market value determineq as above in Section 5.2(d)(i) to reflect the approximate fairmarket value thereof, as determined in good faith by the Board.
Gray C3'1\589021544.
2101326-900000
Voting. Except as otherwise expressly provided herein or as required by law, the
holder of each share of Designated Preferred shall be entitled to the number of votes equal to the
number of shares of Common Stock into which such share of Designated Preferred could be
converted at the record date for detemination of the shareholders entitled to vote on corporate
matters, or if no such record date is established, at the date such vote is taken or any written
consent of shareholders is solicited, and shall have full voting rights and powers equal to the
voting rights and powers of the holders of Common Stock (except as otherwise expressly
provided herein or as required by law), voting together with the Common Stock as a single class
and shall be entitled to notice of any shareholders ' meeting in accordance with the Bylaws of the
corporation. Fractional votes by the holders of Designated Preferred shall not, however, be
permitted and any fractional voting right shall (after aggregating all shares into which shares of
Designated Preferred held by each holder could be converted) be rounded to the nearest wholenumber.
5.4
follows:
Conversion. The holders of Designated Preferred shall have conversion rights as
(a) Right to Convert. Each share of Designated Preferred shall be convertible
at the option of the holder thereof, at any time after the date of issuance of such share, at the
office of the corporation or any transfer agent for the Designated Preferred, into such number of
fully paid and nonassessable shares of Common Stock ("Conversion Stock"), as is detennined by
dividing (i) $0.20 in the case of Series A Preferred, $1.00 in the case of Series B Preferred and
$0.50 in the case of Series B 1 Preferred, by (ii) the Conversion Price (determined as hereinafter
provided) for the respective series of Designated Preferred which is in effect at the time of
conversion (the "Conversion Rate ). The price at which shares of Common Stock shall be
deliverable upon conversion (the "Conversion Price ) shall initially be $0.20 per share for Series
A Preferred, $1.00 per share for Series B Preferred, and $0.50 per share for the Series Bl
Preferred. Such initial Conversion Price shall be subject to adjustment as hereinafter provided.
(b) Automatic Conversion. Each share of any series of Designated Preferredshall automatically be converted into shares of Conversion Stock at the then effective
Conversion Price for such series upon the cumulative conversion of two-thirds (2/3) or more ofthe total issued shares of such series (calculated after subtracting any shares of such series
repurchased or redeemed by the corporation). In addition, each share of any series of Designated
Preferred shall automatically be converted into shares of Conversion Stock at the then effective
Conversion Price for such series upon the closing of a firm commitment underwritten public
offering pursuant to an effective registration statement under the Securities Act of 1933 , as
amended, covering the offer and sale of Common Stock for the account of the corporation to the
public at a price of at least $3.00 per share (as adjusted to reflect subsequent combinations
reclassifications, stock dividends, stock splits, reverse stock splits and recapitalizations or similar
events (each an "Adjustment Event")) with aggregate proceeds of not less than $10,000 000
(prior to deduction of underwriting discounts or commissions and offering expenses) (a "Public
Offering ). In the event of the automatic conversion of the Designated Preferred upon a Public
Offering, the person(s) entitled to receive the Conversion Stock issuable upon such conversion of
Designated Preferred shall not be deemed to have converted such Designated Preferred until
immediately prior to the closing of such sale of securities.
Gray Cal)'\5E\9021544.
2101326.900000
(c) Mechanics of Conversion No fractional shares of Common Stock shall be
issued upon conversion of Designated Preferred. In lieu of any fractional shares to which the
holder would otherwise be entitled, the corporation shall pay cash equal to such fractionmultiplied by the then effective Conversion Price for the respective series of Designated
Preferred. Before any holder of Designated Preferred shall be entitled to convert the same into
full shares of Common Stock and to receive certificates therefor, such holder shall surrender the
certificate or certificates therefor, duly endorsed, at the office of the corporation or of any
transfer agent for the Designated Preferred, and shall give written notice to the corporation at
such office that such holder elects to convert the same; provided, however, that in the event of an
automatic conversion pursuant to Section 5.4(b), the outstanding shares of Designated Preferred
shall be converted automatically without any further action by the holders of such shares and
whether or not the certificates representing such shares are surrendered to the corporation or its
transfer agent; and provided further, that the corporation shall not be obligated to issue
certificates evidencing the shares of Common Stock issuable upon such automatic conversion
unless the certificates evidencing such shares of Designated Preferred are either delivered to the
corporation or its transfer agent as provided above, or the holder notifies the corporation or its
transfer agent that such certificates have been lost, stolen or destroyed and executes
agreement satisfactory to the corporation to indemnify the corporation from any loss incurred by
it in connection with such certificates. The corporation shall, as soon as practicable after
delivery of such certificate, or such agreement of indemnification in the case of a lost certificate
issue and deliver at such office to such holder of Designated Preferred, a certificate or certificates
for the number of shares of Common Stock to which such holder shall be entitled as aforesaidand a check payable to the holder in the amount of any cash amounts payable as the result of a
conversion into fractional shares of Common Stock. Such conversion shall be deemed to have
been made immediately prior to the close of business on the date of such surrender of the shares
of Designated Preferred to be converted, or in the case of automatic conversion under Section
5.4(b) on the date of cumulative conversion of the requisite percentage of shares as specified in
the first sentence of Section 5.4(b), or on the date of closing of the Public Offering, and the
person or persons entitled to receive the shares of Common Stock issuable upon such conversion
shall be treated for all purposes as the record holder or holders of such shares of Common Stock
on such date.
(d)Adjustments to Conversion Price for Dilutive Issues.
(i) Special Definitions
following definitions shall apply:
For purposes of this Section 5.4(d), the
(1) Options shall mean rights, options or warrants to
subscribe for, purchase or otherwise acquire either Common Stock or Convertible Securities.
(2)Original Issue Date shall mean October 31 , 2001.
(3) Convertible Securities shall mean any evidence of
indebtedness, shares of capital stock (other than Common Stock) or other securities, any ofwhich are convertible into or exchangeable for Common Stock.
Gr3Y C3ryISE\90ZI544.
2101326-900000
(4) Additional Shares of Common Stock"shall mean all
shares of Common Stock issued (or, pursuant to Section 5.4(d)(ii), deemed to be issued) by the
corporation after the Original Issue Date, other than:
(A) shares of Common Stock issued or issuable at any
time upon conversion of shares of Designated Preferred and shares of Series B 1 Preferred issuedafter the Original Issue Date;
(B) shares of Designated Preferred issued or issuable at
any time upon exercise of warrants for Designated Preferred issued in connection with the sale of
Designated Preferred;
(C) shares of Common Stock issued or issuable to
officers, directors, employees or sales representatives of, or consultants to, the corporation
pursuant to stock option or stock purchase plans, agreements or arrangements approved by the
Board;
(D) shares of Common Stock issued or issuable at any
time as a dividend or distribution on a pro rata basis to all series of Designated Preferred, or upon
any other adjustment of Designated Preferred, including anti dilution adjustments pursuant to
Section 5.4(d)(iii), adjustments pursuant to Section 5.4(e) or other similar adjustments;
(E) shares of Common Stock issued or issuable to a
strategic or joint venture partner, supplier, vendor or customer ofthe corporation for reasons that
in the good faith judgment of the corporation s Board, are in substantial part other than to raise
capital;
(F) shares of Common Stock issued or issuable upon
conversion of options, warrants, notes or other rights to acquire securities of the corporation that
were outstanding as of the Original Issue Date;
(G) shares of Common Stock issued or issuable upon
conversion of warrants issued in connection with those certain 10% Convertible Promissory
Notes having an aggregate principal amount of up to $1 000 000 and a "Maturity Date" of
September 30, 2002;
(H) shares of common stock issued or issuable in a
transaction as to which the application of this Section 5.4(d) has been waived by written consent
of holders of a majority of the outstanding shares of the affected series; or
(1) shares of Common Stock issued or issuable at any
time by way of dividend or other distribution on shares of Common Stock excluded from the
definition of Additional Shares of Common Stock by the foregoing clauses (A) through (H).
(ii)Deemed Issuance of Additional Shares of Common Stock.
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(1) Options and Convertible Securities In the event the
corporation at any time or from time to time after the Original Issue Date shaH issue any Options
or Convertible Securities, then the maximum number of shares (as set forth in the instrument
relating thereto without regard to any provisions contained therein for a subsequent adjustment
of such number) of Common Stock issuable upon the exercise of such Options or, in the case of
Convertible Securities and Options therefor, the conversion or exchange of such Convertible
Securities , shall , except as otherwise provided in Section 5.4(d)(i)(4), be deemed to be
Additional Shares of Common Stock issued as of the time of such issuance; provided that
Additional Shares of Common Stock shall not be deemed to have been issued for purposes of
calculations pertaining to any series of Designated Preferred unless the consideration per share
(determined pursuant to Section 5.4(d)(iv) hereof) of such Additional Shares of Co~on Stock
would be less than the Conversion Price in effect for such series on the date of and immediately
prior to such issuance; and, provided further, that in any such case in which Additional Shares of
Common Stock are deemed to be issued (notwithstanding the foregoing):
(A) no further adjustment in the Conversion Price for
such series shall be made upon the subsequent issuance of Convertible Securities or shares of
Common Stock upon the exercise of such Options or conversion or exchange of such
Convertible Securities;
(B) if such Options or Convertible Securities by their
tenns provide, with the passage of time or otherwise, except as provided in this Section 5.4(d),
for any increase or decrease in the consideration payable to the corporation, or in the number of
shares of Conunon Stock issuable, upon the exercise, conversion or exchange thereof (a "Change
Event"), the Conversion Price computed upon the original issuance thereof, and any subsequent
adjustments based thereon, shall, upon any such increase or decrease becoming effective, be
recomputed to reflect such increase or decrease insofar as it affects such Options or the rights of
conversion or exchange under such Convertible Securities; provided, however, that anything
herein to the contrary notwithstanding, if the Change Event is triggered or caused by a Dilutive
Issue (as defined in Section 5.4(d)(iii), this Section 5.4(d)(ii)(B) shall be inapplicable and no
adjustment shall be made to any Conversion Price as a result of the Change Event;
(C) upon the expiration of any such Options or anyrights of conversion or exchange under such Convertible Securities which shall not have been
exercised, the Conversion Price computed upon the original issuance thereof, and any subsequent
adjustments based thereon, shall, upon such expiration, be recomputed as if
(I) in the case of Convertible Securities or
Options for Common Stock, only the shares of Common Stock, if any, actually issued upon the
exercise of such Options or the conversion or exchange of such Convertible Securities were
issued at the time of the issuance of such Convertible Securities or Options and the consideration
received therefor was the consideration actuaHy received by the corporation for the issue of all
such Options or Convertible Securities, whether or not exercised, converted, or exchanged, plus
the consideration actually received by the corporation upon such exercise, conversion or
exchange; and
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(II) in the case of Options for Convertible
Securities, only the Convertible Securities, if any, actually issued upon the exercise thereof were
issued at the time of issue of such Options, and the consideration received by the corporation for
the Additional Shares of Common Stock deemed to have been then issued was the consideration
actually received by the corporation for the issue of all such Options, whether or not exercised
plus the consideration deemed to have been received by the corporation upon the issue of the
Convertible Securities with respect to which such Options were actually exercised;
(D) notwithstanding any other provision of this Section
5.4(d), except to the limited extent provided in clauses (B) or (C) above, no adjustment of the
Conversion Price pursuant to this Section 5.4(d) shall have the effect of increasing the
Conversion Price of any series of Designated Preferred to an amount which exceeds the lower of
(i) the Conversion Price for such series on the original adjustme!lt date, or (ii) the Conversion
Price that would have resulted from any other issuance of Additional Shares of Common Stock
between the original adjustment date and such readjustment date; and
(E) in the case of any Options which expire by their
terms not more than 90 days after the date of issuance thereof, no adjustment of the Conversion
Price shall be made until the expiration or exercise of all such Options.
(2) Stock Dividends. In the event the corporation at any time
or from time to time after the Original Issue Date shall declare or pay any dividend on the
Common Stock payable in Common Stock, then and in any such event, Additional Shares of
Common Stock shall be deemed to have been issued immediately after the close of b-usiness on
the record date for the determination of holders of any class of securities entitled to receive such
dividend; provided, however, that if such record date is fixed and such dividend is not fully paid
the only Additional Shares of Common Stock deemed to have been issued will be the number of
shares of Common Stock actually issued in such dividend, and such shares will be deemed to
have been issued as of the close of business on such record date, and the- Conversion Price shall
be recomputed accordingly.
(iii) Adjustment of Conversion Price Upon Issuance of Additional Shares
of Common Stock If at any time or from time to time after the Original Issue Date this
corporation shall issue Additional Shares of Common Stock (including Additional Shares of
Common Stock deemed to be issued pursuant to Section 5.4(d)(ii)) without consideration or for a
consideration (as detennined in Section 5.4(d)(iv)) per share issued (or deemed to have beenissued under Section 5.4(d)(ii)) less than the Conversion Price for a particular series of
Designated Preferred in effect on the date of and immediately prior to such issuance, then and in
such event (a "Dilutive Issue
(A) the Conversion Price for such affected series (other than the
Series B I Preferred) shall be reduced, concurrently with such issuance, to a price determined by
multiplying such Conversion Price by a fraction, the numerator of which shall be the number of
shares of Common Stock outstanding immediately prior to such issuance on a fully diluted basis
(including for such purpose Options and Convertible Securities which are then vested and
exercisable, and Options and Convertible Securities granted or issued, but not yet vested or
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exercisable) plus the number of shares of Common Stock which the aggregate consideration
received by the corporation for the total number of Additional Shares of Common Stock so
issued would purchase at such Conversion Price; and the denominator of which shall be the
number of shares of Common Stock outstanding immediately prior to such issuance on a fully-
diluted basis (including for sue!; purpose Options and Convertible Securities which are then
vested and exercisable, and Options and Convertible Securities granted or issued, but not yet
vested or exercisable) plus the number of such Additional Shares of Common Stock so issued
and
(B) the Conversion Price for the Series B 1 Preferred shall be
reduced, concurrently with each subsequent Dilutive Issue, to a price (calculated to the nearest
tenth of a cent) equal to the price per share of such Dilutive Issue.
(iv) Detennination of Consideration For purposes of this Section
5.4( d), the consideration received by the corporation for the issuance of any Additional Shares of
Common Stock shall be computed as fol1ows:
(1 )Cash and Property.Such consideration shall:
(A) insofar as it consists of cash, be computed at the
aggregate amount of cash.received by the corporation excluding amounts paid or payable for
accrued interest or accrued dividends;
(B) insofar as it consists of property other than cash, be
computed at the fair value thereof at the time of such issuance, as detennined in good faith by the
Board; and
(C) in the event Additional Shares of Common Stock
are issued together with other shares or securities or other assets of the corporation for
consideration which covers both, be the proportion of such consideration so received, computed
as provided in clauses (A) and (B) above, as detennined in good faith by the Board.
(2) Options and Convertible Securities.The consideration per
share received by the corporation for Additional Shares of Common Stock deemed to have been
issued pursuant to Section 5.4(d)(ii)(I), relating to Options and Convertible Securities, shall be
detennined by dividing:
(A) the total amount, if any, received or receivable by
the corporation as consideration for the issue of such Options or Convertible Securities, plus the
minimum aggregate amount of additional consideration (as set forth in the instruments relating
thereto, without regard to any provision contained therein designed to protect against dilution)
payable to the corporation upon the exercise of such Options or the conversion or exchange of
such Convertible Securities, or in the case of Options for Convertible Securities, the exercise of
such Options for Convertible Securities and the conversion or exchange of such Convertible
Securities by
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(B) the maximum number of shares of Common Stock
(as set forth in the instruments relating thereto, without regard to any provision contained therein
designed to protect against dilution) issuable upon the exercise of such Options or the conversion
or exchange of such Convertible Securities.
(3) Stock Dividends. Any Additional Shares of Common
Stock relating to stock dividends shall be deemed to have been issued for no consideration.
(e)Additional Adjustments to Conversion Price
(i) Adjustments for Subdivisions. Combinations or Consolidations of
Common Stock. In the event the outstanding shaI:"es of Common Stock shall be subdivided, by
stock split, or otherwise, into a greater number of shares of Common Stock , the Conversion Price
for each series of Designated Preferred then in effect shall, concurrently wi th the effectiveness of
such subdivision , be proportionately decreased. In the event the outstanding shares of Common
Stock shall be combined or consolidated, by reclassification or otherwise, into a lesser number of
shares of Common Stock , the Conversion Price for each series of Designated Preferred then in
effect shall, concurrently with the effectiveness of such combination or consolidation, be
proportionately increased. Such adjustments shall be made so that the holders of Designated
Preferred shall receive upon conversion thereof, the number of shares of Common Stock that
they would have received if their Designated Preferred had been converted into Common Stock
on the date of such event, subject to all other subsequent adjustments called for under this
Section 5.4 with respect to the rights of the holders of Designated Preferred.
(ii) Adjustments for Other Distributions. In the event the corporation
at any time or from time to time makes, or fixes a record date for the detennination of holders of
Common Stock entitled to receive, any distribution payable in securities of the corporation other
than shares of Common Stock and other than as otherwise adjusted in this Section 5.4, then and
in each such event provision shall be made so that the holders of Designated Preferred shall
receive upon conversion thereof, in addition to the number of shares of Common Stock
receivable thereupon, the amount of securities of the corporation which they would have
received if their Designated Preferred had been converted into Common Stock on the date
such event, subject to all other subsequent adjustments called for under this Section 5.4 with
respect to the rights of the holders of Designated Preferred.
(iii) Adjustments for Reclassification. Exchange and Substitution. Ifthe Common Stock issuable upon conversion of the Designated Preferred shall be changed into
the same or a different number of shares of any other class or classes of stock, whether by capital
reorganization, reclassification or otherwise (other than a subdivision or combination of shares
provided for above),- the Conversion Price for each series of Designated Preferred then in effect
shall, concurrently with the effectiveness of such reorganization or reclassification, be
proportionately adjusted such that the shares of such series of Designated Preferred shall be
convertible into, in lieu of the number of shares of Common Stock which the holders would
otherwise have been entitled to receive, that number of shares of such other class or classes of
stock that would have been received by a holder of the number of shares of Common Stock that
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were subject to receipt by the holders upon conversion of the shares of such series immediatelybefore that change.
(f) No Impairment.The corporation will not, by amendment of its Articles ofIncorporation or through any reorganization, transfer of assets, consolidation, mergerdissolution, issuance or sale of securities or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to be observed or performed hereunder by the
corporation but will at all times in good faith assist in the carrying out of all the provisions of this
Section 5.4 and in the taking of all such actions as may be necessary or appropriate in order to
protect the Conversion Rights of the holders of Designated Preferred against impairment.
(g)
Certificate as to Adjustments. Upon the occurrence of each adjustment or
readjustment of the Conversion Price for any series of Designated Preferred pursuant to this
Section 5.4, the corporation at its expense shall promptly compute such adjustment orreadjustment in accordance with the terms hereof and furnish to each holder of the series soaffected a certificate setting forth such adjustment or readjustment and showing in detail the facts
upon which such adjustment or readjustment is based. The corporation shaH, upon the writtenrequest at any time of any holder of any series of Designated Preferred, furnish or cause to be
furnished to such holder a like certificate setting forth (i) such adjustments and readjustments
(ii) the Conversion Price in effect at the time for such series, and (iii) the number of shares of
Common Stock and the amount, if any, of other property which at the time would be received
upon the conversion of such series of Preferred Stock.
(h)Notices. In the event that the corporation shall propose at any time:
(i) to declare any dividend or distribution upon its Common Stock or
Preferred Stock, whether in cash, property, stock or other securities, whether or not a regular
cash dividend and whether or not out of earnings or earned surplus;
(ii) to effect any reclassification or recapitalization of its outstanding
Common Stock which results in a change in the Common Stock; or
(iii) to merge, consolidate or exchange shares with or into any other
corporation, or sell, lease, license or convey all or substantially all its property or business, or toliquidate, dissolve or wind up; then, in connection with each such event;
this corporation shall send to the holders of Designated Preferred at least twenty (20) days prior
written notice of the payment or distribution date for such dividend, distribution or subscriptionrights, of the date at which the vote on any matter referred to in (ii) and (iii) above will be taken
and of the date on which the holders of Common Stock shall be entitled to exchange theirCommon Stock for securities or other property deliverable upon the occurrence of such event or
the record date for the determination of such holders if such record date is earlier. In the case of
a transaction described in Section 5.4(h)(iii) above that constitutes a deemed liquidation under
Section 5.2(c), if the requirements of this Section 5..4(h) are not complied with, then thecorporation shall forthwith either cause the closing of the transaction to be postponed until such
time as the requirements of this Section 5.4(h) have been complied with, or cancel such
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transaction, in which event the rights, preferences and privileges of the holders of the Designated
Preferred shall revert to and be the same as such rights, preferences and privileges existing
immediately prior to the date of the first notice referred to in Section 5.4(h) hereof. The notice
provisions of this Section 5.4(h) may be waived with respect to a series of Designated Preferred
by the affirmative vote or written consent of the holders of not less than a majority of the
outstanding shares of such series. Each such written notice shall (x) be delivered personally;
(y) be given by certified or registered mail, postage prepaid; or (z) to the extent receipt is
confmned, by telecopy, telefax or other electronic transmission method; and shall be addressed
to the holders of Designated Preferred at the address for each such holder as shown on the books
of this corporation.
(i) Reservation of Shares. The corporation shall at all times reserve and keep
available out of its authorized but unissued shares of Common Stock, solely for the purpose of
effecting the conversion of the shares of Designated Preferred, such number of its shares of
Common Stock as shall from time to time be sufficient to effect the conversion of an outstanding
shares of Designated Preferred. If at any time the number of authorized but unissued shares of
Common Stock shaH not be sufficient to effect the conversion of all then outstanding shares of
Designated Preferred, in addition to such other remedies as shaH be available to the holders of
such Designated Preferred, the corporation will take such corporate actions as may, in the
opinion of its counsel, be necessary to increase its authorized but unissued shares of Common
Stock to such number of shares as shaH be sufficient for such purposes, including, without
limitation, engaging in best efforts to obtain the requisite shareholder approval of any necessary
amendment to these Articles of Incorporation.
Protective Provisions. In addition to any other rights provided to the holders of
Designated Preferred by law, this corporation shall not, without first obtaining the affirmative
vote or written consent of the holders of at least sixty-six and two-thirds percent (66-2/3%) of the
outstanding shares of each series of Designated Preferred that is affected in the manner described
below (each such affected series voting as a separate class):
(a) amend or repeal any provision of, or add any provIsIOn to, the
corporation s Articles of Incorporation (other than the designation of additional shares of
Preferred Stock), if such action would adversely alter or change the preferences, rights, or
privileges of the Designated Preferred;
(b) declare or pay any dividend or make any distribution (whether in cash
shares of capital stock of the corporation, or other property) on shares of its capital stock, except
upon termination of employment, consulting or other relationships with the corporation; or
(c)" increase the authorized number of shares of such series.
ARTICLE 6
NO CUMULATIVE VOTING
Shareholders of this corporation shaH not have the right to cumulate votes for the election
of directors.
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ARTICLE 7
NO PREEMPTIVE RIGHTS
No shareholder of this corporation shall have, solely by reason of being a shareholder
any preemptive or preferential right or subscription right to any stock of this corporation or to
any obligations convertible into stock of this corporation, or to any warrant or option for the
purchase thereof, except to the extent provided by written agreement with this corporation.
ARTICLE 8
SHAREHOLDERS
Calling of Special Meeting of Shareholders. Subsequent to the date that the
corporation is subject to the reporting requirements of Section 13 of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), special meetings of the shareholders for any purpose
or purposes may be called at any time only by the Board or the Chairman of the Board (if one be
appointed) or the President or one or more shareholders holding not less than tvventy-five percent
(25%) of all the shares entitled to be cast on any issue proposed to be considered at that meeting.
Shareholder Voting on Extraordinary Actions. Subsequent to the date that the
corporation is subject to the reporting requirements of Section 13 of the Exchange Act, pursuant
to the authority granted under Sections 23B.IO.030, 23B.l1.030, 23B.12.020, and 23B.14.020 of
the Act, the vote of shareholders of this corporation required in order to approve amendments to
the Articles of Incorporation, a plan of merger or share exchange, the sale, lease, exchange, or
other disposition of all or substantially all of the property of the corporation not in the. usual and
regular course of business, or dissolution of the corporation shall be a majority of all of the votes
entitled to be cast by each voting group entitled to vote thereon.
Contracts with Interested Shareholders. Subject to the limitations set forth in
RCW 23B.19.040, to the extent applicable:
(a) The corporation may enter into contracts and otherwise transact business
as vendor, purchaser, lender, borrower, or otherwise with its shareholders and with corporations
associations, firms, and entities in which they are or may be or become interested as directors
officers, shareholders, members, or otherwise.
(b). Any such contract or transaction shal~ not be affected or invalidated orgive rise to liability by reason of the shareholder s having an interest in the contract or
transaction,
8.4 Ratification by Shareholder Vote. Subject to the requirements of
RCW 23B.08.730 and 23B.19.040, any contract, transaction, or act of the corporation or of any
director or officer of the corporation that shall be authorized, approved, or ratified by the
affirmative vote of a majority of shares represented at a meeting at which a quorum is present
shall , insofar as pellTlitted by law, be as valid and as binding as though ratified by every
shareholder of the corporation.
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Quorum. A quorum shall exist at any meeting of shareholders if a majority of
the votes entitled to be cast is represented in person or by proxy. In the case of any meeting ofshareholders that is adjourned more than once because of the failure of a quorum to attend, thosewho attend the third convening of such meeting, although less than a quorum, shall nevertheless
constitute a quorum for the purpose of electing directors, provided that the percentage of shares
represented at the third convening of such meeting shall not be less than one-third of the shares
entitled to vote.
Less- Than-Unanimous Shareholder Consent. To the extent permitted by the
Act, the taking of action by shareholders without a meeting by less than unanimous writtenconsent of all shareholders entitled to vote on the action shaH be permitted. Written notice of thetaking of such action shall be given to those shareholders entitled to vote on the action who have
not consented in writing (and, if the Act would otherwise require that notice of a meeting of
shareholders to consider the action be given to nonvoting shareholders, to all nonvotingshareholders), describing with reasonable clarity the general nature of the action, and
accompanied by the same material that, under the Act, would have been required to be sent to
nonconsenting (or nonvoting) shareholders in a notice of meeting at which the action would have
been submitted for shareholder action. Such notice shall be either (i) by deposit in the U.S. mail
before the action becomes effective (or, such longer period as required by law, in the case of a
significant business transaction under RCW 23B.19.020 (15)), with first-class postage thereon
prepaid, correctly address~d to each shareholder entitled thereto at the shareholder s address as it
appears on the current record of shareholders of the Corporation; or (ii) by personal delivery,
courier service, wire or wireless equipment, telegraphic or other facsimile transmission, or anyother electronic means which transmits a facsimile of such communication correctly addressed to
each shareholder entitled thereto at the shareholder s physical address, electronic mail address, or
facsimile number, as it appears on the current record of shareholders of the Corporation. Notice
under clause (i) shall be given at least seventy-two (72) hours, and notice under clause (ii) shaHbe given at least twenty-four (24) hours before the action becomes effective (or such longer
period as required by law, in the case of a significant business transaction under RCW
23B.19.020 (15)).
ARTICLE 9
DIRECTORS
Number of Directors. The number of directors of the corporation shall be fixed
as provided in the Bylaws and may be changed from time to time by amending the Bylaws.
Authority of Board of Directors to Amend Bylaws. Subject to the limitation(s)of RCW 23B.1 0.21 0, and subject to the power of the shareholders of the corporation to change
or repeal the Bylaws, the Board is expressly authorized to make, amend, or repeal the Bylaws of
the corporation unless the shareholders in amending or repealing a particular bylaw provide
expressly that the Board may not amend or repeal that bylaw.
Contracts with Interested Directors. Subject to the limitations set forth in
RCW 23B.08.700 through 23B.08.730:
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(a) The corporation may enter into contracts and otherwise transact business
as vendor, purchaser, lender, borrower, or otherwise with its directors and with corporations
associations, finns, and entities in which they are or may be or become interested as directors
officers, shareholders, members, or otherwise.
(b) Any such contract or transaction shall not be affected or invalidated or
give rise to liability by reason ofthe director s having an interest in the contract or transaction.
9.4 Indemnification of Directors, Officers, Employees and Agents. The capitalized
tenns in this Section 9.4 shall have the meanings set forth in RCW 23B.08.500.
(a) The Corporation shall indemnify and hold hannless each individual who is
or was serving as a Director or officer of the Corporation or who, while serving as a Director or
officer of the Corporation, is or was serving at the request of the Corporation as a director
officer, partner, trustee, employee, or agent of another foreign or domestic corporation
partnership, joint venture, trust, employee benefit plan, or other enterprise, against any and all
Liability incurred with respect to any Proceeding to which the individual is or is threatened to be
made a Party because of such service, and shall make advances of reasonable Expenses with
respect to such Proceeding, to the fullest extent permitted by law, without regard to the
limitations in RCW 23B.08.51 0 through 23B.O8.550; provided that no such indemnity shall
indemnify any Director or"officer from or on account of (1) acts or omissions of the Director or
officer finally adjudged to be intentional misconduct or a knowing violation of law; (2) conduct
of the Director or officer finally adjudged to be in violation of RCW 23B.08.31 0; or (3) any
transaction with respect to which it was finally adjudged that such Director or officer personally
received a benefit in money, property, or services to which the Director or officer was not legally
entjtled.
(b) The Corporation may purchase and maintain insurance on behalf of an
individual who is or was a director, officer, employee, or agent of the Corporation or, who, while
a director, officer, employee, or agent of the Corporation, is or was serving at the request of the
Corporation as a director, officer, partner, trustee, employee, or agent of another foreign or
domestic corporation, partnership, joint venture, trust, employee benefit plan, or other enterprise
against Liability asserted against or incurred by the individual in that capacity or arising from the
individual's status as a director, officer, employee, or agent, whether or not the Corporation
would have power to indemnify the individual against such Liability under RCW 23B.08.51 0 or
23B.08.520.
(c) If, after the effective date of this Section 9.4, the Act is amended to
authorize further indemnification of Directors or officers, then Directors and officers of the
Corporation shall be 'indemnified to the fullest extent permitted by the Act.
(d) To the extent permitted by law, the rights to indemnification and advance
of reasonable Expenses conferred in this Section 9.4 shall not be exc1usive of any other right
which any individual may have or hereafter acquire under any statute, provision of the Bylaws
agreement, vote of shareholders or disinterested directors, or othexwise. The right to
indemnification conferred in this Section 9.4 shall be a contract right upon which each Director
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or officer shall be presumed to have relied in determining to serve or to continue to serve as
such. Any amendment to or repeal of this Section 9.4 shall not adversely affect any right or
protection of a Director or officer of the Corporation for or with respect to any acts or omissions
of such Director or officer occurring prior to such amendment or repeal.
(e) If any provision of this Section 9.4 or any application thereof shall be
invalid, unenforceable, or contrary to applicable law, the remainder of this Section 9.4, and the
application of such provisions to individuals or circumstances other than those as to which it is
held invalid, unenforceable, or contrary to applicable law, shall not be affected thereby.
Limitation of Directors' Liability. To the fullest extent permitted by the Act, as
it exists on the date hereof or may hereafter be amended, a director of this corporation shall not
be personally liable to the corporation or its shareholders for monetary damages for conduct as a
director. Any amendment to or repeal of this Section 9.5 shall not adversely affect a director of
this corporation with respect to any conduct of such director occurring prior to such amendment
or repeal.
ARTICLE 10
OTHER MATTERS
10.Amendments to Articles of Incorporation. Except as otherwise provided in
these Articles, as amended from time to time, the corporation reserves the right to amend, alter
change, or repeal any provisions contained in these Articles in any manner now or hereafter
prescribed or permitted by statute. All rights of shareholders of the corporation are subject to this
reservation. A shareholder of the corporation does not have a vested property right resulting from
any provision of these Articles of Incorporation.
10.Correction of Clerical Errors. The corporation shall have authority to correct
clerical errors in any documents filed with the Secretary of State of Washington, including these
Articles or any amendments hereto, without the necessity of special shareholder approval of such
corrections.
Executed this !L day of October, 2001.
NORTHWEST TELEPHONE, INC.
tk.b.L-.
Andrew Metcalfe
President
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fa fe of Idah
CERTIFICATE OF AUTHORITY
NORTHWEST TELEPHONE , INC.
File Number C 150424
, BEN YSURSA, Secretary of State of the State of Idaho, hereby certify that an
Application for Certificate of Authority, duly executed pursuant to the provisions of the
Idaho Business Corporation Act, has been received in this office and is found to
conform to law.
ACCORDINGLY and by virtue of the authority vested in me by law, I issue this
Certificate of Authority to transact business in this State and attach hereto a duplicate
of the application for such certificate.
Dated: 15 August2003
- "
SECRETARY OF STATE
' -" ~-- ,,,~." ;
202
APPLICATION FOR CERTIFICATE
OF AUTHORITY (For Profit)
(Instructions on Back of Application) ZUg3 AUG 15 AM 8: 55
The undersigned Corporation applies for a Certificate of Authority and states1sfEhQw~~rr OF STATE
SlATE OF IDAHO
1. The name of the corporation is:
Northwest Telephone, Inc.
2. The name which it shall use in Idaho is: Northwest Telephone, Inc.
3. It is incorporated under the laws of: Washington
4. Its date of incorporation is: 1/25/1999
5. The address of its principal office is:
1630 N. Wenatchee Avenue, Suite 9 , Wenatchee , WA 98801
6. The address to which correspondence should be addressed, if different from item 5, is:
(same)
300 N. Sixth St., Boise , 10 837027. The street address of its registered office in Idaho is:
and its registered agent in Idaho at that address is: CT Corporation System
8. The names and respective business addresses of its directors and officers are:
Name Office Address
Andrew Metcalfe PresidenUChairman 1630 N. Wenatchee, #9, Wenatchee, WA
Jennifer Rickel Secretary 1630 N. Wenatchee, #9, Wenatchee, WA
Robert Howe Vice President 1630 N. Wenatchee, #9, Wenatchee , WA
Stephen Kautz ' Director 5721 Corte Libre, Pleasanton, CA
Randy Cooper Director 1630 N. Wenatchee, #9, Wenatchee, WA
Dated: August 12 , 2003 Customer Acct # :
Signature:
(~ using pre-paid account)
Secretary of State use only
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,2 Web Form
Typed Name: Robert Howe
Capacity: Vice President
IDAHO SECRETARY OF STATE08/15/2003 05:
CK: 4874 CT: 172289 BH: 696557
1 i! lBB.BB = 188.88 AUTH PRO . 2
1 i! 2B.BB = 2B.88 EXPEDITE C . 3
IYO'l:l~
IDAHO STATE TAX COMMISSION
800 Park Blvd., Plaza IV * P.O. Box 36 * Boise, Idaho 83722-2210(Hearing Impaired TOO) 1-800-377-3529 Equal Opportunity Employer
September 23 2003
NORTHWEST TELEPHONE INC
1630 N WENATCHEE AVE STE 9
WENATCHEE W A 98801-1188
Dear Taxpayer
Your application for an Idaho Seller s Permit has been accepted. You have been approved to file
on a monthly basis, and the number assigned to you is shown on the attached permit. Taxreporting forms (returns) are being sent to you in a separate mailing. You must file a return even
if no tax is due.
After one year, you may file a written request to change your filing frequency.
If you need help filing your returns or have questions about sales tax, call [phone] inBoise or [phone] toll free nationwide.
atLl6- Vl4 dot
POST IN A VISIBLE PLACE
THIS PERMIT IS NOT TRANSFERABLE
IDAHO STATE TAX COMMISSION
SEL:bEmS~BERMIT
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THE BUSINESS NAMED BELOWJt~.~;B,EJ,~N:)((gM1fj:EB18"l'l:!l~i$fLLER'S PERMIT. THISPERMIT IS VALID UNTIL CANC;ELL
pq,
!~VO~~D ()~S~VSfENDED FOR CAUSE AS
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rnLEPHONE ~jr~i: ~.i~~'f~~ c 1m ;:s
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NORTHWEST TELEPHONE mc c . c
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Effective Date: 10/01/20031630 N WENATCHEE AVE, STE9
WENATCHEE, WA98801-l188
11/11/03
Northwest Telephone, Inc.
Summary Balance Sheet
As of September 30, 2003
'-"
nP' -i -led.
Sep 30, '
ASSETS
Current Assets
Checking/Savings
Accounts Receivable
Other Current Assets
Total Current Assets
189,702
477 622
80,510
747 834
200 874
540 547
489,255
Fixed Assets
Other Assets
TOTAL ASSETS
LIABILITIES & EQUITY
Liabilities
Current Liabilities
Accounts Payable
Other Current Liabilities
Total Current Liabilities
452 121
231 103
683 224
386,053
069 276
1,419 979
489,255
Long Term Liabilities
Total Liabilities
Equity
TOTAL LIABILITIES & EQUITY
Dec 31
, '
52,434
410,178
462 612
927 753
703 180
093,545
590 039
138 024
728 063
299,846
027 909
065 636
093,545
Page 1
11/11/03
Northwest Telephone, Inc.
Profit & Loss YTD Comparison
January through September 2003
( l.Jn/Oa.&Jc:LJ~ ')
Jan - Sep '
Ordinary Income/Expense
Income
4000 . Circuits
4100. Telephone
4400 . Broadband Access
4500 . Managed Ports
4600 . Digital Subscriber Line (DSL)
4700 . Wireless
4750, Fiber
4800 . Hardware, Parts and Equipment
4900 . Miscellaneous
Total Income
Cost of Goods Sold
5100 . COGS - Telephone - Verizon
5400 . COGS - Broadband Access
5600 . Cost of DSL Services
5800 . Cost of Hardware, P and E
5900 . COGS - Miscellaneous
Total COGS
78,250
95,311
1,493 965
617 718
630
057
382
046
662
2,462 022
674
358 000
4,437
466
443
383 020
Gross Profit
Expense
6000 . OSS Expenses
6800. OSS Wages
7000 . Operations Expenses
7800 . Operations Wages
8000 . Sales and Marketing Expenses
8800 . Sales and Marketing Wages
9999 . Uncategorized Expenses
Total Expense
079 002
234 890
170 217
681
158 362
514
97,450
724 114
Net Ordinary Income
Other Income/Expense
Other Income
9410. Extraordinary Income
Total Other Income
Other Expense
9500 . Interest Expense
9501 . Convertible Note Interest
9510 . Depreciation expense
9520 . Amortization expense
9900 . Provision For Tax Benefit
Total Other Expense
354 888
729 109
729 109
140 363
55,430
364 000
18,000
151 861
729,654
Net Other Income (545)
Net Income 354 343
Page 1
! .
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~,-, ;.; ", ",
NORTHWEST TELEPHONE, INC.
ACCOUNTANTS' REVIEW REPORT
and
FINANCIAL STATEMENTS
December 3 1 , 2002 and 200 I
LIND ER~;:GO ETZ
"---~,-~,,,,----,-,-,,'-'
G~\"..)i.i,\:",..m,._'....,
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CERTIFIED PUBLIC ACCOUNTANTS & BUSINESS CONSULTANTS
CONTENTS
PAGE
ACCOUNTANTS' REVIEW REPORT
. -
FINANCIAL STATEMENTS
Balance sheets
Statements of operations
Statements of retained deficit
Statements of cash flows
Notes to the financial statements
SUPPLEMENT ARY INFORMA nON
Schedule I - Schedule of revenues, cost of revenues
and general and administrative expenses
...
Post Office Box 578
Wenatchee, WA 98807-0578
Telephone [phone]
Fax [phone]
LIND E!W-O ETZ P. S
CERTIFIED PUBLIC ACCOUNTANTS &. BUSINESS CONSULTANTS
ACCOUNTANTS' REVIEW REPORT
To the Board of Directors
Northwest Telephone, Inc.
Wenatchee, Washington
We have reviewed the accompanying balance sheets of Northwest Telephone, lnc. (a corporation) as
of December 3 1 , 2002 and 2001 , and the related statements of operations, retained deficit, and cash
flows for the years then ended, in accordance with Statements on Standards for Accounting and
Review Services issued by the American Institute of Certified Public Accountants. All infoI111ation
included in these financial statements is the representation of the management of Northwest
Telephone, Inc.
A review consists principally of inquiries of Company personnel and analytical procedures applied
to financial data, It is substantially less in scope than an audit in accordance with generally
accepted auditing standards, the objective of which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the
accompanying financial statements in order for them to be in confom1ity with generally accepted
accounting principles.
Our review was made for the purpose of expressing limited assurance that there are no material
modifications that should be made to the financial statements in order for them to be in confoI111ity
with generally accepted accounting principles. The infom1ation included in the accompanying
Schedule I is presented only for supplementary analysis purposes. Such infom1ation has been
subjected to the inquiry and analytical procedures applied in the review of the basic financial
statements , and we are not aware of any material modifications that should be made thereto.
L- \ /3- G, t)e. T:? P. "?
March 8, 2003
NORTHWEST TELEPHONE, INC.
Balance Sheets
December 31, 2002 and 2001
ASSETS
2002 2001
CURRENT ASSETSCash
Trade accounts receivable
Convertible note receivable
434
410,177
221 697
369,246
29,000 i..
Total current assets 462 611 619,943
EQUIPMENT, FURNITURE AND LEASEHOLDS
Equipment, furniture, and leasehold improvements
Less accumulated depreciation and amortization
OTHER ASSETS
Deposits
Deferred tax asset
Start-up, corporate identity, and collocation costs, net
760,375 706,477
(832 621)(390,105)
927 754 316,372
214 13,331
582,596 433,849
113 370 133,810
703,180 580,990
TOTAL ASSETS 093,545 $ 3,517,305
Equipment, furniture and leasehold improvements, net
Total other assets
See accompanying notes and accountants ' report.
.~-~-- -
. ......n
NORTHWEST TELEPHONE, INC.
Statements of Retained Deficit
For the Years Ended December 31 , 2002 and 2001
RETAINED DEFICIT - END OF YEAR
2002 2001
$ (881,962)(347 745)
(387 325)(534 217)
$( 1 269 287)(881 962)
RETAINED DEFICIT - BEGINNING OF YEAR
NET LOSS
;,;;
See accompanying notes and accountants' report.
. - --.-
See accompanying notes an accountants report.
NORTHWEST TELEPHONE, INC.
Notes to the Financial Statements
December 31 , 2002 and 2001
Note 1 - Summary of Significant Accounting Policies
Nature of Activities
Northwest Telephone, Inc. is a business-to-business telecommunications company fonned in 1999 to operate as
a Competitive Local Exchange Carrier (CLEC), Interexchange Carrier (IXC) and Internet Service Provider (ISP)
in the State of Washington, specifically the Eastern Washington Area. Northwest Telephone, Inc. is authorized
to provide both voice and high speed data services.
Basis of Accounting
The accompanying financial statements have been prepared on the accrual basis of accounting in accordance
with generally accepted accounting principles.
Estimates
The preparation of financial statements in confonnity with generally accepted accounting principles requires the
use of management's estimates. Accordingly, actual results could differ from estimates used. Significant
estimates used in the preparation of these financial statements include the collectibility of trade accounts
receivable and the estimated useful lives of fixed assets.
Cash and Cash Equivalents
Cash and cash equivalents consists of all monies in banks and highly liquid investments with maturity dates of
less than three months.
Accounts receivable
Accounts receivable represent charges to commercial and residential customers for telecommunications and
Internet services. The Company obtains credit checks on all Broadband, Managed Ports, and Telephone
customers. No allowance for doubtful accounts is considered necessary at December 31 , 2002 or 2001 , as all
" known doubtful accounts have been written-off prior to year end.
Equipment. Furniture. and Leasehold Improvements
Equipment, furniture, and leasehold improvements are stated at cost. Depreciation is determined using the
straight-line method over estimated lives ranging from 5 to 10 years for equipment, and furniture, and 39 years
for leasehold improvements. Maintenance and repairs are charged against income as incurred, and additions
renewals and improvements are capitalized. In addition, the Company capitalizes wages incurred in connection
with the facility set-up and installation of switching and other equipment. Capitalized wages for 2002 and 2001
were $167,328 and $202 992 , respectively.
Income Taxes
Income taxes are recognized using enacted tax rates, and are composed of taxes on financial accounting income
that is adjusted for requirements of current tax law, and deferred taxes. Deferred taxes are the expected future
tax consequences of temporary differences between financial statement carrying amounts and tax bases of
existing assets and liabilities, and the effects of net operating loss carry forwards.
NORTHWEST TELEPHONE, INC.
Notes to the Financial Statements
December 31 , 2002 and 2001
Note 1 - Summary of Significant Accounting Policies (Continued)
Start-uD costs. corporate identity and collocation costs
Start-up costs consist of legal and other fees incurred to organize the Company. Collocation costs represent
costs incurred to secure placement of Company equipment. Start-up costs are being amortized over a five year
period. Collocation costs are being amortized over a fifteen year period.
Note 2 - Long-Term Debt
2002 2001
Long-term debt at December 31, 2002 and 2001 consists of the following:
Equipment purchase contract payable in monthly installments of $6 717
including interest at 10%, collateralized by related equipment, matures
November 22, 2004.140 040 197,136
Tenn loan payable to bank in monthly installments of $2 128, including
interest at the Wall Street Journal Prime Rate plus 1.5%, currently 6.25%,
collateralized by personal guarantees from stockholders of the Company,
with a maturity date of February 10 2005. The bank may demand payment
in full at its option.084 69,078
Switching equipment purchase contract. Payable in monthly installments of
$10 000 with no terms for interest. The contract is collateralized by the
related equipment, and matures in March 2004.145,904 267 507
Note payable to minority shareholder, payable in monthly payments of
" $4 500 representing interest only at 18%, collateralized by equipment
matures October 2004.300,000 300,000
Billing software purchase contract payable in monthly installments of
$3,552, including interest at 18%, collateralized by related asset. During
2002 the note was removed when use of the software was abandoned.432
Two vehicle purchase contracts payable in a combined monthly payment of
$698, including interest at 10.94%, collateralized by two 1997 Dodge Dakota
trucks, matures January 2006.21,830 27,474
Sub-total 654 858 908 627
NORTHWEST TELEPHONE, INC.
Notes to the Financial Statements
December 31 , 2002 and 2001
Note 2 - Long-term Debt (Continued)
2002 2001
Sub-total forward 654 858 908,627
Equipment purchase note payable in monthly installments of $2 942
including interest at 24%, collateralized related equipment, matures May 31
2005.276
719,134 908,627
(265 337)(360,635)
453,797 547,992
Total long-term debt
Less current portion
C':.Long-term debt, net of current portion
The following is a summary of the estimated future principal maturities at December 31 , 2002:
Year Ended December 31
2003
2004
2005
2006
$ 265,337
131,411
321 695
691
719,134
Note 3 - Major Customers
During the years ended December 31, 2002 and 2001 the Company had major customers that represented
approximately 37% and 40% of total revenues, respectively. Accounts receivable outstanding at December 31
2002 and 2001 related to these customers were $163 506 and $115 682, respectively.
Note 4 - Related Party Transactions
During the year ended December 31 , 2000 Northwest Telephone, Inc. purchased equipment ftom a vendor that is
also a minority shareholder in the Company. The total purchase price of the equipment was $323,521. The entire
purchase price was financed with the company under terms that are similar to those offered to its other customers.
NORTHWEST TELEPHONE, INC.
Notes to the Financial Statements
December 31, 2002 and 2001
Note 5 - Obligations Under Capital Leases
Certain equipment is held under non-cancelable capital leases. The cost of this equipment is being amortized using
the straight-line method over the estimated life of five years. The rates of interest implicit in the leases range from
21 % to 52%. The investment in capital leases and accumulated amortization included in equipment at December
3 1 , 2002 and 2001 is as follows:
Equipment cost
Less accumulated amortization
2002
633 097
(159,183)
473 914
2001
633 097
(65,515)
567 582
The net minimum lease payments as of December 31 , 2002, including the lease in dispute outlined in Note - 6, are
as follows:
Year Ended December 31
2003
2004
Total future minimum lease payments
69,594
136,800
206 394
(104 791 )
101 603
(49,520)
083
479 109
531 192
Less imputed interest and taxes
Present value of net minimum lease payments
Less current portion
Lease in dispute, Note - 6
Long-term portion
A capital lease obligation included above contains certain provisions that allow the lessor to accept payment of
the final option price of $72 000 in shares of Northwest Telephone, Inc. common shares valued at $1.00 per
share.
Note 6 - Lease in Dispute - Subsequent Event
On November 3, 2000 the Company entered into a Master Agreement to Lease Equipment with a vendor in
connection with the acquisition of telephone switching equipment. In addition to the lease commitment, the
vendor received warrants to purchase 128,700 shares of the Company s common stock for a $1 per share
exercise price. Any unexercised warrants expire on November 3,2005. The related switching equipment has a
capitalized cost of $497 018 and related accumulated depreciation of $216 563 at December 31 , 2002.
Since its installation the switching equipment has not perfonned to the standards expected by management of
Northwest Telephone, Inc. Management believes that the malfunctioning equipment has significantly reduced
the Company s ability to provide quality service to existing and potential customers, thus impeding the
Company s growth and profitability. In August 2001 the Company suspended all payments on the obligation
until the matter can be resolved to their satisfaction. At December 31 , 2002 the Company was still in
negotiations with the vendor. In March 2003 a tentative agreement was presented to the Company that would
relieve the Company of the entire obligation and allow it to maintain ownership of the equipment.
NORTHWEST TELEPHONE, INC.
Notes to the Financial Statements
December 31, 2002 and 2001
Note 7 - Business Risks and Credit Concentration
The Company operates in the highly competitive telecommunications and Internet service industry. Significant
technological changes and increased competition in the industry could adversely affect operating results.
The Company provides credit, in the normal course of business, to customers located in Washington State. All
outstanding customer balances are generally unsecured.
The Company maintains cash balances at one financial institution. Accounts are insured by the Federal Deposit
Insurance Corporation up to $100 000. In the normal course of business, the Company may have deposits that
exceed the insured balance.
Note 8 - Advertising Expense
The Company expenses the cost of advertising as incurred. Advertising costs charged to operations for the years
ended December 31, 2002 and 2001 were $28,580 and $58,387, respectively.
Note 9 - Operating Lease Commitments
The Company leases its office space and equipment site in Wenatchee, Washington under two separate
agreements. The office is rented for $1 200 per month for five years beginning January 1 , 1999. The equipment
site is rented for $900 per month for five years beginning November 1, 2000. Both leases contain options for an
additional five year term. The Company also leases office space in Moses Lake, Washington for $450 per month
under a five year lease beginning July 15 2000.
The following is a schedule by years of future minimum payments for the significant non-cancelable operating
l~ases at December 31,2002.
Year Ended December 31
2003
2004
2005
30,600
30,600
11,700
72,900
In addition to the above leases, the Company rents communications site space at various locations through-out the
State. The lease terms range from one to five years and carry a monthly rental of approximately $1 750 in
aggregate.
Total rents paid during the years ended December 31 , 2002 and 2001 for office, facilities and communication sites
were $53,882 and $44 500, respectively.
NORTHWEST TELEPHONE, INC.
Notes to the Financial Statements
December 31 , 2002 and 2001
Note 10 - Preferred Stock
In accordance with the Articles of Incorporation as amended, the authorized shares of preferred stock were divided
into and issued in series. Certain series of preferred stock are presently designated, and their tenns are set forth as
follows:
Series A Preferred Stock
Series B Preferred Stock
Series B-1 Preferred Stock
Authorized
Shares
875 000
500 000
814 546
Issued
Shares
825 000
392 727
514 546
189,546 732 273
Preferences, rights, privileges and restrictions granted to or imposed on the respective shares of each such series of
Designated Preferred Stock include preferences as to dividends, liquidating distributions, and voting rights.
During 2000 the Company issued an additional 1 200,000 shares of Series A Preferred Stock and 1 150,000 shares
of Series B Preferred Stock in exchange for capital contributions of $300 000 and $1 150,000 respectively. The
convertible note receivable at December 31 , 2001 represents $29 000 for the unpaid portion of convertible notes.
During 2002 $4 000 of this amount was received. The remaining $25,000 was cancelled by the issuing party.
Note 11 - Warrants and Options
As part of the Company s efforts to raise capital and obtain financing for operating equipment the Company issues
~arrants and stock purchase options to existing stockholders and major equipment vendors from time to time.
The following is a schedule of warrants and options outstanding as of December 31 , 2002 and 2001:
Share Class 2002
Common Warrants 694 325
Preferred Warrants 749,782
Common Options 000
2001
694 325
525 634
72,000
The options and warrants contain various expiration dates between 2002 and 2006. As of December 31 , 2002 the
combined value from exercisable options and warrants was approximately $2.7M.
Note 12 - Compensated Absences
Employees of Northwest Telephone, Inc. earn a vested right to compensation for unused vacation and personal
absence time. Accordingly, the Company has made an accrual for vacation and personal absence
compensation that employees have earned but not taken.
NORTHWEST TELEPHONE, INC.
Notes to the Financial Statements
December 31 , 2002 and 2001
Note 13 - Convertible Notes
The Company is authorized to issue 10% Convertible Promissory Notes for an aggregate principal amount of
up to $1 000 000. At December 31 , 2002 and 2001 a total of $741 100 and $730 100 in Convertible
Promissory Notes were issued, respectively. Interest accrues on the outstanding principal balance from the
date of issue until the date the Notes are paid in full, at the rate of ten percent (10%) per annum, simple
interest. If not sooner paid or converted according to the Note tenns, the outstanding principal balances and
any accrued interest thereon were scheduled to mature on September 30, 2002. During 2002 the maturity date
was extended to September 30, 2004. The notes are subordinated in right of payment to the prior payment in
full of all the Company s Senior Indebtedness.
The Notes are convertible as follows:
Automatic Conversion - If, prior to the Maturity Date, the Company completes as single, continuous
integrated offering of its Series C Preferred Stock for cash in an amount not less than $500 000 in the aggregate
(the "Triggering Financing ), the Outstanding Principal Balance and accrued interest shall be automatically
converted into that number of shares of Equivalent Preferred Stock equal to the quotient (rounded downward to
the nearest whole number) obtained by dividing the amount of the Outstanding Principal Balance and accrued
interest by the lower of the (i) per share offering price of the Series C Preferred Stock sold in the Triggering
Financing, or (ii) $.50 per share. Equivalent Preferred Stock shall mean a series of preferred stock if not the
Series C Preferred Stock, to be duly authorized and issued by the Company to accommodate the conversion
substantially equivalent in its rights, privileges, powers, and limitations to, and on a parity with, the Series C
Preferred Stock sold in the Triggering Financing.
Optional Conversion - If the Notes are not sooner paid or automatically converted, a majority-in-interest of
Holders of the Notes may, (i) at any time after the Maturity Date, (ii) at any time during the Notice Period, or
(iii) upon the sale, conveyance or other transfer of all or substantially all of the Company s assets or business
(other than a spin-off to a commonly-owned entity) or upon the acquisition of the Company by means of any
transaction or series of related transactions (including without limitation any reorganization, share exchange
merger or consolidation) that results in the transfer of fifty percent (50%) or more of the outstanding voting
power of the Company, at their option, elect to convert the Outstanding Principal Balance and accrued interest
under the Notes, in whole or in part, into that number of shares of the Company s Common Stock equal to the
quotient (rounded downward to the nearest whole number) obtained by dividing the amount of the Outstanding
Principal Balance and accrued interest by $0.50 per share.
Note 14 - Employee Stock Purchase Plan
The Company has an employee stock purchase plan which provides that eligible employees may purchase shares
of the Company s common stock. The total number of shares issuable under the plan is 1 000 000. January 2002
was the earliest date current employees became eligible to purchase shares. To date no eligible employees have
purchased shares under the terms of the plan..
NORTHWEST TELEPHONE, INC.
Notes to the Financial Statements
December 31 , 2002 and 2001
Note 15 - Income Taxes
The (provision) benefit for federal income taxes for the years ended December 31 , 2002 and 2001 , consists of the
following:
2002 2001
Current
Deferred 148 747 254,386
148 747 254 386
The compositions of the deferred income tax assets and liabilities at December 31 , 2002 and 2001 , are as follows:
Non-current deferred income taxes
Gross deferred tax assets
Gross deferred tax liabilities.
2002 2001
782 868 546,404
(200,272)(112 555)
582 596 433,849
The significant temporary differences between the carrying amounts and tax bases of existing assets and liabilities
that give rise to deferred tax assets and liabilities include property and equipment, and a net operating loss carry
forward of $2,302 500 that is available to offset future taxable income. The net operating loss carry forward will
begin to expire in the year 2014 if not used.
. .,...'
- ---______n___
__-------- ----..----..----
Supplementary Information
,------..---.-.---- ._~-
NORTHWEST TELEPHONE, INc.
1630 N WENATCHEE AVE, SUITE 9
WENATCHEE, WASHINGTON 98801
Voice: 509.661.2000
Fax: [phone]
Web: www.nw-tel.com
Describing All Services Offered; and All Prices, Charges, Terms and Conditions
Pertaining Thereto
November 12.2003
Date Issued Effective Date:
Issued by: Northwest Telephone, Inc.
~ ~
Title: President
NORTHWEST TELEPHONE, INC
PRICE LIST
PAGE NO.
(C)
(D)
(I )
( K)
EXPLANA TION OF SYMBOLS
To signify changed conditions or regulations
To signify discontinued rate, regulation or condition
To signify increase
To signify that material has been transferred to another sheet or place in the price
list.
( M) To signify that material has been transferred from another sheet or place in the
price list.
(N)
(0 )
( R)
(T)
To signify new rate, regulation, condition or sheet
To signify no change
To signify reduction
To signify a change in text for clarification
The use of the symbol "0" shall be discretionary unless its use in the interest of
clarity is evident or specifically requested by the Commission.
November 12.2003
Date Issued Effective Date:
Issued by: Northwest Telephone, Inc.
By: ~ ;w Title: President
NORTHWEST TELEPHONE, INC
PRICE LIST
PAGE NO.
SECTION 1 - DEFINITIONS
Authorized User:An end user authorized by the customer to use the service.
Collect Call: A billing arrangement where a call is billed to the called station.
Commission: The Idaho Utilities and Transportation Commission
Customer: The person, firm, corporation or other entity which orders or uses service
and has agreed by signature or otherwise to honor the terms of the service herein, and is
responsible for the payment of rates and charges for service to called customer locations
and for compliance with price list regulations.
Measured Service: The provision of intrastate and interstate long distance measured
time communications telephone service to customers who access the carrier s service at
its switching and call processing equipment by means of access facilities obtained from a
local exchange common carrier. Carrier is responsible for arranging for any access lines.
Operator Station: A call that is completed with the assistance of an operator and billed to
the calling party.
Person - to - Person: A call for which the person originating the call specifies to the
operator a particular person, department or extension is to be reached. Person - to
Person charges only apply when the call is completed to the requested party or when the
calling party agrees to talk to another person.
Third Party Calling: Service option that allows a call to be billed to an account different
from that of the calling or called party.
November 12.2003
Date Issued Effective Date:
Issued by: Northwest Telephone, Inc.
By Title: President
NORTHWEST TELEPHONE. INC.
PRICE LIST
PAGE NO.
SECTION 2 - SERVICES, LOCATION, PRICES AND CHARGES
DESCRIPTION OF SERVICE
a. Northwest Telephone, Inc. offers resold and switched services including
local exchange, intrastate, interstate and international, dialed and operator-
assisted telecommunications message services procured from common
carriers in the local exchange and long distance sectors.
b. Timing of calls begins when the called station is answered, as determined
by standard industry methods generally in use for ascertaining answer
including hardware answer supervision in which the local telephone
company sends a signal to the switch utilizing audio tone detection. The
company does not bill for incomplete calls.
LOCATION OF SERVICE
a. Northwest Telephone, Inc. serves the entire state of Idaho as both a
Competitive Exchange Carrier and an Interexchange Carrier. Its initial
areas of focus are Coeur d' Alene and Boise, with expansion into the
remainder of the state over ensuing years.
November 12.2003
Date Issued Effective Date:
Issued by: Northwest Telephone, Inc.
Title: President
NORTHWEST TELEPHONE. INc.
PRICE LIST
PAGE NO.
SECTION 2 - SERVICES, LOCATION, PRICES AND CHARGES (Cont'
PRICES AND CHARGES
Local Exchange
Business Service
In areas where Verizon or other Independent telephone company is the Incumbent Local
Exchange Carrier, Northwest Telephone, Inc. hereby elects to mirror the tariffs and rates
for Local exchange service, as filed by Verizon, with the Idaho Utilities and
Transportation Commission.
Northwest Telephone, Inc. will add to bill all applicable surcharges assessed by other
agencIes.
Intrastate Toll Service
Business Service
IntraLA T A
All Mileage / Min Flat Rate
Northwest Telephone, Inc. bills a 6 second minimum, then in 6 seconds increments
InterLATA
All Mileage / Min Flat Rate
Northwest Telephone, Inc. bills a 6 second minimum, then in 6 seconds increments
November 12.2003
Date Issued Effective Date:
Issued by: Northwest Telephone, Inc.~U)~Title: President
NORTHWEST TELEPHONE. INC.
PRICE LIST
PAGE NO.
SECTION 2 - SERVICES, LOCATION, PRICES AND CHARGES (Cont'
PRICES AND CHARGES (Cont'd)
Interstate Toll Service
Business Service
All Mileage 1 Min Flat Rate
Northwest Telephone, Inc. bills a 6 second minimum, then in 6 seconds increments
800/888 Service
Business Service
800 Inbound 1 Switched Service
IntraLATA
All Mileage 1 Min Flat Rate
Northwest Telephone, Inc. bills a 6 second minimum, then in 6 seconds increments
T -1 800 Inbound
IntraLATA
All Mileage 1 Min Flat Rate
Northwest Telephone, Inc. bills a 6 second minimum, then in 6 seconds increments
November 12.2003
Date Issued Effective Date:
Issued by: Northwest Telephone, Inc.
By: ~.q..F Title: President
NORTHWEST TELEPHONE. INc.
PRICE LIST
PAGE NO.
SECTION 2 - SERVICES, LOCATION, PRICES AND CHARGES (Cont'd)
PRICES AND CHARGES (Cont'd)
Prepaid Toll Service (CAN INCLUDE TRAVEL CARD)
Business Service
IntraLATA
All Mileage / Min Flat Rate
Northwest Telephone, Inc. bills a 6 second minimum, then in 6 seconds increments
*Flat Rate includes, Day, Evening & Night Usage
SECTION 3 - RULES AND REGULATIONS
1. ADOPTION OF RULES OR REGULATORY AUTHORITHY
a. The rules regulating Competitive Classified Companies presubscribed by
the Commission are adopted and by this reference are made a part of this
price list unless otherwise waived by the order of the Commission.
2. INTERCONNECTION
a. Interconnection with the facilities or services of other carriers shall be
under the applicable terms and conditions of the other carrier s tariffs.
The customer is responsible for taking all necessary legal steps for
interconnecting customer-provided terminal equipment or
communications systems with carrier s facilities. The customer shall
secure all licenses, permits, right-of-way and other arrangements
necessary for such interconnection. Any special interface equipment or
facilities necessary to achieve compatibility between the facilities of the
carrier and other participation carriers shall be provided at the customer
expense.
November 12.2003
Date Issued Effective Date:
Issued by: Northwest Telephone, Inc.
By: ~'M Title: President
NORTHWEST TELEPHONE. INC.
PRICE LIST
PAGE NO. 8
SECTION 3 - RULES AND REGULATIONS (Cont'd)
3. APPLICATION FOR SERVICE
a. Application for service may be made verbally or in writing. The name(s)
of the customer( s) desiring to use the service must be set forth in the
application for service.
4. DEPOSITS
a. Customers will be required to demonstrate satisfactory credit when
ordering either local exchange service or interexchange service. The
requirements and conditions for establishing satisfactory credit shall be the
same as those set forth in Commission Rules at ID AP A 31.41.01 Rule (5)
Section (3), which are adopted and made a part of this price list by
reference.
b. When a customer does not evidence satisfactory credit based on the
measurements set forth in IDAPA 31.41.01 Rule (5) Section (3), the
requirements for the type and amount of deposit necessary shall be those
listed in IDAPA 31.41.01 Rule 101 Section (2) and (3).
5. PAYMENT AND BILLING
a. Service is provided and billed on a monthly basis in advance.
b. Initial billing for set-up and installation charges or monthly services fees
will not commence for any new customer until the customer has been
placed in service.
c. Billing will be payable upon receipt and past due 15 days after issuance.
November 12.2003
Date Issued Effective Date:
Issued by: Northwest Telephone, Inc.
By: ~.U Title: President
NORTHWEST TELEPHONE. INC.
PRICE LIST
PAGE NO.
SECTION 3 - RULES AND REGULATIONS (Cont'd)
6. CANCELLATION BY CUSTOMER
a. Cancellation of service by the customer must be made in writing.
i. Where an application for service is canceled by the customer prior
to the start of any design work or installation of facilities, no
charge applies.
ii. When the application, which requires special design work is
canceled after the design work has begun, the company may
collect charges equal to the cost incurred for the associated design
work to date.
111. If cancellation is requested after completion of an installation, it
will be treated as a discontinuance of service. Any minimum
contract requirements of prescribed service will be applicable.
November 12,2003
Date Issued Effective Date:
Issued by: Northwest Telephone, Inc.
BY:Title: President
NORTHWEST TELEPHONE. INc.
PRICE LIST
PAGE NO. 10
SECTION 3 - RULES AND REGULATIONS (Cont'
7. DISCONNECTION OF SERVICE BY CARRIER
a. The carrier may discontinue service for any of the following reasons:
i. Nonpayment of bills;
ii. Tampering with the company s property;
111. Vacation of the premise by subscriber;
IV. Violation of rules, service agreement or filed price list;
v. Use of subscriber equipment which adversely affects the
company s service to its other subscribers;
vi. Fraudulent obtaining or use of service;
vii. Unlawful use of service or use of service for unlawful purposes.
November 12. 2003
Date Issued Effective Date:
Issued by: Northwest Telephone, Inc.
..1 Title: President
NORTHWEST TELEPHONE. INc.
PRICE LIST
PAGE NO. 11
SECTION 3 - RULES AND REGULATIONS (Cont'
7. DISCONNECTION OF SERVICE BY CARRIER (Cont'
b. Except in case of danger to life or property, fraudulent use, impairment of
service or violation of law, the carrier will, prior to disconnection, mail
written notice of the pending disconnection to the subscriber. The
company will not disconnect service prior to the eighth business day
following mailing of the notice. In the alternative the company may
provide delivered notice and disconnect not prior to 5 p.m. on the next
business day, in accordance with IDAPA 31.41.01 Rule 302 and Rule 303.
c. Before service is disconnected, the company will make a good faith effort
by two attempts during reasonable hours, to reach the subscriber by
telephone to advise the subscriber of the pending disconnection and the
reasons therefore. The company will maintain a log or record of the
attempts, showing the telephone number called and the time of the call. In
the alternative, the company may provide personal notice in accordance
with IDAPA 31.41.01 Rule 304.
Telephone or personal contact need not be attempted when the company
has attempted such contact in any two billing periods during a consecutive
twelve month period and the company has notified the subscriber n the
writing that telephone or personal contact will not be attempted in the
future before disconnecting service.
d. All notices of delinquency or pending disconnection will include details
pertinent to the situation and describe how the subscriber can make
contact with the company to resolve any differences. All notices must
accurately state amounts owing for service(s), which are subject to
disconnection. A new notice will be required in cases where information
is incorrect.
November 12,2003
Date Issued Effective Date:
Issued by: Northwest Telephone, Inc.
By: 4?t'iJf
Title: President
NORTHWEST TELEPHONE. INC.
PRICE LIST
PAGE NO. 12
SECTION 3 - RULES AND REGULATIONS (Cont'
7. DISCONNECTION OF SERVICE BY CARRIER (Cont'd)
e. Except in case of danger to life or property, no disconnection shall be
made on Saturdays, Sundays, legal holidays, or on any other day on which
the company cannot reestablish service on the same or following day.
f. When the company has reason to believe service is to other than the
subscriber of record, the company shall undertake reasonable efforts to
inform occupants of the service address of the impending disconnection.
In this case, at the request of the service users, a minimum period of five
business days will be allowed to permit the service users to arrange for
continued service.
g. Where service is provided to a hospital, medical clinic with resident
patients or nursing home, notice of the pending disconnection shall be
provided to the secretary, Idaho State Department of Social and Health
Services, as well as to the subscriber. Upon request from the secretary or
his designee, a delay in disconnection of no less than five business days
from the date of notice will be allowed so that the department may take
whatever steps are necessary in its view to protect the interests of the
resident patients.
h. The company may not immediately disconnect service if the customer has
met the requirements of 31.41.01 Rule 308 regarding a medical
emergency.
Service will not be totally disconnected while a subscriber is pursuing any
remedy or appeal provided for by the Commission rules, provided any
amounts not in dispute are paid when due.
Service will be restored when the causes of discontinuance have been
removed and when payment or satisfactory arranges for payment of all
proper charges due from the customer has been made as provided for in
the price list of NTI.
November 12.2003
Date Issued Effective Date:
Issued by: Northwest Telephone, Inc.
By EZjL Title: President
NORTHWEST TELEPHONE. INc.
PRICE LIST
PAGE NO. 13
SECTION 3 - RULES AND REGULATIONS (Cont'
8. INTERRUPTION OF SERVICE
a. The company will follow the Commission s rules (IDAPA 31.41.01 Rule
501) in the case of major outage and/or service interruption.
b. It is the obligation of the customer to notify the carrier of any interruptions
in service. Before giving such notice, the customer shall ascertain that the
trouble is not being caused by any action or omission of the customer, not
within the customer s control, or is not in wiring or equipment connected
to the terminal of the carrier.
c. All reported interruptions of service will be restored within two working
days, excluding Sundays and holidays, except those caused by emergency
situations, unavoidable catastrophes and force majeure.
9. RESTORATION OF SERVICE
a. The use and restoration of service in emergencies shall be in accordance
with Part 64, Subpart D of the Federal Communications Commission
Rules and Regulations, which specifies the priority system for such
activities and in compliance with IDAP A 31.41.01 Rule 503.
10. TAX ADJUSTMENT
a. The Company concurs in the Municipal Utility Occupation tax schedules
of each Local Exchange Company tariff in the state of Idaho to the extent
those local taxes are both current and applicable to the services the
Company provides. This amount will be separately stated on bill to the
customer.
November 12.2003
Date Issued Effective Date:
Issued by: Northwest Telephone, Inc.
BY:
~~
Title: President