<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 22, 1999
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
CORECOMM LIMITED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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BERMUDA 4812 NOT APPLICABLE
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION CLASSIFICATION CODE NUMBER)
</TABLE>
CEDAR HOUSE
41 CEDAR AVENUE
HAMILTON, HM 12
BERMUDA
(441) 295-2244
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
CORECOMM LIMITED
110 EAST 59(TH) STREET
NEW YORK, NEW YORK 10022
(212) 906-8485
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPIES TO:
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THOMAS H. KENNEDY DOUGLAS J. BATES
SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP GALLOP, JOHNSON & NEUMAN, L.C.
919 THIRD AVENUE INTERCO CORPORATE TOWER
NEW YORK, NEW YORK 10022 101 SOUTH HANLEY
(212) 735-3000 ST. LOUIS, MISSOURI 63105
(314) 862-1200
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: Upon
consummation of the merger described herein (the "merger").
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this form is filed to registered additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement number for the same offering. [ ] ________
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ] __________
CALCULATION OF FILING FEE
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<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
PROPOSED
MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO OFFERING PRICE AGGREGATE VALUE OF REGISTRATION
TO WHICH TRANSACTION APPLIES BE REGISTERED(1) PER SHARE(2) TRANSACTION(2) FEE(3)
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CoreComm Limited Common Stock par
value $.01 per share............... 1,682,726 (2) $100,964 $28.07
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(1) The maximum number of shares of common stock, par value $0.01 per share, of
CoreComm Limited (and their associated Series A Junior Participating
Preferred Stock Purchase Rights) that may be issued and distributed to
shareholders of MegsINet pursuant to the Agreement and Plan of Merger to
which this Proxy Statement relates, based on (1) a total number of
outstanding shares of common stock, without par value, of MegsINet of
10,200,632, a total number of outstanding shares of MegsINet's 1998A Series
Preferred Stock, without par value, of 1,200, which will be treated as
1,200,000 shares of MegsINet common stock, a total number of outstanding
shares of MegsINet's 1999A Series Preferred Stock, par value $0.01 per
share, of 2,000,000 which will be treated as 2,000,000 shares of MegsINet
common stock, (2) multiplied by the conversion ratio of 0.21 shares of
CoreComm common stock for each share of MegsINet capital stock, and assuming
the exchange of 50% of the shares of MegsINet capital stock for shares of
CoreComm common stock. In addition, the aggregate number includes a total of
1,145,998 shares of MegsINet common stock issuable pursuant to outstanding
stock options and warrants which will be converted into options and warrants
to purchase CoreComm common stock upon completion of the merger as described
herein, multiplied by the conversion ratio of 0.21 and 35,000 shares of
CoreComm common stock to be issued to a preferred shareholder in exchange
for its warrant to acquire MegsINet shares.
(2) Estimated solely for the purpose of computing the registration fee, based
upon the book value of MegsINet's capital stock of $.06 per share, in
accordance with Rule 457(f)(2) under the Securities Act of 1933, as amended
(the "Securities Act"). The maximum aggregate value represents the 50% of
MegsINet's common stock, plus shares represented by option and warrants,
that are being exchanged for CoreComm common stock in the merger.
(3) Calculated pursuant to Rule 457(f) under the Securities Act.
------------------------
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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[LOGO]
THIS PRELIMINARY PROXY STATEMENT -- PROSPECTUS DATED MARCH 22, 1999, IS SUBJECT
TO COMPLETION AND AMENDMENT.
TO THE SHAREHOLDERS OF MEGSINET INC.
A MERGER PROPOSAL -- YOUR VOTE IS VERY IMPORTANT
Dear fellow Shareholders:
As you may know from press reports, CoreComm Limited and MegsINet Inc. have
signed an agreement providing for CoreComm's acquisition of MegsINet by the
merger of MegsINet into a subsidiary of CoreComm. Although the MegsINet Board of
Directors unanimously approved the agreement, subject to our amending our
charter to reduce the vote required to approve the merger, a favorable vote of
shareholders owning at least a majority of the shares of capital stock entitled
to vote is also required. SO, I INVITE YOU TO ATTEND A SPECIAL MEETING OF
SHAREHOLDERS AT THE CHICAGO ATHLETIC ASSOCIATION, 12 SOUTH MICHIGAN AVENUE,
CHICAGO, ILLINOIS, ON , 1999, AT .
If the merger is completed, all MegsINet shareholders will have the right
to elect to receive for each share of common stock they own either:
- $2.50 in cash, or
- 0.21 shares of CoreComm common stock.
The agreement establishes a maximum cash amount and number of shares which
will be available for election. If either fund is oversubscribed, the election
of all persons electing the oversubscribed fund will be reduced proportionately
and those persons will receive the undersubscribed fund on a pro-rata basis as
if they had elected it. CoreComm common stock is listed on the Nasdaq National
Market under the trading symbol "COMMF," and on , 1999, the
CoreComm common stock closed at $ per share. Owners of 1998A Series
Convertible Preferred Stock and 1999A Series Convertible Preferred Stock will
have the same rights to elect cash or stock as they would have if they had
converted their shares into common stock immediately before the merger.
The accompanying proxy statement-prospectus contains detailed information
concerning CoreComm and the merger. I urge you to read carefully the proxy
statement-prospectus, in particular the discussion in the section entitled "RISK
FACTORS" which begins on page 14. AFTER CAREFUL CONSIDERATION, YOUR BOARD OF
DIRECTORS UNANIMOUSLY DETERMINED THE MERGER TO BE FAIR TO YOU AND IN YOUR BEST
INTERESTS AND RECOMMENDS THAT YOU VOTE IN FAVOR OF THE MERGER.
Please use this opportunity to make your preferences known. Whether or not
you plan to attend the meeting, please complete, sign, date and return the
accompanying proxy in the enclosed self-addressed stamped envelope. Returning
the proxy does NOT deprive you of your right to attend the meeting and to vote
your shares in person. YOUR VOTE IS VERY IMPORTANT. In addition, please take a
moment to complete, sign and return (with the accompanying proxy) the
accompanying Exchange Election Form. If you fail to properly complete, sign or
return the Exchange Election Form, we will assume that you want to elect to
receive your portion of whatever is available after those shareholders who
submitted their Exchange Election Form have received their portions.
/s/ MICHAEL HENRY
--------------------------------------
MICHAEL HENRY
Director, Chief Executive
Officer and President
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROXY STATEMENT-PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
This proxy statement-prospectus is dated , 1999 and was first
mailed to shareholders on or about .
<PAGE> 3
The information in this Proxy Statement -- Prospectus is not complete and
may be changed. CoreComm may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is effective. This
Proxy Statement -- Prospectus is not an offer to sell these securities in any
state where the offer or sale is not permitted.
<PAGE> 4
[LOGO]
MEGSINET INC.
225 WEST OHIO STREET, SUITE 400
CHICAGO, ILLINOIS 60610
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
, 1999
To the Shareholders of MegsINet Inc.:
A Special Meeting of Shareholders of MegsINet Inc. will be held on
, , 1999 at 10:00 a.m. Central Standard Time at
The Chicago Athletic Association (the Continental Room), 12 South Michigan
Avenue, Chicago, Illinois.
The only purpose of this meeting is to discuss and vote on whether to
authorize the acquisition of MegsINet by CoreComm Limited through a merger in
accordance with the terms and conditions contained in the Agreement and Plan of
Merger dated as of February 17, 1999.
Only owners of common stock and preferred stock as shown on MegsINet's
records at the close of business on , 1999 will be entitled to vote
at the meeting. A list of all shareholders entitled to vote at the meeting,
arranged in alphabetical order and showing the address of and number of shares
held by each shareholder, will be open at the principal office of MegsINet, 225
West Ohio Street, Suite 400, Chicago, Illinois 60610, during usual business
hours, to the examination of any shareholder for any purpose germane to the
meeting for 10 days prior to the meeting date. The list of shareholders will
also be available at the meeting for examination at any time during such
meeting.
By Order of the Board of Directors
/s/ MICHAEL BOLAND
--------------------------------------
Michael Boland, Secretary
WHETHER OR NOT YOU INTEND TO BE PRESENT AT THE MEETING, PLEASE MARK, SIGN,
DATE AND RETURN THE ACCOMPANYING PROXY PROMPTLY. A POSTAGE-PREPAID RETURN
ADDRESSED ENVELOPE IS ENCLOSED FOR YOUR CONVENIENCE.
<PAGE> 5
[LOGO]
PROXY STATEMENT PROSPECTUS
TABLE OF CONTENTS
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Summary of the Proxy Statement - Prospectus................. 1
The Companies............................................. 1
Recent Transactions....................................... 2
Questions and Answers About the MegsINet/CoreComm
Merger................................................. 2
Summary of the Transaction................................ 3
Selected Historical and ProForma Financial Data........... 8
Risk Factors................................................ 14
Risk Factors Relating to the Merger Between CoreComm and
MegsINet.................................................. 14
To the extent you receive CoreComm common stock you
will receive 0.21 of a share of CoreComm common stock
for each share of MegsINet stock despite changes in
market value.......................................... 14
Although CoreComm and MegsINet expect that the merger
will result in benefits, those benefits may not be
realized.............................................. 14
MegsINet's officers and directors have conflicts of
interest that may influence them to support or approve
the merger............................................ 14
Failure to complete the merger could negatively impact
MegsINet's future business and operations............. 15
CoreComm's anti-takeover defense provisions may deter
potential acquirors of CoreComm and may depress its
stock price........................................... 15
Risk Factors Relating to CoreComm's Businesses............ 16
Thus far we have had mostly new or limited operations
since our formation in 1998........................... 16
Because we were spun-off from another company less than
1 year ago, we do not have much history operating as
an independent public company, which means that future
operating results may differ from those presented
here.................................................. 16
Our liquidity and capital resources are limited and we
will need to raise more money in the future to develop
and expand our existing business...................... 17
We face heavy competition in the telecommunication
industry for all of the services we currently provide
and those we intend to provide in the future.......... 17
Our planned LMDS System involves new and largely
untested technology, so there is a risk that
unanticipated technical problems will cause this
business to lose money for us......................... 19
Although we have a license to use the Cellular-One(R)
brand name for our cellular services, there is a
possibility we may lose our right to use that brand
name in the future.................................... 19
We are dependent on relationships with facilities-based
providers of telecommunications services because we
presently do not own our own facilities, and thus we
run the risk of adverse future changes in the terms on
which we obtain their services for resale............. 20
Customers may not accept our planned services.......... 21
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i
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We depend on the services of a small number of key
management people who have years of experience and
success in the cellular communications industry....... 21
Our officers and directors face potential conflicts of
interest because they are officers and directors of
other companies in our industry, which could impede
their ability to make decisions for us................ 21
Government regulation.................................. 21
We are a Bermuda Company and are thus subject to the
laws of a foreign country that differ from the laws of
most U.S. states...................................... 21
Risk Factors Relating to MegsINet's Business and
CoreComm's ISP Business................................ 22
The Internet business is highly competitive and may be
unsuccessful against bigger, more established
players............................................... 22
Because of the fast pace of technological change in the
Internet industry, there is a risk that we will fall
behind in keeping up with change, which could harm our
ability to compete in the ISP business................ 22
The ISP business depends on continued growth of the
Internet as a medium of communication and commerce.... 23
MegsINet's Internet service business is dependent upon
its internal and leased network....................... 23
We are dependent on telecommunications carriers and
other suppliers....................................... 23
Any decline in MegsINet's member retention levels of
its Internet services may adversely affect us......... 23
Our Internet services business may become subject to
burdensome government regulation...................... 23
The Special Meeting of MegsINet Shareholders................ 25
Proxy Statement-Prospectus................................ 25
Date, Time and Place of the Special Meeting............... 25
Purpose of the Special Meeting............................ 25
Shareholder Record Date for the Special Meeting........... 25
Vote of MegsINet Shareholders Required for Adoption of the
Merger Agreement....................................... 26
Proxies................................................... 26
The Merger.................................................. 28
Background of the Merger.................................. 28
Joint Reasons for the Merger.............................. 29
MegsINet's Reasons for the Merger......................... 30
Recommendation of MegsINet's Board of Directors........... 31
Interests of Certain MegsINet Directors, Officers and
Affiliates in the Merger............................... 31
Completion and Effectiveness of the Merger................ 32
Structure of the Merger and Conversion of MegsINet Common
Stock.................................................. 32
Exchange of MegsINet Stock Certificates for CoreComm Stock
Certificates........................................... 34
Material United States Federal Income Tax Consequences of
the Merger............................................. 35
Tax Implications to CoreComm Shareholders................. 36
Tax Implications to MegsINet Shareholders................. 36
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ii
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Exchange of MegsINet Common Stock Solely for CoreComm Common Stock in the Merger............. 36
Exchange of Some MegsINet Common Stock for Cash and Exchange of Some MegsINet Common Stock
for Stock in the Merger................................................................... 36
Exchange of All MegsINet Common Stock for Cash in the Merger................................. 38
Tax Implications to CoreComm, MegsINet and Sub............................................... 38
Regulatory Filings and Approvals Required to Complete the Merger............................. 38
Restrictions on Sales of Shares by Affiliates of MegsINet and CoreComm....................... 39
Listing on the Nasdaq National Market of CoreComm Common Stock to be Issued in the Merger.... 39
Dissenters' and Appraisal Rights............................................................. 39
The Merger Agreement......................................................................... 41
Access to Information; Best Efforts.......................................................... 44
Cooperation.................................................................................. 44
Treatment of MegsINet Stock Options and Certain Employee Matters............................. 44
Selected Covenants........................................................................... 46
Additional Agreements........................................................................ 48
Waivers to Cisco and Ascend Credit Facilities and the Ascend Warrant......................... 48
Operations After the Merger.................................................................. 49
Business of CoreComm........................................................................... 50
Background................................................................................... 50
Business Strategy............................................................................ 50
The Smart LEC Network........................................................................ 51
Marketing Strategy........................................................................... 52
Recent Developments.......................................................................... 52
CoreComm's Management.......................................................................... 54
Management and Interrelationship of the Former Affiliates.................................... 54
Directors.................................................................................... 54
Classified Board of Directors................................................................ 56
Committees of the Board of Directors......................................................... 56
Executive Officers........................................................................... 56
Executive Compensation....................................................................... 57
Bermuda Resident Representative and Secretary................................................ 57
Stock Options Plans.......................................................................... 58
Security Ownership of Management............................................................... 59
MegsINet's Business............................................................................ 60
Competitive Strengths........................................................................ 60
Internet Access Service...................................................................... 60
Competitive Local Exchange Service........................................................... 60
Internet Telephony Service Provider.......................................................... 61
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iii
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<TABLE>
Service Offerings. 62
<S> <C>
Pequot Transaction........................................ 63
MegsINet Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 64
Overview.................................................. 64
Results of Operations -- Comparison of 1998 and 1997...... 64
Liquidity and Capital Resources........................... 65
Material Commitments...................................... 65
Year 2000 Readiness Disclosure............................ 66
Unaudited Pro Forma Financial Information................... 69
Comparison of Rights of Holders of MegsINet Common Stock and
CoreComm Common Stock..................................... 73
Classes of Common Stock of MegsINet and CoreComm.......... 73
Voting Rights............................................. 73
Classified Board of Directors............................. 74
Number of Directors....................................... 75
Removal of Directors...................................... 75
Filling Vacancies of the Board of Directors............... 76
Interested Directors...................................... 76
Limits on Shareholder Action by Written Consent........... 76
Ability to Call Special Meetings.......................... 76
Advance Notice Provisions for Shareholder Meetings and
Proposals.............................................. 77
Amendment of Memorandum of Association and Articles of
Incorporation.......................................... 78
Amendment of By-laws...................................... 79
Derivative Actions........................................ 79
Indemnification of Directors and Officers................. 80
Preferred Stock........................................... 80
Business Combinations..................................... 82
Shareholder Rights Plan................................... 83
Amalgamations, Exchange of Assets & Mergers............... 84
Short Form Merger......................................... 85
Dissenters' Rights........................................ 86
Share Ownership by Principal Shareholders, Management and
Directors of MegsINet..................................... 87
Legal Opinions.............................................. 89
Experts..................................................... 89
Shareholder Proposals for the 1999 Annual Meeting of
MegsINet Shareholders if the Merger is not Completed...... 90
Where You Can Find More Information......................... 91
Statements Regarding Forward-Looking Information............ 93
Index to Financial Statements............................... F-1
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Independent Auditors' Report. F-2
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MegsINet Inc. and Subsidiary Consolidated Financial
Statements................................................ F-3
Annex A - Agreement and Plan of Merger...................... A-1
Annex B - Irrevocable Proxy................................. B-1
Annex C - Dissenters' Rights................................ C-1
</TABLE>
v
<PAGE> 10
[LOGO]
SUMMARY OF THE PROXY
STATEMENT-PROSPECTUS
This summary may not contain all of the information that is important to
you. You should carefully read this entire document and the other documents we
refer to for a more complete understanding of the merger. In particular, you
should read the documents attached to this proxy statement-prospectus, including
the merger agreement and the irrevocable proxies, which are attached as Annexes
A and B, respectively. In addition, we incorporate by reference important
business and financial information about CoreComm into this proxy
statement-prospectus. You may obtain the information incorporated by reference
into this proxy statement-prospectus without charge by following the
instructions in the section entitled "Where You Can Find More Information" on
page 91 of this proxy statement-prospectus.
THE COMPANIES
CORECOMM LIMITED
110 East 59th Street
New York, New York 10022
(212) 906-8485
http://www.core.com
CoreComm Limited was formed in March 1998 as a subsidiary of Cellular
Communications of Puerto Rico, Inc., formerly CoreComm Incorporated ("CCPR").
CCPR is a premier telecommunications company operating cellular and paging
services in Puerto Rico and the U.S. Virgin Islands. CCPR created CoreComm in
order to succeed to the midwestern cellular and paging businesses and assets
that were operated by OCOM Corporation, which had been purchased by CCPR, and to
pursue new telecommunications opportunities outside of Puerto Rico and the U.S.
Virgin Islands. CCPR spun-off CoreComm on September 2, 1998, by distributing to
each CCPR shareholder, on a one for one basis, 100% of the outstanding common
stock of CoreComm (the "Spin-off"). CoreComm has since been listed on the Nasdaq
national market and trades under the symbol "COMMF". As of December 31, 1998,
CoreComm and its subsidiaries had approximately 250 employees.
We now hold, through subsidiaries, companies which operate or hold licenses
or applications to operate the following businesses:
- competitive local exchange carrier ("CLEC")
- cellular long distance resale
- landline long distance resale
- cellular service resale
- paging resale service and repair
- prepaid cellular service resale
- centralized exchange telecommunications services and related equipment
- local multipoint distribution services ("LMDS")
- Internet service provider ("ISP")
Following our success as a reseller of the above services, we are now
embarking on the next phase of our business strategy, which is to create a
national, facilities-based network capable of transmitting voice and data to our
customers using the latest technologies.
MEGSINET INC.
225 West Ohio Street Suite 400
Chicago, Illinois 60610
(312) 470-9015
http://www.megsinet.net
MegsINet plans to become an Integrated Communications Provider ("ICP"), by
offering local and long distance telephone services and Internet access to
businesses and consumers on a national basis. MegsINet is constructing a state
of the art packet telecommunications network to provide high-speed data, voice
and video services. Currently, MegsINet's focus is on the Internet service
provider (ISP) business where it has in excess of 45,000 customers. However,
MegsINet is seeking to expand its business into the CLEC and Internet Telephony
Service Provider (ITSP) businesses. To that end, MegsINet:
- has entered into an agreement with Northern Telcom, Inc. to use Nortel's
1
<PAGE> 11
latest generation of switched service technology
- is in the process of registering to operate as a CLEC in the contiguous
48 states
- is also in the process of becoming eligible to be a long distance carrier
in those states
- has received FCC approval that allows it to provide certain international
telecommunications services
When it completes these and other related steps, MegsINet believes it will
be one of the first ICPs to provide services as an ISP, CLEC, and Interexchange
Company (IXC).
RECENT TRANSACTIONS
Potential Acquisition of Assets of USN Communications, Inc.
On February 19, 1999, CoreComm announced that it had entered into an asset
purchase agreement to acquire substantially all of the assets of USN
Communications, Inc., excluding one of its wireless subsidiaries. This
acquisition remains subject to an auction process, because USN has commenced a
voluntary Chapter 11 reorganization case under the U.S. Bankruptcy Code.
Therefore, we cannot be certain the purchase will be completed.
QUESTIONS AND ANSWERS ABOUT THE
MEGSINET/CORECOMM MERGER
Q: WHY ARE WE PROPOSING TO MERGE? (SEE PAGE 30)
A: The MegsINet board considered a variety of factors in making its decision to
approve the merger agreement and to recommend to the MegsINet shareholders
that they vote their shares for the merger. The factors included:
- the merger would result in a larger, more diversified Company
- the premium to be paid to MegsINet shareholders and the tax-free nature
of the transaction to the extent stock is received by MegsINet
shareholders
- the opportunity for liquidity for MegsINet shareholders
- the prospects for positive long term performance of the CoreComm shares
Q: WHAT WILL I RECEIVE IN THE MERGER? (SEE PAGE 32)
A: If the merger is completed, you will receive, at your election, either 0.21
of a share of CoreComm common stock and the associated Series A Junior
Participating Preferred Stock Purchase Right for each share of MegsINet
common stock you own, or $2.50 in cash for each share of MegsINet common
stock you own, or a combination determined by you, of cash and CoreComm's
common stock. No matter which election you choose, a small portion of your
shares will be used to cover your pro-rata share of the transaction
expenses, as described on page 33. Also, because a fixed number of shares
and a fixed cash amount will be available for all shareholders, your
election will be subject to an overall allocation of shares and cash. For
more information, please review the cash election summary below. CoreComm
will not issue fractional shares of common stock. Instead of any fractional
shares, you will receive cash based on the market price of CoreComm common
stock. If you receive shares of CoreComm common stock, you will be required
to sign a shareholders' agreement with CoreComm limiting your ability to
sell those shares for a period of one year. In addition, if you receive
CoreComm common stock, you automatically will receive the associated Series
A Junior Participating Preferred Stock Purchase Right, attached to that
stock, which is described on page 83 in the section, "Shareholder Rights
Plan."
The number of shares of CoreComm common stock to be issued for each share of
MegsINet common stock is fixed and will not be adjusted based upon changes
in the value of these shares. As a result, to the
2
<PAGE> 12
extent you will receive CoreComm common stock, the value of the shares you
receive in the merger will not be known at the time you vote on the merger
and may go up or down as the market price of CoreComm common stock goes up
or down. MegsINet is not permitted to "walk away" from the merger or
resolicit the vote of its shareholders based solely on changes in the value
of CoreComm common stock. Based on the number of MegsINet and CoreComm
shares outstanding as of March 16, 1999, the former shareholders of MegsINet
will own approximately 9.6% of CoreComm.
Q: HOW WILL THE CASH ELECTION FEATURE WORK?
A: CoreComm has agreed to pay for 50% of MegsINet's shares in stock and for 50%
of MegsINet's shares in cash. Therefore, the purchase price is equal to
1,407,066 shares and $16,750,790 in cash. The election form mailed with this
proxy statement/prospectus permits you to elect:
- the number of your MegsINet shares to be converted into 0.21 shares of
CoreComm common stock and
- the number of your MegsINet shares to be converted into $2.50 in cash
No matter which election you choose, a small portion of your shares will be used
to cover your pro-rata share of the transaction expense, as described on page
33.
Also, because there is a fixed number of shares and a fixed cash amount CoreComm
has agreed to pay, the amount of cash and stock you actually receive may differ
from what you elect depending on how much cash and stock other MegsINet
shareholders elect. Thus, if enough MegsINet shareholders elect to convert their
shares for cash so that the total amount of cash to be paid would be more than
$16,750,790, then each shareholder's allocation of cash will be proportionately
reduced so that a total of $16,750,790 is paid for in cash. A similar reduction
will occur if enough MegsINet's shareholders elect to convert their shares into
CoreComm common stock so that the total number of shares to be issued would be
greater than 1,407,066.
For example:
A. Assume that all MegsINet shareholders elect to exchange their shares for
CoreComm common stock and none elect cash. Assume that you have 100 shares of
MegsINet common stock to exchange. Instead of receiving .21 x 100 = 21 shares of
CoreComm common stock, in order to preserve the 50/50 cash to stock ratio, half
of everyone's shares would be exchanged for cash, and you would receive .21 x 50
= 10.5 shares of CoreComm common stock (cash would be paid for the extra half-
share based on the trading price of CoreComm's shares) and $2.50 x 50 = $125 in
cash (less your allocation of MegsINet's expenses).
B. Assume that all MegsINet shareholders elect to exchange their shares for
cash and none elect stock. Assume, again, that you have 100 shares of MegsINet
common stock to exchange. Instead of receiving $2.50 x 100 = $250 in cash, in
order to preserve the 50/50 cash to stock ratio, half of everyone's shares would
be exchanged for stock, and you would receive .21 x 50 = 10.5 shares of CoreComm
common stock (again, the fractional half share would be converted into cash
based on the trading price of CoreComm shares) and $2.50 x 50 = $125 in cash
(less your allocation of MegsINet's expenses).
SUMMARY OF THE TRANSACTION
STRUCTURE OF THE TRANSACTION (SEE PAGE 32)
MegsINet will merge into a subsidiary of CoreComm and become a wholly-owned
subsidiary of CoreComm. Following the merger, you will either become a
shareholder of CoreComm, in which event you will have an equity stake in
MegsINet's parent company, or you will receive cash, or both.
3
<PAGE> 13
SHAREHOLDER APPROVAL (SEE PAGE 26)
In the merger agreement, MegsINet agreed to obtain a vote from its
shareholders amending MegsINet's articles of incorporation to reduce the
affirmative vote required to approve the merger to a majority of the outstanding
shares of common stock. In addition, holders of 60% of the 1998A Series
Preferred shares must vote for the merger. The 1998A Series Preferred
shareholders are party to an agreement which effectively requires their voting
for the merger. Because holders of a sufficient number of shares to amend
MegsINet's articles of incorporation have either signed irrevocable proxies or
agreements to vote affirmatively for the amendment, it is expected that this
approval will be obtained in advance of the special meeting described in this
proxy statement-prospectus. Therefore, the holders of only a majority of the
outstanding shares of MegsINet common stock and 60% of the 1998A Series
Preferred Stock will be required to adopt the merger agreement. In the absence
of the reduction of the vote requirement, the holders of two-thirds of the
outstanding shares of MegsINet common stock would be required to adopt the
merger agreement. CoreComm shareholders are not required to adopt the merger
agreement and will not vote on the merger.
You are entitled to cast one vote per share of MegsINet capital stock you
owned as of ____________ , 1999 the record date.
RECOMMENDATION OF MEGSINET'S BOARD OF DIRECTORS (SEE PAGE 31)
After careful consideration, your board of directors unanimously determined
the merger to be fair to you and in your best interests and declared the merger
advisable. MegsINet's board of directors approved the merger agreement and
unanimously recommends that you adopt it.
PROCEDURE FOR CASTING YOUR VOTE (SEE PAGE 25)
Please mail your signed proxy card in the enclosed return envelope as soon
as possible so that your shares of MegsINet common stock may be represented at
the special meeting. If you do not include instructions on how to vote your
properly executed proxy, your shares will be voted FOR adoption of the merger
agreement.
PROCEDURE FOR CHANGING YOUR VOTE (SEE PAGE 26)
If you want to change your vote, send the Secretary of MegsINet a
later-dated, signed proxy card before the special meeting or attend the special
meeting in person. You may also revoke your proxy by sending written notice to
the Secretary of MegsINet before the special meeting.
PROCEDURE FOR EXCHANGING YOUR STOCK CERTIFICATES (SEE PAGE 34)
After the merger is completed, we will send you written instructions for
exchanging your MegsINet stock certificates for CoreComm stock certificates
and/or cash. Do not send your MegsINet stock certificates now.
COMPLETION AND EFFECTIVENESS OF THE MERGER (SEE PAGE 32)
We will complete the merger when all of the conditions to the merger are
satisfied or waived. The merger will become effective when we file a certificate
of merger with the State of Delaware.
We are working toward completing the merger as quickly as possible. We hope
to complete the merger during the early summer of 1999.
CONDITIONS TO COMPLETION OF THE MERGER (SEE PAGE 45)
Our respective obligations to complete the merger are subject to the prior
satisfaction or waiver of conditions. The conditions that must be satisfied or
waived before the completion of the merger include the following:
- the merger agreement must be adopted by MegsINet shareholders
4
<PAGE> 14
- no MegsINet shareholder will have demanded appraisal under the Illinois
Business Corporation Act
- the applicable waiting periods under antitrust laws must expire or be
terminated
- all filings must be made with the government, unless failing to make such
filings would not have an adverse effect on MegsINet
- no injunction or order preventing the completion of the merger may be in
effect
- the registration statement must be effective under the securities laws
- our respective representations and warranties in the merger agreement
must be true and correct, including the absence of material adverse
changes in our respective businesses
- we must have complied with our respective agreements in the merger
agreement
- the MegsINet employee stock options must be amended in accordance with
the merger agreement
- the terms of a MegsINet warrant held by Ascend Communications, Inc. and
two MegsINet warrants held by Pequot Private Equity Fund, L.P. and Pequot
Offshore Private Equity Fund, Inc. must be amended
- each MegsINet shareholder who will be receiving CoreComm shares must sign
a stockholders agreement
- MegsINet must obtain any required consents from third parties relating to
the merger
- CoreComm must receive an opinion of its tax counsel to the effect that
the merger will qualify as a tax-free reorganization and receive an
opinion of special counsel for MegsINet regarding regulatory matters
TERMINATION OF THE MERGER AGREEMENT (SEE PAGE 47)
The merger agreement may be terminated under certain circumstances at any
time before the completion of the merger, as summarized below:
- by our mutual consent
- by either CoreComm or MegsINet if the conditions to completion of the
merger would not be satisfied because of a material breach of an
agreement in the merger agreement by the other which is not cured within
45 days
In addition, the merger agreement may be terminated by either CoreComm or
MegsINet under any of the following circumstances:
- if the merger is not completed by June 15, 1999, however, CoreComm has
the right to extend the merger agreement for up to 3 months after June
15, 1999
- if a final court order prohibiting the merger is issued and cannot be
appealed
- if the MegsINet shareholders do not adopt the merger agreement at the
special meeting
PAYMENT OF TERMINATION FEE (SEE PAGE 47)
MegsINet has agreed to pay CoreComm a termination fee of $1.5 million if
the merger agreement is terminated because MegsINet's shareholders do not adopt
the merger agreement.
NO OTHER NEGOTIATIONS INVOLVING MEGSINET (SEE PAGE 43)
Until the merger is completed or the merger agreement is terminated,
MegsINet has agreed not to take any of the following actions:
- solicit, initiate or encourage a takeover proposal of the nature
specified in the merger agreement, such as an acquisition of 10% or more
of MegsINet's common stock or a merger or reorganization or sale of
assets, involving MegsINet and a party other than CoreComm
5
<PAGE> 15
- engage in discussions or negotiations with any person, entity or group
that is pursuing a takeover proposal as described above
SOME MEGSINET SHAREHOLDERS HAVE ENTERED INTO IRREVOCABLE PROXIES OR VOTING
AGREEMENTS (SEE PAGE 48)
MegsINet shareholders Brian L. Clark, Patrick and Patricia Henry, Clayton
Capital Company, L.L.C., Michael Henry, Scott Widham, MegsINet Investors
Partnership, L.P., Pequot Private Equity Fund, L.P. and Pequot Offshore Private
Equity Fund, Inc. executed irrevocable proxies giving CoreComm the right to vote
their shares in favor of the merger agreement as well as on other matters
related to the merger agreement. These MegsINet shareholders were not paid
additional consideration in connection with these agreements. The holders of
1998A Series Preferred Stock are party to an agreement that effectively requires
their approval of the merger.
The MegsINet shareholders who entered into these agreements collectively
held approximately 51% of the outstanding MegsINet common stock as of the record
date.
INTERESTS OF CERTAIN PERSONS IN THE MERGER (SEE PAGE 31)
When considering the recommendation of MegsINet's board of directors, you
should be aware that certain MegsINet directors and officers have interests in
the merger that are different from, or are in addition to, yours.
As of the record date, directors and executive officers of MegsINet
beneficially owned approximately 25.1% of the outstanding shares of MegsINet
common stock entitled to vote at the special meeting.
U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER (SEE PAGE 35)
We have structured the merger so that, in general, we expect that CoreComm,
MegsINet and their respective shareholders will not recognize gain or loss for
United States federal income tax purposes in the merger, except for taxes
payable by MegsINet shareholders because of cash received, including cash
received for fractional shares. It is a condition to the merger that CoreComm
receives a legal opinion that the merger will be treated as a reorganization
within the meaning of Section 368(a) of the Internal Revenue Code.
ACCOUNTING TREATMENT OF THE MERGER (SEE PAGE 35)
We intend to account for the merger under the purchase method of accounting
for business combinations.
ANTITRUST APPROVAL REQUIRED TO COMPLETE THE MERGER (SEE PAGE 38)
The merger is subject to antitrust laws. We are in the process of making
the required filings with the Department of Justice and the Federal Trade
Commission. However, we are not permitted to complete the merger until the
applicable waiting periods have expired or terminated.
RESTRICTIONS ON THE ABILITY TO SELL CORECOMM STOCK (SEE PAGE 48)
As a condition to closing in the merger agreement, all of MegsINet's
shareholders receiving CoreComm common stock must sign a stockholder agreement
in which they agree not to transfer their CoreComm common stock for one year
after the closing. Other than this restriction, any shares of CoreComm common
stock received by you in connection with the merger will be freely transferable
unless you are considered an "affiliate" of either of us under the Securities
Act of 1933. Shares of CoreComm common stock held by affiliates may only be sold
pursuant to a registration statement or exemption under the Securities Act.
YOU HAVE DISSENTERS' RIGHTS (SEE PAGE 39)
Under Illinois law, if you are a MegsINet shareholder and you comply with
certain requirements of Illinois law, you are entitled to dissenters' rights in
the merger. However, it is a condition of MegsINet's obligation to consum-
6
<PAGE> 16
mate the merger that no MegsINet shareholder exercise dissenter's appraisal
rights.
If you dissent, the fair value of your stock may be determined by a court
and paid to you in cash. To dissent, you must follow certain procedures,
including giving MegsINet certain notices and not voting your shares in favor of
the merger. You will not receive any stock in CoreComm if you dissent and follow
all of the required procedures. Instead, you will only receive the value of your
stock in cash. The relevant sections of Illinois law governing this process are
attached to this document as Annex C.
WHERE YOU CAN FIND MORE INFORMATION (SEE PAGE 91)
If you have any questions about the merger, please call MegsINet at (314)
965-3337 ext. 316. You may also call CoreComm at (212) 906-8485.
FORWARD LOOKING STATEMENTS IN THIS PROXY STATEMENT-PROSPECTUS (SEE PAGE 93)
This proxy statement-prospectus and the documents incorporated by reference
into this proxy statement-prospectus contain forward-looking statements within
the "safe harbor" provisions of the Private Securities Litigation Reform Act of
1995 with respect to CoreComm's and MegsINet's financial condition, results of
operations and business and on the expected impact of the merger on CoreComm's
financial performance. Words such as "anticipates," "expects," "intends,"
"plans," "believes," "seeks," "estimates" and similar expressions identify
forward-looking statements. These forward-looking statements are not guarantees
of future performance and are subject to risks and uncertainties that could
cause actual results to differ materially from the results contemplated by the
forward-looking statements. In evaluating the merger, you should carefully
consider the discussion of risks and uncertainties in the section entitled "Risk
Factors" on page 14 of this proxy statement-prospectus.
7
<PAGE> 17
CORECOMM
SELECTED HISTORICAL FINANCIAL DATA
The following selected financial data of CoreComm and its predecessor, OCOM
Corporation Telecoms Division (OCOM) should be read in conjunction with the
historical financial statements and notes thereto included in CoreComm's Form
10-K which is incorporated by reference into this proxy statement-prospectus.
The selected historical financial data relates to OCOM as it was operated prior
to its acquisition by CoreComm.
<TABLE>
<CAPTION>
THE PREDECESSOR (OCOM)
FOR THE PERIOD FROM -------------------------------------------------------
APRIL 1, 1998 FOR THE PERIOD
(DATE OPERATIONS FROM YEAR ENDED DECEMBER 31,
COMMENCED) TO JANUARY 1, 1998 -------------------------------------
DECEMBER 31, 1998(1) TO MAY 31, 1998 1997 1996 1995(2) 1994
-------------------- --------------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues................ $ 6,713 $ 1,452 $ 3,579 $ 5,103 $ 4,001 $ 3,690
Operating expenses...... 25,139 4,234 7,954 6,333 8,413 2,987
Net income (loss)....... (16,255) (2,782) (4,379) (1,097) (4,154) 1,048
Net income (loss) per
common share:
Basic................. (1.23) (.21) (.33) (.08) (.38) .11
Diluted............... (1.23) (.21) (.33) (.08) (.38) .10
Weighted average number
of common shares(3):
Basic................. 13,190 13,183 13,075 13,196 11,070 9,867
Diluted............... 13,190 13,183 13,075 13,196 11,070 10,161
THE PREDECESSOR (OCOM)
DECEMBER 31,
DECEMBER 31, ---------------------------------------------
1998(1) 1997 1996 1995 1994
-------------------- --------------- ------- ------- -------
BALANCE SHEET DATA:
Working capital......... $133,899 $ (950) $ (490) $ (42) $ 148
Fixed assets -- net..... 3,582 1,269 270 226 172
Total assets............ 176,526 1,731 917 1,020 670
Noncurrent
liabilities........... 501 -- -- -- --
Shareholders' equity.... 169,297 -- -- -- --
Parent's investment..... -- 321 (208) (207) 353
</TABLE>
- -------------------------
(1) During the period from April 1, 1998 (date operations commenced) to December
31, 1998, CCPR made the following contributions to CoreComm prior to the
Spin-off: (a) a cash contribution of $150 million, (b) a contribution of
businesses acquired by CCPR in April and June 1998 and (c) the contribution
of the subsidiary that owns various LMDS licenses in Ohio that were acquired
for an aggregate of $25,241,000. Revenues and expenses of CoreComm increased
in the period from April 1, 1998 (date operations commenced) to December 31,
1998 when compared to the revenues and expenses of OCOM for the year ended
December 31, 1997
8
<PAGE> 18
due to the increase in OCOM expenses subsequent to its acquisition by CoreComm
and the consolidation of the results of operations of the acquired businesses.
(2) OCOM incurred one-time costs of $2,294,000 in 1995 in connection with the
expansion of its cellular long distance resale business into certain AT&T
Wireless markets.
(3) The weighted average number of common shares are equivalent to CCPR's
historical weighted average shares on a one-for-one basis, plus CoreComm's
weighted average shares in the 1998 period.
CoreComm has never declared or paid any cash dividends.
9
<PAGE> 19
MEGSINET
SELECTED HISTORICAL FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The selected historical financial data of MegsINet have been derived from
the audited historical consolidated financial statements of MegsINet for the
year ended December 31, 1998, the audited historical balance sheet as of
December 31, 1997, and the unaudited historical statement of operations for the
year ended December 31, 1997. The historical information is only a summary and
you should read it in conjunction with the financial statements of MegsINet. See
pages F-1 through F-14.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1998 1997
-------- -------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA(1):
Total revenues.......................................... $ 4,172 $1,605
Income (loss) from operations........................... (4,516) $ (604)
Net income (loss)....................................... (5,175) $ (731)
Net income (loss) per share basic and diluted........... $ (0.58) $(0.12)
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------
1998 1997
------- ------
<S> <C> <C>
BALANCE SHEET DATA:
Total assets............................................ $28,418 $1,839
Equipment payable....................................... $ 9,964 $ 0.0
Short-term debt and current capital lease obligations... $ 6,010 $ 529
Long-term debt and capital lease obligations............ $12,040 $1,013
Shareholders' equity.................................... $(2,088) $ (128)
</TABLE>
(1) Statement of Operations data is unaudited for the year ended December 31,
1997.
MegsINet has never declared or paid any cash dividends.
10
<PAGE> 20
CORECOMM LIMITED
SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table sets forth the pro forma financial data as of December
31, 1998 and for the year then ended giving effect to CoreComm's acquisitions
completed in 1998 and to the proposed acquisition of MegsINet. This information
should be read in conjunction with the pro forma condensed consolidated
financial data included herein.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1998
------------
<S> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.................................................... $ 15,671
(Loss) from operations...................................... (26,156)
Net income (loss)........................................... (24,644)
Net income (loss) per share basic and diluted............... (1.68)
</TABLE>
<TABLE>
<CAPTION>
AS OF
DECEMBER 31,
1998
------------
<S> <C>
BALANCE SHEET DATA:
Working capital............................................. $104,799
Fixed assets -- net......................................... 30,384
Total assets................................................ 241,908
Non-current liabilities..................................... 12,542
Shareholders' equity........................................ 204,173
</TABLE>
11
<PAGE> 21
UNAUDITED COMPARATIVE PER SHARE INFORMATION
We have summarized below the per share information for our respective
companies on a pro forma combined and per share equivalent historical basis. The
MegsINet Per Share Equivalents are calculated by multiplying the Pro Forma
Combined per share amounts by 0.21, the exchange ratio. The calculations assume
that 50% of the purchase price is paid in cash at $2.50 per share and 50% of the
purchase price is paid in CoreComm common stock at a fixed exchange ratio of
0.21. The pro forma per share data of CoreComm is presented to give effect to
the merger.
<TABLE>
<CAPTION>
AS OF OR FOR THE YEAR ENDED
DECEMBER 31,
--------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Pro Forma combined:
Net (loss) per common share................... $ (1.68)
Book value per common share................... $ 13.95
MegsINet Per Share Equivalents:
Net (loss) per common share................... $ (0.35)
Book value per common share................... $ 2.93
MegsINet -- Historical:
Net income (loss) per common share............ $ (0.58) $ (0.12)
Book value (deficiency) per common share...... $ (0.18) $ (0.02)
CoreComm and its predecessor OCOM --
Historical:
Net (loss) per common share................... $ (1.23) $ (0.33) $ (0.08)
Book value (deficiency) per common share...... $ 12.83 $ 0.02 $ (0.02)
</TABLE>
12
<PAGE> 22
COMPARATIVE MARKET PRICE INFORMATION
CoreComm common stock is traded on the Nasdaq National Market under the
symbol "COMMF." MegsINet common stock is not traded publicly.
The following table sets forth historical trading information for CoreComm
common stock on the first trading day of each month since October 1998 including
the price of CoreComm common stock the last full trading day prior to the
printing of this proxy statement-prospectus.
<TABLE>
<CAPTION>
CORECOMM
COMMON STOCK
CLOSING PRICE
-------------
<S> <C>
October 1, 1998.................................. $10.63
November 2, 1998................................. $12.50
December 1, 1998................................. $14.75
January 4, 1999.................................. $16.38
February 1, 1999................................. $22.50
March 1, 1999.................................... $39.13
March 19, 1999................................... $35.19
</TABLE>
Because the market price of CoreComm common stock may increase or decrease
before the completion of the merger, you are urged to obtain current market
quotations.
13
<PAGE> 23
RISK FACTORS
By voting in favor of the merger, you will be choosing to invest in
CoreComm common stock. An investment in CoreComm common stock involves a high
degree of risk. In addition to the other information contained in or
incorporated by reference into this proxy statement-prospectus, you should
carefully consider the following risk factors in deciding whether to vote for
the merger.
RISK FACTORS RELATING TO THE MERGER BETWEEN CORECOMM AND MEGSINET
TO THE EXTENT YOU RECEIVE CORECOMM COMMON STOCK YOU WILL RECEIVE 0.21 OF A SHARE
OF CORECOMM COMMON STOCK FOR EACH SHARE OF MEGSINET STOCK DESPITE CHANGES IN
MARKET VALUE.
Upon completion of the merger, for those of you who receive CoreComm common
stock as all or part of the consideration for your shares of MegsINet common
stock, each share of MegsINet common stock will be exchanged for 0.21 of a share
of CoreComm common stock. There will be no adjustment for changes in the value
of MegsINet common stock or changes in the market price of CoreComm common
stock, and MegsINet is not permitted to "walk away" from the merger or resolicit
the vote of its shareholders because of changes in the market price of CoreComm
common stock. Accordingly, the specific dollar value of CoreComm common stock to
be received by you upon completion of the merger will depend on the market value
of CoreComm common stock at the time of completion of the merger.
ALTHOUGH CORECOMM AND MEGSINET EXPECT THAT THE MERGER WILL RESULT IN BENEFITS,
THOSE BENEFITS MAY NOT BE REALIZED.
CoreComm and MegsINet entered into the merger agreement expecting that the
merger will result in benefits including strengthening our positions in the
provision of both Internet and telephone services and creating the opportunity
for potential cost savings. Achieving the benefits of the merger will depend in
part on integrating our technology, operations and personnel in a timely and
efficient manner to minimize the risk that the merger will result in the loss of
customers or key employees or the continued diversion of the attention of
management. Another challenge is to demonstrate to our customers that the merger
will not result in adverse changes in client service standards or business focus
and persuade our personnel that our business cultures are compatible. There can
be no assurance that CoreComm and MegsINet can be successfully integrated or
that any of the anticipated benefits will be realized, and failure to do so
could have a material adverse effect on CoreComm's business, financial condition
and operating results.
MEGSINET'S OFFICERS AND DIRECTORS HAVE CONFLICTS OF INTEREST THAT MAY INFLUENCE
THEM TO SUPPORT OR APPROVE THE MERGER.
The directors and officers of MegsINet participate in arrangements that
provide them with interests in the merger that are different from, or are in
addition to, yours.
In particular, Michael Henry, Brian Clark and Scott Widham have employment
contracts with MegsINet that CoreComm has agreed to honor after the merger. As a
result, these directors and officers could have been more likely to support the
merger agreement than if they did not have these contracts. Each has already
signed an agreement
14
<PAGE> 24
to vote in favor of the merger. MegsINet shareholders should consider whether
these interests may have influenced these directors and officers to support or
recommend the merger.
FAILURE TO COMPLETE THE MERGER COULD NEGATIVELY IMPACT MEGSINET'S FUTURE
BUSINESS AND OPERATIONS.
If the merger is not completed for any reason, MegsINet may be subject to a
number of material risks, including the following:
- MegsINet may be required to pay CoreComm a termination fee of $1.5
million
- costs related to the merger, such as legal and accounting fees, must be
paid even if the merger is not completed
In addition, MegsINet's customers may, in response to the announcement of
the merger, delay or defer decisions to continue or renew using MegsINet's
service in part because CoreComm has less history as an Internet service
provider. Any delay or deferral in purchasing decisions by MegsINet customers
could have a material adverse effect on MegsINet's business, regardless of
whether or not the merger is ultimately completed. Similarly, current and
prospective MegsINet employees may experience uncertainty about their future
role with CoreComm until CoreComm's strategies with regard to MegsINet are
announced or executed. This may adversely affect MegsINet's ability to attract
and retain key management, marketing and technical personnel.
Further, if the merger is terminated and MegsINet's board of directors
determines to seek another merger or business combination, there can be no
assurance that it will be able to find a partner willing to pay an equivalent or
more attractive price than that which CoreComm has agreed to pay. In addition,
while the merger agreement is in effect, subject to certain limited exceptions
described on page 43 of this proxy statement-prospectus, MegsINet is prohibited
from soliciting, initiating or knowingly encouraging or entering into certain
extraordinary transactions, such as a merger, sale of assets or other business
combination, with any party other than CoreComm.
Finally, MegsINet's management has focused much of its attention to the
merger and has made certain assumptions with regard to future operations,
including how immediate capital needs will be met. If the merger is not
completed, MegsINet will immediately have to find alternate financing and
develop new strategic plans to continue without the anticipated resources of
CoreComm. MegsINet cannot assure that it would be able to obtain the necessary
financing or develop new plans.
CORECOMM'S ANTI-TAKEOVER DEFENSE PROVISIONS MAY DETER POTENTIAL ACQUIRORS OF
CORECOMM AND MAY DEPRESS ITS STOCK PRICE.
CoreComm's memorandum of association and by-laws contain provisions that
could have the effect of making it more difficult for a third party to acquire,
or of discouraging a third party from attempting to acquire, control of
CoreComm. These provisions include the following:
- CoreComm may issue preferred stock with rights senior to those of its
common stock
- CoreComm has a classified board of directors
- CoreComm's by-laws prohibit action by written consent by shareholders
15
<PAGE> 25
- CoreComm requires advance notice for nomination of directors and for
shareholder proposals
In addition, under CoreComm's shareholder rights plan, holders of CoreComm
common stock are entitled to one preferred share purchase right for each
outstanding share of common stock they hold, exercisable under certain defined
circumstances involving a potential change of control, as discussed on page 83
of this proxy statement-prospectus. The preferred share purchase rights have the
anti-takeover effect of causing substantial dilution to a person or group that
attempts to acquire CoreComm on terms not approved by CoreComm's board of
directors. The foregoing provisions could have a material adverse effect on the
premium that potential acquirors might be willing to pay in an acquisition or
that investors might be willing to pay in the future for shares of CoreComm
common stock.
RISK FACTORS RELATING TO CORECOMM'S BUSINESSES
THUS FAR WE HAVE HAD MOSTLY NEW OR LIMITED OPERATIONS SINCE OUR FORMATION IN
1998.
Aside from our cellular long distance business, which has been operating
for eight years, we have only recently begun managing our other businesses:
- "Competitive Local Exchange Carrier" or "CLEC" service, which is local
phone service that competes with the older, established regional phone
companies such as Ameritech or Bell Atlantic
- "Local Multipoint Distribution Service" or "LMDS", which is a wireless
system for delivery of multiple telecommunications and television
services
- Landline long distance service
- Paging service
- Centrex service which is centralized telecommunications for office
buildings
- Cellular telephone service, including prepaid cellular telephone service
- Internet Service Provider Business
We have only recently begun to develop the requisite staff and plans
necessary to effectively manage and operate these businesses. Therefore,
historical financial information reflects that we are in the early growth stage
of our development and may make it more difficult for you to evaluate our
performance. You should be aware of the difficulties encountered by enterprises
in development, like us, especially in view of the highly competitive nature of
the telecommunications industry.
BECAUSE WE WERE SPUN-OFF FROM ANOTHER COMPANY LESS THAN 1 YEAR AGO, WE DO NOT
HAVE MUCH HISTORY OPERATING AS AN INDEPENDENT PUBLIC COMPANY, WHICH MEANS THAT
FUTURE OPERATING RESULTS MAY DIFFER FROM THOSE PRESENTED HERE.
We were formed from various, separate previously owned subsidiaries of
another company, Cellular Communications of Puerto Rico, Inc. ("CCPR"), as well
as some other independent businesses, and have less than 1 year's worth of
operating history as an independent public company. Accordingly, you should be
aware that the financial statements included with this prospectus may not
necessarily reflect the results of operations, financial condition and cash
flows that would have been achieved had we been operating as an independent
company during the periods presented.
16
<PAGE> 26
Our future results of operations will also depend upon a number of factors
and events, including the following:
- the level of demand for our various cellular services, as well as the
services being acquired from MegsINet, assuming completion of the
transaction
- the substantial competition we encounter in all of our businesses
- future unforeseen changes in the regulations that govern our businesses;
and
- the ongoing costs associated with our transition to an independent public
company
OUR LIQUIDITY AND CAPITAL RESOURCES ARE LIMITED AND WE WILL NEED TO RAISE MORE
MONEY IN THE FUTURE TO DEVELOP AND EXPAND OUR EXISTING BUSINESSES.
We will require significant capital resources to develop and expand our
existing businesses and licenses, acquire or develop additional
telecommunications-related business, and fund near term operating losses. Thus
far, we have paid for our near term capital expenses, operating losses and
working capital requirements with a $150,000,000 capital contribution in cash
which we received from CCPR prior to our being spun-off last September. Longer
term, it is likely that we will need to raise additional money to fully
implement our goals.
Our existing businesses that resell services provided by larger,
facilities-based companies, will require additional money to acquire new
customers and to finance the spending required to support these new customers.
These businesses will also require additional billing, customer service and
other back-office expenditures. Our planned Smart LEC network, described on
pages 51 through 52, will also require large amounts of capital to build and
maintain, which will include building through acquisitions.
We are not certain of the amount of the development costs of our LMDS
services. We anticipate, however, that the costs will be several times the $25
million paid for the LMDS licenses, which we purchased through a government
auction last year. We are uncertain about these costs because LMDS is a new
technology, and there have not yet been enough companies creating LMDS networks
for there to be a standard for costs of equipment, such as transmitters needed
to broadcast television signals to homes and receivers placed in the home to
receive the broadcasts.
WE FACE HEAVY COMPETITION IN THE TELECOMMUNICATIONS INDUSTRY FOR ALL OF THE
SERVICES WE CURRENTLY PROVIDE AND THOSE WE INTEND TO PROVIDE IN THE FUTURE.
The telecommunications industry and all of its segments are highly
competitive. Our CLEC business, which is in the development stage, will operate
in this highly competitive environment. We expect that competition will continue
to intensify in the future due to the increase in the size, resources and number
of market participants. In each of its markets, we face competition from larger,
better capitalized incumbent local exchange carriers ("ILEC"), including:
Ameritech, Bell Atlantic and GTE.
We also face competition or prospective competition from one or more CLECs,
many of which have significantly greater financial resources. For example, AT&T,
MCI WorldCom and Sprint, among other carriers, have begun to offer local
telecommunications services in major U.S. markets using their own facilities or
by resale of the ILECs or other providers' services. In fact, certain
competitors, including AT&T, MCI WorldCom and Sprint, have entered into
interconnection agreements with Ameritech to provide local exchange service in
Michigan and Ohio, where we currently operate.
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In addition to these long distance carriers, entities that currently offer
or are potentially capable of offering switched services include:
- other CLECs
- cable television companies
- electric utilities
- other long distance carriers
- microwave carriers
- wireless telephone system operators
- large customers who build private networks
Many facilities-based CLECs and long distance carriers, for example, have
committed substantial resources to building their networks or to purchasing
CLECs or IXCs with complementary facilities. By building or purchasing a network
or entering into interconnection agreements or resale agreements with ILECs,
including Regional Bell Operating Companies ("RBOCs"), a facilities-based
provider can offer single source local and long distance services similar to
those offered by CoreComm. Such additional alternatives may provide such
competitors with greater flexibility and a lower cost structure than ours. In
addition, some of these CLECs and other facilities-based providers of local
exchange service are acquiring or being acquired by IXCs. Any of these combined
entities may have resources far greater than those of CoreComm. These combined
entities may provide a bundled package of telecommunications products, including
local and long distance telephony, that is in direct competition with the
products offered or planned to be offered by CoreComm.
Our planned LMDS Business will compete with franchised cable television
systems and also may face competition from several other sources such as:
- Multichannel Multipoint Distribution Systems
- Satellite Master Antenna Television Systems
- Direct Broadcast Satellite ("DBS") and other television receive-only
satellite dishes
- video service from telephone companies
Moreover, the Telecommunications Act relaxed the regulatory barriers to
entry by ILECs into the provision of video programming in their local telephone
service areas, and it substantially reduces current and future regulatory
burdens on franchised cable television systems, thus potentially resulting in
significant additional competition from local telephone companies and franchised
cable television systems.
Pay television operators face competition from other sources of
entertainment, such as movie theaters and computer on-line (including Internet)
services. Further, premium movie services offered by cable television systems
have encountered significant competition from the home video industry. In areas
where several off-air television broadcasts can be received without the benefit
of cable television, cable television systems have experienced competition from
such broadcasters.
We also face strong competition in our other businesses, including from
other IXCs (facilities-based carriers, including AT&T, MCI Worldcom and Sprint,
as well as resellers), other paging carriers (operating in the same local
markets, regionally or nationally), other providers of Centrex Service and
multiline business telecommunications
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equipment (including private branch exchanges ("PBX")), and other cellular and
personal communications service ("PCS") carriers.
Some of the present competitors and potential future competitors of
CoreComm may have greater financial, technical, marketing or personnel resources
than CoreComm. The competitive environment could have a variety of adverse
effects on CoreComm. For example, it could:
- require price reductions in the fees for services and require increased
spending on marketing, network capacity and product development
- negatively impact CoreComm's ability to generate greater revenues and
profits from sources other than our core local telephone, cellular and
Internet service businesses
- limit CoreComm's ability to develop new products and services
- limit CoreComm's ability to continue to grow its subscriber base
- result in attrition in CoreComm's subscriber base
Any of the foregoing events could have an adverse impact on revenues or
result in an increase in costs as a percentage of revenues, either of which
could have a material adverse effect on CoreComm's business, financial condition
and operating results.
OUR PLANNED LMDS SYSTEM INVOLVES NEW AND LARGELY UNTESTED TECHNOLOGY, SO THERE
IS A RISK THAT UNANTICIPATED TECHNICAL PROBLEMS WILL CAUSE THIS BUSINESS TO LOSE
MONEY FOR US.
Our planned LMDS broadband wireless telecommunications system uses new
technology with a limited operating history whose system architecture remains
subject to further development and refinement. In the past, other companies
using LMDS have experienced technical difficulties, some of which have affected
subscriber acceptance of their systems. Additional technical issues may arise in
the course of system deployment that could adversely affect reception quality
and our ability to cover different service areas. In addition, we believe that a
significant percentage of the households in our LMDS markets will be located in
"shadowed" areas capable of receiving the transmitted signal only with the
assistance of small, low cost "repeaters," which we may deploy. We would only
deploy repeaters where their deployment is economically justifiable. Two-Way
Services that we may launch will require the development and mass production of
special equipment. We cannot be sure that the equipment needed for two-way
services will become commercially available at an acceptable cost. You should
also be aware that our ability to support high service volumes will be limited
to the technology involved in LMDS, including limited available bandwidth.
ALTHOUGH WE HAVE A LICENSE TO USE THE CELLULAR-ONE(R) BRAND NAME FOR OUR
CELLULAR SERVICES, THERE IS A POSSIBILITY WE MAY LOSE OUR RIGHT TO USE THAT
BRAND NAME IN THE FUTURE.
We have a license for the use of the service mark and trademark CELLULAR
ONE(R) in Ohio and Michigan. Cellular One(R) is also licensed to many of the
non-wireline cellular systems in the United States. In 1997, the owners of the
Cellular One(R) mark entered into a new agreement with our predecessor, with an
effective thirteen-year term. Under the Cellular One(R) Agreement, we must
maintain service quality standards and pay licensing and other fees for the use
of the service mark. We believe that the use of the nationally recognized
Cellular One(R) brand name assists in attracting and retaining
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customers in our markets. If we lost our right to use the Cellular One(R) mark
and had to adopt a new brand name, we could encounter significant challenges in
marketing our services under the new brand name. We would have to make large
advertising and promotional expenditures to position a new brand name in our
regional and local markets. We cannot predict the extent of expenditures that
would be necessary to implement a new brand. We also cannot predict with
certainty the extent to which the substitution of a new brand name may adversely
affect our retention and acquisition of customers, our access to distribution
channels or our financial performance.
Although we anticipate that we will continue to have use of the
CellularOne(R) mark, there is no guarantee that it will remain available after
the expiration of our existing agreement. Moreover, it is possible that we will
cease to meet the service quality standards required to maintain use of the
mark.
WE ARE DEPENDENT ON RELATIONSHIPS WITH FACILITIES-BASED PROVIDERS OF
TELECOMMUNICATIONS SERVICES BECAUSE WE PRESENTLY DO NOT OWN OUR OWN FACILITIES,
AND THUS WE RUN THE RISK OF ADVERSE FUTURE CHANGES IN THE TERMS ON WHICH WE
OBTAIN THEIR SERVICES FOR RESALE.
Although we are building our own "Smart LEC" network, which is described at
pages 51 through 52, we currently do not own any part of a local exchange
network or a long distance network which are the types of facilities needed to
operate our telephone services. As a result, we depend entirely on
facilities-based carriers for our various resale-based services, and we have
entered into resale agreements with various carriers. Although we believe that
our relationships with these carriers are good, the termination of any of our
contracts with our carriers or a reduction in the quality or increase in cost of
their services could have a material adverse effect on our financial condition
and results of operations. In addition, the accurate and prompt billing of our
customers is dependent upon the timeliness and accuracy of call detail records
provided by the carriers whose services we resell. We cannot be sure that our
current carriers will continue to provide, or that new carriers will provide,
accurate information on a timely basis. A carrier's failure to do so could have
a material adverse effect on our financial condition and results of operations.
In addition the following conditions of the facilities-based carriers could
cause interruption in service and/or reduced capacity for our customers:
- physical damage
- power loss
- software defects (including the inability to update their systems to be
Year 2000 compliant)
In the event that our long distance carriers are unable to handle the growth in
customer usage, we could transfer traffic to a carrier that had sufficient
capacity, but we cannot be sure that additional capacity will be available. If
any of the local exchange carriers is unable to handle the growth in customer
usage, then we would be required to use another local carrier, which could be
difficult in light of the limited number of local carriers with their own
facilities. In the event we otherwise elect to use other carriers, the charges
for services may exceed those under the existing contracts, which could have a
material adverse effect on our financial condition and results of operations.
See the section entitled "Business of CoreComm" beginning on page 50.
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CUSTOMERS MAY NOT ACCEPT OUR PLANNED SERVICES.
The success of our business strategy will depend upon consumer acceptance
of our planned offerings, most of which are in their early stages of deployment
or are only in the planning stage. Subscriber acceptance could be hurt by
customer loyalty to more established competitors and unfamiliarity with
CoreComm. In addition, we cannot be sure that technical problems will not impede
or delay subscriber acceptance of our services.
WE DEPEND ON THE SERVICES OF A SMALL NUMBER OF KEY MANAGEMENT PEOPLE WHO HAVE
YEARS OF EXPERIENCE AND SUCCESS IN THE CELLULAR COMMUNICATIONS INDUSTRY.
We believe that our success depends to a significant extent upon the
abilities and continued efforts of our senior management. Our management team
has a proven back record of success with many companies including:
- Cellular Communications, Inc.
- Cellular Communications of Puerto Rico, Inc. (formerly CoreComm
Incorporated)
- Cellular Communications International, Inc.
- NTL Incorporated
The loss of the services of any of these people could have a negative effect
upon our results of operations and financial condition. You should be aware that
the members of senior management are all officers and/or directors of other
companies and that none of these individuals have entered into employment
agreements with us.
OUR OFFICERS AND DIRECTORS FACE POTENTIAL CONFLICTS OF INTEREST BECAUSE THEY ARE
OFFICERS AND DIRECTORS OF OTHER COMPANIES IN OUR INDUSTRY, WHICH COULD IMPEDE
THEIR ABILITY TO MAKE DECISIONS FOR US.
Certain of our officers and directors are also officers and directors of
NTL Incorporated and Cellular Communications of Puerto Rico, Inc., which have
historical ties to us. From time to time, opportunities may arise that would be
pursued by one or more of these companies and CoreComm at the same time. Because
all of our directors are directors of one or both of these other companies,
decisions about these opportunities may result in a conflict of interest. In
those instances, our board of directors will seek to act, with the advice of our
counsel, in a manner consistent with each director's duties to us and our
shareholders under the law.
GOVERNMENT REGULATION.
We are subject to extensive regulation by the FCC and by the public utility
commissions of various states. Changes in statutes, regulations or judicial
interpretations could have material adverse effects on our operations.
WE ARE A BERMUDA COMPANY AND ARE THUS SUBJECT TO THE LAWS OF A FOREIGN COUNTRY
THAT DIFFER FROM THE LAWS OF MOST U.S. STATES.
Our corporate affairs are governed by our memorandum of association and
by-laws and by the laws governing corporations incorporated in Bermuda. The
rights of our shareholders and the responsibilities of members of CoreComm's
board of directors under Bermuda law are different from those applicable to a
corporation incorporated in the United States. For a description of significant
differences between Bermuda and U.S. law, see the section entitled "Comparison
of Rights of Holders of MegsINet Common Stock and Corecomm Common Stock," at
page 73.
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RISK FACTORS RELATING TO MEGSINET'S BUSINESS
AND CORECOMM'S ISP BUSINESS.
THE INTERNET BUSINESS IS HIGHLY COMPETITIVE AND MAY BE UNSUCCESSFUL AGAINST
BIGGER, MORE ESTABLISHED PLAYERS.
The Internet services market is extremely competitive. Our current and
prospective competitors include many large companies that have substantially
greater market presence, financial, technical, marketing and other resources
than either MegsINet or CoreComm has in the area of Internet services. We
compete directly or indirectly with the following categories of companies:
- established online services, such as America Online, the Microsoft
Network and Prodigy
- local, regional and national ISPs, such as MindSpring, Rocky Mountain
Internet and Internet America
- national telecommunications companies, such at AT&T and GTE
- regional Bell operating companies, such as BellSouth and SBC
Communications
- online cable services, such as At Home and Roadrunner.
This competition is likely to increase. We believe this will probably
happen as large diversified telecommunications and media companies acquire ISPs
and as ISPs consolidate into larger, more competitive companies. Diversified
competitors may bundle other services and products with Internet connectivity
services, potentially placing us at a significant competitive disadvantage,
although in the future CoreComm plans to offer bundled services as well. In
addition, competitors may charge less than we do for Internet services, causing
us to reduce (or preventing us from raising) fees. As a result, our businesses
may suffer.
BECAUSE OF THE FAST PACE OF TECHNOLOGICAL CHANGE IN THE INTERNET INDUSTRY, THERE
IS A RISK THAT WE WILL FALL BEHIND IN KEEPING UP WITH CHANGE, WHICH COULD HARM
OUR ABILITY TO COMPETE IN THE ISP BUSINESS.
The Internet services market is characterized by rapidly changing
technology, evolving industry standards, changes in member needs and frequent
new service and product introductions. Our future success depends, in part, on
our ability to use leading technologies effectively, to develop our technical
expertise, to enhance our existing services and to develop new services that
meet changing member needs on a timely and cost-effective basis. In particular,
we must provide subscribers with the appropriate products, services and guidance
to best take advantage of the rapidly evolving Internet. Our failure to respond
in a timely and effective manner to new and evolving technologies (such as those
offering greater bandwidth services, among others) could have a negative impact
on our business and financial results.
Our business may also be affected by problems caused by computer viruses,
security breaches and other inappropriate uses of our network (e.g., email
"spamming"). Alleviating these problems may cause interruptions, delays or
cessation in service to our members, which could cause them to terminate their
membership or assert claims against us.
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THE ISP BUSINESS DEPENDS ON CONTINUED GROWTH OF THE INTERNET AS A MEDIUM OF
COMMUNICATION AND COMMERCE.
Our future success in the ISP business substantially depends on continued
growth in the use of the Internet. Although we believe that Internet usage and
popularity will continue to grow as it has in the past, we cannot be certain
that this growth will continue or that it will continue in its present form. If
Internet usage declines or evolves away from our business, our growth in this
case will slow or stop and our financial results may suffer.
MEGSINET'S INTERNET SERVICE BUSINESS IS DEPENDENT UPON ITS INTERNAL AND LEASED
NETWORK.
Our success depends, in part, on the capacity, reliability and security of
MegsINet's network infrastructure. Network capacity constraints may occur in the
future, both at the level of particular dial-up points of presence, or POPs
(affecting only members attempting to use that particular POP), and in
connection with system-wide services (such as email and news services, which can
affect all members). These capacity constraints would result in slowdowns,
delays or inaccessibility when members try to use a particular service. Poor
network performance could cause members to terminate their membership with us.
To reduce the probability of such problems, we will be required to expand and
improve our infrastructure. Such expansion and improvement could be very costly
and time consuming.
We must also protect our infrastructure against fire, power loss,
telecommunications failure, computer viruses, security breaches and similar
events. We do not currently maintain a redundant or backup network operations
center. A natural disaster or other unanticipated problem at our headquarters
and sole network operations center in Chicago, Illinois, at POPs through which
members connect to the Internet, in the networks of telecommunications carriers
we use, or in the Internet backbone in general could cause interruptions in our
services.
WE ARE DEPENDENT ON TELECOMMUNICATIONS CARRIERS AND OTHER SUPPLIERS.
We rely on telecommunications carriers to transmit our Internet traffic
over local and long distance networks. These networks may experience disruptions
that are not easily remedied. In addition, we depend on certain suppliers of
hardware and software. If our suppliers fail to provide us with network
services, equipment or software in the quantities, at the quality levels or at
the times we require, or if we cannot develop alternative sources of supply, it
will be difficult, if not impossible, for us to provide our services.
ANY DECLINE IN MEGSINET'S MEMBER RETENTION LEVELS OF ITS INTERNET SERVICES MAY
ADVERSELY AFFECT US.
Our new member acquisition costs are substantial relative to the monthly
fees we charge. Accordingly, our long-term success largely depends on our
retention of existing members. While we continue to invest significant resources
in our infrastructure and technical and member support capabilities, it is
relatively easy for Internet users to switch to competing providers. Any
significant loss of members will substantially decrease our revenue and cause
our business to suffer.
OUR INTERNET SERVICES BUSINESS MAY BECOME SUBJECT TO BURDENSOME GOVERNMENT
REGULATION.
We provide Internet services through data transmissions over public
telephone lines and cable television networks. These transmissions are subject
to regulation of the Federal
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Communications Commission and state public utility commissions. These
regulations affect the prices we pay for transmission services, the competition
we face from telecommunications services and other aspects of our market. As an
Internet access provider, we are not subject to direct regulation by the FCC or
any other governmental agency, other than regulations applicable to businesses
generally. However, we could become subject to FCC or other regulatory agency
regulation, especially as Internet services and telecommunications services
converge. Changes in the regulatory environment could decrease our revenues,
increase our costs and affect our service offerings.
There have been various regulations and court cases relating to liability
of ISPs and other on-line service providers for information carried on or
through their services or equipment, including in the areas of copyright,
indecency, obscenity, defamation and fraud. The United States Supreme Court
declared the Communications Decency Act of 1996 to be unconstitutional as it
applies to the transmission of indecent on-line communications to minors, and a
lower court declared the 1998 Federal Child Online Protection Act to be
unconstitutional. Other federal and state statutes continue to prohibit the
on-line distribution of obscene materials. The law in this area is unsettled and
there may be new legislation and court decisions that expose ISPs such as
MegsINet to liabilities or affect their services.
Additional laws and regulations may be adopted with respect to the
Internet, covering issues such as Universal Service Fund support payments,
content, user privacy, pricing, libel, obscene material, indecency, gambling,
intellectual property protection and infringement and technology export and
other controls. Other federal Internet-related legislation has been introduced
which may limit commerce and discourse on the Internet. The FCC recently ruled
that ISPs are enhanced service providers, calls to ISPs are jurisdictionally
interstate, and ISPs should not pay access charges applicable to
telecommunications carriers. The FCC is examining inter-carrier compensation for
calls to ISPs, which could affect ISPs' costs.
This proxy statement-prospectus and the documents incorporated by reference
into this proxy statement-prospectus contain forward-looking statements within
the "safe harbor" provisions of the Private Securities Litigation Reform Act of
1995 with respect to our financial condition, results of operations and
business, and on the expected impact of the merger on CoreComm's financial
performance. Words such as "anticipates," "expects," "intends," "plans,"
"believes," "seeks," "estimates" and similar expressions identify
forward-looking statements. These forward-looking statements are not guarantees
of future performance and are subject to risks and uncertainties that could
cause actual results to differ materially from the results contemplated by the
forward-looking statements. In evaluating the merger, you should carefully
consider the above discussion of risks and uncertainties.
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THE SPECIAL MEETING OF MEGSINET SHAREHOLDERS
PROXY STATEMENT-PROSPECTUS
This proxy statement-prospectus is being furnished to you in connection
with the solicitation of proxies by MegsINet's board of directors in connection
with our proposed merger.
This proxy statement-prospectus is first being furnished to shareholders of
MegsINet on or about , 1999.
DATE, TIME AND PLACE OF THE SPECIAL MEETING
The special meeting of shareholders of MegsINet will take place at the
Chicago Athletic Association, 12 South Michigan Avenue, Chicago, Illinois and
will be scheduled as follows:
PURPOSE OF THE SPECIAL MEETING
The special meeting is being held so that shareholders of MegsINet may
consider and vote upon a proposal to adopt the Agreement and Plan of Merger,
dated as of February 17, 1999, by and among CoreComm, CoreComm Acquisition Sub,
Inc. ("Sub"), a newly-formed and wholly-owned subsidiary of CoreComm, and
MegsINet. The shareholders may also transact other business that properly comes
before the special meeting or any adjournment. Adoption of the merger agreement
will also constitute approval of the merger and the other transactions
contemplated by the merger agreement.
If the shareholders of MegsINet adopt the merger agreement, MegsINet will
merge with and into Sub and Sub will survive the merger as a wholly-owned
subsidiary of CoreComm. You may elect to receive 0.21 of a share of CoreComm
common stock for each share of MegsINet common stock you hold, or you may elect
to receive $2.50 for each share of MegsINet common stock you own, or you may
elect a combination of cash and CoreComm's common stock. No matter which
election you choose, a small portion of your shares will be used to cover your
pro-rata share of the transaction expense, as described on page 33. Also, the
amount of cash and stock you actually receive may differ from what you elect
depending on how much cash and stock other MegsINet shareholders elect because
CoreComm has agreed to pay a fixed amount of cash and stock for all of
MegsINet's shares. Thus, if enough of MegsINet's shareholders collectively elect
to exchange their shares for more than the fixed amount of cash, then each
shareholder's allocation of cash will be proportionately reduced so that the
total paid is equal to the maximum cash amount, which is approximately $16.75
million. Similarly, the same will be done if enough of MegsINet's shareholders
collectively elect more than the fixed amount of CoreComm stock which is
1,407,066 shares, in which case each shareholders' allocation of stock will be
proportionately reduced.
SHAREHOLDER RECORD DATE FOR THE SPECIAL MEETING
MegsINet's board of directors has fixed the close of business on
, 1999, as the record date for determination of MegsINet
shareholders entitled to notice of and entitled to vote at the special meeting.
On the record date, there were:
10,200,632 shares of MegsINet common stock outstanding;
1,200 shares of 1998A Series Preferred Stock outstanding; and
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2,000,000 shares of 1999A Series Preferred Stock outstanding
held by approximately 93 holders of record.
VOTE OF MEGSINET SHAREHOLDERS REQUIRED FOR ADOPTION OF THE MERGER AGREEMENT
Prior to holding the vote to adopt the merger agreement, MegsINet is
obligated, under that agreement, to obtain a vote from its shareholders to amend
its articles of incorporation to reduce from 66.67% to a simple majority the
number of MegsINet shares required to be voted affirmatively to adopt the merger
agreement. A sufficient number of shareholders have agreed in advance to adopt
the reduced voting requirement so that it will be done prior to the special
meeting.
A majority of the outstanding shares of MegsINet common stock, 60% of the
outstanding shares of 1998A Series Preferred Stock and a majority of the
outstanding shares of 1999A Series Preferred Stock entitled to vote at the
special meeting must be represented, either in person or by proxy, to constitute
a quorum at the special meeting. Assuming the adoption of the amendment to
MegsINet's articles reducing the vote requirement, the affirmative vote of the
holders of at least:
(A) a majority of MegsINet's common stock (including the holders of 1999A
Series Preferred Stock, which are entitled to vote as if their stock
were converted into common stock) and
(B) 60% of MegsINet's 1998A Series Preferred Stock
outstanding and entitled to vote at the special meeting is required to adopt the
merger agreement. You are entitled to one vote for each share of MegsINet common
stock or preferred stock held by you on the record date on each proposal to be
presented to shareholders at the special meeting.
The MegsINet shareholders who are parties to irrevocable proxies with
CoreComm or who have otherwise agreed to vote their shares of MegsINet common
stock in favor of the adoption of the merger agreement held approximately
6,108,091 shares of MegsINet common stock (or preferred equivalents) which
represents approximately 51% of all outstanding shares of MegsINet common stock
entitled to vote at the special meeting as of March 22, 1999. In addition, the
1998A Series Preferred Shareholders are party to an agreement that assures that
they vote in favor of the merger. Accordingly, the affirmative vote required to
adopt the merger agreement has effectively been obtained.
As of March 22, 1999, directors and executive officers of MegsINet
beneficially owned approximately 2,560,260 shares of MegsINet common stock
entitled to vote at the special meeting which represented approximately 25.1% of
all outstanding shares of MegsINet common stock.
PROXIES
All shares of MegsINet common stock represented by properly executed
proxies received before or at the special meeting will, unless the proxies are
revoked, be voted in accordance with the instructions indicated thereon. If no
instructions are indicated on a properly executed proxy, the shares will be
voted FOR adoption of the merger agreement. You are urged to mark the box on the
proxy to indicate how to vote your shares.
If a properly executed proxy is returned and the shareholder has abstained
from voting on adoption of the merger agreement, the MegsINet common stock
represented by the proxy will be considered present at the special meeting for
purposes of determining a
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quorum and for purposes of calculating the vote, but will not be considered to
have been voted in favor of adoption of the merger agreement. Abstentions and
failures to vote will have the same effect as a vote against adoption of the
merger agreement.
MegsINet does not expect that any matter other than adoption of the merger
agreement will be brought before the special meeting. If, however, other matters
are properly presented, the persons named as proxies will vote in accordance
with their judgment with respect to those matters, unless authority to do so is
withheld in the proxy.
You may revoke your proxy at any time before it is voted by:
- notifying in writing the Secretary of MegsINet at 225 West Ohio Street,
Suite 400, Chicago, Illinois 60610.
- granting a subsequent proxy
- appearing in person and voting at the special meeting. Attendance at the
special meeting will not in and of itself constitute revocation of a
proxy
We will equally share the expenses incurred in connection with the printing
and mailing of this proxy statement-prospectus. MegsINet has retained D.F. King
& Co., Inc. at an estimated cost of $[--] plus reimbursement of expenses, to
assist in the solicitation of proxies.
You should not send in any stock certificates with your proxies. A
transmittal form with instructions for the surrender of stock certificates for
MegsINet common stock will be mailed to you as soon as practicable after
completion of the merger.
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THE MERGER
This section of the proxy statement-prospectus describes material aspects
of the proposed merger, including the merger agreement and the irrevocable
proxies. While we believe that the description covers the material terms of the
merger and the related transactions, this summary may not contain all of the
information that is important to you. You should read this entire document and
the other documents we refer to carefully for a more complete understanding of
the merger.
BACKGROUND OF THE MERGER
In February 1998, Albert Schneider of Schneider & Associates, a consultant
for CoreComm, met with Mitchell Marks, a consultant for MegsINet, where Mr.
Schneider discussed CoreComm's interest in investing or perhaps acquiring
MegsINet.
On August 13, 1998, further discussions were had between Mr. Schneider and
Mr. Marks regarding a potential investment or an acquisition. Mr. Schneider
learned that MegsINet was preparing to raise funds from outside investors.
On October 4, 1998, Mr. Schneider visited MegsINet's Chicago office and met
with Michael Henry, Chief Executive Officer of MegsINet, to discuss a possible
acquisition of MegsINet by CoreComm. Several weeks later, Mr. Schneider met with
Brian Clark, Chief Financial Officer of MegsINet, and Scott Widham, Executive
Vice President of MegsINet, to discuss the business of MegsINet.
In the middle of November 1998, Patty Flynt, Senior Vice President and
Chief Operating Officer of CoreComm, R.J. Walker, a CoreComm engineer, Hamid
Heidary, Vice President, Director of Networks at CoreComm, and Mr. Schneider met
with Mr. Henry and Mr. Widham in Chicago for a tour of MegsINet's facilities.
In late November 1998, Brian Clark and Scott Widham met with Gerald Poch,
Martin Hale, Jr. and Jeffrey Seldon, all principals of Pequot Private Equity
Fund, LP, in their New York office to discuss the possibility of Pequot making a
minority investment in MegsINet.
In early December 1998, Mr. Schneider met with Mr. Henry, Mr. Widham and
Mr. Clark to discuss how to value the potential transaction with CoreComm and
the operational results of MegsINet.
In late December 1998, a term sheet was sent by CoreComm to Mr. Henry
outlining the terms of a proposed acquisition of a majority interest in
MegsINet. Discussions continued by telephone among Mr. Schneider, Mr. Clark and
Mr. Widham.
On December 31, 1998, a meeting was held in Princeton, New Jersey attended
by J. Barclay Knapp, Chief Executive Officer of CoreComm, Michael Peterson,
Director of Corporate Development for CoreComm, Mr. Schneider, Mr. Clark and Mr.
Widham to discuss the potential transaction.
On January 8, 1999, another meeting was held in Chicago with Mr. Henry, Mr.
Clark and Mr. Widham, from MegsINet, and Mr. Knapp and Ms. Flynt on behalf of
CoreComm. A revised transaction to purchase a majority interest in MegsINet was
discussed and tentatively agreed to with the understanding that a term sheet
would be prepared and follow.
Throughout January 1999, different proposals, for either a merger or the
acquisition of a majority interest were discussed. Then on January 10, 1999,
MegsINet signed a letter of
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intent with Pequot whereby Pequot would make a minority investment in MegsINet.
That letter of intent prohibited MegsINet from discussing a merger proposal with
any other party, including CoreComm.
On January 12, 1999, Mr. Knapp and Mr. Schneider met with Gerald Poch, a
principal of Pequot, to discuss potential investments and transactions involving
MegsINet and CoreComm. Pequot agreed to allow CoreComm to continue merger talks
with MegsINet.
On January 26, 1999, CoreComm, represented by its legal counsel, Skadden,
Arps, Slate, Meagher & Flom, LLP, and MegsINet, represented by its legal
counsel, Gallop, Johnson & Neuman, L.C., entered into a letter of intent to
merge.
Following execution of that letter of intent, during the week of February 1
through February 5, 1999, representatives of CoreComm and MegsINet met in
Chicago and St. Louis to conduct due diligence.
On February 12, 1999, CoreComm held a board of directors meeting at which
meeting senior management of CoreComm discussed the proposed merger and the
proposed principal terms and conditions of the transaction. After extensive
discussion regarding the merger proposal, the CoreComm board of directors
unanimously determined that the merger, upon the terms in the merger agreement,
is fair to and in the best interests of CoreComm's shareholders and adopted the
merger agreement.
On February 16, 1999, MegsINet held a board of directors meeting to discuss
the proposed merger and the proposed principal terms of and conditions of the
transactions. The board also discussed in detail its fiduciary duties and
responsibilities to its shareholders. After extensive discussion regarding the
merger proposal, the MegsINet board of directors unanimously determined that the
merger, upon the terms in the merger agreement, is fair to and in the best
interests of MegsINet shareholders, adopted the merger agreement and recommended
that its shareholders vote in favor of the merger.
On February 17, 1999, the parties negotiated the final changes in the
definitive merger agreement, and on that day, the merger agreement and the
related documents were executed.
On February 18, 1999, CoreComm publicly announced the signing of the merger
agreement.
JOINT REASONS FOR THE MERGER
CoreComm's and MegsINet's boards of directors have determined that the
combined company following the merger would have the potential to realize
long-term improved operating and financial results and a stronger competitive
position. CoreComm's and MegsINet's boards of directors have identified
additional potential mutual benefits of the merger that they believe will
contribute to the success of the combined company. These potential benefits
include the following:
- the combined company will have an enhanced ability to sell Internet and
telecommunications services
- the combined company will have an enhanced infrastructure, including the
combination of MegsINet's network and CoreComm's network
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- adding MegsINet to CoreComm will expand the range of CoreComm products
and services by adding world-class technology and an experienced
development team that has demonstrated its ability to innovate rapidly
- the combined company will be able to offer services to a larger combined
base of users
- combining CoreComm and MegsINet may improve network efficiency through
increased scale
MEGSINET'S REASONS FOR THE MERGER
In addition to the anticipated potential joint benefits described above,
MegsINet's board of directors believes that the merger will be beneficial to
MegsINet and its shareholders for the following reasons:
- The merger would result in a larger, more diversified company, better
able to compete effectively in a rapidly changing and increasingly
competitive industry
- The premium to be paid to MegsINet shareholders and the tax-free nature
of the transaction to the extent of stock received by MegsINet
shareholders
- The opportunity for liquidity for holders of MegsINet shares, whether
such holder receives cash or CoreComm shares, which will be listed and
traded on the Nasdaq National Market
- The prospects for positive long-term performance of the CoreComm shares,
balanced with a more active trading market
- The conclusion of MegsINet's board of directors that the merger
consideration was fair, from a financial point of view, to the MegsINet
shareholders
- The MegsINet board's assessment of MegsINet's strategic alternatives to
the merger, including remaining an independent company
In the course of its deliberations, the MegsINet board reviewed with
MegsINet management and outside advisors a number of additional factors relevant
to the merger, including:
- MegsINet's business, financial condition, results of operations and
prospects
- MegsINet management's view as to the financial condition, results of
operations and businesses of CoreComm and MegsINet before and after
giving effect to the merger based on management's due diligence review
and review of publicly available information
- market conditions and historical market prices, volatility and trading
information with respect to CoreComm common stock
- the impact of the merger on MegsINet's customers and employees
- MegsINet's evaluation of other potential strategic relationships
MegsINet's board of directors also identified and considered a variety of
potentially negative factors in its deliberations concerning the merger,
including, but not limited to:
- the risk that the potential benefits sought in the merger might not be
fully realized, including, the possibility that CoreComm's stock might
lose value after the merger
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- the possibility that the merger might not be completed and the effect the
failure to complete the merger would have on MegsINet's business,
including the termination fee
- the risk that despite the efforts of the combined company, key technical
and management personnel might not remain employed by the combined
company
- the difficulty of managing separate operations at different geographic
locations
- the other risks described under "Risk Factors" on page 14 of this proxy
statement-prospectus
MegsINet's board of directors believed that these risks were outweighed by
the potential benefits of the merger.
The foregoing discussion is not exhaustive of all factors considered by
MegsINet's board of directors. Each member of MegsINet's board may have
considered different factors, and MegsINet's board evaluated these factors as a
whole and did not quantify or otherwise assign relative weights to factors
considered.
RECOMMENDATION OF MEGSINET'S BOARD OF DIRECTORS
AFTER CAREFUL CONSIDERATION, YOUR BOARD OF DIRECTORS UNANIMOUSLY DETERMINED
THE MERGER TO BE FAIR TO YOU AND IN YOUR BEST INTERESTS AND DECLARED THE MERGER
ADVISABLE. MEGSINET'S BOARD OF DIRECTORS APPROVED THE MERGER AGREEMENT AND
UNANIMOUSLY RECOMMENDS YOUR ADOPTION OF THE MERGER AGREEMENT.
In considering the recommendation of the MegsINet board of directors with
respect to the merger agreement, you should be aware that certain directors and
officers of MegsINet have certain interests in the merger that are different
from, or are in addition to the interests of MegsINet shareholders generally.
INTERESTS OF CERTAIN MEGSINET DIRECTORS, OFFICERS AND AFFILIATES IN THE MERGER
When considering the MegsINet board's recommendation that you vote in favor
of the merger, you should be aware that certain executive officers of MegsINet,
including some officers who are also directors, have certain interests in the
merger that are different from, or in addition to, yours.
In particular, certain executive officers or directors hold shares and
stock options of MegsINet, and will be entitled to receive shares of CoreComm or
cash in the same manner as all other shareholders or stock option holders of
MegsINet. Additionally, Michael Henry, Brian Clark and Scott Widham have
employment agreements with MegsINet that CoreComm will honor following the
merger. Currently each agreement contains a "change of control" provision that
could give Messrs. Henry, Clark and Widham certain benefits as a result of the
merger. However, prior to the merger, the agreements will be amended to remove
these "change of control" provisions. Also prior to the merger, their employment
agreements will be amended to include customary non-competition and
non-solicitation clauses.
As of March 18, 1999, directors and executive officers of MegsINet
beneficially owned approximately 2,560,260 shares of MegsINet's common stock
entitled to vote at the special meeting, which is approximately 25.1% of the
outstanding shares of MegsINet common stock. Messrs. Henry, Clark and Widham
have all signed an irrevocable proxy
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that gives CoreComm the right to vote their shares. See the section entitled
"Vote of MegsINet Shareholders Required for Adoption of the Merger Agreement" on
page 26 for more information on these proxies.
COMPLETION AND EFFECTIVENESS OF THE MERGER
The merger will be completed when all of the conditions to completion of
the merger are satisfied or waived, including adoption of the merger agreement
by the shareholders of MegsINet. The merger will become effective upon the
filing of a certificate of merger with the state of Delaware.
We are working towards completing the merger as quickly as possible. We
hope to complete the merger during the early summer of 1999.
STRUCTURE OF THE MERGER AND CONVERSION OF MEGSINET COMMON STOCK
In accordance with the merger agreement and Illinois and Delaware law,
MegsINet will be merged into CoreComm Acquisition Sub, Inc., a newly-formed and
wholly-owned subsidiary of CoreComm. As a result of the merger, the separate
corporate existence of MegsINet will cease and Sub will survive the merger as a
wholly-owned subsidiary of CoreComm.
Upon completion of the merger, each outstanding share of (A) MegsINet
common stock (B) 1998A Series Preferred Stock and (C) 1999A Series Preferred
Stock, other than shares held by us and our subsidiaries, will be converted into
the right, at your election, to receive 0.21 of a fully paid and nonassessable
share of CoreComm common stock, or $2.50 in cash. Owners of 1998A Series
Preferred Stock and 1999A Series Preferred Stock will be treated as if they had
converted to MegsINet common stock immediately before the merger. You may elect
a combination of cash and CoreComm's common stock to allocate to your shares.
The allocation of either cash or CoreComm common stock to MegsINet's
shareholders will be set forth on a schedule to be delivered to the exchange
agent at or after the effective time of the merger, which will be prepared by
MegsINet based on your elections. For shares of MegsINet to be converted into
CoreComm common stock, the number of shares of CoreComm common stock to be
issued for each share of MegsINet common stock is fixed and will not be adjusted
based upon changes in the value of these shares. As a result, the value of the
CoreComm shares you receive in the merger will not be known at the time you vote
on the merger and may go up or down as the market price of CoreComm common stock
goes up or down. MegsINet is not permitted to "walk away" from the merger or
resolicit the vote of its shareholders based solely on changes in the value of
CoreComm common stock.
No certificate or scrip representing fractional shares of CoreComm common
stock will be issued in connection with the merger. Instead you will receive
cash, without interest, in lieu of a fraction of a share of CoreComm common
stock based upon the market price of CoreComm common stock.
Elections. Along with this proxy statement-prospectus, each holder of
record of shares of MegsINet common stock, 1998A Series Preferred Stock and
1999A Series Preferred Stock has been sent an election form, which permits the
shareholder, subject to a minimum cash election as described below, to elect to
receive either:
(1) the stock consideration in exchange for each share of MegsINet stock
held;
(2) the cash consideration in exchange for each share of MegsINet stock; or
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(3) any combination thereof.
If a shareholder either:
(1) does not submit a properly completed election form in a timely fashion;
or
(2) revokes its election form prior to the deadline for the submission of
the election form,
the shares of MegsINet stock held by such shareholder shall be designated
"No Election Shares" and treated in accordance with the following section.
Election Procedures. All elections will be required to be made on an
election form. To make an effective election with respect to shares of MegsINet
stock, you must complete properly and return the election form to MegsINet.
You should make an election because shares as to which an election has been
made will be given priority in allocating consideration over shares as to which
an election is not received. Neither MegsINet nor the MegsINet Board makes any
recommendation as to whether shareholders should elect to receive cash or stock
in the merger. You must make your own decision with respect to such election.
Minimum Cash Election
All of MegsINet's shareholders will share in MegsINet's expenses connected
with the merger, including, accounting and legal expenses and a finder's fee
("Transaction Expenses"). We estimate that Transaction Expenses should not
exceed $500,000, or approximately 3.75 cents per share. Upon the consummation of
the merger, a sufficient number of your shares will automatically be exchanged
for cash, as if you had made a cash election for those shares, to cover your pro
rata share of the total Transaction Expenses. This amount will be withheld to
pay these Transaction Expenses. With respect to the remainder of your shares,
your elections will be honored in accordance with the following section. For
example, if you own 1,000 shares of MegsINet common stock, you would owe $37.50
(1,000 X 3.75 cents = $37.50) which would be your pro rata share of the
Transaction Expenses. Prior to your election, a minimum of 15 of your shares
would be converted into cash at $2.50 a share to cover the $37.50 (15 X $2.50 =
$37.50). You would then be free to make either election with respect to your
remaining 985 shares.
Allocation Procedures. If the aggregate cash consideration to be paid by
CoreComm, which is $16,750,790 (the cash price CoreComm is paying for 50% of the
MegsINet shares) is greater than $2.50 multiplied by the total number of shares
for which cash has been elected ("Cash Election Shares") (the "Cash Election
Amount"), then:
(1) each Cash Election Share will be converted into the right to receive
$2.50 in cash;
(2) MegsINet will select, on a pro rata basis, first from among the holders
of No Election Shares and then, if necessary, from among the holders of
shares for which stock has been elected ("Stock Election Shares"), a
sufficient number of shares ("Cash Designee Shares") such that the sum
of the Cash Designee Shares and the Cash Election Shares multiplied by
$2.50 equals as closely as practicable $16,750,790 (each Cash Designee
Share will be converted into the right to receive $2.50 in cash); and
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(3) any Stock Election Shares and any No Election shares, in each case, not
so selected as Cash Designee Shares will be converted into the right to
receive 0.21 shares of CoreComm common stock.
If $16,750,790 is less than the Cash Election Amount, then:
(1) all Stock Election Shares will be converted into the right to receive
CoreComm common stock at the exchange ratio of 0.21;
(2) MegsINet will select, on a pro rata basis first among the holders of No
Election Shares and then, if necessary, from among the holders of Cash
Election Shares, a sufficient number of shares ("Stock Designee
Shares") such that the number of Stock Designee Shares multiplied by
$2.50 equals as closely as practicable the difference between the Cash
Election Amount and $16,750,790 (the Stock Designee Shares shall be
converted into the right to receive CoreComm common stock at the
exchange ratio); and
(3) each Cash Election Shares and No Election Shares not so selected as
Stock Designee Shares shall be converted into the right to receive
$2.50 in cash.
The pro rata selection process to be used by MegsINet will consist of an
equitable pro ration process.
Dissenting Shareholders. Any shares of MegsINet stock as to which
appraisal rights have been asserted and not withdrawn will not be converted into
the right to receive the merger consideration unless the holder fails to
perfect, or effectively withdraws or loses, his or her right to dissent. If any
dissenting holder fails to perfect or effectively withdraws or loses his or her
right to dissent, 50% of that holder's shares will be allocated cash
consideration and 50% will be allocated stock consideration, regardless of
elections of other shareholders. It is a condition to the merger that there are
no dissenting shareholders.
Miscellaneous. If CoreComm effects a stock dividend, reclassification,
recapitalization, split-up, combination, exchange of shares or similar
transaction prior to the Effective Time, an appropriate adjustment to the
consideration will be made.
No fractional shares of CoreComm common stock will be issued in connection
with the merger and cash will be paid in lieu thereof.
EXCHANGE OF MEGSINET STOCK CERTIFICATES FOR CORECOMM STOCK CERTIFICATES
When the merger is completed, the exchange agent will mail to you an
executed letter of transmittal and instructions for use in surrendering your
MegsINet stock certificates in exchange for cash and/or CoreComm stock
certificates. When you deliver your MegsINet stock certificates to the exchange
agent along with a properly executed letter of transmittal and any other
required documents, your MegsINet stock certificates will be canceled and you
will receive either CoreComm stock certificates representing the number of full
shares of CoreComm common stock to which you are entitled under the merger
agreement or cash or both. You will receive payment in cash, without interest,
in lieu of any fractional shares of CoreComm common stock which would have been
otherwise issuable to you as a result of the merger.
YOU SHOULD NOT SUBMIT YOUR MEGSINET STOCK CERTIFICATES FOR EXCHANGE UNLESS
AND UNTIL YOU RECEIVE THE TRANSMITTAL INSTRUCTIONS AND A FORM OF LETTER OF
TRANSMITTAL FROM THE EXCHANGE AGENT.
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You are not entitled to receive any dividends or other distributions on
CoreComm common stock until the merger is completed and you have surrendered
your MegsINet stock certificates in exchange for CoreComm stock certificates.
If there is any dividend or other distribution on CoreComm common stock
with a record date after the merger and a payment date prior to the date you
surrender your MegsINet stock certificates in exchange for CoreComm stock
certificates, you will receive it with respect to the whole shares of CoreComm
common stock issued to you promptly after they are issued. If there is any
dividend or other distribution on CoreComm common stock with a record date after
the merger and a payment date after the date you surrender your MegsINet stock
certificates in exchange for CoreComm stock certificates, you will receive it
with respect to the whole shares of CoreComm common stock issued to you promptly
after the payment date.
CoreComm will only issue a CoreComm stock certificate or a check in lieu of
a fractional share in a name other than the name in which a surrendered MegsINet
stock certificate is registered if you present the exchange agent with all
documents required to show and effect the unrecorded transfer of ownership and
show that you paid any applicable stock transfer taxes.
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The following are the material United States federal income tax
consequences of the merger. The following discussion and the United States
federal income tax opinion referred to below are based on and subject to the
Internal Revenue Code of 1986, the regulations promulgated thereunder, existing
administrative interpretations and court decisions and any related laws, all of
which are subject to change, possibly with retroactive effect, and based on
assumptions, limitations, representations and covenants, including those
contained in certificates of officers of CoreComm and MegsINet expected to be
executed as of the completion of the merger. This discussion does not address
all aspects of United States federal income taxation that may be important to
you in light of your particular circumstances or if you are subject to special
rules, such as rules relating to:
- shareholders who are not citizens or residents of the United States
- financial institutions
- tax-exempt organizations
- insurance companies
- dealers in securities
- shareholders who acquired their shares of MegsINet common stock pursuant
to the exercise of options or similar derivative securities or otherwise
as compensation
- shareholders who hold their shares of MegsINet common stock as part of a
straddle or conversion transaction
This discussion assumes you hold your shares of MegsINet common stock as
capital assets within the meaning of Section 1221 of the Internal Revenue Code.
CoreComm's obligation to complete the merger is conditioned on, subject to
waiver by CoreComm, the delivery of an opinion dated as of the completion of the
merger to CoreComm from Skadden, Arps, Slate, Meagher & Flom (Illinois)
regarding material United States federal income tax consequences of the merger.
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The opinion discussed in the preceding paragraph will conclude as of the
completion of the merger, that the merger will be treated for federal income tax
purposes as a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code, and Sub and MegsINet will each be a party to that
reorganization within the meaning of Section 368(b) of the Internal Revenue
Code. The opinion of counsel referred to above will assume the absence of
changes in existing facts and will rely on assumptions, representations and
covenants including those contained in certificates executed by officers of
CoreComm, MegsINet and others and dated as of the completion of the merger. The
opinions referred to above neither bind the IRS nor preclude the IRS from
adopting a position contrary to that expressed below, and no assurance can be
given that contrary positions will not be successfully asserted by the IRS or
adopted by a court if the issues are litigated. Neither of us intends to obtain
a ruling from the IRS with respect to the tax consequences of the merger. The
following discussion assumes the validity of the opinion of counsel referred to
above.
TAX IMPLICATIONS TO CORECOMM SHAREHOLDERS
Current shareholders of CoreComm will not recognize gain or loss for United
States federal income tax purposes as a result of the merger.
TAX IMPLICATIONS TO MEGSINET SHAREHOLDERS
EXCHANGE OF MEGSINET COMMON STOCK SOLELY FOR CORECOMM COMMON STOCK IN THE
MERGER
Except as discussed below, you will not recognize gain or loss for United
States federal income tax purposes when you exchange your MegsINet common stock
solely for CoreComm common stock pursuant to the merger. The aggregate tax basis
of the CoreComm common stock you receive as a result of the merger will be the
same as your aggregate tax basis in the MegsINet common stock you surrender in
the exchange, reduced by the tax basis of any shares of MegsINet common stock
for which you receive cash instead of fractional shares of CoreComm common
stock. The holding period of the CoreComm common stock you receive as a result
of the exchange will include the period during which you held the MegsINet
common stock you exchange in the merger. You will recognize gain or loss for
United States federal income tax purposes with respect to the cash you receive
instead of a fractional share interest in CoreComm common stock. Your gain or
loss will be measured by the difference between the amount of cash you receive
and the portion of the tax basis of your shares of MegsINet common stock
allocable to the shares of MegsINet common stock exchanged for such fractional
share interest. This gain or loss will be capital gain or loss and will be a
long-term capital gain or loss if your shares of MegsINet common stock have been
held for more than one year at the time the merger is completed.
EXCHANGE OF SOME MEGSINET COMMON STOCK FOR CASH AND EXCHANGE OF SOME
MEGSINET COMMON STOCK FOR STOCK IN THE MERGER
If you exchange some of your MegsINet common stock for cash and exchange
some of your MegsINet common stock for CoreComm common stock in the merger, you
will recognize gain in an amount equal to the lesser of (a) the excess of the
cash and fair market value of CoreComm common stock you receive over your tax
basis in your MegsINet common stock disposed of in the merger, or (b) the cash
you receive. You will not recognize any loss. Except as described below, any
such gain generally will be capital
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gain, and will be long-term if you have held your MegsINet common stock for more
than one year at the time of the merger.
If the cash you receive, however, has the effect of the distribution of a
dividend, the gain you recognize would be treated as a dividend to the extent of
your ratable share of MegsINet's earnings and profits if any. In general, the
determination as to whether the gain you recognize in the exchange will be
treated as capital gain or dividend income depends upon whether and to what
extent that exchange reduces your deemed percentage stock ownership of CoreComm.
For purposes of that determination, you would be treated as if you first
exchanged all your MegsINet common stock for CoreComm common stock and then
CoreComm immediately redeemed a portion of that CoreComm common stock for the
cash you actually received. The gain you recognize in that exchange will be
treated as capital gain under Section 302 of the Internal Revenue Code if your
receipt of cash is (i) "not essentially equivalent to a dividend" or (ii)
"substantially disproportionate" with respect to you.
Whether the receipt of cash is "not-essentially equivalent to a dividend"
will depend upon your circumstances. At a minimum, however, in order to be "not
essentially equivalent to a dividend," the transaction must result in a
"meaningful reduction" in your deemed percentage stock ownership of CoreComm. In
general, that determination requires a comparison of (i) the percentage of the
outstanding stock of CoreComm you are deemed actually and constructively to have
owned immediately before the deemed redemption and (ii) the percentage of the
outstanding stock of CoreComm you are deemed actually and constructively to have
owned immediately after the deemed redemption.
The receipt of cash will be "substantially disproportionate" with respect
to you if the percentage of the outstanding voting stock of CoreComm actually
and constructively owned by you immediately after the deemed redemption is less
than 80% of the percentage of the outstanding voting stock of CoreComm actually
and constructively owned by you immediately before the deemed redemption. The
receipt of cash will not be treated as substantially disproportionate unless
your actual and constructive ownership of CoreComm common stock immediately
following and before the deemed redemption also meets the 80% requirement of the
preceding sentence.
You should be aware that you may be considered to constructively own
MegsINet or CoreComm common stock that certain person or entities that are
related to you own, pursuant to Section 318 of the Internal Revenue Code. These
rules could cause you to be treated as not sufficiently reducing your equity
interest in the merger, with the result that your receipt of cash (up to the
amount of your recognized gain) could be taxed as a dividend, but only to the
extent of your ratable share of MegsINet's undistributed earnings and profits,
if any. As these rules are complex, you should consult your own tax advisor if
you think you may be subject to them.
The aggregate tax basis of CoreComm common stock that you receive upon your
exchange of MegsINet common stock for a combination of CoreComm common stock and
cash pursuant to the merger will be the same as the aggregate tax basis of the
shares of stock surrendered therefor, decreased by the cash received and
increased by any recognized gain (whether capital gain or dividend income). The
holding period of CoreComm Common stock will include the holding period of your
shares of MegsINet common stock surrendered therefor.
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EXCHANGE OF ALL MEGSINET COMMON STOCK FOR CASH IN THE MERGER
If you exchange all your MegsINet common stock for cash in the merger,
subject to the discussion above regarding constructive stock ownership under
Section 318 of the Internal Revenue Code, you will recognize capital gain or
loss equal to the difference between (a) the amount of cash you receive and (b)
your tax basis in your MegsINet common stock disposed of in the merger. Any such
capital gain or loss will be long term if you have held your MegsINet common
stock for more than one year.
Under Section 318 of the Internal Revenue Code, if you constructively own
MegsINet common stock that is exchanged for CoreComm common stock in the merger,
or possibly, constructively own shares of CoreComm stock after the merger, you
may in unusual circumstances be treated as receiving a dividend to the extent of
MegsINet's current and accumulated earnings and profits. Also, if you do not
actually own, but do constructively own CoreComm stock you may be able to avoid
the rules of Section 318 by filing an agreement with the IRS. Because of the
complexity of these rules, you should consult your tax advisor if you think you
may be subject to Section 318 of the Internal Revenue Code.
TAX IMPLICATIONS TO CORECOMM, MEGSINET AND SUB
CoreComm, MegsINet and Sub will not recognize gain or loss for United
States federal income tax purposes as a result of the merger.
THIS FOREGOING DISCUSSION IS NOT INTENDED TO BE A COMPLETE ANALYSIS OR
DESCRIPTION OF ALL POTENTIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OR
ANY OTHER CONSEQUENCES OF THE MERGER. IN ADDITION, THIS DISCUSSION DOES NOT
ADDRESS TAX CONSEQUENCES WHICH MAY VARY WITH, OR ARE CONTINGENT ON, YOUR
INDIVIDUAL CIRCUMSTANCES. MOREOVER, THIS DISCUSSION DOES NOT ADDRESS ANY
NON-INCOME TAX OR ANY FOREIGN, STATE OR LOCAL TAX CONSEQUENCES OF THE MERGER.
ACCORDINGLY, YOU ARE STRONGLY URGED TO CONSULT WITH YOUR TAX ADVISOR TO
DETERMINE THE PARTICULAR UNITED STATES FEDERAL, STATE, LOCAL OR FOREIGN INCOME
OR OTHER TAX CONSEQUENCES TO YOU OF THE MERGER.
REGULATORY FILINGS AND APPROVALS REQUIRED TO COMPLETE THE MERGER
The merger is subject to the requirements of the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, which prevents some transactions from being
completed until required information and materials are furnished to the
Antitrust Division of the Department of Justice and the Federal Trade Commission
and certain waiting periods end or expire. The requirements of Hart-Scott-Rodino
will be satisfied if the merger is completed within one year from the
termination of the waiting period.
However, the Antitrust Division of the Department of Justice or the Federal
Trade Commission may challenge a merger on antitrust grounds either before or
after expiration of the waiting period. Accordingly, at any time before or after
the completion of the merger, either the Antitrust Division of the Department of
Justice or the Federal Trade Commission could take action under the antitrust
laws as it deems necessary or desirable in the public interest, or other persons
could take action under the antitrust laws, including seeking to enjoin the
merger. Additionally, at any time before or after the completion of the merger,
notwithstanding that the applicable waiting period expired or ended, any state
could take action under the antitrust laws as it deems necessary or desirable in
the public
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interest. There can be no assurance that a challenge to the merger will not be
made or that, if a challenge is made, we will prevail.
Neither CoreComm nor MegsINet is aware of any other material governmental
or regulatory approval required for completion of the merger, other than
compliance with applicable corporate law of Illinois and Bermuda.
RESTRICTIONS ON SALES OF SHARES BY AFFILIATES OF MEGSINET AND CORECOMM
The shares of CoreComm common stock to be issued in connection with the
merger will be registered under the Securities Act of 1933, and, with the
exception of the limitations on transfer set forth in a stockholders agreement
which each shareholder is required to sign prior to the completion of the
merger, it will be freely transferable under the Securities Act, except for
shares of CoreComm common stock issued to any person who is deemed to be an
"affiliate" of either of us at the time of the special meeting. Persons who may
be deemed to be affiliates include individuals or entities that control, are
controlled by, or are under common control of either of us, which may include
some of our officers and directors, as well as our principal shareholders.
Affiliates may not sell their shares of CoreComm common stock acquired in
connection with the merger except pursuant to:
- an effective registration statement under the Securities Act covering the
resale of those shares
- an exemption under paragraph (d) of Rule 145 under the Securities Act
- any other applicable exemption under the Securities Act
CoreComm's registration statement on Form S-4, of which this proxy
statement-prospectus forms a part, does not cover the resale of shares of
CoreComm common stock to be received by our affiliates in the merger.
LISTING ON THE NASDAQ NATIONAL MARKET OF CORECOMM COMMON STOCK TO BE ISSUED IN
THE MERGER
CoreComm will use best efforts to cause the shares of CoreComm common stock
to be issued in the merger to be approved for listing on the Nasdaq National
Market, subject to official notice of issuance, before the completion of the
merger.
DISSENTERS' AND APPRAISAL RIGHTS
Under Illinois law, if you are a MegsINet shareholder and you comply with
certain requirements of Illinois law, you are entitled to dissenters' rights in
the merger. However, it is a condition of each of our obligations to consummate
the merger that no MegsINet shareholder exercise dissenter's appraisal rights.
You have the right to dissent to the approval of the merger pursuant to
Section 11.65 of the Illinois Act and the right to be paid the "fair value" of
your shares in cash by complying with the procedures set forth in Section 11.70
of the Illinois Act. To qualify you must dissent with respect to all of the
shares beneficially owned by you. You may assert dissenter's rights as to fewer
than all the shares recorded in your name only if you dissent with respect to
all shares beneficially owned by any one person and notify MegsINet in writing
of the name and address of each person on whose behalf you assert dissenter's
rights. If you partially dissent, your rights are determined as if the shares as
to which dissent is made and the remaining shares were recorded in the names of
different
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shareholders. If you are the beneficial owner of shares you may dissent only if
the record owner consents in writing and you give that consent to MegsINet. A
copy of Sections 11.65 and 11.70 of the Illinois Act is attached as Annex C and
those sections are incorporated herein by reference. Set forth below is a
summary of the procedures relating to the exercise of dissenters' rights. This
summary does not purport to be a complete statement of the provisions of
Sections 11.65 and 11.70 of the Illinois Act and is qualified in its entirety by
reference to Annex C.
To be entitled to a cash payment upon exercise of dissenters' rights, you
must:
1. before the vote at the MegsINet special meeting, deliver to MegsINet a
written demand for payment for your shares if the merger is consummated;
and
2. not vote your shares in favor of the adoption of the merger agreement at
the MegsINet special meeting.
The written demand must be made in addition to, and separate from, any
proxy or vote against the approval of the merger agreement; neither a proxy nor
a vote against approval of the merger agreement constitutes a written demand.
You should send the written demand in advance of the MegsINet special
meeting by registered or certified mail, return receipt requested, to MegsINet,
225 West Ohio Street, Suite 400, Chicago, Illinois 60610. You may also deliver
the written demand to MegsINet before or at the MegsINet special meeting, so
long as it is delivered before the vote is taken on the proposal to approve the
merger agreement. With respect to condition (2) above, you must either vote by
proxy or in person against the merger agreement or abstain from voting. If you
return a proxy but do not indicate your vote, you will be deemed to have voted
for approval of the merger agreement and will not have satisfied condition (2)
above.
If you have satisfied conditions (1) and (2) above, then you will be
entitled only to payment in cash of the fair value of your shares as provided in
Section 11.70 of the Illinois Act. If you withdraw the written demand to be paid
the fair value of your shares, or if the merger is abandoned or terminated, or
if a court determines that the holder of MegsINet common stock is not entitled
to receive payment for your shares, or if you otherwise lose your dissenters'
rights, then you will be reinstated to all of your rights as a holder of
MegsINet common stock as of the filing of his or her written demand. If the
merger is consummated, these rights would include the right to receive CoreComm
common stock and any cash payment, if applicable, into which your shares of
MegsINet common stock were converted pursuant to the merger agreement.
Within 10 days after the Effective Time or 30 days after you comply with
conditions (1) and (2) noted above or deliver to MegsINet your written demand
for payment, whichever is later, CoreComm, as successor to MegsINet, will send
to you:
(a) a statement setting forth the opinion of MegsINet as to the estimated
value of the shares of MegsINet common stock;
(b) MegsINet's latest balance sheet as of the end of the fiscal year ending
not earlier than 16 months before delivery of the statement, together
with the statement of income for the year and the latest interim
financial statements; and
(c) a commitment to pay for the shares of the dissenting shareholder of
MegsINet common stock at the estimated value upon transmittal to
CoreComm of the certificate or certificates, or other evidence of
ownership, with respect to the shares.
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If you do not agree with the opinion of CoreComm as to the estimated value
of your shares of MegsINet common stock, you must, within 30 days of the
delivery of CoreComm's statement of estimated value, notify CoreComm in writing
of your estimate of value and demand payment of the difference between your
estimate of value and the amount of the proposed payment by CoreComm.
If, within 60 days from delivery of your notification of the estimate of
value of the shares of MegsINet common stock, CoreComm and you have not agreed
in writing upon the value of the shares, CoreComm has the right to either
1. pay the difference in value demanded by the shareholder; or
2. file a petition in the Circuit Court of Cook County, Illinois,
requesting the court to determine the "fair value" of the shares of the
MegsINet common stock.
If CoreComm commences such a proceeding, it must make all dissenters,
whether or not residents of Illinois, whose demands remain unsettled, parties to
the proceeding as an action against their shares, and all parties must be served
with a copy of the petition. Non-resident shareholders may be served by
registered or certified mail or by publication as provided by law. The failure
of CoreComm to commence an action pursuant to Section 11.70 of the Illinois Act
will not limit or affect the right of dissenting shareholders to otherwise
commence an action as permitted by law.
Each dissenting holder of MegsINet common stock who is made a party to the
proceeding is entitled to judgment for the amount, if any, by which the court
finds that the fair value of his or her shares of MegsINet common stock exceeds
the amount committed to be paid by CoreComm. The judgment may include an
allowance for interest, and, if the fair market value of the shares materially
exceeds the amount which CoreComm offered to pay for the shares, the expenses of
the proceeding, including the reasonable compensation and expenses of
appraisers, may be assessed against CoreComm. On the other hand, if the fair
value of the shares as determined by the court does not materially exceed the
amount which CoreComm offered to pay for the shares, then the dissenting
shareholder may be responsible for paying his or her own expenses of the
proceeding.
THE MERGER AGREEMENT
Please note that the italicized terms Material Adverse Effect and MegsINet
Takeover Proposal used in this section are defined on pages 46 and 44
respectively.
Our Representations and Warranties. We each made a number of
representations and warranties in the merger agreement regarding aspects of our
respective businesses, financial condition, structure and other facts pertinent
to the merger.
The representations given by MegsINet cover the following topics, among
others, as they relate to MegsINet and its subsidiaries:
- MegsINet's corporate organization and its qualification to do business
- MegsINet's articles of incorporation and by-laws
- MegsINet's capitalization
- authorization of the merger agreement by MegsINet
- regulatory approvals required to complete the merger
- the effect of the merger on obligations of MegsINet and under applicable
laws
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- MegsINet's financial statements
- MegsINet's liabilities
- the absence of changes in MegsINet's business since September 30, 1998
and material adverse effects since January 1, 1998
- MegsINet's title to the properties it owns and leases
- MegsINet's material contracts
- MegsINet's insurance
- the possession of and compliance with permits required to conduct
MegsINet's business
- MegsINet's compliance with applicable laws and litigation involving
MegsINet
- information supplied by MegsINet in this proxy statement-prospectus and
the related registration statement filed by CoreComm
- MegsINet's employee benefit plans
- the absence of any liability under the Employee Retirement Income
Security Act of 1974 or the threat of any work stoppage resulting from
any labor dispute
- MegsINet's taxes and required filings
- year 2000 readiness
- voting requirements for approval of the merger agreement
- intellectual property used by MegsINet
- the treatment of the merger as a tax-free reorganization
- identification of MegsINet's subscribers and fixed assets
- the absence of MegsINet financial advisors other than Mitchell Marks and
the estimate of legal expenses to be incurred
- the voting proxies obtained by CoreComm including the shares to be issued
to Pequot represent 50% of the shares of MegsINet common stock
- the absence of certain contracts that would materially delay the
transactions contemplated in the merger agreement or otherwise have a
material adverse effect on MegsINet
- the presence in escrow of the certificates of shares of MegsINet common
stock that are subject to irrevocable proxies
The representations given by CoreComm cover the following topics, among
others, as they relate to CoreComm and its subsidiaries:
- CoreComm's corporate organization and its qualification to do business
- CoreComm's memorandum of association and by-laws
- CoreComm's capitalization
- authorization of the merger agreement by CoreComm and Sub
- regulatory approvals required to complete the merger
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- the absence of financial advisors employed by CoreComm with respect to
the merger other than Schneider & Company
- CoreComm's filings and reports with the Securities and Exchange
Commission
- CoreComm's liabilities
- changes in CoreComm's business since September 2, 1998
- information supplied by CoreComm in this proxy statement-prospectus and
the related registration statement filed by CoreComm
- CoreComm's taxes and compliance with required filings
- the treatment of the merger as a tax-free reorganization
The representations and warranties in the merger agreement are complicated
and not easily summarized. You are urged to carefully read Article III of the
merger agreement entitled "Representations and Warranties."
MegsINet's Conduct of Business Before Completion of the Merger. MegsINet
agreed that until the completion of the merger or unless CoreComm consents in
writing, MegsINet and its subsidiaries will operate their businesses in good
faith consistent with past practice in order to achieve the following goals:
- preserve intact their current business organizations
- keep available the services of their current officers and employees
- preserve their business relationships so that their goodwill and ongoing
business dealings remain unimpaired
MegsINet and its subsidiaries agreed that they would conduct their business
in compliance with specific restrictions relating to the following:
- the issuance, encumbrance and redemption of securities
- the issuance of dividends or other distributions
- the split, combination or reclassification of any capital stock except as
regards MegsINet's convertible securities
- the liquidation or restructuring of, or any merger involving, MegsINet
- modification of MegsINet's articles of incorporation and by-laws
- the incurrence of indebtedness
- the acquisition of assets with a value greater than $20,000
- the disposition of MegsINet's assets
- the violation of any representations and warranties in the merger
agreement
- expansion of states in which businesses currently operate
- employees and employee benefits
- liens
The agreements related to the conduct of MegsINet's business in the merger
agreement are complicated and not easily summarized. You are urged to carefully
read
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Article IV of the merger agreement entitled "Covenants Relating to the Conduct
of Business."
No Other Negotiations Involving MegsINet. Until the merger is completed or
the merger agreement is terminated, MegsINet has agreed not to solicit,
initiate, knowingly encourage or otherwise facilitate any MegsINet Takeover
Proposal. Additionally, MegsINet has agreed to provide CoreComm with detailed
information about any MegsINet Takeover Proposal it receives. However, nothing
prohibits MegsINet from entering into an agreement for the sale of the 1999A
Series Preferred Stock to Pequot.
A MegsINet Takeover Proposal is any inquiry, offer or proposal involving
MegsINet and its subsidiaries other than the transactions contemplated by the
merger agreement is a merger or other similar transaction, acquisition, or any
tender offer that would result in a party other than CoreComm owning directly or
indirectly 10% or more of any class of equity securities of MegsINet and its
subsidiaries.
ACCESS TO INFORMATION; BEST EFFORTS
MegsINet and CoreComm will afford each other reasonable access to all their
respective properties, books, contracts, commitments, personnel and records. We
agree not to use one another's non-public, confidential or proprietary
information other than in connection with the merger agreement.
MegsINet and CoreComm also agree to use their best efforts to obtain all
consents, waivers, approvals, authorizations or orders and to make all filings
required to complete the merger. We further agree to defend against legal
proceedings challenging the merger agreement and to take all action necessary to
ensure that no state takeover statute or similar statute or regulation becomes
applicable to the merger.
COOPERATION
CoreComm will have the right to install designated representatives at
MegsINet's principal offices from time to time for the purpose of reviewing the
conduct of the business of MegsINet. CoreComm representatives will be present
and may not materially disrupt MegsINet's business. However, MegsINet will
consult with these representatives on material decisions.
TREATMENT OF MEGSINET STOCK OPTIONS AND CERTAIN EMPLOYEE MATTERS
Upon completion of the merger, each outstanding option to purchase MegsINet
common stock will be converted, in accordance with its terms, into an option to
purchase the number of shares of CoreComm common stock equal to 0.21, the
exchange ratio, times the number of shares of MegsINet common stock which could
have been obtained before the merger upon the exercise of each option, rounded
down to the nearest whole share. The exercise price will be equal to the
exercise price per share of MegsINet common stock subject to the option before
conversion divided by 0.21, rounded down to the nearest whole cent.
The other terms of each MegsINet option plan under which the options were
issued will continue to apply after the merger. MegsINet will obtain all option
holders' consents to the treatment of the MegsINet options contemplated in the
merger agreement, including a waiver by all option holders of any option
provision that would result in a lapse of restrictions or acceleration of
vesting or exercisability. Upon completion of the merger, all MegsINet
obligations under the employment agreements between MegsINet and
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Michael Henry, Brian L. Clark and Scott R. Widham will be amended or converted
into a similar instrument of CoreComm, with adjustments to preserve their value.
However, the titles and duties of these individuals may vary from those set
forth in each of their respective agreements. In addition, within 14 days prior
to the closing of the merger, MegsINet shareholders Michael Henry, Brian L.
Clark and Scott R. Widham will enter into employment agreements with CoreComm
containing customary "non-compete" and "no-solicitation" provisions, each with a
duration of 5 years.
CoreComm will use its best efforts to cause the CoreComm stock issuable
upon conversion of the MegsINet options to be approved for quotation on the
Nasdaq National Market.
Conditions to Completion of the Merger. Our respective obligations to
complete the merger and the other transactions contemplated by the merger
agreement are subject to the satisfaction or waiver of each of the following
conditions before completion of the merger:
- CoreComm's registration statement on Form S-4 must be effective
- no MegsINet shareholder shall have demanded appraisal under Illinois law
- the merger agreement must be adopted by the holders of a majority of the
outstanding shares of MegsINet common stock and holders of 60% of the
1998A Series Preferred shares
- no law, regulation or order must be enacted or issued which has the
effect of making the merger illegal or otherwise prohibiting completion
of the merger substantially on the terms contemplated by the merger
agreement
- all applicable approvals and consents required to complete the merger
must be received, the failure of which would have a Material Adverse
Effect on CoreComm or would result in a violation of any laws, and all
applicable waiting periods under applicable antitrust laws must have
expired or been terminated
CoreComm's obligations to complete the merger and the other transactions
contemplated by the merger agreement are subject to the satisfaction or waiver
of each of the following additional conditions before completion of the merger:
- MegsINet's representations and warranties must be true and correct as of
the date the merger is to be completed, and no material adverse change
relating to MegsINet may have occurred
- MegsINet must perform or comply in all material respects with all of its
obligations required by the merger agreement
- The MegsINet stock option plan and the terms of the warrants issued to
Ascend Communications, Inc. and Pequot must be amended
- CoreComm must receive the opinion of its tax counsel, Skadden, Arps,
Slate, Meagher & Flom (Illinois) to the effect that the merger will
qualify as a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code
- CoreComm must receive the opinion of Amy Gross, Esq. to the effect that
MegsINet and its subsidiaries have all necessary permits and that the
transactions contemplated by the merger agreement comply with relevant
laws
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- Each holder of MegsINet capital stock that receives CoreComm common stock
in the merger must sign a shareholders agreement prohibiting the sale of
CoreComm common stock for 1 year following the merger
MegsINet's obligations to complete the merger and the other transactions
contemplated by the merger agreement are subject to the satisfaction or waiver
of each of the following additional conditions before completion of the merger:
- CoreComm's representations and warranties, must be true and correct as of
the date the merger is to be completed, and no material adverse change
relating to CoreComm may have occurred
- CoreComm must perform or comply in all material respects with all of its
obligations required by the merger agreement
The failure of any condition precedent to the merger resulting from either
CoreComm or MegsINet's failure to use its best efforts to consummate the merger
will not extinguish either party's obligations under the merger agreement.
A Material Adverse Effect is any change, event or effect that individually
or in the aggregate, is reasonably likely to be materially adverse to the
business, results of operations or financial condition of CoreComm or MegsINet
and their respective subsidiaries, taken as a whole.
SELECTED COVENANTS
Both CoreComm and MegsINet agreed to perform the following covenants
pursuant to the merger agreement:
- After the effective time, MegsINet will deliver to the exchange agent a
schedule directing how many shares of CoreComm common stock or how much
cash, or a combination of cash and stock, will go to each MegsINet
shareholder pursuant to the merger. MegsINet takes sole responsibility
for producing the allocation schedule.
- MegsINet will amend the terms of the outstanding warrant issued to Ascend
such that the warrant will become exercisable for CoreComm stock instead
of MegsINet stock.
- CoreComm will use its best efforts to cause the release of the security
interest held by Cisco in MegsINet common stock owned by Michael Henry.
- MegsINet will amend its credit facilities with Cisco and Ascend so that
the credit agreements with Cisco and Ascend are satisfactory to CoreComm
in its good faith business judgment.
- Prior to consummation of the merger, MegsINet will require each holder of
MegsINet capital stock who receives shares of CoreComm common stock
pursuant to the merger agreement to sign a stockholders agreement. The
shareholders agreement will provide that stockholders who are parties to
the agreement will not sell or transfer shares of CoreComm common stock
for 1 year after the merger.
- MegsINet and Michael Henry, Brian L. Clark and Scott Widham will divest
all of their respective interests in GMV Network, LLC.
- MegsINet and Michael Henry, Brian L. Clark and Scott Widham will amend
the terms of any agreements or other instruments between MegsINet and
Capital
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Internet, L.L.C. or any other entity controlled by any MegsINet officer,
director or shareholder to eliminate any conflict of interest to the
satisfaction of CoreComm.
- MegsINet will obtain full repayment of any personal loans made by
MegsINet to any individuals including, but not limited to, Michael Henry.
- Prior to consummation of the merger, MegsINet will take all steps to
resolve any claim brought by a certain shareholder.
- MegsINet will use its best efforts to maintain the interconnection
agreement between MegsINet and Ameritech Information Industry Services on
terms no less favorable than those currently in place. Additionally,
MegsINet will obtain actual physical interconnection as promptly as
practicable with the facilities of Ameritech Corporation in its Chicago,
Illinois facilities.
Termination of the Merger Agreement. The merger agreement may be
terminated at any time prior to completion of the merger, whether before or
after adoption of the merger agreement by MegsINet shareholders:
- by mutual consent of CoreComm and MegsINet
- by CoreComm, upon a material breach of any covenant or agreement on the
part of MegsINet set forth in the merger agreement, or if any of
MegsINet's representations or warranties are or become untrue or
inaccurate so that the corresponding condition to completion of the
merger would not be met. However, if the breach or inaccuracy is curable
by MegsINet through the exercise of its reasonable efforts and MegsINet
continues to exercise such reasonable efforts, CoreComm may not terminate
the merger agreement if the breach or inaccuracy is cured within 45 days
of notice to CoreComm
- by MegsINet, upon a material breach of any covenant or agreement on the
part of CoreComm set forth in the merger agreement, or if any of
CoreComm's representations or warranties are or become untrue or
inaccurate so that the corresponding condition to completion of the
merger would not be met. However, if the breach or inaccuracy is curable
by CoreComm through the exercise of its reasonable efforts and CoreComm
continues to exercise such reasonable efforts, MegsINet may not terminate
the merger agreement if the breach or inaccuracy is cured within 45 days
of notice to MegsINet
- by CoreComm or MegsINet, if there is any order of a court or governmental
authority permanently prohibiting the completion of the merger which is
final and may not be appealed, unless the party relying on such order has
not complied with certain of its obligations under the merger agreement
- by CoreComm or MegsINet, if the merger agreement fails to receive the
requisite vote for adoption by the shareholders of MegsINet at the
MegsINet special meeting
Payment of Termination Fee. MegsINet will pay to CoreComm a termination
fee of $1.5 million promptly, but not later than two business days after the
termination date if the merger agreement is terminated because the MegsINet
shareholders do not approve the merger at the special meeting.
Extension, Waiver and Amendment of the Merger Agreement. We may amend the
merger agreement at any time before or after MegsINet shareholders' approval of
the merger, provided that the amendment does not require further shareholder
approval.
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ADDITIONAL AGREEMENTS
CoreComm required MegsINet shareholders Michael Henry, Brian L. Clark,
Clayton Capital Company, L.L.C., Scott Widham, Patrick and Patricia Henry,
MegsINet Investors Partnership L.P. and Pequot to enter into irrevocable
proxies. Each irrevocable proxy requires these MegsINet shareholders to vote all
of the shares of MegsINet common stock beneficially owned by them in favor of
the merger.
As of the record date, the MegsINet shareholders who entered into
irrevocable proxies or agreements to vote in favor of the merger collectively
held approximately 6,108,091 shares of MegsINet voting shares which represented
approximately 51% of the MegsINet voting shares. None of the shareholders who
are parties to irrevocable proxies was paid additional consideration in
connection with the irrevocable proxies.
Upon completion of the merger, under the terms of a separate letter
agreement, Pequot will surrender all warrants issued to Pequot to purchase
MegsINet common stock in consideration of 35,000 shares of CoreComm common
stock.
MegsINet will use its best efforts to maintain the Interconnection
Agreement between MegsINet and Ameritech Information Industry Services on terms
no less favorable than those currently in place. Furthermore, MegsINet will use
its best efforts to obtain actual physical interconnection as promptly as
practicable.
Prior to the completion of the merger, MegsINet will obtain the signatures
of each MegsINet shareholder who receives CoreComm common stock on a
stockholders agreement. The stockholders agreement will provide that parties to
the agreement are prohibited from selling CoreComm common stock for 1 year
following the merger.
WAIVERS TO CISCO AND ASCEND CREDIT FACILITIES AND THE ASCEND WARRANT
MegsINet obtains financing to purchase computers, hardware, software and
other capital items from Ascend Communications, Inc. and Cisco Systems Capital
Corporation. The combined working capital and equipment credit facilities are
approximately $20 million from Ascend and $20 million from Cisco, and they are
secured by, among other things, Michael Henry's stock in MegsINet, rights of
acceleration upon a change of control, anti-dilution protection, covenants
restricting the activities of MegsINet and liens on the equipment. In addition,
Ascend was issued a warrant to acquire common stock of MegsINet upon certain
events, such as a change of ownership of MegsINet.
As a condition to closing and subject to completion of the merger, Cisco
must waive certain provisions of their $4 million secured promissory note.
Negotiations are in process to amend the Cisco agreements to waive all
conversion rights, all right to accelerate the payments, waive this merger from
being an event of default, waive mandatory prepayment, and remove its
restrictive covenants from its credit facility. Negotiations are in process to
amend the Cisco agreements to release Michael Henry from his obligations as a
guarantor of the Cisco credit facility and release his pledged MegsINet stock.
Additionally, as a condition to closing and subject to completion of the
merger, Ascend has waived its board observation rights and mandatory prepayment
of its $4 million secured promissory note. In addition, Ascend has agreed to
modify its warrant so as to receive a warrant for 12,923 shares of CoreComm
common stock at an exercise price of $30.95 per share of CoreComm common stock.
Ascend modified other sections of its warrant to effect this change.
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OPERATIONS AFTER THE MERGER
Following the merger, MegsINet will continue its operations as a
wholly-owned subsidiary of CoreComm. The membership of CoreComm's board of
directors will remain unchanged as a result of the merger. The shareholders of
MegsINet who receive stock consideration will become shareholders of CoreComm,
and their rights as shareholders will be governed by the CoreComm memorandum of
association, as currently in effect the CoreComm by-laws and the laws of
Bermuda. See "Comparison of Rights of Holders of Megsinet Common Stock and
CoreComm Common Stock" on page 73.
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BUSINESS OF CORECOMM
BACKGROUND
CoreComm was formed in March 1998 as a subsidiary of Cellular
Communications of Puerto Rico, Inc. (formerly CoreComm Incorporated) ("CCPR").
CCPR offers cellular, paging and other telecommunications services in Puerto
Rico and the U.S. Virgin Islands. CCPR created CoreComm in order to succeed to
operations of OCOM Corporation, which had been purchased by CCPR, and to pursue
new telecommunications opportunities outside of Puerto Rico and the U.S. Virgin
Islands in an entrepreneurial corporate environment. CCPR spun-off CoreComm on
September 2, 1998, by distributing to each CCPR stockholder, on a one for one
basis, 100% of the outstanding common stock of CoreComm (the "Spin-off").
CoreComm has since been listed on the Nasdaq National Market and trades under
the symbol "COMMF". As of December 31, 1998, CoreComm and its subsidiaries had
approximately 250 employees.
Certain of CoreComm's businesses were formerly owned by OCOM Corporation,
previously a subsidiary of NTL Incorporated. OCOM Corporation sold all of these
assets and related liabilities to a subsidiary of CCPR pursuant to an agreement
dated as of June 1, 1998. The common stock of that subsidiary was among the
assets contributed to CoreComm prior to the Spin-off. CoreComm also owns
Digicom, Inc. which operates a CLEC in the State of Ohio. CoreComm also owns
Stratos which was acquired on November 30, 1998, and provides Internet service
to customers in the Ohio region. CoreComm also owns the assets of JeffRand
Corp., also known as the Wireless Outlet, which operates prepaid cellular and
paging businesses. Following a Federal Communications Commission ("FCC")
auction, on June 8, 1998, Cortelyou Communications Corp., a subsidiary of
CoreComm, was awarded local multipoint distribution service (referred to in this
industry as LMDS) licenses for 15 markets in the state of Ohio.
BUSINESS STRATEGY
CoreComm is now embarking on the next phase of its business strategy, which
is to create a national, facilities-based network capable of transmitting voice
and data to our customers using the latest technologies.
CoreComm's objective is to exploit the convergence of the
telecommunications and information services industries through a "Smart Local
Exchange Carrier" or "Smart LEC" strategy. This strategy combines advanced
communications technologies together with a unique implementation plan which
management believes will result in the production of a low cost, efficient
delivery system for bundled Internet access and local and long distance
telephony. In time, this network may provide video services as well.
A core part of our strategy is to offer our customers "one-stop shopping"
for bundled telecommunications and Internet services. We are building our Smart
LEC network to provide a full range of voice and data services. Bundling these
services together with convenient integrated billing and a single point of
contact for sales and service are central to our strategy. We have already
developed this approach in our Ohio operations.
The Smart LEC concept -- combining our own facilities and switches with
leased lines, interconnection agreements for use of local networks -- allows us
to implement our own national facilities-based telecommunications network
without the great expense and time commitment of building our own lines and
local loops. Management believes this strategy, which has been made possible by
the Telecommunications Act of 1996, will result
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in better profit margins than those of the resale business in a much shorter
period of time. This strategy also allows us to expand incrementally over time,
while we continue to act as a reseller where we do not have facilities in place
yet.
We have already begun building the Smart LEC network in Ohio. We are in the
process of installing switches and will make use of the local ILEC's networks
through interconnection agreements. We are also in the process of negotiating
leases for transport lines that will carry communications to our switch.
CoreComm now holds, through directly and indirectly wholly owned
subsidiaries, entities which operate or hold licenses or applications to operate
the following businesses:
- competitive local exchange carrier
- Internet service provider
- long distance service
- centralized exchange telecommunications services
- cellular service
- prepaid cellular service
- paging service
- local multipoint distribution services
THE SMART LEC NETWORK
The Smart LEC network will be built through a combination of several
elements:
- Installing "switches" in population centers, beginning with Ohio. These
switches are devices which route voice and data transmissions -- i.e.,
ordinary phone service and Internet service -- between networks and to
and from end users.
- Leasing the "last mile" or "local loop" (the portion of the network
extending from the end-office to the customer's premises) from incumbent
local exchange carriers or "ILECs" which own the vast majority of the
existing telephone lines -- both copper and fiber-optic -- that can carry
and terminate voice and data transmissions in most cities. The ILECs own
the networks of lines leading to a customer's home or office in most
local areas.
- Leasing the transport lines necessary to carry voice and data nationally
from interexchange carriers ("IXCs") and Competitive Access Providers
("CAPs").
- Entering into interconnection agreements with the ILECs through which we
route voice and data communications over the ILEC's networks to carry
those transmissions directly to homes and offices.
Our Smart LEC network will be capable of carrying both voice and data
communications using the following technologies:
- Standard Telephony -- involving the transmission of voice or data over a
copper wire and fiber optical transmission path which, through the use of
switches, becomes a dedicated end-to-end circuit.
- Internet Protocol (IP) -- the structure of data transmitted over the
Internet. Because Internet Protocol involves splitting data into
"packets" which are transmitted independently and reassembled at their
destination, Internet Protocol does not require a dedicated end-to-end
circuit and many different communications can be routed simultaneously
over the same transmission facilities.
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- Digital Subscriber Line (DSL) -- a transport protocol that allows mixing
data, voice and video over conventional, copper phone lines. A technique
known as "modulation" is used to boost transmission rates hundreds of
times beyond that of ordinary modem transmission rates. There are
geographic limitations using the various forms of DSL technology that
require users to be within certain distances from the DSL "access
multiplexers."
- Asynchronous Transfer Mode (ATM) -- a transport protocol that supports
many types of high speed transmissions including voice, data, video,
audio and imaging.
These technologies will allow us to offer telephone and Internet service
over the same network. Our planned acquisition of MegsINet would give us access
to their network, which already incorporates IP and ATM technology and is in the
process of being upgraded to implement classic telephony and DSL technologies as
well. MegsINet's network currently consists of 57 major-city "nodes" linked via
a high capacity ATM network.
MARKETING STRATEGY
CoreComm's marketing strategy is to provide business and residential
customers a bundled package of high quality telecommunications services at
competitive prices, delivered with exceptional care and service to the customer.
Based on our experience in the telecommunications industry, a bundled
service offering allows us to package products in ways which are viewed
attractively by the customer. These bundled packages can be priced to provide
better "value for money" than more typical service offerings, can be modified
for individual customer needs, and are conveniently offered on a single bill. We
believe that these and other factors will improve acceptance ratios for our
services and increase customer retention.
The Smart LEC strategy will enable us to market our services over wide
geographical areas. By using a combination of resold and facilities-based
services, we will not be limited to offering services only in areas where we
have built our own networks. We believe that the ability to market over larger
areas will increase the efficiency and effectiveness of our marketing and
advertising programs.
In addition, CoreComm, through its own marketing, as well as acquisitions,
has an existing base of customers to which it intends to offer additional
services.
For additional information on CoreComm's business see "Where You Can Find More
Information" at page 91.
RECENT DEVELOPMENTS
Proposed Acquisition of Assets of USN Communications, Inc.
On February 19, 1999, CoreComm entered into an asset purchase agreement to
acquire certain assets of USN Communications, Inc., (specifically excluding its
wireless business), for an upfront payment of approximately $27 million in cash,
warrants to purchase an aggregate of 350,000 shares of CoreComm common stock,
and a contingency payment based on future operating results, that caps the total
consideration at $85 million. Completion of this transaction is conditioned upon
approval by the Bankruptcy Court presiding over USN's voluntary Chapter 11
reorganization case that is currently pending. USN is currently subject to an
auction in that proceeding, in which third parties may bid for the same assets
that CoreComm agreed to purchase. CoreComm may be outbid for
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these USN assets, which would result in our not completing this acquisition and
termination of the agreement.
USN offers a bundled package of telecommunications products, including
local and long distance telephony, voicemail, paging, teleconferencing, and
other enhanced and value-added telecommunications services, tailored to meet the
needs of its customers. USN primarily focuses its marketing efforts on small and
medium-sized businesses with telecommunications usage of less than $5,000 per
month.
USN is presently selling service to customers in certain states in the Bell
Atlantic Corporation region (including Massachusetts, New Hampshire, New York
and Rhode Island) and the entire Ameritech Corporation region (including
Illinois, Indiana, Michigan, Ohio and Wisconsin) and is currently in
negotiations to expand its bundled services offering throughout the 14-state
Bell Atlantic region.
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CORECOMM'S MANAGEMENT
MANAGEMENT AND THE INTERRELATIONSHIP OF THE FORMER AFFILIATES
The senior management and directors of CoreComm also serve as management
and directors of CoreComm affiliates' NTL Incorporated ("NTL"), Cellular
Communications of Puerto Rico, Inc. ("CCPR") and Cellular Communications
International, Inc. ("CCII"). In 1990, Cellular Communications, Inc. ("CCI"), a
Delaware corporation in the cellular communications industry, entered into an
agreement with AirTouch Communications, Inc. (formerly PacTel Corporation)
through which the two parties operated a partnership that controlled a cellular
communications business in the states of Ohio, Michigan, Indiana and Kentucky
(the "CCI Joint Venture"). In connection with the CCI Joint Venture, on July 31,
1991, CCI distributed pro rata to its stockholders all of the capital stock of
CCII and OCOM Corporation (now known as NTL), which conducted CCI's
international and long distance/microwave operations, respectively. On February
28, 1992, also in connection with the CCI Joint Venture, CCI distributed pro
rata to its stockholders all of the capital stock of its former subsidiary CCPR.
Accordingly, because historically CCII, NTL, CCPR and most recently, CoreComm,
have their origins in the same corporate family, there is an historical
interconnection among these companies' management and directors. Each officer
and director's specific roles are outlined in the following sections.
NTL provides certain corporate management, financial, legal and technical
services to CoreComm. NTL charges CoreComm for direct costs where identifiable
and a fixed percentage of its corporate overhead, which is 30%.
DIRECTORS
The CoreComm board of directors consists of the seven persons listed below,
each of whom were elected for a term expiring at the annual meeting of
shareholders indicated below.
<TABLE>
<CAPTION>
TERM EXPIRES
AT ANNUAL
NAME AGE MEETING IN
- ---- --- ------------
<S> <C> <C>
Alan J. Patricof................................ 64 2001
Warren Potash................................... 67 2001
Sidney R. Knafel................................ 68 2002
Ted H. McCourtney............................... 60 2002
Del Mintz....................................... 71 2002
George S. Blumenthal............................ 55 2000
J. Barclay Knapp................................ 42 2000
</TABLE>
Set forth below is a brief description of the present and past business
experience of each of the persons who serve as directors of the Company:
ALAN J. PATRICOF, has been a director of CoreComm since March 18, 1998. Mr.
Patricof is Chairman of Patricof & Co. Ventures, Inc., a venture capital firm he
founded in 1969. Mr. Patricof has been a director of CCII from the July 1991
distribution by CCI to its shareholders of the common stock of CCII (the "CCII
Distribution") and a director of CCPR from the February 1992 distribution by CCI
to its shareholders of the common stock of CCPR (the "CCPR Distribution").
Additionally, Mr. Patricof has been a director of NTL since its formation and is
a director of other privately owned companies.
WARREN POTASH has been a director of CoreComm since March 18, 1998. Mr.
Potash retired in 1991 as President and Chief Executive Officer of the Radio
Advertising Bureau,
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a trade association, a position he held since 1989. Prior to that time, and
beginning in 1986, he was President of New Age Communications, Inc., a
communications consultancy firm. Until his retirement in 1986, Mr. Potash was a
Vice President of Capital Cities/ABC Broadcasting, Inc., a position he held
since 1970. Mr. Potash has also been a director of CCII from and prior to the
CCII Distribution, CCPR from and prior to the CCPR Distribution and NTL, since
its formation.
SIDNEY R. KNAFEL has been a director of CoreComm since March 18, 1998. Mr.
Knafel has also been Managing Partner of SRK Management Company, a private
investment concern, since 1981. In addition, Mr. Knafel is Chairman of Insight
Communications, Inc. and BioReliance Corporation. Mr. Knafel is also a director
of General American Investors Company, Inc., IGENE Biotechnology, Inc. and some
privately owned companies, and has been a director of CCII from and prior to the
CCII Distribution, CCPR from and prior to the CCPR Distribution and NTL, since
its formation.
TED H. MCCOURTNEY has been a director of CoreComm since March 18, 1998. Mr.
McCourtney is a General Partner of Venrock Associates, a venture capital
investment partnership, a position he has held since 1970. Mr. McCourtney also
has been a director of NTL since its formation and serves as a director of
Medpartners Inc., Visual Networks, Inc. and several privately owned companies.
DEL MINTZ has been a director of CoreComm since March 18, 1998. Mr. Mintz
is President of Cleveland Mobile Tele Trak, Inc., Cleveland Mobile Radio Sales,
Inc. and Ohio Mobile Tele Trak, Inc., companies providing telephone answering
and radio communications services in Cleveland and Columbus, respectively. Mr.
Mintz has held similar positions with the predecessors of these companies since
1967. Mr. Mintz is president of several other companies, and was President and a
principal stockholder of Cleveland Mobile Cellular Telephone, Inc. before that
company was acquired through a merger with CCI's predecessor in 1985. Mr. Mintz
has also been a director of CCII since the CCII Distribution and of CCPR since
the CCPR Distribution. Additionally, Mr. Mintz has been a director of NTL since
its formation and is a director of several privately owned companies.
GEORGE S. BLUMENTHAL has been a director of CoreComm since March 18, 1998.
Mr. Blumenthal has been the Chairman, Treasurer and a director of CCPR since the
CCPR Distribution and was Chief Executive Officer from March 1994 until March
1998. In addition, Mr. Blumenthal is Chairman, Treasurer and a director of NTL.
Mr. Blumenthal is also a director of Andover Togs, Inc. Mr. Blumenthal was
Chairman, Treasurer and a director of CCII from its organization until April
1994. Mr. Blumenthal was also Chairman, Treasurer and a director of CCI from
CCI's founding in 1981 until its merger in 1996 into a subsidiary of AirTouch
Communications, Inc. (the "CCI Merger").
J. BARCLAY KNAPP has been a director of CoreComm since March 18, 1998. Mr.
Knapp was appointed President of CCPR in March 1994 and Chief Executive Officer
in March 1998. Mr. Knapp has been a director of CCPR since the CCPR Distribution
and was Chief Financial Officer from that date to 1997. Mr. Knapp was Executive
Vice President, Chief Operating Officer and a director of CCII from and prior to
the CCII Distribution until June 1998. He is President, Chief Executive Officer,
Chief Financial Officer and a director of NTL. Mr. Knapp was also Executive Vice
President, Chief Operating Officer, Chief Financial Officer and a director of
CCI until the CCI Merger.
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CLASSIFIED BOARD OF DIRECTORS
CoreComm's memorandum of association provides for a classified board of
directors consisting of three classes as nearly equal in number as possible. The
directors in each class serve staggered three-year terms. The Class I directors
are George S. Blumenthal and J. Barclay Knapp; the Class II directors are Alan
J. Patricof and Warren Potash and the Class III directors are Sidney R. Knafel,
Ted H. McCourtney and Del Mintz. The terms of the Class I, Class II and Class
III Directors expire initially in 2000, 2001 and 2002, respectively. At each
annual meeting of the shareholders of CoreComm, the successors to the class of
directors whose term expires will be elected to hold office for a term expiring
at the annual meeting of shareholders held in the third year following their
election. See "Comparison of Rights of Holders of MegsINet Common Stock and
CoreComm Common Stock."
COMMITTEES OF THE BOARD OF DIRECTORS
The board of directors has established a Compensation and Option Committee
(the "Compensation Committee") and an Audit Committee. Messrs. Knafel and Mintz
serve as members of the board of directors' Compensation and Option Committee
and Messrs. Mintz, Patricof and Potash serve as members of the board of
directors' Audit Committee. The Compensation and Option Committee review and
make recommendations regarding annual compensation for CoreComm officers and the
Audit Committee oversees CoreComm's financial reporting process on behalf of
CoreComm's board of directors. There are no other plans to establish committees
of the board of directors. Directors will be reimbursed for out-of-pocket
expenses incurred in attending meetings of the board of directors and the
committees.
EXECUTIVE OFFICERS
The following table sets forth certain information concerning the persons
who serve as executive officers of CoreComm. Executive officers of CoreComm are
elected annually by the board of directors and serve until their successors are
duly elected and qualified.
<TABLE>
<CAPTION>
NAME AGE TITLE
- ---- --- -----
<S> <C> <C>
George S. Blumenthal............ 55 Chairman of the Board
J. Barclay Knapp................ 42 President, Chief Executive Officer and Chief
Financial Officer
Patty J. Flynt.................. 47 Senior Vice President -- Chief Operating
Officer
Richard J. Lubasch.............. 52 Senior Vice President -- General Counsel and
Secretary
Gregg Gorelick.................. 40 Vice President -- Controller, Treasurer
</TABLE>
Set forth below is a brief description of the present and past business
experience of each of the persons who serve as executive officers of CoreComm
who are not also serving as directors.
PATTY J. FLYNT has been CoreComm's Senior Vice President and Chief
Operating Officer since 1998 and was OCOM Corporation's President from 1996
until 1998. Ms. Flynt is also Group Managing Director of the Information
Services Division of NTL. Prior to joining OCOM Corporation in 1996, Ms. Flynt
was a Vice President of New Par, a joint venture of CCI and AirTouch
Communications, Inc. from 1989 until 1996.
RICHARD J. LUBASCH has been CoreComm's Senior Vice President -- General
Counsel and Secretary since 1998. Additionally, Mr. Lubasch has been CCPR's
Senior Vice
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President and General Counsel and Secretary from and prior to the CCPR
Distribution. He has also been the Senior Vice President -- General Counsel and
Secretary of CCII from and prior to the CCII Distribution and has held the same
title for NTL since its formation. Mr. Lubasch was Vice President, General
Counsel and Secretary of CCI from July 1987 until the CCI Merger and he is
Treasurer of CCII.
GREGG GORELICK has been CoreComm's Vice President and Controller since
1998. Mr. Gorelick has been CCPR's Vice President and Controller from the date
of the CCPR Distribution, and has held that position at CCII from and prior to
the CCII Distribution and at NTL since its formation. From 1981 to 1986 he was
employed by Ernst & Whinney (now known as Ernst & Young LLP). Mr. Gorelick is a
certified public accountant and was Vice President -- Controller of CCI from
1986 until the CCI Merger.
EXECUTIVE COMPENSATION POLICY
The Compensation Committee has the responsibility for the design and
implementation of CoreComm's executive compensation program. The Compensation
Committee is composed entirely of independent non-employee directors.
CoreComm's executive compensation program is designed to be closely linked
to corporate performance and return to shareholders. To this end, CoreComm has
developed an overall compensation strategy and specific compensation plans that
tie a very significant portion of an executive's aggregate compensation to the
appreciation in CoreComm's stock price. In addition, executive bonuses are
linked to the achievement of operational goals and therefore relate to
shareholder return. The overall objective of this strategy is to attract and
retain the best possible executive talent, to motivate these executives to
achieve the goals inherent in CoreComm's business strategy and to link executive
and shareholder interests through equity-based compensation, thereby seeking to
enhance CoreComm's profitability and shareholder value.
Each year the Compensation Committee conducts a review of CoreComm's
executive compensation program to determine the appropriate level and forms of
compensation. Such review will permit an annual evaluation of the link between
CoreComm's performance and its executive compensation.
In assessing compensation levels for the executives, the Compensation
Committee recognizes the fact that such executives have participated in the
development of CoreComm (and its predecessors) from its earliest stages. In
determining the annual compensation for the Chief Executive Officer, the
Committee uses the same criteria as it does for the other named executives.
BERMUDA RESIDENT REPRESENTATIVE AND SECRETARY
CoreComm is required, as a matter of Bermuda law, to maintain a
representative presence in Bermuda and has elected to appoint a resident
representative. The resident representative is entitled to attend and speak, but
not to vote at meetings of the board or any committee of the board or of the
shareholders. Hugh Gillespie, an attorney with Appleby, Spurling & Kempe,
CoreComm's Bermuda legal advisor is also CoreComm's initial resident
representative.
CLAIRE SOUSA is employed by A.S. & K. Services Ltd., a Bermuda Corporation,
and an affiliate of Appleby, Spurling & Kemp, as a corporate administrator and
serves as CoreComm's Secretary resident in Bermuda.
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STOCK OPTION PLANS
In 1998, CoreComm's Board of Directors adopted the CoreComm Limited 1998
Stock Option Plan (the "CoreComm Stock Option Plan"), reserving thereunder
shares for issuances to employees and directors.
The CoreComm Stock Option Plan is intended to encourage stock ownership by
employees of the Company and its divisions and subsidiary corporations and other
affiliates, so that they may acquire or increase their proprietary interest in
the Company, and to encourage such employees and directors who are employees to
remain in the employ of the Company or its affiliates and to put forth maximum
efforts for the success of the business. The CoreComm Stock Option Plan provides
for grants of options to acquire shares of CoreComm common stock, which options
may be "incentive stock options" within the meaning of Section 422 of the
Internal Revenue Code. The terms of options granted pursuant to the CoreComm
Stock Option Plan, including provisions regarding vesting, exercisability,
exercise price and duration are generally set by the Compensation Committee. In
addition, in January, 1999, CoreComm Ohio Limited, a wholly owned subsidiary of
CoreComm, adopted the CoreComm Ohio Limited 1999 Stock Option Plan. Under that
plan, up to thirty percent of the common stock of CoreComm Ohio Limited may
become subject to options. These options will not become exercisable unless and
until there is a registered public offering of CoreComm Ohio Limited's common
stock.
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SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of CoreComm common stock as of March 19, 1999 by (i) each executive
officer and director of CoreComm and (ii) all directors and executive officers
as a group.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP
----------------------------------------------------------------
PRESENTLY TOTAL
COMPANY EXERCISABLE OPTIONS
EXECUTIVE OFFICERS AND DIRECTORS STOCK OPTIONS(1) OUTSTANDING TOTAL PERCENT(2)
- -------------------------------- ------- ----------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C>
George S. Blumenthal(3)...... 175,449 846,813 846,813 1,022,262 7.28%
J. Barclay Knapp............. 9,198 926,478 926,478 935,776 6.62%
Patty J. Flynt............... 0 18,250 36,250 18,250 *
Richard J. Lubasch........... 3,282 201,685 201,685 204,967 1.53%
Gregg Gorelick............... 18,837 52,404 78,404 71,241 *
Del Mintz.................... 330,286 92,823 92,823 423,109 3.16%
Sidney R. Knafel............. 98,800 92,823 92,823 191,623 1.44%
Ted H. McCourtney(5)......... 210,355 60,323 90,323 270,678 2.04%
Alan J. Patricof(6).......... 13,236 92,823 92,823 108,559 *
Warren Potash................ 542 63,219 90,219 63,761 *
All Directors and Officers as a
group (11 in number)....... 862,585 2,447,641 2,548,641 3,310,226 21.16%
</TABLE>
- ---------------
* Represents less than one percent
(1) Includes shares of CoreComm common stock purchasable upon the exercise of
options which are presently exercisable or become exercisable in the next 60
days.
(2) Includes common stock and presently exercisable CoreComm options.
(3) Includes 1,980 shares of common stock held by trusts for the benefit of Mr.
Blumenthal's children and 3,000 shares owned by Mr. Blumenthal's wife, as to
which shares Mr. Blumenthal disclaims beneficial ownership.
(4) Includes 104 shares of common stock owned by Mr. Lubasch as custodian for
his child, as to which shares Mr. Lubasch disclaims beneficial ownership.
(5) Includes 520 shares of common stock held by trusts for the benefit of Mr.
McCourtney's children, as to which shares Mr. McCourtney disclaims
beneficial ownership. Also includes 200,000 shares of common stock owned by
various entities of which Mr. McCourtney is a general partner, as to which
shares Mr. McCourtney disclaims beneficial ownership.
(6) Includes 1,065 shares of common stock owned by Mr. Patricof's wife, as to
which shares Mr. Patricof disclaims beneficial ownership. Also includes
2,500 shares of Common Stock owned by the Patricof & Co. Ventures, Inc.'s
Profit Sharing Plan, of which Mr. Patricof is a trustee and Mr. Patricof
disclaims beneficial ownership of such securities other than the amount
allocable to his beneficial interest in the plan.
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MEGSINET'S BUSINESS
MegsINet plans to become an Integrated Communications Provider ("ICP"), by
offering local and long distance telephone services and Internet access to
businesses and consumers on a national basis. MegsINet is constructing a state
of the art packet telecommunications network to provide high-speed data, voice
and video services. Currently, MegsINet's focus is on the Internet Service
Provider (ISP) business with over 45,000 customers. However, MegsINet is seeking
to expand its business into the competitive local exchange carrier (CLEC) and
Internet Telephony Service Provider (ITSP) businesses. To that end, MegsINet:
- has entered into a joint venture with Northern Telcom, Inc. (Nortel) to
use Nortel's latest generation of switched service technology.
- is in the process of registering to operate as a CLEC in the contiguous
48 states.
- is also in the process of becoming eligible to be a long distance carrier
in those states.
- has received FCC approval that will allow it to provide certain
international phone services.
When it completes these and other related steps, MegsINet believes it will
be one of the first ICPs to provide services as an ISP, CLEC, and Interexchange
Company.
COMPETITIVE STRENGTHS
MegsINet believes it has the following competitive advantages in Internet
distribution:
Centralized Management. Chicago is the regional hub from which MegsINet
manages and maintains its network operations. From its Chicago offices, MegsINet
is able to centrally diagnose common problems. This approach decreases personnel
cost and the need to locally employ technicians at each site. In the event that
a MegsINet technician is required, it is MegsINet's policy to have the
technician on site within 24 hours.
Level One Internet Access Provider. MegsINet directly peers with major
backbone providers including MCI-Worldcom and PSINet. These peering arrangements
help MegsINet maintain a competitive low cost network.
Network Capacity. MegsINet believes its current network can support a
customer base significantly larger than its current size.
INTERNET ACCESS SERVICE
MegsINet's Internet access service strategy has been to establish itself as
a low cost provider of Internet services. MegsINet has expanded into over 50
metropolitan areas. In addition to selling dial-up services, MegsINet also sells
dedicated services such as DS-3, T1, ISDN, and other Internet services such as
web hosting.
COMPETITIVE LOCAL EXCHANGE SERVICE
Part of MegsINet's strategy is also to become a Competitive Local Exchange
Company, or CLEC, by providing local telephone service in competition with other
CLECs and Independent Local Exchange Companies, or ILECs. Some CLECs resell the
services of ILECs or other CLECs. MegsINet has chosen to build its own
telecommunications switch facilities.
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As part of this strategy, MegsINet entered an agreement with Nortel to
purchase up to ten Nortel DMS-500 networks. Nortel has agreed to finance each
network under a lease agreement that provides for a payment stream based on
lines sold with a minimum monthly payment that accelerates over the life of the
lease.
Each network will consist of one host "switch" and ten or more remote
switches. Switches are computer controlled telecommunications facilities that
provide both local and long distance routing of voice and data transmissions. In
the planned configuration one network will be constructed in each of ten major
metropolitan markets and have capacity to support approximately 30,000 customer
lines. The first network is currently under construction in Chicago and is
expected to be operational in the summer of 1999.
The ten Nortel DMS-500 networks will be connected by the MegsINet
Asynchronous Transfer Mode, or ATM, platform. This is a transport platform that
will support many different types of transmissions, and this will allow MegsINet
to carry long distance traffic between its switches on its own network.
As a CLEC MegsINet expects to provide the following services:
- Local telephone service
- Custom features such as Call Waiting, Three-way calling and Call
forwarding
- Long distance service
- Digital Subscriber Line (DSL) service at speeds up to 1 megabit per
second
We intend to aggressively sell advances services, which are typically available
only to Fortune 1,000 size companies, to the small to medium sized business
market. This will allow a full array of Centrex, ISDN, voice mail and other
custom calling features to become available to these smaller companies.
In addition to providing these services, we intend to remain flexible by
deploying several integrated platforms, which would include both packet and
circuit switched networks. As a result, we will not be dependent on any one
fixed architecture.
INTERNET TELEPHONY SERVICE PROVIDER
Due to recent advancements made in voice compression algorithms and Digital
Signal Processors (DSPs), the overall quality of the network has become more
equivalent to a toll call on a circuit-switched network. MegsINet's platform
will convert voice into IP packets using DSP and ancillary software. The
platform will compress and convert voice into data packets that are transmitted
via MegsINet's private IP network.
In addition to voice, MegsINet will be able to provide the following voice
grade services, Interlata, Intralata, Interstate, Intrastate, International,
local Dialtone, Dialaround (10-10321), Credit Card services and 0 Plus services.
MegsINet's service offerings are based on a network architecture that provides
high quality telephony services via an Intranet or Internet connection between
standard customer premise equipment ("CPE") devices such as conventional
telephones and fax machines.
MegsINet's nodes interface between a circuit switched telephone network
that is a conventional telephone network that carries voice signals and a packet
network (which carries data, video and voice information). Due to its
scalability and compression features, MegsINet's network affords a lower capital
cost of entry when compared to circuit switches. At MegsINet's node, voice
communication is compressed prior to transport onto the network, allowing a
greater quantity of simultaneous voice calls and data to be carried
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over the network compared to traditional circuit switching, thus utilizing
significantly less bandwidth.
MegsINet generally intends to use its private IP network as a backbone
transport system rather than the Internet. MegsINet's private IP network is
based on the interconnection of the equipment via domestic private line and
international private line leased or owned facilities. The use of its private IP
network rather than the Internet provides MegsINet with lower overall network
latency, greater reliability, higher speed end-to-end transmission and the
avoidance of security risks that may be associated with the Internet.
MegsINet currently enjoys the a low latency across its national private IP
network when compared to other national IP backbone providers. MegsINet believes
that many national IP backbone providers will be forced to upgrade their
infrastructures to meet network delay requirements to transport Toll Quality
Voice over IP traffic, which will serve as a barrier to entry for some national
IP backbone providers.
MegsINet's CLEC and ISP segments of the business offer significant
synergies for its entry into the Internet Telephony Service Provider market. In
addition:
- MegsINet expects to utilize its DMS 500 Supernodes to provide the
following:
- Off-net termination in markets and areas that it does not yet have
IPTelephony Gateways, but do have a CLEC network presence.
- Value added features to IP Telephony customers such as toll free voice
mail anywhere in the country.
- Fully utilize the long distance-tandem switching capabilities of the
DMS500 Supernode to interface to all off net traffic.
- MegsINet expects to leverage off of its existing ISP POPs already
operational, by co-locating Voice over IP Telephony gateways.
- MegsINet plans to initially utilize existing bandwidth that supports
the ISP business to transport its Internet Telephony product
offerings.
SERVICE OFFERINGS
MegsINet expects to charge a fee for any calls originating or terminating
using the MegsINet equipment plus a charge for carriage over the MegsINet
network. The range of services to be offered at each POP site include:
- The ability to make actual local or long distance phone calls utilizing
the Internet, from telephone to telephone, without a PC being required.
- Using existing technology, it will be possible to transmit both voice
and data simultaneously. This can mean significant savings to business
users.
- The ability to send faxes local or long distance utilizing the Internet.
Faxes may be sent computer to computer, computer to fax, fax to computer,
or fax to fax.
- Each POP location will have the technical ability to set up and service
business accounts desiring Intra-net capability. In addition, MegsINet's
systems can both replace older PBX style phone systems and provide low
cost multi-site WAN communication capability using the Internet.
- High-speed PC access to the Internet for both business and individual
customers.
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- The ability to maintain a "seamless" connection, without "line drops."
- Provide secure data storage and retrieval services, both as a convenience
and as a means of "disaster recovery" for interested business
subscribers.
MegsINet's income will be derived from fees for all of the services
provided.
PEQUOT TRANSACTION
In February, 1999, MegsINet raised a total of $5 million by the sale of 2
million shares of 1999A Series 10% Senior Convertible Preferred Stock to Pequot
Private Equity Fund, L.P. and its affiliate Pequot Offshore Private Equity Fund,
Inc. (collectively referred to as "Pequot").
Some of the terms of this transaction include:
- The 1999A Series Preferred Stock is convertible into shares of MesgINet
common stock on a 1 to 1 basis;
- Pequot received warrants to purchase 666,666 shares of common stock at
$3.33 per share and has agreed to relinquish these warrants in exchange
for 35,000 shares of CoreComm Common Stock;
- MegsINet's ability to issue dividends, sell assets, merge or make
investments in other companies or place liens on its assets is
restricted;
- Pequot received veto rights regarding certain matters including the sale
of capital stock, issuance of options, joint ventures, certain governance
issues, capital expenditures or incurrence of new indebtedness over
limited amounts; and
- Pequot agreed to vote in favor of the merger with CoreComm.
All the restrictive covenants and veto rights granted to Pequot will be
extinguished upon the completion of the merger.
The Pequot transaction provided MegsINet with a substantial portion of the
working capital required by MegsINet to continue to execute its business plan
during the period of time required to complete the merger with CoreComm.
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MEGSINET MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a discussion of certain factors affecting MegsINet's
results for the two fiscal years ending December 31, 1998 and its liquidity and
capital resources. This discussion should be read along with the financial
statements and their notes, which can be found on pages F-1 to F-14 of this
document. These results are not necessarily indicative of any future results.
This discussion contains statements that plan for or anticipate the future.
Because these forward-looking statements include future risks and uncertainties,
there are factors that could cause actual results to differ materially from
those expressed or implied.
MegsINet's fiscal year ends on December 31. The years mentioned throughout
this discussion are fiscal years.
OVERVIEW
MegsINet plans to become an Integrated Communications Provider ("ICP"), by
offering local and long distance telephone services and Internet access to
businesses and consumers on a national basis. MegsINet is constructing a state
of the art packet telecommunications network to provide high-speed data, voice
and video services. Currently, MegsINet's focus is on the Internet Service
Provider (ISP) business with over 45,000 customers. However, MegsINet is seeking
to expand its business into the competitive local exchange carrier (CLEC) and
Internet Telephony Service Provider (ITSP) businesses. To that end, MegsINet:
- has entered into a joint venture with Northern Telcom, Inc. (Nortel) to
use Nortel's latest generation of switched service technology.
- is in the process of registering to operate as a CLEC in the contiguous
48 states.
- is also in the process of becoming eligible to be a long distance carrier
in those states.
- has received FCC approval that will allow it to provide certain
international phone services.
When it completes these and other related steps, MegsINet believes it will
be one of the first ICPs to provide services as an ISP, CLEC, and Interexchange
Company.
RESULTS OF OPERATIONS -- COMPARISON OF 1998 AND 1997
Revenues:
MegsINet's revenues for 1998 increased by $2.6 million from $1.6 million to
approximately $4.2 million. This increase was due to the continued growth in
revenue from Internet dial up access customers, as well as an increase in
MegsINet's dedicated access and web hosting customers.
Cost of Sales:
MegsINet's cost of sales for 1998 increased by $3.8 million from
approximately $1.1 million, or 68% of revenues, to approximately $4.9 million,
or 117% of revenues. Cost of sales is composed mainly of the cost associated
with the purchase of equipment related to MegsINet's network, dedicated
facilities between Points of Presence (POPs) in the markets served by MegsINet
and cost of phone lines supporting the dialup access ports.
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The increase in the cost of sales as a percentage of revenues was due to the
rapid expansion of the network into new markets during 1998. MegsINet served
approximately 20 markets at December 31, 1997 and 50 at December 31, 1998.
Operating Expenses:
MegsINet's operating expenses for 1998 increased by $2.7 million from $1.1
million, or 69% of revenues, to approximately $3.8 million, or 92% of revenues.
In 1998, MegsINet hired additional employees to support the expansion of its
network and operations and to support the planned launch of MegsINet -- CLEC.
The added employees caused an increase in operating expenses as a percentage of
revenues.
Interest Expense:
MegsINet's interest expense for 1998 increased by approximately $500,000
from $127,000, or 8% of revenues, to approximately $658,000, or 16% of revenues.
The increase in interest expense as a percentage of revenues was due to
equipment financing and working capital financing MegsINet obtained to support
the expansion of the network.
LIQUIDITY AND CAPITAL RESOURCES
MegsINet has not generated net cash from operations since its inception.
MegsINet's primary source of cash has come from private sales of equity
securities, loan proceeds and other financing activities. MegsINet also has
available equipment and working capital loans and equipment leases from major
equipment vendors. Total cash from financing activities for 1998 was
approximately $12.9 million, which was an increase of 11.3 million. In 1997,
total cash provided by financing activities was approximately $1.6 million.
At December 31, 1998 MegsINet's principal sources of liquidity was
approximately $1 million in cash, $4 million of availability under working
capital lines of credit and approximately $170 million of equipment financing
lines of credit from Cisco, Ascend and Nortel. Additionally, under an agreement
dated February 19, 1999, MegsINet raised approximately $5 million from the sale
of Preferred Stock.
MegsINet believes that these capital resources will provide it with
sufficient resources to fund its operations through approximately the second
quarter of 1999. If the merger with CoreComm is not completed by that time,
MegsINet will seek alternate sources of capital.
MATERIAL COMMITMENTS
MegsINet has the following material commitments in the ordinary course of
business including:
- - MegsINet has entered into a contract with Nortel to purchase up to ten (10)
DMS-500 networks. MegsINet also is committed to make a final payment of $1
million on the $4 million up-front fee associated with this contract;
- - MegsINet has entered into a professional services contract with Nortel
associated with the start of operations of the first switch in the amount of
$750,000;
- - MegsINet has a monthly take or pay commitment for telecommunication facilities
with IXC Communications, Inc. of $250,000;
- - MegsINet has an annual take or pay commitment for telecommunication facilities
with American Communications Services, Inc. of $540,000;
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- - MegsINet has financed equipment in its network whereby MegsINet has committed
to numerous capital and operating lease obligations which currently total
approximately $350,000 per month;
- - MegsINet has ongoing obligations under service agreements with numerous
telecommunications providers which currently total approximately $650,000 per
month; and
- - MegsINet has monthly payment obligations for equipment and working capital
loans which total $500,000 per month.
YEAR 2000 READINESS DISCLOSURE
General
The advent of the year 2000 poses certain technological challenges
resulting from a reliance in computer technologies on two digits rather than
four digits to represent the calendar year (e.g., "98" for "1998"). Computer
technologies programmed in this manner, if not corrected, could produce
inaccurate or unpredictable results or system failures in connection with the
transition from 1999 to 2000, when dates will begin to have a lower two-digit
number than dates in the prior century. This problem, the so-called "Year 2000
Problem" or "Y2K Problem," may have a material adverse effect on MegsINet's
financial condition, results of operations, business or business prospects
because MegsINet relies extensively on computer technology to serve its
customers and manage financial information.
MegsINet's State of Readiness
To deal with the Year 2000 Problem, MegsINet is developing a Year 2000
Action Plan (the "Plan"), specifying a range of tasks and goals to be achieved
at various dates before the year 2000. To date, the Plan is on target and major
deadlines have been met. Senior management and the board of directors of
MegsINet are regularly apprised of MegsINet's progress, and both provide input
and guidance on a regular basis.
MegsINet's network and overall business operations are dependent on a
significant number of computer based systems including systems and applications
that provide customers with Internet access, web hosting and email. New customer
service offerings currently planned but not yet implemented such as local and
long distance telephone service, when implemented, will also be dependent on
computer based systems. Customer billing and other administrative systems are
also dependent on computer based systems. MegsINet has begun to identify those
internal systems which are in need of modification or renovation to minimize
disruptions or failures related to the Y2K Problem, and such systems have either
already been modified or replaced, or such upgrades or replacements are
scheduled to be completed by the third quarter of 1999.
MegsINet has also begun the testing phase of its Plan with respect to those
mission critical systems that are operated by MegsINet internally. Testing of
internal mission critical systems is scheduled to be substantially completed
prior to the third quarter of 1999.
MegsINet has actively monitored the Y2K preparedness of its third party
providers and servicers, utilizing various methods for testing and verification.
However, MegsINet's ability to evaluate is limited to some extent by the
willingness of vendors to supply information and the ability of vendors to
verify the Y2K preparedness of their own systems or their sub-providers.
MegsINet has requested certifications of Year 2000 preparedness from principal
software and equipment providers. In those cases where a vendor has not
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been able to certify their product's preparedness with respect to the Y2K
problem, MegsINet has taken steps to bring the system into compliance or to
replace the system. MegsINet's network hardware consists principally of
equipment supplied by Ascend Communications and Cisco Systems Inc. MegsINet has
received certifications from those companies that all such equipment will
function properly through the transition from 1999 to 2000. The Nortel DMS-500
switch currently under construction will be certified by Nortel to function
properly through the transition from 1999 to 2000 prior to the completion of its
installation.
MegsINet has not conducted any assessment of major customers. As is the
case with other similarly situated companies, if current or future customers
fail adequately to prepare for the Year 2000 Problem, or if they divert
technology expenditures (especially technology expenditures that were reserved
for enterprise software) to address the Y2K Problem, MegsINet's financial
condition, results of operations, business or business prospects could be
adversely impacted.
The Costs to Address MegsINet's Year 2000 Issues
MegsINet's Y2K costs have been and are expected to remain immaterial, and
include internal personnel costs to manage the process and external consulting
or advisory fees, technical support for MegsINet's products, product engineering
and customer satisfaction, which collectively have been and are expected to be
minimal. MegsINet has funded, and plans to fund, its Year 2000 related
expenditures out of general operating cash flows.
Year 2000 Risks Facing MegsINet and MegsINet's Contingency Plans
The failure of MegsINet to substantially complete its Plan could result in
an interruption in or failure of certain normal business activities or
operations. Such failures could materially adversely affect MegsINet's results
of operations, liquidity and financial condition. Currently, the Plan is on
schedule and management believes that successful completion of the Plan should
significantly reduce the risks faced by MegsINet with respect to the Year 2000
Problem.
MegsINet does not have any significant concentration of customers from any
particular industry (to the extent some industries might be particularly
susceptible to Y2K concerns), and no individual customer accounts for a
significant portion of MegsINet's revenue. However, management anticipates some
negative impact on the performance of various customer accounts due to failure
of the customers to prepare adequately for the Year 2000 Problem. In a
worst-case scenario, these customer-related difficulties might cause a
disruption in cash flows to MegsINet in the early months of 2000, and may
require MegsINet to seek interim financing.
MegsINet, like similarly-situated enterprises, is subject to certain risks
as a result of possible industry-wide or area-wide failures triggered by the
Year 2000 Problem. For example, the failure of certain utility providers (e.g.,
electricity, gas, telecommunications) to avoid disruption of service in
connection with the transition from 1999 to 2000 could materially adversely
affect MegsINet's results of operations, liquidity and financial condition. In
management's estimate, such a system-wide or area-wide failure presents a
significant risk to MegsINet in connection with the Year 2000 Problem because
the resulting disruption may be entirely beyond the ability of MegsINet to cure.
The significance of any such disruption would depend on its duration and
systemic and geographic magnitude. Of course, any such disruption would likely
impact businesses other than MegsINet.
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In order to reduce the risks enumerated above, MegsINet has begun to
develop contingency plans. These activities are anticipated to be completed
during the third quarter of 1999. Certain catastrophic events (such as the loss
of utilities or the failure of certain governmental bodies to function) are
outside the scope of MegsINet's contingency plans, although MegsINet anticipates
that it would respond to any such catastrophe in a manner designed to minimize
disruptions in customer service, and in full cooperation with its peer
providers, community leaders and service organizations.
After the merger, the combined company intends to continue the assessment,
implementation, remediation, testing and contingency planning described above
related to the Year 2000 Problem. The risks and potential adverse effects and
consequences associated with the Year 2000 Problem currently faced by each
company and described above will continue to exist. Although CoreComm and
MegsINet intend to take appropriate actions to reduce the risk of disruption or
delay in ongoing Year 2000 compliance programs following the merger, there can
be no assurance that the merger will not cause some delay or disruption.
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UNAUDITED PRO FORMA FINANCIAL INFORMATION
The unaudited pro forma financial information gives effect to (i) the
acquisition of the assets and related liabilities of OCOM in June 1998, (ii) the
acquisition of all of the outstanding capital stock of Digicom, Inc. in April
1998, (iii) the acquisition of all of the operating assets of Wireless Outlet in
April 1998, (iv) the acquisition in November 1998 of Stratos Internet Group,
Inc. (collectively the "acquisitions") and (v) the proposed acquisition of
MegsInet. The pro forma financial information is based on the historical
financial statements of the Company, OCOM, Digicom, Wireless Outlet, Stratos and
MegsINet.
The acquisitions have been accounted for using the purchase method of
accounting. Accordingly, assets acquired and liabilities assumed have been
recorded at their estimated fair value, which are subject to further adjustment
based upon appraisals and other analysis. The contribution of assets initially
acquired by CCPR from CCPR to the Company were accounted for at historical cost
in a manner consistent with a transfer of entities under common control which is
similar to that used in a "pooling of interests." The Company's historical
financial statements include the results of the contributed companies for all
periods owned by CCPR.
The unaudited pro forma condensed consolidated statement of operations for
the year ended December 31, 1998 gives effect to the acquisitions as if they had
been consummated on January 1, 1998. The unaudited pro forma condensed
consolidated balance sheet as of December 31, 1998 gives effect to the
acquisition of MegsINet as if it had been consummated on December 31, 1998.
The pro forma adjustments are based upon available information and
assumptions that management believes are reasonable at the time made. Management
believes that any variations from the available information and assumptions
applied will not have a material effect on the pro forma financial statements
presented. The unaudited pro forma condensed consolidated financial statements
do not purport to present the financial position or results of operations of the
Company had the acquisitions occurred on the dates specified, nor are they
necessarily indicative of the financial position or results of operations that
may be achieved in the future. The unaudited pro forma condensed consolidated
statements of operations do not reflect any adjustments for synergies that
management expects to realize commencing upon consummation of the acquisitions.
No assurances can be made as to the amount of cost savings or revenue
enhancements, if any, that may be realized.
The unaudited pro forma financial statements should be read in conjunction
with the financial statements and notes thereto of the Company and OCOM (its
predecessor) incorporated by reference herein and the financial statements of
MegsINet appearing elsewhere in this proxy statement-prospectus.
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CORECOMM LIMITED
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PREDECESSOR
(OCOM) PROFORMA
JANUARY 1, 1998 FOR
CORECOMM TO MAY 31, OTHER COMPLETED MEGSINET
HISTORICAL 1998(1) ACQUISITIONS(2) ADJUSTMENTS ACQUISITIONS HISTORICAL ADJUSTMENTS
---------- --------------- --------------- ----------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues................. $ 6,713 $ 1,452 $ 3,334 $ -- $ 11,499 $ 4,172 $ --
Operating expenses....... 5,584 772 2,025 -- 8,381 4,867 --
Selling, general and
administrative
expenses............... 13,989 3,205 1,077 -- 18,271 2,739 --
Compensation charge from
the issuance of stock
options................ 4,586 -- -- (4,586)(C) -- -- --
Depreciation............. 749 255 133 -- 1,137 1,082 --
Amortization............. 231 2 -- 195(B) 428 4,922(B)
-------- ------- ------ ------- -------- ------- -------
Operating loss........... (18,426) (2,782) 99 4,391 (16,718) (4,516) (4,922)
Interest income and
other.................. 2,632 -- -- -- 2,632 -- --
Interest expense......... (21) -- -- -- (21) (659) --
Income tax............... (440) -- -- -- (440) -- --
-------- ------- ------ ------- -------- ------- -------
Net income/(loss)........ $(16,255) $(2,782) $ 99 $ 4,391 $(14,547) $(5,175) $(4,922)
======== ======= ====== ======= ======== ======= =======
Number of weighted
average shares
outstanding............ 13,190 1,442(A)
======== =======
Basic and diluted net
(loss) per share....... $ (1.23)
========
<CAPTION>
PROFORMA
--------
<S> <C>
Revenues................. $ 15,671
Operating expenses....... 13,248
Selling, general and
administrative
expenses............... 21,010
Compensation charge from
the issuance of stock
options................ --
Depreciation............. 2,219
Amortization............. 5,350
--------
Operating loss........... (26,156)
Interest income and
other.................. 2,632
Interest expense......... (680)
Income tax............... (440)
--------
Net income/(loss)........ $(24,644)
========
Number of weighted
average shares
outstanding............ 14,632
========
Basic and diluted net
(loss) per share....... $ (1.68)
========
</TABLE>
- -------------------------
(1) CoreComm's predecessor for the period from January 1, 1998 to May 31, 1998.
(2) For the periods from January 1, 1998 to date of acquisition.
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CORECOMM LIMITED
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
CORECOMM MEGSINET
HISTORICAL HISTORICAL ADJUSTMENTS PROFORMA
---------- ---------- ----------- --------
<S> <C> <C> <C> <C>
Cash and cash equivalents................. $ 26,161 $ 1,072 $(12,251)(A)(D) $ 14,982
Marketable securities..................... 110,718 -- -- 110,718
Accounts receivable, net and other........ 3,748 544 -- 4,292
-------- ------- -------- --------
Total Current Assets............ 140,627 1,616 (12,251) 129,992
Fixed assets, net......................... 3,582 26,802 -- 30,384
LMDS license costs........................ 25,366 -- -- 25,366
Goodwill, net............................. 4,028 -- 49,215(A) 53,243
Other, net................................ 2,923 -- -- 2,923
-------- ------- -------- --------
$176,526 $28,418 $ 36,964 $241,908
======== ======= ======== ========
Accounts payable and accrued expenses..... $ 6,184 $11,970 $ -- $ 18,154
Current portion of note payable and
capital lease obligations............... 133 5,853 -- 5,986
Other..................................... 411 642 -- 1,053
-------- ------- -------- --------
Total Current Liabilities....... 6,728 18,465 -- 25,193
Non-current liabilities................... 501 12,041 -- 12,542
Shareholders' equity...................... 169,297 (2,088) 36,964(A) 204,173
-------- ------- -------- --------
$176,526 $28,418 $ 36,964 $241,908
======== ======= ======== ========
</TABLE>
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CORECOMM LIMITED
PRO FORMA ADJUSTMENTS
<TABLE>
<S> <C> <C>
A. Purchase price of MegsINet
CoreComm shares to be issued to MegsINet shareholders....... 1,442,000
CoreComm closing price on date prior to announcement........ $ 21.375
-----------
30,824,000
Value of MegsINet stock options converted to CoreComm stock
options..................................................... 4,052,000
Cash portion of purchase price (including fees of
$500,000)................................................... 17,251,000
-----------
Total purchase price 52,127,000
MegsINet shareholders' deficiency at December 31, 1998...... 2,088,000
Sale of MegsINet stock in February 1999..................... (5,000,000)
-----------
Excess of purchase price over net tangible assets
acquired.................................................... $49,215,000
===========
B. To record the amortization of intangibles(1)
Amortization of intangibles over 10 years:
For the year ended December 31, 1998 (1 year of amortization
less the historical amount recorded) for the completed
acquisitions................................................ $ 195,000
===========
For the year ended December 31, 1998 for MegsINet
acquisition................................................. $ 4,922,000
===========
C. To adjust for compensation recorded in connection with the
spin off of CoreComm to the shareholders of CCPR............ $(4,586,000)
===========
D. To record issuance by MegsINet in February 1999 of
Convertible Preferred Stock for $5,000,000.................. $ 5,000,000
===========
</TABLE>
- -------------------------
(1) The excess of the purchase price over the net tangible assets acquired is
being allocated to intangible assets. The intangible assets arising from the
purchase include customer lists and goodwill. The amount of each individual
intangible is not currently determinable. The amounts of each intangible
will be determined based on appraisals and other analyses. The amortization
period for each may vary, although it is assumed in the Pro Forma Adjustment
that 10 years is a representative blended amortization period.
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COMPARISON OF RIGHTS OF HOLDERS OF
MEGSINET COMMON STOCK AND
CORECOMM COMMON STOCK
This section of the proxy statement-prospectus describes certain
differences between the rights of holders of MegsINet common stock and CoreComm
common stock. While we believe that the description covers the material
differences between the two, this summary may not contain all of the information
that is important to you. You should carefully read this entire document and the
other documents we refer to for a more complete understanding of the differences
between being a shareholder of MegsINet and being a shareholder of CoreComm.
As a shareholder of MegsINet, your rights are governed by MegsINet's
articles of incorporation, as currently in effect, and MegsINet's by-laws, both
of which adhere to the requirements of Illinois law as stipulated in the
Illinois Business Corporation Act (the "Illinois Act"). After completion of the
merger, you will become a shareholder of CoreComm. As a CoreComm shareholder,
your rights will be governed by CoreComm's memorandum of association and
CoreComm's by-laws, both of which adhere to the requirements of Bermuda law as
stipulated in the Bermuda Companies Act 1981, as amended (the "Bermuda Act").
CLASSES OF COMMON STOCK OF MEGSINET AND CORECOMM
We each have one class of common stock issued and outstanding. Holders of
CoreComm common stock and holders of MegsINet common stock are each entitled to
one vote for each share of common stock held.
VOTING RIGHTS
Under Bermuda law, questions proposed for consideration at a company's
general meeting are decided by a simple majority vote or as the by-laws of the
Bermuda company may prescribe.
Any question proposed for consideration at a general meeting may be decided
on a show of hands, in which each shareholder present in person is entitled to 1
vote that is cast by raising his or her hand. In the alternative, a poll may be
demanded by:
- the chairman of the meeting;
- at least 3 shareholders present in person or represented by proxy;
- any shareholders holding between them at least 10% of the total voting
rights of all shareholders entitled to vote at the meeting; or
- voting shareholders who have paid up an aggregate sum on their shares
equal to at least 10% of the total sum paid up on all voting shares.
In a poll, each shareholder is entitled to 1 vote cast either personally or
by proxy for each share held. Bermuda law does not require any prior notice of a
poll.
The CoreComm by-laws provide that unless the board of directors determines
otherwise, no shareholder is entitled to vote at any general meeting unless all
sums presently payable by the shareholder in respect of its CoreComm shares have
been paid. Any shareholder may appoint a standing proxy or representative by
delivering to CoreComm a signed authorization. A proxy which is not a standing
proxy should be
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delivered to CoreComm at least 48 hours prior to a meeting at which the
shareholder seeks to vote by proxy.
With some exceptions, actions by the shareholders of CoreComm require a
simple majority of the votes cast.
The quorum required at any shareholder meeting is 2 or more persons holding
the majority of the shares of the relevant class, provided, however, that if the
relevant class of shareholders has only 1 shareholder, the presence of that
shareholder alone constitutes a quorum.
Under the Bermuda Act, CoreComm must circulate notice of a shareholder
proposal for a resolution together with a statement of up to 1,000 words in
respect of the proposed resolution. The resolution must be supported by the
lesser of 100 shareholders or shareholders representing 5% of the total voting
rights. The resolution and notice is circulated at the expense of the
shareholders making the proposal, unless CoreComm otherwise resolves. The
proposal must be delivered to CoreComm at least 6 weeks before the meeting.
At any MegsINet meeting, only business specified in the notice of the
meeting or otherwise directed by the board of directors may be transacted.
Shareholders may vote in person or by proxy. The presence of holders of a
majority of the issued and outstanding shares entitled to vote on a matter at a
meeting constitutes a quorum. If a quorum is present, actions by the
shareholders of MegsINet require a simple majority of the votes cast, except as
otherwise provided in the articles of incorporation or as required by Illinois
law. Under Illinois law the following company acts require the vote of holders
of more than a majority of the outstanding shares:
- mergers and sales, leases or exchanges of assets not in the ordinary
course of business require the vote of holders of 66.667% of the
outstanding shares; and
- business combinations require the vote of holders of 80% of the
outstanding shares or holders of 66.667% of the disinterested shares.
However, Illinois law allows a company to amend its articles of
incorporation to specify a different voting requirement, but in no case, less
than a majority. The merger is contingent on MegsINet shareholders amending the
articles of incorporation to permit mergers and sales, leases or exchanges of
assets not in the ordinary course of business to be approved upon a vote of
holders of a simple majority of the outstanding shares, which amendment only
requires approval of the holders of a simple majority of the outstanding shares.
CLASSIFIED BOARD OF DIRECTORS
Both Bermuda and Illinois law provide that a corporation's board of
directors may be divided into various classes with staggered terms of office.
Both CoreComm's and MegsINet's boards of directors are divided into 3 classes,
as nearly equal in size as possible, with each class serving staggered terms of
a maximum of three years so that approximately one-third of the directors are
elected at each annual meeting. CoreComm directors in Class I serve until the
date of the annual meeting in the year 2000, and directors in Classes II and III
serve until the annual meetings in the years 2001 and 2002, respectively.
MegsINet directors in Class I serve until the annual meeting in 2001, and
directors in Classes II and III server until the annual meetings in 2002 and
2003, respectively. Both CoreComm and MegsINet directors are elected for terms
of 3 years.
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NUMBER OF DIRECTORS
CoreComm's board of directors currently consists of 7 directors. The
by-laws provide that the number of directors shall consist of not more than 15
nor less than 3 directors. In addition, pursuant to authority conferred under a
shareholder resolution, and subject to any rights of holders of any shares of
preferred stock, a majority of the directors then in office is empowered to fill
any vacancies on the board. A director appointed to fill a casual vacancy will
hold office only until the next CoreComm annual meeting and will not be
allocated to a class of directors. If not reappointed at the next CoreComm
annual meeting, the director appointed to fill a vacancy will vacate their
office at the end of the meeting.
MegsINet's board of directors currently consists of 5 members. The number
of MegsINet directors may not be less than 4 or more than 9. The number of
directors may be changed by a duly adopted amendment to MegsINet's articles of
incorporation or by-laws as enacted by the affirmative vote of holders of a
majority of the outstanding shares.
REMOVAL OF DIRECTORS
Under the CoreComm by-laws, a director may be removed by the shareholders
only for "cause." CoreComm shareholders may remove a director by the affirmative
vote of a majority of shareholders entitled to vote at a special meeting called
for the purpose of removing a director. Notice of the special meeting must be
delivered to the director subject to removal at least 14 days prior to the
meeting. The CoreComm shareholders or, if the shareholders fail to act, the
remaining CoreComm directors have the power to appoint any qualified person to
fill a casual vacancy in the Board to hold office until the next following
annual general meeting, and the existing directors may act notwithstanding any
vacancy in the board of directors.
CoreComm's by-laws provide that a director automatically ceases to be a
director if he or she:
- resigns his or her office in writing delivered to CoreComm or tendered at
a meeting;
- becomes of unsound mind or a patient as determined by applicable Bermuda
statutes regarding mental health;
- becomes bankrupt or compounds with his or her creditors;
- is prohibited by law from being a director;
- is absent from board meetings for more than 6 consecutive months without
board permission and the board resolves to vacate his or her office; or
- he or she ceases to be a director, or pursuant to the Companies Act or
the CoreComm by-laws, or is removed pursuant to the by-laws.
Holders of a majority of the outstanding shares of MegsINet may remove a
director with or without "cause" by the affirmative vote of holders of a
majority of the outstanding shares of MegsINet. However, MegsINet shareholders
may not remove a director unless notice for the shareholder meeting announces
that the purpose of the meeting is the removal of one or more directors and
those directors are enumerated in the notice. A director may only be removed by
shareholders of the class or series that elected the director.
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FILLING VACANCIES ON THE BOARD OF DIRECTORS
A majority of the remaining members of the board of directors may fill any
newly created directorships in either of our boards of directors resulting from
any increase in the number of authorized directors or any vacancies. The right
of the board to fill casual vacancies does not preclude shareholders from
similarly doing so by the affirmative vote of all outstanding shares.
Newly created directorships or decreases in directorships in either of our
boards of directors are to be apportioned among the classes of directors so as
to make all classes as nearly equal in number as practicable, provided that no
decreases in the number of directors in either of our boards of directors may
shorten the term of any director then in office.
We try to add any newly created directorship to the class of directors that
has the latest expiration date, unless a majority of the directors decides
otherwise. If we eliminate directorships we select the new directors from the
class whose term has the earliest expiration date unless otherwise provided for
by resolution of the majority of the directors then in office.
INTERESTED DIRECTORS
Transactions between CoreComm and MegsINet and interested directors are not
voidable by CoreComm or MegsINet if those directors are not liable to CoreComm
or MegsINet for any profit realized pursuant to such transaction if the nature
of the interest is disclosed at the first opportunity at a meeting of directors,
and a majority of disinterested directors or shareholders entitled to vote
ratify the transaction.
LIMITS ON SHAREHOLDER ACTION BY WRITTEN CONSENT
CoreComm shareholders may take action by attending annual or special
meetings of shareholders, or by effecting a resolution through the written
consent of all CoreComm shareholders entitled to vote unless they want to remove
an auditor or director. The date of the resolution in writing is deemed to be
the date on which the resolution was signed.
MegsINet shareholders may take action by attending annual or special
meetings of shareholders, or by setting forth the action in a written consent.
If the consent is signed by a majority but fewer than all of the shareholders
entitled to vote, then the consent will take effect only if notice of the
resolution is delivered to all shareholders at least 5 days prior to execution
of the consent, and if a second notice is delivered after execution to the
non-signing shareholders. Written consents cannot be used to authorize a
business combination.
ABILITY TO CALL SPECIAL MEETINGS
Special meetings of CoreComm shareholders may be called by CoreComm's board
of directors or the shareholders in compliance with the Bermuda Act.
Special meetings of MegsINet shareholders may be called by 2 members of
MegsINet's board of directors or the president of MegsINet. Business transacted
at a MegsINet special meeting is limited to the purposes stated in the notice of
the meeting.
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ADVANCE NOTICE PROVISIONS FOR SHAREHOLDER MEETINGS AND PROPOSALS
The CoreComm by-laws allow shareholders to nominate candidates for election
to CoreComm's board of directors at any annual meeting or any special
shareholder meeting at which the board of directors has determined that
directors will be elected. However, nominations and proposals may only be made
by a shareholder who has given timely written notice to the Secretary of
CoreComm before the annual or special shareholder meeting.
Under CoreComm's by-laws, to be timely, notice of shareholder nominations
or proposals to be made at an annual shareholder meeting must be received by the
Secretary of CoreComm not less than 75 days nor more than 90 days before the
first anniversary of the preceding year's annual shareholder meeting. However,
in the event that less than 90 days' notice or prior public disclosure of the
meeting date is given or made to shareholders, notice by the shareholder must be
received not later than the fifteenth day following the day on which notice of
the date of the meeting was mailed or public disclosure was made, whichever
first occurs.
Under the Nomination Procedure, a shareholder's notice to CoreComm
proposing to nominate a person for election as a director must contain certain
information about each proposed nominee and the nominating shareholder,
including, without limitation,
- the name, age, business address and residence address of the nominee,
- the principal occupation or employment of the nominee,
- the class, series and number of shares of capital stock of CoreComm which
are beneficially owned by the nominee,
- any other information relating to the nominee that is required to be
disclosed in solicitations of proxies for election of directors pursuant
to the Rules and Regulations of the Commission under the Exchange Act,
- the name and record address of the shareholder, and
- the class, series and number of shares of capital stock of CoreComm which
are beneficially owned by the shareholder. CoreComm may require any
proposed nominee to furnish such other information as may reasonably be
required by CoreComm to determine the eligibility of such proposed
nominee to serve as a director of CoreComm. If the officer presiding at a
meeting determines that a person was not nominated in accordance with the
correct procedure, the person will not be eligible for election as a
director and the nomination will be disregarded.
Additionally, under CoreComm's by-laws, to be timely, notice of an annual
general meeting or a special shareholder meeting must be received not less than
10 days nor more than 60 days before the annual or special meeting. The
accidental omission to give notice of an annual or special meeting or the
accidental omission to send a proxy does not by itself invalidate the
proceedings of an otherwise procedurally valid meeting. Shareholders are deemed
to have received notice of the meeting if they are present in person or by
proxy.
MegsINet also has an advance notice procedure for shareholders to nominate
candidates for election to MegsINet's board of directors at both annual and
special shareholder meetings, and to bring proposals before MegsINet's annual
shareholder meeting. However, the deadlines for these notices differ from
CoreComm's requirements.
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Furthermore, nominations of directors may only be made by a shareholder who has
given timely written notice to the Secretary of MegsINet before the annual or
special meeting.
To be timely, a shareholder must deliver a notice of a nominee at a special
meeting to the Secretary of MegsINet at least 10 days and not more than 60 days
before the date of the meeting. In the case of a meeting at which a change of
control or disposition of assets will be considered, notice must be given at
least 20 days and not more than 60 days prior to the date of the meeting. For
annual meetings, notice must be received at the principal offices of MegsINet at
least 120 days and not more than 150 days prior to the anniversary of the notice
of last year's annual meeting.
A shareholder's notice regarding a proposal must set forth as to each
matter the shareholder proposes to bring before the annual meeting the following
information:
- a brief description of the business desired to be brought before the
annual meeting and the reasons for conducting such business at the annual
meeting;
- the name and address, as they appear on MegsINet's books, of the
shareholder proposing such business;
- the class and number of shares of MegsINet which are beneficially owned
by the shareholder; and
- any material interest of the shareholder in such business.
AMENDMENT OF MEMORANDUM OF ASSOCIATION AND ARTICLES OF INCORPORATION
Bermuda law provides that a company may alter its memorandum of association
by passing a resolution at a general meeting of shareholders. Due notice of the
meeting and in some instances consent of the Bermuda Minister of Finance is also
required. Holders of at least 20% of any class of a Bermuda company's share
capital may apply to the Bermuda Supreme Court to annul any amendment. In
addition, under Bermuda law a company may by passing a resolution at a general
meeting of its shareholders, alter the conditions of its memorandum of
association to:
- increase its share capital,
- divide its shares into several classes,
- consolidate and divide its share capital into shares of a larger par
value,
- sub-divide its shares into shares of a smaller par value,
- change the currency denomination of its share capital, and
- cancel any shares which have not been taken or agreed to be taken by any
person and diminish the amount of its share capital accordingly,
if the company's by-laws permit. The CoreComm by-laws similarly provide
shareholders with the authority to alter the CoreComm memorandum of association.
Illinois Law requires the affirmative vote of the holders of 66.667% of the
outstanding shares in order to alter the articles of incorporation, but the
Illinois Act permits a corporation to decrease the voting requirement.
Accordingly MegsINet's articles of incorporation provide that the articles of
incorporation may be amended by the holders of not less than a majority of the
outstanding shares entitled to vote on any amendment and not less than a
majority of each class when class voting applies to amend its articles of
incorporation. Additionally, the affirmative vote of holders of 60% of the
outstanding shares
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of 1998A Series Preferred Stock is required to amend the articles if the
proposed amendment would adversely effect the preferred shareholders' rights.
Also, the affirmative vote of 66.667% of the outstanding shares of 1999A Series
Preferred Stock is required to amend the articles if the amendment would alter
the rights or authorized number of shares of 1999A Series Preferred Stock.
AMENDMENT OF BY-LAWS
Pursuant to the Bermuda Act, the CoreComm by-laws may only be amended by a
resolution of the board of directors, which is approved by the shareholders.
Additionally, the CoreComm by-laws provide that the following actions require a
vote of the holders of 66.667% of the shares entitled to vote:
- the repeal, alteration, amendment or recision of by-laws governing:
1. appointment and removal of directors;
2. indemnification of directors, officers and committee members;
3. alteration of CoreComm's by-laws; and
4. Certain Business Combinations.
Under Illinois law, shareholders entitled to vote have the power to adopt,
amend or repeal by-laws. In addition, a corporation may, in its articles of
incorporation, confer such power upon the board of directors. The shareholders
always have the power to adopt, amend or repeal by-laws, even though the board
may also be delegated such power.
MegsINet's board of directors is expressly authorized to adopt, amend and
repeal MegsINet's by-laws by an affirmative vote of a majority of the total
number of authorized directors at that time, regardless of any vacancies.
MegsINet's by-laws may also be adopted, amended and repealed by the affirmative
vote of the holders of at least a majority of the outstanding shares of capital
stock of MegsINet entitled to vote in the election of directors, voting together
as a single class. The power to amend the MegsINet by-laws may be supplemented
by appropriate provisions in the MegsINet articles of incorporation.
DERIVATIVE ACTIONS
The Bermuda courts ordinarily would be expected to follow English
precedent, which would permit a shareholder to commence a derivative action in
the name of the company to remedy a wrong done to the company only:
1. where the act complained of is alleged to be beyond the corporate power
of the company or illegal;
2. where the act complained of is alleged to constitute a fraud against
the minority shareholders by those controlling the company, provided that
the majority shareholders have used their controlling position to prevent
the company from taking action against the wrongdoers;
3. where an act requires approval by a greater percentage of the company's
shareholders than actually approved it; or
4. where there is an absolute necessity to waive the general rule that a
shareholder may not bring such an action in order that there not be a
violation of the company's memorandum of association or by-laws.
The actions summarized above are generally recognized as exceptions to the
rule in Foss v. Harbottle, under which only the company could initiate an action
for a wrong done to the company.
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There is a statutory remedy under Bermuda law which enables a shareholder
who complains that the affairs of a company are being or have been conducted in
a manner oppressive or prejudicial to some part of the shareholders, including
himself or herself, to petition the court, which may, if it is of the opinion
that to wind up a company would unfairly prejudice those shareholders, but that
otherwise the facts would justify a winding up order on just and equitable
grounds, make such order as it thinks fit. Bermuda law also provides that a
company may be wound up by the court if the court is of the opinion that it is
just and equitable to do so. The latter provision is also available to minority
shareholders seeking relief from the oppressive conduct of the majority.
Traditionally, such relief has been granted in relatively limited circumstances.
MegsINet shareholders do not have a direct and individual right to enforce
rights which could be asserted by the corporation, but may do so derivatively on
behalf of the corporation. Pursuant to Illinois law, upon compliance with
certain requirements, a shareholder may institute a derivative suit in the right
of the corporation against the present or former officers or directors of a
corporation because the corporation refused to enforce rights that could be
asserted by the corporation, if he or she was a shareholder at the time of the
transaction complained of, or if his or her stock thereafter devolved upon him
or her by operation of law from a person who was a shareholder at that time.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Bermuda Act and the Illinois Act permit a company to indemnify its
directors or officers in respect of any loss arising or liability attaching to
them by virtue of any negligence, default, breach of duty or breach of trust
committed in good faith.
Our respective certificates of incorporation and by-laws provide that any
person who was or is a party or is threatened to be made a party to or is
involved in any type of proceeding, because that person is or was a director or
officer, be indemnified against expenses, including attorney's fees, and held
harmless by each of us to the fullest extent permitted by Bermuda and Illinois
law.
The by-laws permit CoreComm to advance the expenses incurred in defending
any civil or criminal action for which indemnification is required against an
undertaking of the indemnified party is not entitled to be indemnified under the
by-laws and subject to a determination by the Board of Directors or, in
specified situations, independent legal counsel or a majority vote of the
shareholders, that indemnification would be proper in the circumstances.
CoreComm's by-law 151 stipulates that each shareholder and CoreComm agree
to waive any claim or right of action against any director, officer or committee
member for any failure to act or any action taken by a director, officer or
committee member in the performance of their duties with or for CoreComm. The
waiver does not extend to claims arising from the fraud of a director, officer
or committee member or any action to recover personal profit or advantage gained
by a director to which the director is not legally entitled.
PREFERRED STOCK
Both CoreComm's by-laws and MegsINet's articles of incorporation provide
that our boards of directors are authorized to provide for the issuance of
shares of preferred stock in 1 or more series, and to fix the designations,
powers, preferences and rights of the shares of each series and any
qualifications, limitations or restrictions thereof.
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Subject to any special rights conferred on the holders of any class of
shares, any CoreComm preferred stock may be issued by a majority vote of the
board of directors. The CoreComm board may act to issue preferred stock even
without shareholder approval. Approval by a majority vote of the CoreComm
directors is required to issue redeemable preferred stock. The CoreComm board of
directors acting alone may authorize CoreComm to repurchase its shares without
shareholder approval. By a majority vote of the shareholders, CoreComm may:
- increase its capital by an amount divided into shares of par value
determined by the shareholders;
- decrease its share capital or any share premium in any manner and on
terms determined by the shareholders;
- divide its shares into classes and attach any preferential or special
rights;
- consolidate and divide any of its share capital into shares of larger par
value or sub-divide its shares into shares of smaller par value;
- issue shares that do not carry voting rights;
- cancel shares that have not been taken and reduce its share capital by
the amount of cancelled shares; and
- change the currency and denomination of share capital.
Any special rights attaching to any class of CoreComm shares may be altered
with the consent in writing of the holders of at least 75% of the issued shares
of that class or by the majority vote of CoreComm shareholders taken at a
special meeting. Alteration of a special right attaching to a class of CoreComm
shares is deemed to occur when a reduction of capital paid on the shares is
executed in a manner other than a CoreComm redemption of the shares.
Substitution of other classes of shares ranking higher in priority for payment
of a dividend or in favorability of voting rights also constitutes an alteration
of the special rights attaching to a class of shares.
Under the Bermuda Act shareholders of CoreComm holding at least 10% of the
issued shares of a class of shares, the rights of which have been varied, may
apply to the court to have the variation cancelled. Where the application is
made the variation has no effect until it is confirmed by the court.
Shares of MegsINet preferred stock may be issued exclusively by the
MegsINet board of directors. The MegsINet board has authorized the issuance of
1998A Series Preferred Stock as well as 1999A Series Preferred Stock, which
provide that, in the event of a merger, reorganization or sale of substantially
all assets, the following rights attach:
- holders of 1998A Series Preferred Stock are entitled to convert their
preferred shares into the shares that are issuable in connection with the
transaction rather than common stock of MegsINet;
- each share of 1999A Series Preferred Stock will automatically be
converted into MegsINet common stock at the conversion price of $2.50 per
share of common stock;
- MegsINet must deliver notice of the transaction to the preferred
shareholders at least twenty days prior to the transaction; and
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- the affirmative vote of 60% of outstanding 1998A Series Preferred Stock
is required to approve the transaction, unless the preferred
shareholders' rights are not adversely affected or they receive
substantially similar rights at the conclusion of the transaction.
Additionally, the affirmative vote of 60% of the outstanding 1998A Series
Preferred Stock is required to approve amendment of the MegsINet articles if the
proposed amendment would adversely effect the preferred shareholders' rights.
The affirmative vote of 66.667% of the outstanding 1999A Series Preferred Stock
is required to approve amendment of the MegsINet articles if the proposed
amendment would alter the rights or authorized number of the 1999A Series
Preferred Stock.
BUSINESS COMBINATIONS
CoreComm by-laws require the affirmative vote of 66.667% of the voting
power of CoreComm to sanction any "Business Combination" (as defined) proposed
by a beneficial owner of more than 10% of CoreComm voting shares during the 2
years preceding the Business Combination ("Bermuda Interested Shareholder"). The
additional voting requirement does not apply if the Business Combination was
approved by at least a majority of directors who have served on the board prior
to the initiation of the Bermuda Interested Shareholder's ownership of CoreComm
stock and who are not affiliated with the Bermuda Interested Shareholder.
Approval by the disinterested directors also requires satisfaction of 2
conditions. First, the consideration paid to CoreComm shareholders in the
Business Combination must be at least equal to the higher of either:
(1) the highest per-share price paid by the Bermuda Interested Shareholder
during the 2 years preceding the date of the Business Combination; or
(2) the fair market value per share of CoreComm common stock on the date of
the Business Combination.
Second, proxies must be solicited in accordance with the rules of the Securities
and Exchange Commission, and regular dividends cannot be decreased as a result
of the transaction.
A "Business Combination" includes the following transactions:
- merger, consolidation or amalgamation with an interested shareholder or
any affiliate of an interested shareholder;
- sale or other disposition of assets having a fair market value of
$5,000,000 or more if an interested shareholder is a party to the
transaction;
- adoption of any plan for liquidation or dissolution or for amendment of
the by-laws; or
- any reclassification of securities, recapitalization, merger with a
subsidiary, or other transaction which has the effect, directly or
indirectly, of increasing the proportionate share of any class of
outstanding stock (or securities convertible into stock) owned by an
interested shareholder.
Under the Illinois Act, Sections 7.85 and 11.75, any Business Combination
with an Illinois Interested Shareholder requires the affirmative vote of at
least 80% of the combined voting power of outstanding shares of all classes and
66.667% of the disinterested shares. An Illinois Interested Shareholder is
defined as the beneficial owner of over 15% of the outstanding shares of the
Illinois corporation at any time in the 3 years preceding the
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date at which determination of interest is sought. The higher voting
requirements of this provision do not apply to a transaction if 66.667% of the
disinterested directors approve the transaction and comply with the
substantially similar conditions imposed upon CoreComm directors in a Business
Combination.
SHAREHOLDER RIGHTS PLAN
The following description of the CoreComm Rights Agreement is qualified in
its entirety by reference to the CoreComm Rights Agreement.
The Rights Agreement provides that 1 right will be issued with each share
of common stock issued on or after the date of the Distribution and prior to the
Rights Distribution Date (as hereinafter defined). The rights are not
exercisable until the Rights Distribution Date and will expire at the close of
business on December 31, 2010 unless previously redeemed by CoreComm. When
exercisable, each right entitles the owner to purchase from CoreComm
one-hundredth of a share of CoreComm's Series A Junior Participating Preferred
Stock at a purchase price of $100.00.
Except as described below, the rights will be evidenced by all the common
stock certificates and will be transferred with the common stock certificates,
and no separate rights certificates will be distributed. The rights will
separate from the common stock and a "Rights Distribution Date" will occur upon
the earlier of:
- 10 days following a public announcement that a person or group of
affiliated or associated persons (an "Acquiring Person") has acquired, or
obtained the right to acquire, beneficial ownership of 15% or more of the
outstanding shares of common stock (the "Shares Acquisition Date"); or
- 10 business days (or such later date as is determined by CoreComm's board
of directors) following the commencement of a tender offer or exchange
offer that would result in a person or group becoming an Acquiring
Person.
After the Rights Distribution Date, rights certificates will be mailed to
holders of record of common stock as of the Rights Distribution Date and,
thereafter the separate rights certificates alone will represent the rights.
The Series A Junior Participating Preferred Stock is entitled to a minimum
quarterly dividend payment of $0.01 per share and will be entitled to an
aggregate dividend of 100 times the dividend, if any, declared per share of
common stock. In the event of liquidation, the holders of the Series A Junior
Participating Preferred Stock will be entitled to a minimum preferential
liquidation payment of $100 per share and will be entitled to an aggregate
payment of 100 times the payment made per share of common stock. Each share of
Series A Junior Participating Preferred Stock will have 100 votes, and these
holders will vote together with the holders of common stock. In the event of any
merger, consolidation or other transaction in which shares of the common stock
are changed or exchanged, each share of Series A Junior Participating Preferred
Stock will be entitled to receive 100 times the amount received per share of
common stock. These rights are protected by customary antidilution provisions.
Because of the nature of the Series A Junior Participating Preferred Stock's
dividend, liquidation and voting rights, the value of one-hundredth of a share
of Series A Junior Participating Preferred Stock purchasable upon exercise of
each right should approximate the value of 1 share of common stock.
In the event that a person becomes an Acquiring Person, each holder of a
right will thereafter have the right to receive, upon the exercise thereof at
the then current exercise
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price, common stock (or, in certain circumstances, cash, property or other
securities of CoreComm) having a value equal to 2 times the exercise price of
the right. Following the occurrence of any such event, all rights that are, or
(under certain circumstances specified in the Rights Agreement) were,
beneficially owned by any Acquiring Person will be null and void. However,
rights are not exercisable following the occurrence of the event set forth above
until the rights are no longer redeemable by CoreComm.
In the event that, at any time following the Shares Acquisition Date,
- CoreComm is acquired in a merger or other Business Combination
transaction in which CoreComm is not the surviving corporation, or
- the common stock is changed or exchanged, or
- 50% or more of CoreComm's assets or earning power is sold or transferred,
each holder of a right has the opportunity to receive common stock of the
acquiring company having a value equal to 2 times the exercise price of the
right.
At any time prior to the earlier of 10 days following the Shares
Acquisition Date or the Final Expiration Date, CoreComm may redeem the rights in
whole, but not in part, at a price of $.01 per right. Immediately upon a
board-ordered redemption of the rights, the rights will terminate and the only
privilege of the rights holder will be to receive the $.01 redemption price.
Until a right is exercised, the holder has no rights as a shareholder of
CoreComm, including without limitation, the right to vote or to receive
dividends. While the distribution of the rights will not be taxable to
shareholders or to CoreComm, shareholders may, depending upon the circumstances,
recognize taxable income in the event that the rights become exercisable for the
Newco common stock (or other consideration) or for common stock of the acquiring
company as set forth above.
Other than those provisions relating to the principal economic terms of the
rights, any of the provisions of the Rights Agreement may be amended by the
board of directors prior to the Rights Distribution Date. After the Rights
Distribution Date, the provisions of the Rights Agreement may be amended by the
board of directors in order to cure any ambiguity, to make changes which do not
adversely affect the interests of holders of rights (excluding the interests of
any Acquiring Person) or to shorten or lengthen any time period under the Rights
Agreement, provided that no amendment to adjust the time period governing
redemption shall be made at such time as the rights are not redeemable.
MegsINet has no similar rights plan in place. Thus, as a result of the
merger, CoreComm shareholders will gain greater takeover protection. The rights
discourage takeovers because they will cause substantial dilution to a person or
group that acquires a substantial interest in CoreComm without the prior
approval of the board of directors.
AMALGAMATIONS, EXCHANGE OF ASSETS & MERGERS
CoreComm may acquire the business of another exempted Bermuda company
similarly exempt from Bermuda taxes or a company incorporated outside Bermuda
and carry on such business when it is within the objects of its memorandum of
association. CoreComm may also amalgamate with another Bermuda exempted company
or with a body incorporated outside Bermuda upon the approval of the board of
directors and a majority of the holders of the outstanding shares of CoreComm,
including any shares that would otherwise be non-voting shares. In the case of
an amalgamation, a dissenting
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shareholder may apply to a Bermuda court for a proper valuation of such
shareholder's shares if such shareholder is not satisfied that fair value has
been paid for such shares.
The Illinois Act requires the affirmative vote of the holders of 66.667% of
the outstanding shares entitled to vote as well as a majority vote of the board
of directors to approve a merger. The MegsINet articles of incorporation may
supersede this Illinois Act provision by specifying a lesser or greater vote
requirement. We expect that prior to the vote on this merger, MegsINet will
amend its articles to provide that only a majority need vote in favor of a
merger. Additionally, an affirmative vote by the holders of 60% of the
outstanding 1998A Series Preferred Stock is required to approve any merger,
reorganization or sale of substantially all assets, unless the preferred
shareholders' rights are not adversely affected or they receive substantially
similar rights at the conclusion of the transaction. The merger is contingent on
MegsINet shareholders amending the articles of incorporation to permit mergers
and other similar transactions to be approved by a vote of holders of a simple
majority of the outstanding shares.
SHORT FORM MERGER
Under Bermuda law an amalgamation is only permitted without shareholder
vote when between a parent company and its wholly owned subsidiary.
Pursuant to Bermuda law, where the transfer of shares or any class of
shares in a company to another company has, within 4 months after the making of
the offer in this regard by the transferee company, been approved by the holders
of not less than 90% in value of the shares or class of shares for which the
offer was made, subject to the satisfaction of certain conditions, the
transferee company may, within 2 months after the expiration of the 4 month
period, give notice to any dissenting shareholder that it desires to acquire his
or her shares. Such transferee company shall then be entitled and bound to
acquire such shares on the terms on which shareholders who approved such scheme
or contract transferred their shares, unless the Bermuda Supreme Court orders
otherwise upon application by the dissenting shareholder. "Dissenting
shareholder" includes a shareholder who has not assented to a scheme or contract
and any shareholder who has failed or refused to transfer shares to the
transferee company.
Within 1 month of the transfer of 90% in value of the transferor company's
shares or class of shares to the transferee company, or to its nominee, the
transferee company is required to notify the holders of the remaining shares of
such transfer. Within 3 months of the giving of notice, any such remaining
holder of shares may require the transferee company to acquire his or her shares
on the same terms as provided for in the scheme or contract, or upon such terms
as may be agreed, or upon such terms as the Bermuda Supreme Court may determine
upon application of the transferee company or the shareholder.
Under Bermuda law, a holder or holders of not less than 95% of the shares,
or of any class of shares, of a Bermuda company may give notice to the remaining
shareholders, or the remaining shareholders of the appropriate class, of their
intention to acquire the remaining shares, on the terms set out in the notice.
Bermuda law provides that when such notice is given the acquiring holder or
holders shall be entitled and bound to acquire the shares of the remaining
shareholders on the terms set out in the notice, unless the remaining
shareholders exercise statutory appraisal rights.
85
<PAGE> 95
Illinois law permits certain mergers without shareholder approval where the
acquiror gains a controlling interest of 85% of the outstanding shares or where
a subsidiary merges into a parent company owning at least 90% of the subsidiary.
DISSENTERS' RIGHTS
Under Bermuda law, a properly dissenting shareholder who did not vote in
favor of an amalgamation and who is not satisfied that he or she has been
offered fair value for his or her shares may apply to a court to appraise the
fair value of his or her shares. If the court-appraised value is greater than
the value received or to be received in the amalgamation, the company must pay
the court-appraised value to the dissenting shareholder within 1 month of the
appraisal. Bermuda law additionally provides a right of appraisal in respect of
the situation in which a holder of not less than 95% of the shares or any class
of shares in the company proposes to acquire the remaining shares.
Pursuant to Illinois law, a shareholder is entitled, to dissent from the
following corporate actions:
- mergers and share exchanges if shareholder authorization is required for
the transaction by the Illinois Act or the company's articles of
incorporation;
- the sale, lease or exchange of all or substantially all of the corporate
assets; and
- amendments to the articles of incorporation that materially and adversely
affect rights in respect of a dissenter's shares.
It is a condition of MegsINet's obligation to consummate the merger that no
MegsINet shareholder exercise dissenter's appraisal rights
86
<PAGE> 96
SHARE OWNERSHIP BY PRINCIPAL
SHAREHOLDERS, MANAGEMENT AND DIRECTORS OF MEGSINET
The following table sets forth information concerning the beneficial
ownership of common stock of MegsINet as of March 11, 1999 for the following:
- each person or entity who is known by MegsINet to own beneficially more
than 5% of the outstanding shares of MegsINet common stock
- each of MegsINet's current directors
- the chief executive officer and certain other highly compensated officers
of MegsINet
- all directors and executive officers of MegsINet as a group
The number and percentage of shares beneficially owned is determined in
accordance with Rule 13d-3 of the Exchange Act and the information is not
necessarily indicative of beneficial ownership for any other purpose. Under such
rule, beneficial ownership includes any shares as to which the individual or
entity has voting power or investment power and any shares that the individual
has the right to acquire within 60 days of March 11, 1999 through the exercise
of any stock option or other right. Unless otherwise indicated in the footnotes
or table, each person or entity has sole voting and investment power (or shares
such powers with his or her spouse) with respect to the shares shown as
beneficially owned and has an address of c/o MegsINet, 225 West Ohio Street,
Suite 400, Chicago, Illinois 60610.
Certain shareholders of MegsINet, as indicated on page 48, have entered
into an irrevocable proxy with CoreComm agreeing to vote their shares of
MegsINet common stock in favor of the proposed merger.
<TABLE>
<CAPTION>
AMOUNT OF PERCENT PERCENT
NAME OF COMMON OF AMOUNT OF OF
BENEFICIAL OWNER STOCK CLASS PREFERRED(1) CLASS
---------------- --------- -------- ------------ --------
<S> <C> <C> <C> <C>
Michael Henry......................... 2,066,000(2) 20% -- *
Megsinet Investors Partnership,
L.P.(3)............................. 650,000 6.3 -- *
Scott Widham.......................... 662,189(4) 6.1 -- *
Pequot Private Equity Fund, L.P.(5)... 591,745(6) 5.5 1,775,236 88.8%
Clayton Capital, L.L.C.(7)............ 562,500 5.5 -- *
Antilles Partners, L.P.(8)............ 560,000(9) 5.2 -- *
Brian L. Clark........................ 219,571(10) 2.1 -- *
Gerald N. Schutt...................... 52,500(11) * -- *
Terry Barnich......................... -- * -- *
Gerald A. Poch(12).................... -- * -- *
Pequot Offshore Private Equity Fund,
Inc.(13)............................ -- * 224,764 11.2
All directors and executive officers
as a group (6 persons).............. 3,000,260(14) 28.3% -- *
</TABLE>
- -------------------------
* Less than one percent
(1) This column sets forth the number of shares of the 1999A Series 10% Senior
Convertible Preferred Stock.
87
<PAGE> 97
(2) The stated number of shares includes 50,000 shares subject to an
exercisable option.
(3) The Partnership's address is 440 South Lasalle, Suite 2380, Chicago, IL
60605.
(4) The stated number of shares includes 212,500 shares subject to an
exercisable option.
(5) The Fund's address is 345 Pequot Ave., Southport, CN 04690.
(6) All of the 591,745 stated shares are subject to an exercisable warrant.
(7) Clayton Capital L.L.C.'s address is 906 South Kirkwood Road, Suite 200,
Kirkwood, MO 63122.
(8) The address of Antilles Partners, L.P. is 7 Lakeside Dr., Rye, NY 10580.
(9) The stated number of shares includes 560 shares of 1998A Series 8%
Convertible Preferred Stock held by Antilles Partners, L.P., which is
convertible into 560,000 shares of common stock.
(10) The stated number of shares includes 125,000 shares subject to an
exercisable option, and excludes 562,500 shares held in the name of Clayton
Capital, L.L.C., over which Mr. Clark has voting power.
(11) The stated number of shares includes 2,500 shares subject to exercisable
option.
(12) Mr. Poch's address is c/o Hemisphere Management Limited, Hemisphere House,
9 Church Street, P.O. Box HM951, Hamilton, HM-OX Bermuda; the stated number
of shares held by Mr. Poch excludes 591,745 shares subject to an
exercisable warrant held by Pequot Private Equity Fund L.P. for which Mr.
Poch serves as a principal and 74,921 shares subject to an exercisable
warrant held by Pequot Offshore Private Equity Fund, Inc. for which Mr.
Poch serves as a principal.
(13) The Fund's address is c/o Hemisphere Management Limited, Hemisphere House,
9 Church Street, P.O. Box HM951, Hamilton, HM-OX Bermuda.
(14) The stated number of shares includes those shares described in footnotes 2,
4, 10, and 11.
88
<PAGE> 98
LEGAL OPINIONS
The validity of the shares of CoreComm common stock offered by this proxy
statement-prospectus will be passed upon by Appleby, Spurling & Kempe, Hamilton,
Bermuda, special counsel to CoreComm. Federal income tax matters relating to the
merger will be passed upon for CoreComm by Skadden, Arps, Slate, Meagher & Flom
(Illinois). Amy Gross, Esq. will pass on certain regulatory matters relating to
MegsINet.
EXPERTS
The consolidated financial statements of CoreComm Limited and its
Predecessor OCOM Corporation Telecoms Division appearing in CoreComm Limited's
Annual Report (Form 10-K) for the year ended December 31, 1998 have been audited
by Ernst & Young LLP, independent auditors, as set forth in their reports
thereon included therein and incorporated herein by reference. Such consolidated
financial statements are incorporated herein by reference in reliance upon such
reports given on the authority of such firm as experts in accounting and
auditing.
KPMG LLP, independent certified public accountants, have audited the
consolidated balance sheets of MegsINet as of December 31, 1998 and 1997 and the
related consolidated statements of operations, stockholders' deficit and cash
flows for the year ended December 31, 1998. These audited financials for
MegsINet are included as pages F-1 to F-14 of this proxy statement-prospectus.
These consolidated financial statements are included herein in reliance on their
reports, given on their authority as experts in accounting and auditing.
89
<PAGE> 99
SHAREHOLDER PROPOSALS FOR THE 1999
ANNUAL MEETING OF MEGSINET SHAREHOLDERS
IF THE MERGER IS NOT COMPLETED
If the merger is not completed, you may present proper proposals for
consideration at the next annual meeting of MegsINet shareholders by submitting
your proposal in writing to the Secretary of MegsINet in a timely manner.
MegsINet's by-laws establish an advance notice procedure for shareholder
proposals not included in MegsINet's proxy statement, to be brought before an
annual meeting of shareholders. In general, nominations for the election of
directors may be made by:
- MegsINet's board of directors
- any nominating committee appointed by MegsINet's board of directors
- any shareholder entitled to vote who has delivered written notice to the
Secretary of MegsINet 60 days in advance of MegsINet's annual meeting,
which notice must contain specified information concerning the nominees
and concerning the shareholder proposing the nominations
With respect to an election of directors to be held at a special meeting of
MegsINet shareholders, nominations for the election of directors may be made by
any MegsINet shareholder entitled to vote who has delivered written notice to
the Secretary of MegsINet 10 days but not more than 60 days before the date of
the meeting.
The only business that will be conducted at an annual meeting of MegsINet
shareholders is business that is brought before the meeting by or at the
direction of the chairman of the meeting or by any shareholder entitled to vote
who has delivered written notice to the Secretary of MegsINet at least 120 days
but not more than 150 days prior to the previous year's notice date, which
notice must contain specified information concerning the matters to be brought
before the meeting and concerning the shareholder proposing those matters. If a
shareholder who has notified MegsINet of his intention to present a proposal at
an annual meeting does not appear or send a qualified representative to present
his proposal at the meeting, MegsINet need not present the proposal for a vote
at the meeting. A copy of the full text of the by-law provisions discussed above
may be obtained by writing to the Secretary of MegsINet. All notices of
proposals by shareholders, whether or not included in MegsINet's proxy
materials, should be sent to MegsINet at 225 West Ohio Street, Suite 400,
Chicago, Illinois 60610.
90
<PAGE> 100
WHERE YOU CAN FIND MORE INFORMATION
THIS PROXY STATEMENT-PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE
NOT PRESENTED IN OR DELIVERED WITH THIS PROXY STATEMENT-PROSPECTUS.
All documents filed by us pursuant to Section 13(a), 13(c), 14 or 15(d) of
the Securities Exchange Act of 1934 after the date of this proxy
statement-prospectus and before the date of the special meeting are incorporated
by reference into and to be a part of this proxy statement-prospectus from the
date of filing of those documents.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR THAT
WE HAVE REFERRED YOU TO. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT.
The following documents, which have been filed by CoreComm with the
Securities and Exchange Commission, are incorporated by reference into this
proxy statement-prospectus:
- CoreComm's Annual Report on Form 10-K, for the fiscal year ended December
31, 1998 (SEC file number 0-24521 and filing date March 22, 1999).
- The description of the common stock, par value $.01 per share, of
CoreComm and the Series A Junior Participating Preferred Stock Purchase
Rights (the "Rights") which are attached to shares of CoreComm Common
Stock set forth under the caption "Description of Capital Stock" in the
Registration Statement on Form 10/A filed by CoreComm with the Commission
on August 31, 1998 (File No. 0-24521).
- CoreComm's Current Reports on Form 8-K dated February 17, 1999 and
September 1, 1998.
Any statement contained in a document incorporated or deemed to be
incorporated by reference into this proxy statement-prospectus will be deemed to
be modified or superseded for purposes of this proxy statement-prospectus to the
extent that a statement contained in this proxy statement-prospectus or any
other subsequently filed document that is deemed to be incorporated by reference
into this proxy statement-prospectus modifies or supersedes the statement. Any
statement so modified or superseded will not be deemed, except as so modified or
superseded, to constitute a part of this proxy statement-prospectus.
The documents incorporated by reference into this proxy
statement-prospectus are available from us upon request. We will provide a copy
of any and all of the information that is incorporated by reference in this
proxy statement-prospectus (not including exhibits to the information unless
those exhibits are specifically incorporated by reference into this proxy
statement-prospectus) to any person, without charge, upon written or oral
request.
91
<PAGE> 101
Requests for documents relating to MegsINet
should be directed to:
MegsINet, Inc.
225 West Ohio Street,
Suite 400
Chicago, Illinois 60610
(312) 470-9015
Requests for documents relating to CoreComm
should be directed to:
CoreComm Limited
110 East 59th Street
New York, New York 10022
(212) 906-8485
CoreComm files reports, proxy statements and other information with the
Securities and Exchange Commission. Copies of its reports, proxy statements and
other information may be inspected and copied at the public reference facilities
maintained by the SEC at:
<TABLE>
<S> <C> <C>
Judiciary Plaza Citicorp Center Seven World Trade Center
Room 1024 500 West Madison Street 13th Floor
450 Fifth Street, N.W. Suite 1400 New York, New York 10048
Washington, D.C. 20549 Chicago, Illinois 60661
</TABLE>
Reports, proxy statements and other information
concerning CoreComm may be inspected at:
The National Association of
Securities Dealers
1735 K Street, N.W.
Washington, D.C. 20006
Copies of these materials can also be obtained by mail at prescribed rates
from the Public Reference Section of the SEC, 450 Fifth Street, N.W.,
Washington, D.C. 20549 or by calling the SEC at 1-800-SEC-0330. The SEC
maintains a Website that contains reports, proxy statements and other
information regarding each of us. The address of the SEC Website is
http://www.sec.gov.
CoreComm has filed a registration statement on Form S-4 under the
Securities Act with the Securities and Exchange Commission with respect to
CoreComm's common stock to be issued to MegsINet shareholders in the merger.
This proxy statement-prospectus constitutes the prospectus of CoreComm filed as
part of the registration statement. This proxy statement-prospectus does not
contain all of the information set forth in the registration statement because
certain parts of the registration statement are omitted in accordance with the
rules and regulations of the SEC. The registration statement and its exhibits
are available for inspection and copying as set forth above.
If you have any questions about the merger, please call MegsINet at (312)
470-9015. You may also call CoreComm at (212) 906-8485.
THIS PROXY STATEMENT-PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO PURCHASE, THE SECURITIES OFFERED BY THIS PROXY
STATEMENT-PROSPECTUS, OR THE SOLICITATION OF A PROXY, IN ANY JURISDICTION TO OR
FROM ANY PERSON TO WHOM OR FROM WHOM
92
<PAGE> 102
IT IS UNLAWFUL TO MAKE SUCH OFFER, SOLICITATION OF AN OFFER OR PROXY
SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROXY
STATEMENT-PROSPECTUS NOR ANY DISTRIBUTION OF SECURITIES PURSUANT TO THIS PROXY
STATEMENT-PROSPECTUS SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE INFORMATION SET FORTH OR INCORPORATED INTO THIS
PROXY STATEMENT-PROSPECTUS BY REFERENCE OR IN OUR AFFAIRS SINCE THE DATE OF THIS
PROXY STATEMENT-PROSPECTUS. THE INFORMATION CONTAINED IN THIS PROXY
STATEMENT-PROSPECTUS WITH RESPECT TO MEGSINET AND ITS SUBSIDIARIES WAS PROVIDED
BY MEGSINET AND THE INFORMATION CONTAINED IN THIS PROXY STATEMENT-PROSPECTUS
WITH RESPECT TO CORECOMM WAS PROVIDED BY CORECOMM.
STATEMENTS REGARDING FORWARD-LOOKING INFORMATION
This proxy statement-prospectus and the documents incorporated by reference
into this proxy statement-prospectus contain forward-looking statements within
the "safe harbor" provisions of the Private Securities Litigation Reform Act of
1995 with respect to our financial condition, results of operations and
business, and on the expected impact of the merger on CoreComm's financial
performance. Words such as "anticipates," "expects," "intends," "plans,"
"believes," "seeks," "estimates" and similar expressions identify
forward-looking statements. These forward-looking statements are not guarantees
of future performance and are subject to risks and uncertainties that could
cause actual results to differ materially from the results contemplated by the
forward-looking statements.
In evaluating the merger, you should carefully consider the discussion of
risks and uncertainties in the section entitled "Risk Factors" on page 14 of
this proxy statement-prospectus.
93
<PAGE> 103
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
MEGSINET, INC. NUMBER
- -------------- ------
<S> <C>
Independent Auditors' Report.............................. F-2
Consolidated Balance Sheets as of December 31, 1998 and
1997................................................... F-3
Consolidated Statement of Operations for the year ended
December 31, 1998...................................... F-4
Consolidated Statement of Stockholders' Deficit for the
year ended December 31, 1998........................... F-5
Consolidated Statement of Cash Flows for the year ended
December 31, 1998...................................... F-6
Notes to Consolidated Financial Statements................ F-7
</TABLE>
F-1
<PAGE> 104
INDEPENDENT AUDITORS' REPORT
The Board of Directors
MegsINet, Inc.:
We have audited the accompanying consolidated balance sheets of MegsINet,
Inc. and subsidiary as of December 31, 1998 and 1997 and the related
consolidated statements of operations, stockholders' deficit, and cash flows for
the year ended December 31, 1998. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit of financial statements includes examining, on a test
basis, evidence supporting the amounts and disclosures in those financial
statements. An audit of financial statements also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of MegsINet,
Inc. and subsidiary as of December 31, 1998 and 1997 and the results of their
operations and their cash flows for the year ended December 31, 1998 in
conformity with generally accepted accounting principles.
February 15, 1999
F-2
<PAGE> 105
MEGSINET, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
----------- ---------
<S> <C> <C>
ASSETS
Cash.................................................. $ 1,071,584 284,041
Prepaid expenses and other current assets............. 544,112 53,623
----------- ---------
Total current assets........................ 1,615,696 337,664
Property and equipment, net........................... 26,802,413 1,501,692
----------- ---------
Total assets................................ $28,418,109 1,839,356
=========== =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Equipment payable..................................... $ 9,964,881 --
Current portion of notes payable...................... 3,757,164 --
Current portion of capital lease obligations.......... 2,096,865 356,871
Note payable to stockholder........................... 156,158 172,477
Accounts payable...................................... 1,465,367 171,482
Accrued liabilities................................... 383,376 51,000
Deferred revenue...................................... 641,985 202,851
----------- ---------
Total current liabilities................... 18,465,796 954,681
----------- ---------
Notes payable, less current portion................... 6,956,178 --
Capital lease obligations, less current portion....... 5,084,112 1,013,160
Commitments and contingencies
Stockholders' deficit:
Preferred stock, no par value, 3,000,000 and no
shares authorized and 1,200 and no shares issued
at December 31, 1998 and 1997, respectively...... -- --
Common stock, no par value, 30,000,000 shares
authorized and 10,141,442 and 7,121,386 shares
issued at December 31, 1998 and
1997, respectively............................... -- --
Paid-in capital..................................... 4,005,988 790,541
Retained deficit.................................... (6,093,965) (919,026)
----------- ---------
Total stockholders' deficit................. (2,087,977) (128,485)
----------- ---------
Total liabilities and stockholders'
deficit.................................. $28,418,109 1,839,356
=========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 106
MEGSINET, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<S> <C>
Revenues.................................................... $ 4,172,072
Cost of sales............................................... 4,866,702
-----------
Costs in excess of revenues............................... (694,630)
-----------
Operating expenses:
Salaries and compensation................................. 1,734,675
Other operating expense................................... 2,086,804
-----------
Total operating expenses.......................... 3,821,479
-----------
Loss from operations................................... (4,516,109)
Interest expense............................................ 658,830
-----------
Net loss............................................... $(5,174,939)
===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 107
MEGSINET, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
TOTAL
PREFERRED COMMON PAID-IN RETAINED STOCKHOLDERS'
STOCK STOCK CAPITAL DEFICIT DEFICIT
--------- -------- --------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31,
1997..................... $ -- -- 790,541 (919,026) (128,485)
Issuance of preferred
stock, 1,200 shares...... -- -- 1,500,000 -- 1,500,000
Issuance of common stock,
2,527,199 shares, net of
$63,110 issue costs...... -- -- 1,439,447 -- 1,439,447
Issuance of common stock,
492,857 shares, in lieu
of compensation.......... -- -- 276,000 -- 276,000
Net loss................... -- -- -- (5,174,939) (5,174,939)
-------- -------- --------- ---------- ----------
Balance at December 31,
1998..................... $ -- -- 4,005,988 (6,093,965) (2,087,977)
======== ======== ========= ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 108
MEGSINET, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss.................................................. $(5,174,939)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.......................... 1,082,032
Compensation paid through issuance of stock............ 276,000
Changes in operating working capital:
Prepaid expenses and other current assets............ (490,489)
Accounts payable..................................... 1,293,885
Accrued liabilities.................................. 332,376
Deferred revenue..................................... 439,134
-----------
Net cash used in operating activities............. (2,242,001)
-----------
Cash flows from investing activities -- capital
expenditures.............................................. (9,858,130)
-----------
Cash flows from financing activities:
Proceeds from notes payable............................... 10,713,342
Payments on note payable to stockholder................... (16,319)
Payments on capital lease obligations..................... (748,796)
Issuance of stock......................................... 2,939,447
-----------
Net cash provided by financing activities......... 12,887,674
-----------
Net increase in cash.............................. 787,543
Cash, beginning of year..................................... 284,041
-----------
Cash, end of year........................................... $ 1,071,584
===========
Supplemental disclosure of cash flow information -- cash
paid for interest......................................... $ 667,287
===========
Supplemental disclosure of non cash investing and financing
activities:
Capital lease obligations of $6,559,742 were incurred in
1998 when the Company entered into equipment leases.
Equipment payable of $9,964,881 was incurred in 1998 when
the Company purchased equipment.
The Company paid $19,817 of commissions through issuance
of common stock.
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 109
MEGSINET, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(1) DESCRIPTION OF THE BUSINESS
MegsINet, Inc. was formed to develop and operate a national packet based
data network and to provide a broad range of telecommunications services. At
December 31, 1998, the Company had constructed a network that served 50 markets
in the United States. From inception through the end of 1998, the Company
provided a variety of Internet connection and web hosting services to its
customer base.
During 1998, MegsINet formed a wholly owned subsidiary called
Megsinet-CLEC, Inc. (Megsinet-CLEC). This subsidiary will provide local exchange
telephone service and long distance telephone service in competition with
incumbent and competitive local exchange telephone companies and long distance
providers. Megsinet-CLEC has received authority to provide local telephone
service in seven states and has filed applications in two additional states as
of December 31, 1998. Megsinet-CLEC has received authority to provide long
distance service in 36 states and has filed applications in eight additional
states as of December 31, 1998.
MegsINet is an Illinois Corporation formed in 1995.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The presentation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual results can differ from those estimates.
All significant intercompany balances and transactions have been eliminated
in consolidation.
PROPERTY AND EQUIPMENT
Property and equipment consist primarily of network communications
equipment, computer equipment, furniture and fixtures, and equipment being built
for use by Megsinet-CLEC, all of which are stated at cost. Property and
equipment under capital leases are stated at the present value of minimum lease
payments.
Depreciation on property and equipment is computed using the straight-line
method over estimated service lives of three to five years.
EQUIPMENT PAYABLE
Equipment payable represents amounts due for equipment which has been
received by MegsINet, but which has not yet been installed. Upon installation,
MegsINet will enter into a capital lease under an arrangement with Ascend
Communications, Inc. (Ascend) as discussed in note 5. As no lease agreement has
been signed at December 31, 1998, the entire balance has been classified as
current.
F-7
<PAGE> 110
MEGSINET, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
REVENUE RECOGNITION AND DEFERRED REVENUE
MegsINet's customers generally pay for service in advance. Revenue is
recognized ratably over the service period. Deferred revenue represents the
unearned portion of customer payments.
INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating losses and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
STOCK-BASED COMPENSATION
MegsINet applies the intrinsic value-based method of accounting prescribed
by Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued
to Employees, and related interpretations, in accounting for its fixed plan
stock options. Pro forma information regarding net income as calculated under
the provisions of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," is disclosed in note 9.
(3) PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
1998 1997
----------- ---------
<S> <C> <C>
Telecommunications equipment.......... $24,766,423 1,496,862
Computer equipment.................... 482,151 183,401
Telephone equipment................... 147,357 2,285
Furniture and fixtures................ 42,514 16,119
Leasehold improvements................ 127,213 15,563
Construction in progress.............. 2,531,325 --
----------- ---------
28,096,983 1,714,230
Less accumulated depreciation and
amortization........................ 1,294,570 212,538
----------- ---------
Net property and equipment.......... $26,802,413 1,501,692
=========== =========
</TABLE>
F-8
<PAGE> 111
MEGSINET, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(4) LEASES
MegsINet is obligated under various capital leases for telecommunications
equipment that expires at various dates during the next five years. At December
31, 1998 and 1997, the gross amount of equipment and related accumulated
amortization recorded under capital leases was as follows:
<TABLE>
<CAPTION>
1998 1997
---------- ---------
<S> <C> <C>
Telecommunications equipment........... $8,110,081 1,496,862
Less accumulated amortization.......... 933,428 135,028
---------- ---------
$7,176,653 1,361,834
========== =========
</TABLE>
MegsINet also has several noncancelable operating leases for
telecommunications equipment that expire over the next three years. MegsINet is
required to pay all executory costs such as maintenance and insurance. Rental
expense for operating leases during 1998 totaled approximately $304,000.
Future minimum lease payments under noncancelable operating leases (with
initial or remaining lease terms in excess of one year) and future minimum
capital lease payments as of December 31, 1998 are:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
---------- ----------
<S> <C> <C>
Year ending December 31:
- -----------------------------
1999................................ $2,864,659 481,831
2000................................ 3,292,654 372,508
2001................................ 2,267,504 265,688
2002................................ 102,006 --
2003................................ 973 --
---------- ----------
Total minimum lease
payments................. 8,527,796 $1,120,027
==========
Less amount representing interest (at
rates ranging from 8.5% to
26.44%)............................. 1,346,819
----------
Present value of net minimum
capital lease payments...... 7,180,977
Less current installments of
obligations under capital leases.... 2,096,865
----------
Obligations under capital
leases, excluding current
installments................ $5,084,112
==========
</TABLE>
F-9
<PAGE> 112
MEGSINET, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(5) NOTES PAYABLE
Notes payable at December 31, 1998 consist of the following:
<TABLE>
<S> <C>
Borrowings under Ascend working capital promissory
note, interest at 8.5%........................... $2,000,000
Borrowings under Cisco working capital promissory
note, interest at 13.5%.......................... 2,021,885
Note payable to Cisco for equipment, interest at
12.75%........................................... 6,691,457
----------
Total notes payable...................... 10,713,342
Less current installments.......................... 3,757,164
----------
Notes payable, less current installments........... $6,956,178
==========
</TABLE>
In 1998, MegsINet entered into an agreement with Ascend to lease up to $16
million in telecommunications equipment under a capital lease agreement. In
addition, Ascend agreed to loan MegsINet up to $4.0 million in working capital
(the Ascend Note), limited by a ratio of $1 in working capital for each $4 in
equipment purchased or leased. At December 31, 1998, MegsINet was obligated
under capital leases with Ascend related to this agreement totaling
approximately $4.4 million and had received approximately $10.0 million in
equipment for which no formal lease agreement had been signed (see note 2). The
obligation related to this equipment is classified as equipment payable. As of
December 31, 1998, MegsINet had borrowed $2.0 million under the Ascend Note.
The terms of the Ascend Note require MegsINet to make monthly principal
payments beginning six months after a minimum draw of $500,000 is made. Interest
payments start in the month following the borrowing. Based on the timing of
borrowings on the Ascend Note, MegsINet will begin to make payments of $37,118
in April 1999, increasing to $74,236 in June 1999. The amount outstanding at
December 31, 1998 is scheduled to be repaid in November 2001.
The Ascend Note is secured by warrants to purchase MegsINet stock at $6.50
per share. The number of warrants held by Ascend at December 31, 1998 is
approximately 355,000. The terms of the warrants restrict Ascend's ability to
exercise the warrants unless the Company is in default. If MegsINet repays the
Ascend Note without default, 90% of these warrants expire.
In 1998, MegsINet also entered into an agreement with Cisco Systems Capital
Corporations (Cisco) whereby MegsINet can purchase up to $16 million in
telecommunications equipment under a promissory note (the Cisco Equipment Note).
In addition, Cisco has agreed to loan MegsINet up to $4.0 million in working
capital (the Cisco Note) limited by a ratio of $1 in working capital for each $4
in equipment purchases; however, the first $2.0 million in working capital is
subject to only a 1 to 2 ratio. At December 31, 1998, MegsINet was obligated
under the Cisco Equipment Note totaling $6,691,457 and had borrowed
approximately $2.0 million under the Cisco Note.
The terms of the Cisco Equipment Note require MegsINet to make monthly
principal and interest payments beginning in April 1999. MegsINet will make
payments of $261,655. The amount outstanding at December 31, 1998 is scheduled
to be repaid in
F-10
<PAGE> 113
MEGSINET, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
September 2001. The Cisco Equipment Note is secured by the telecommunications
equipment being purchased.
The terms of the Cisco Note require MegsINet to make monthly principal and
interest payments beginning in April 1999. MegsINet will make payments of
$179,350. The amount outstanding at December 31, 1998 is scheduled to be repaid
in March 2000. The Cisco Note is secured by common stock held by the president
of MegsINet and a life insurance policy on the president equal to the
outstanding balance of the note. The Cisco Note also carries conversion rights.
These conversion rights allow Cisco to convert all or part of the Cisco Note
obligation to common stock at the market value determined on the date of
conversion.
The aggregate maturities of notes payable subsequent to December 31, 1998
are as follows: 1999, $3,757,164; 2000, $4,007,670; and 2001, $2,948,508.
The Company did not have any notes payable obligations outstanding at
December 31, 1997.
(6) RELATED-PARTY TRANSACTIONS
At December 31, 1998 and 1997, MegsINet had an unsecured note payable to a
stockholder in the amount of $156,158 and $172,477, respectively. The note
carries an interest rate of 8.5% and is due upon demand.
(7) CHANGES IN CAPITAL STRUCTURE
In July 1997, MegsINet's board of directors authorized a 477-to-1 split for
each share of common stock. All share data presented has been revised to reflect
this transaction.
In June 1998, MegsINet increased the authorized common shares to 30
million.
During 1998, MegsINet authorized 3 million shares of preferred stock, of
which 1,200 shares were issued as 1998 Series Convertible Preferred Stock. Such
stock has a liquidation value of $1,250 per share and is entitled to dividends
of $100 per share per year. As of December 31, 1998, MegsINet had not declared
the 1998 dividends, therefore no amount has been accrued. Unpaid dividends
totaled $60,000 at December 31, 1998.
(8) INCOME TAXES
No income tax benefit was recorded during 1998. The actual income tax
benefit for 1998 differs from the expected income tax benefit computed by
applying the U.S. federal corporate tax rate of 34% to loss before income taxes
as follows:
<TABLE>
<S> <C>
Computed "expected" income tax benefit.......... $(1,759,480)
State income taxes.............................. (206,996)
Non-utilization of net operating loss........... 1,966,476
-----------
Tax benefit................................ $ --
===========
</TABLE>
F-11
<PAGE> 114
MEGSINET, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effects of temporary differences that give rise to deferred tax
assets at December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
---------- --------
<S> <C> <C>
Net operating loss carryforwards........ $2,008,196 165,959
Start-up costs.......................... 124,239 --
Difference in depreciation on property,
plant, and equipment.................. 89,606 89,606
---------- --------
Gross deferred tax assets.......... 2,222,041 255,565
Less valuation allowance................ (2,222,041) (255,565)
---------- --------
Net deferred tax assets............ $ -- --
========== ========
</TABLE>
The valuation allowance for deferred tax assets as of December 31, 1998 and
1997 was $2,222,041 and $255,565, respectively. The net change in the valuation
allowance for the year ended December 31, 1998 was an increase of $1,966,476.
(9) STOCK-BASED COMPENSATION
In 1998, MegsINet adopted a stock option plan (the Plan) pursuant to which
the Company's Board of Directors may grant stock options to MegsINet employees.
The Plan authorizes grants of options to purchase up to 2,000,000 shares of
authorized but unissued common stock. Stock options are granted with an exercise
price equal to the stock's fair market value at the date of grant. All stock
options under this plan have five-year terms and vest 25% per year from the date
of grant. During the year ended December 31, 1998, 191,960 options were issued
under this plan.
MegsINet also has the right to issue options to officers and directors of
MegsINet. During 1998, the Company issued options to purchase 650,000 shares of
MegsINet's common stock to officers and directors with exercise prices ranging
from $.56 to $1.38 per share. These options vest at different rates over the
next three years.
The per share weighted-average fair value of stock options granted during
1998 was $0.36 on the date of grant using the Black-Sholes option-pricing model
(excluding a volatility assumption) with the following weighted-average
assumptions: no expected dividend yield, risk-free interest rate of 6.0%, and an
expected life equal to the term of the respective option.
MegsINet applies APB Opinion No. 25 in accounting for its stock options.
MegsINet has issued options which qualify for fixed plan treatment and,
accordingly, no compensation cost has been recognized for its stock options in
the consolidated financial statements. Had MegsINet determined compensation cost
based on the fair value at the grant date for its stock options under SFAS No.
123, MegsINet's 1998 net loss would have been increased to the pro forma amount
of approximately $5,266,000.
F-12
<PAGE> 115
MEGSINET, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock option activity during 1998 is as follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
<S> <C> <C>
Balance at December 31, 1997....... 250,000 $0.36
Granted............................ 841,960 0.90
--------- -----
Balance at December 31, 1998....... 1,091,960 0.78
========= =====
</TABLE>
At December 31, 1998, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was as follows:
<TABLE>
<CAPTION>
NUMBER WEIGHTED-AVERAGE WEIGHTED-AVERAGE SHARES WEIGHTED-AVERAGE
OF SHARES EXERCISE PRICE CONTRACTUAL LIFE EXERCISABLE EXERCISE PRICE
- --------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C>
150,000 $0.22 4.3 years 150,000 $0.22
550,000 0.56 5.5 63,000 0.56
241,960 1.25 5.0 28,430 1.25
150,000 1.38 5.0 -- --
======= ===== ==== ======= =====
</TABLE>
During 1997, MegsINet issued options to purchase 150,000 shares of
MegsINet's common stock to an officer with an exercise price of $.22 per share.
The agreement states that the options are 100% vested upon grant. At December
31, 1997, all options were still outstanding.
During 1997, MegsINet also issued options to purchase 100,000 shares of
MegsINet's common stock to a director of MegsINet with an exercise price of
$.56, which was equal to the market value of the stock at the date of issue. The
options, which were 100% vested upon grant, remained outstanding at December 31,
1997.
During 1998 and 1997, MegsINet issued 492,857 and 984,800 shares,
respectively, of common stock to employees in lieu of compensation.
(10) COMMITMENTS AND CONTINGENCIES
MegsINet is involved in certain litigation which occurs in the normal
course of business. In the opinion of management, the ultimate results of these
matters will not have a material impact on the financial position of MegsINet.
F-13
<PAGE> 116
MEGSINET, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(11) CONTINUED OPERATIONS
In February 1999, the Company sold 2,000,000 shares of 1999A Series 10%
Senior Convertible Preferred Stock (the Preferred Stock Transaction) in the
amount of $5,000,000, less cost of issuance.
Also in February 1999, MegsINet entered into a definitive agreement whereby
all of MegsINet's outstanding stock will be acquired, and MegsINet will be
merged into the acquiring company (the Merger Transaction). At the close of the
Merger Transaction, MegsINet will cease to exist as a separate entity. This
agreement is subject to shareholder approval. At the close of the Merger
Transaction, the acquiring company will assume the obligations and liabilities
of MegsINet and be responsible for funding future operations. Management
believes the Preferred Stock Transaction will provide MegsINet adequate funding
through the close of the Merger Transaction.
F-14
<PAGE> 117
AGREEMENT AND PLAN OF MERGER
AMONG
CORECOMM LIMITED,
CORECOMM ACQUISITION SUB, INC.
AND
MEGSINET INC.
DATED AS OF FEBRUARY 17, 1999
A-1
<PAGE> 118
TABLE OF CONTENTS
PAGE
<TABLE>
<S> <C> <C>
ARTICLE I
THE MERGER
SECTION 1.1 The Merger................................................ 2
SECTION 1.2 Closing................................................... 2
SECTION 1.3 Effective Time............................................ 2
SECTION 1.4 Effects of the Merger..................................... 2
SECTION 1.5 Certificate of Incorporation and By-laws.................. 3
SECTION 1.6 Directors and Officers.................................... 3
ARTICLE II
EFFECT OF THE MERGER ON THE CAPITAL STOCK
OF THE CONSTITUENT CORPORATIONS; EXCHANGE OF CERTIFICATES
SECTION 2.1 Effect on Capital Stock................................... 3
SECTION 2.2 Exchange of Certificates.................................. 5
SECTION 2.3 Certain Adjustments....................................... 9
SECTION 2.4 Shares of Dissenting Stockholders......................... 10
ARTICLE III
REPRESENTATIONS AND WARRANTIES
SECTION 3.1 Representations and Warranties of Megsinet................ 11
SECTION 3.2 Representations and Warranties of CoreComm................ 30
ARTICLE IV
COVENANTS RELATING TO CONDUCT OF BUSINESS
SECTION 4.1 Conduct of Business....................................... 38
SECTION 4.2 No Solicitation by Megsinet............................... 42
SECTION 4.3 Cooperation............................................... 43
ARTICLE V
ADDITIONAL AGREEMENTS
SECTION 5.1 Megsinet Stockholders Meeting............................. 44
SECTION 5.2 Access to Information; Confidentiality.................... 45
SECTION 5.3 Best Efforts.............................................. 46
SECTION 5.4 Stock Options............................................. 47
SECTION 5.5 Megsinet Stock Plan and Certain Employee Matters.......... 49
</TABLE>
A-2
<PAGE> 119
<TABLE>
<S> <C> <C>
SECTION 5.6 Fees and Expenses......................................... 50
SECTION 5.7 Public Announcements...................................... 50
SECTION 5.8 NASDAQ Quotation.......................................... 50
SECTION 5.9 Conveyance Taxes.......................................... 50
SECTION 5.10 Proxy/Prospectus; Registration Statement.................. 51
SECTION 5.11 Ascend Warrant............................................ 52
SECTION 5.12 Pequot Warrant............................................ 52
SECTION 5.13 Allocation Schedule....................................... 52
SECTION 5.14 Cisco Loan................................................ 52
SECTION 5.15 Cisco and Ascend Credit Facilities........................ 53
SECTION 5.16 Pequot Agreement.......................................... 53
SECTION 5.17 Stockholders Agreement.................................... 53
SECTION 5.18 NASDAQ Listing............................................ 53
SECTION 5.19 GMV Network LLC........................................... 54
SECTION 5.20 Interested Contracts...................................... 54
SECTION 5.21 Personal Loans............................................ 54
SECTION 5.22 Michael S. Nelson......................................... 54
SECTION 5.23 Ameritech Interconnection................................. 55
SECTION 5.24 Alternative Financing..................................... 55
ARTICLE VI
CONDITIONS PRECEDENT
Conditions to Each Party's Obligation to Effect the
SECTION 6.1 Merger.................................................... 55
SECTION 6.2 Conditions to Obligations of CoreComm and Sub............. 56
SECTION 6.3 Conditions to Obligations of Megsinet..................... 58
SECTION 6.4 Frustration of Closing Conditions......................... 59
ARTICLE VII
TERMINATION, AMENDMENT AND WAIVER
SECTION 7.1 Termination............................................... 59
SECTION 7.2 Effect of Termination..................................... 60
SECTION 7.3 Amendment................................................. 61
SECTION 7.4 Extension; Waiver......................................... 61
Procedure for Termination, Amendment, Extension or
SECTION 7.5 Waiver.................................................... 61
ARTICLE VIII
GENERAL PROVISIONS
SECTION 8.1 Survival and Indemnification.............................. 62
SECTION 8.2 Notices................................................... 65
</TABLE>
A-3
<PAGE> 120
<TABLE>
<S> <C> <C>
SECTION 8.3 Definitions............................................... 66
SECTION 8.4 Interpretation............................................ 67
SECTION 8.5 Counterparts.............................................. 68
SECTION 8.6 Entire Agreement; No Third-Party Beneficiaries............ 68
SECTION 8.7 Governing Law............................................. 68
SECTION 8.8 Assignment................................................ 68
SECTION 8.9 Consent to Jurisdiction................................... 68
SECTION 8.10 Headings.................................................. 69
SECTION 8.11 Severability.............................................. 69
</TABLE>
A-4
<PAGE> 121
AGREEMENT AND PLAN OF MERGER dated as of FEBRUARY 17, 1999, among CORECOMM
LIMITED, a Bermuda corporation ("CoreComm"), CORECOMM ACQUISITION SUB, INC. a
Delaware corporation("Sub"), and MEGSINET INC., an Illinois corporation
("Megsinet").
WHEREAS, the respective Boards of Directors of CoreComm, Sub and Megsinet
have each approved the merger of Megsinet with and into Sub (the "Merger"), upon
the terms and subject to the conditions set forth in this Agreement, whereby
each issued and outstanding share of common stock, without par value, of
Megsinet ("Megsinet Common Stock"), other than shares owned by CoreComm or
Megsinet, will be converted into the right to receive the Merger Consideration
(as defined in Section 2.1(b)) and the shares of Series 1998A Convertible
Preferred Stock, par value $.01 per share ("Series 1998A Preferred") and Series
A Convertible Preferred Stock, par value $.01 per share intended to be issued to
Pequot (as defined) ("Pequot Preferred") will be converted as set forth in
Section 2.1(d);
WHEREAS, the respective Boards of Directors of CoreComm, Sub and Megsinet
have each determined that the Merger and the other transactions contemplated
hereby are consistent with, and in furtherance of, their respective business
strategies and goals and are in the best interests of their respective
stockholders;
WHEREAS, the parties desire to make certain representations, warranties,
covenants and agreements in connection with the Merger and also to prescribe
various conditions to the Merger;
WHEREAS, for federal income tax purposes, it is intended that the Merger
will qualify as a reorganization under Section 368(a) of the Internal Revenue
Code, as amended (the "Code"); and
NOW, THEREFORE, in consideration of the representations, warranties,
covenants and agreements contained in this Agreement, the parties agree as
follows:
ARTICLE I
THE MERGER
SECTION 1.1 The Merger. Upon the terms and subject to the conditions set
forth in this Agreement, and in accordance with the Illinois Business
Corporation Act (the "IBCA") and the Delaware General Corporation Law (the
"DGCL"), Megsinet shall be merged with and into Sub at the Effective Time (as
defined in Section 1.3). Following the Effective Time, Sub shall be the
surviving corporation (the "Surviving Corporation") and shall succeed to and
assume all the rights and obligations of Megsinet in accordance with the IBCA
and the DGCL.
SECTION 1.2 Closing. The closing of the Merger (the "Closing") will take
place at 10:00 a.m. on a date to be specified by the parties (the "Closing
Date"), which shall be no later than the second business day after satisfaction
or waiver of the conditions set forth in Article VI, unless another time or date
is agreed to by the parties hereto. The Closing will be held at such location in
New York, New York as is agreed to by the parties hereto.
SECTION 1.3 Effective Time. Subject to the provisions of this Agreement,
as soon as practicable on the Closing Date, the parties shall cause the Merger
to be consummated by filing articles of merger or other appropriate documents
(in any such case, the "Articles of Merger") executed in accordance with the
relevant provisions of the IBCA and the DGCL and shall make all other filings or
recordings required under the IBCA and the
A-5
<PAGE> 122
DGCL. The Merger shall become effective at such time as the Articles of Merger
is duly filed with the Secretary of State of the State of Delaware, or at such
subsequent date or time as Sub and Megsinet shall agree and specify in the
Articles of Merger (the time the Merger becomes effective being hereinafter
referred to as the "Effective Time").
SECTION 1.4 Effects of the Merger. The Merger shall have the effects set
forth in Section 5/11.50 of the IBCA and Section 259 of the DGCL.
SECTION 1.5 Certificate of Incorporation and By-laws of the Surviving
Corporation. The certificate of incorporation of Sub, as in effect immediately
prior to the Effective Time, shall be the certificate of incorporation of the
Surviving Corporation until thereafter changed or amended as provided therein or
by applicable law. The by-laws of Sub, as in effect immediately prior to the
Effective Time, shall be the by-laws of the Surviving Corporation until
thereafter changed or amended as provided therein or by applicable law.
SECTION 1.6 Directors and Officers. The directors of Sub and the officers
of Megsinet at the Effective Time shall, from and after the Effective Time, be
the directors and officers, respectively, of the Surviving Corporation until
their successors shall have been duly elected or appointed and qualified or
until their earlier death, resignation or removal in accordance with the
certificate of incorporation and the by-laws of the Surviving Corporation.
ARTICLE II
EFFECT OF THE MERGER ON THE CAPITAL STOCK
OF THE CONSTITUENT CORPORATIONS;
EXCHANGE OF CERTIFICATES
SECTION 2.1 Effect on Capital Stock. As of the Effective Time, by virtue
of the Merger and without any action on the part of the holder of any shares of
Megsinet Common Stock, Series 1998A Preferred or Pequot Preferred (collectively,
"Megsinet Capital Stock"):
(a) Cancellation of Treasury Stock. Each share of Megsinet Capital
Stock that is owned by Megsinet shall automatically be cancelled and
retired and shall cease to exist, and no consideration shall be delivered
in exchange therefor.
(b) Conversion of Megsinet Common Stock. Subject to Section 2.2(e),
each issued and outstanding share of Megsinet Common Stock (other than
shares to be cancelled in accordance with Section 2.1(a)) shall be
converted into the right to receive either $2.50 in cash (the "Cash
Consideration") or 0.21 (the "Exchange Ratio") validly issued, fully paid
and nonassessable shares of common stock, par value $.01 per share, and the
associated Series A Junior Participating Preferred Stock Purchase Rights
("CoreComm Common Stock"), of CoreComm, (the "Stock Consideration"). The
allocation of either the Cash Consideration or the Stock Consideration to
each share of Megsinet Common Stock shall be set forth on a schedule to be
delivered to the Exchange Agent at the Effective Time (the "Allocation
Schedule"). The consideration to be issued to holders of Megsinet Capital
Stock in the aggregate is referred to herein as the "Merger Consideration."
As of the Effective Time, all such shares of Megsinet Common Stock shall no
longer be outstanding and shall automatically be cancelled and retired and
shall cease to exist, and each holder of a certificate representing any
such shares of Megsinet Common Stock shall cease to have any rights with
respect thereto, except the right to receive
A-6
<PAGE> 123
Cash Consideration and/or Stock Consideration and any cash in lieu of
fractional shares of CoreComm Common Stock to be issued or paid in
consideration therefor upon surrender of such certificate in accordance
with Section 2.2, without interest.
(c) Conversion of Common Stock of Sub. Each issued and outstanding
share of common stock, par value $.01 per share, of Sub shall be converted
into one validly issued, fully paid and nonassessable share of common stock
of the Surviving Corporation.
(d) Conversion of Megsinet Convertible Securities. Each issued and
outstanding share of Series 1998A Preferred and Pequot Preferred shall be
converted into the right to receive that amount of Cash Consideration
and/or Stock Consideration which would be allocable to the number of shares
of Megsinet Common Stock into which each such share of 1998A Preferred or
Pequot Preferred would be convertible if such Series 1998A Preferred and
Pequot Preferred had been converted into Megsinet Common Stock immediately
prior to the Effective Time. The allocation to the holders of Megsinet
Convertible Securities of Cash Consideration and/or Stock Consideration
shall be included on the Allocation Schedule. The Series 1998A Preferred
and Pequot Preferred are referred to collectively as the "Megsinet
Convertible Securities."
SECTION 2.2 Exchange of Certificates. (a) Exchange Agent. As of the
Effective Time, CoreComm shall deposit with the Exchange Agent (who will
mutually be acceptable to CoreComm and Megsinet), for the benefit of the holders
of shares of Megsinet Capital Stock, for exchange in accordance with this
Article II, through the Exchange Agent, the Cash Payment and certificates
representing the Stock Payment together with any dividends or distributions with
respect thereto with a record date after the Effective Time, and any additional
cash (pursuant to Section 2.2(e)), such cash and stock collectively being
hereinafter referred to as the "Exchange Fund" The Cash Payment shall equal
$2.50 multiplied by the product of (i) 0.50 and (ii)the Megsinet Selling Shares.
The Stock Payment shall equal the number of shares of CoreComm Common Stock
represented by 0.21 multiplied by the product of (i) 0.50 and (ii) the Megsinet
Selling Shares. The "Megsinet Selling Shares" shall equal the number of shares
of Megsinet Common Stock issued and outstanding immediately prior to the
Effective Time plus the number of Shares of Megsinet Common Stock into which the
Series 1998A Preferred and the Pequot Preferred would be convertible if
converted immediately prior to the Effective Time.
(b) Exchange Procedures. As soon as reasonably practicable after the
Effective Time, the Exchange Agent shall mail to each holder of record of a
certificate or certificates which immediately prior to the Effective Time
represented outstanding shares of Megsinet Capital Stock (the "Certificates")
whose shares were converted into the right to receive the Merger Consideration
pursuant to Section 2.1, (i) a letter of transmittal (which shall specify that
delivery shall be effected, and risk of loss and title to the Certificates shall
pass, only upon delivery of the Certificates to the Exchange Agent and shall be
in such form and have such other provisions as Megsinet and CoreComm may
reasonably specify) and (ii) instructions for use in surrendering the
Certificates in exchange for the Merger Consid-eration. Upon surrender of a
Certificate for cancellation to the Exchange Agent, together with such letter of
transmittal, duly executed, and such other documents as may reasonably be
required by the Exchange Agent, the holder of such Certificate shall be entitled
to receive in exchange therefor the Merger Consideration in the form of cash or
a certificate representing that number of whole shares of CoreComm Common Stock
which such holder has the right to receive pursuant to the
A-7
<PAGE> 124
provisions of this Article II and as set forth on the Allocation Schedule,
certain dividends or other distributions in accordance with Section 2.2(c) and
cash in lieu of any fractional share of CoreComm Common Stock in accordance with
Section 2.2(e), and the Certificate so surrendered shall forthwith be cancelled.
In the event of a surrender of a Certificate representing shares of Megsinet
Capital Stock which are not registered in the transfer records of Megsinet under
the name of the person surrendering such Certificate, a certificate representing
the proper number of shares of CoreComm Common Stock may be issued to a person
other than the person in whose name the Certificate so surrendered is registered
if such Certificate shall be properly endorsed or otherwise be in proper form
for transfer and the person requesting such issuance shall pay any transfer or
other taxes required by reason of the issuance of shares of CoreComm Common
Stock to a person other than the registered holder of such Certificate or
establish to the satisfaction of CoreComm that such tax has been paid or is not
applicable. Until surrendered as contemplated by this Section 2.2, each
Certificate shall be deemed at any time after the Effective Time to represent
only the right to receive upon such surrender the Merger Consideration which the
holder thereof has the right to receive in respect of such Certificate pursuant
to the provisions of this Article II and as set forth on the Allocation
Schedule, certain dividends or other distributions in accordance with Section
2.2(c) and cash in lieu of any fractional share of CoreComm Common Stock in
accordance with Section 2.2(e). No interest shall be paid or will accrue on any
cash payable to holders of Certificates pursuant to the provisions of this
Article II. Notwithstanding the foregoing, the Exchange Agent will not mail any
cash or shares of CoreComm Common Stock prior to receipt of the Allocation
Schedule.
(c) Distributions with Respect to Unexchanged Shares. No dividends or
other distributions with respect to CoreComm Common Stock with a record date
after the Effective Time shall be paid to the holder of any unsurrendered
Certificate with respect to the shares of CoreComm Common Stock represented
thereby, and, in the case of Certificates representing the right to receive a
cash payment in lieu of fractional shares of CoreComm Common Stock, no such cash
payment shall be paid to any such holder pursuant to Section 2.2(e), and all
such dividends, other distributions and cash in lieu of fractional shares of
CoreComm Common Stock shall be paid by CoreComm to the Exchange Agent and shall
be included in the Exchange Fund, in each case until the surrender of such
Certificate in accordance with this Article II. Subject to the effect of
applicable escheat or similar laws, following surrender of any such Certificate
there shall be paid to the holder of the certificate representing whole shares
of CoreComm Common Stock issued in exchange therefor, without interest, (i) at
the time of such surrender, the amount of dividends or other distributions with
a record date after the Effective Time theretofore paid with respect to such
whole shares of CoreComm Common Stock and, in the case of Certificates
representing Megsinet Common Stock, the amount of any cash payable in lieu of a
fractional share of CoreComm Common Stock to which such holder is entitled
pursuant to Section 2.2(e) and (ii) at the appropriate payment date, the amount
of dividends or other distributions with a record date after the Effective Time
and with a payment date subsequent to such surrender payable with respect to
such whole shares of CoreComm Common Stock.
(d) No Further Ownership Rights in Megsinet Capital Stock. All shares of
CoreComm Common Stock issued upon the surrender for exchange of Certificates in
accordance with the terms of this Article II and any cash paid pursuant to this
Article II shall be deemed to have been issued (and paid) in full satisfaction
of all rights pertaining to the shares of Megsinet Capital Stock, theretofore
represented by such Certificates,
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subject, however, to the Surviving Corporation's obligation to pay any dividends
or make any other distributions with a record date prior to the Effective Time
which may have been declared or made by Megsinet on such shares of Megsinet
Common Stock which remain unpaid at the Effective Time, and there shall be no
further registration of transfers on the stock transfer books of the Surviving
Corporation of the shares of Megsinet Capital Stock which were outstanding
immediately prior to the Effective Time. If, after the Effective Time,
Certificates are presented to the Surviving Corporation or the Exchange Agent
for any reason, they shall be cancelled and exchanged as provided in this
Article II, except as otherwise provided by law.
(e) No Fractional Shares. (i) No certificates or scrip representing
fractional shares of CoreComm Common Stock shall be issued upon the surrender
for exchange of Certificates, no dividend or distribution of CoreComm shall
relate to such fractional share interests and such fractional share interests
will not entitle the owner thereof to vote or to any rights of a stockholder of
CoreComm.
(ii) As soon as practicable after receipt of the Allocation Schedule, the
Exchange Agent shall determine, for each former holder of Megsinet Capital Stock
entitled to receive shares of CoreComm Common Stock pursuant to Article II, an
amount in cash equal to the product obtained by multiplying (A) the fractional
share interest to which such former holder (after taking into account all shares
of Megsinet Capital Stock held at the Effective Time by such holder and the
Allocation Schedule) would otherwise be entitled by (B) the average of the
closing prices of the CoreComm Common Stock as reported on NASDAQ during the ten
trading days preceding the fifth trading day prior to the Closing Date.
(iii) As soon as practicable after the determination of the amount of cash,
if any, to be paid to holders of Certificates formerly representing Megsinet
Capital Stock with respect to any fractional share interests, the Exchange Agent
shall make available such amounts to such holders of Certificates formerly
representing Megsinet Capital Stock subject to and in accordance with the terms
of Section 2.2(c).
(f) Termination of Exchange Fund. Any portion of the Exchange Fund which
remains undistributed to the holders of the Certificates for six months after
the Effective Time shall be delivered to CoreComm, upon demand, and any holders
of the Certificates who have not theretofore complied with this Article II shall
thereafter look only to CoreComm for payment of their claim for Merger
Consideration, any dividends or distributions with respect to CoreComm Common
Stock and any cash in lieu of fractional shares of CoreComm Common Stock.
(g) No Liability. None of CoreComm, Sub, Megsinet, the Surviving
Corporation or the Exchange Agent shall be liable to any person in respect of
any shares of CoreComm Common Stock, any dividends or distributions with respect
thereto, any cash in lieu of fractional shares of CoreComm Common Stock or any
cash from the Exchange Fund, in each case delivered to a public official
pursuant to any applicable abandoned property, escheat or similar law.
(h) Investment of Exchange Fund. The Exchange Agent shall invest any cash
included in the Exchange Fund, as directed by CoreComm, on a daily basis. Any
interest and other income resulting from such investments shall be paid to
CoreComm.
(i) Lost Certificates. If any Certificate shall have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
such Certificate to be lost, stolen or destroyed and, if required by the
Surviving Corporation, the posting by such
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person of a bond in such reasonable amount as the Surviving Corporation may
direct as indemnity against any claim that may be made against it with respect
to such Certificate, the Exchange Agent shall issue in exchange for such lost,
stolen or destroyed Certificate the Merger Consideration and, if applicable, any
unpaid dividends and distributions on shares of CoreComm Common Stock
deliverable in respect thereof and any cash in lieu of fractional shares, in
each case pursuant to this Agreement.
SECTION 2.3 Certain Adjustments. If between the date hereof and the
Effective Time, the outstanding shares of Megsinet Common Stock or of CoreComm
Common Stock shall be changed into a different number of shares by reason of any
reclassification, recapitalization, split-up, combination or exchange of shares,
or any dividend payable in stock or other securities shall be declared thereon
with a record date within such period, the Exchange Ratio shall be adjusted
accordingly to provide to the holders of Megsinet Common Stock the same economic
effect as contemplated by this Agreement prior to such reclassification,
recapitalization, split-up, combination, exchange or dividend.
SECTION 2.4 Shares of Dissenting Stockholders. Notwithstanding anything
in this Agreement to the contrary, any shares of Megsinet Common Stock that are
issued and outstanding as of the Effective Time and that are held by a
stockholder who has exercised his right (to the extent such right is available
by law) to demand and to receive the fair value of such shares (the "Dissenting
Shares") under the IBCA shall not be converted into the right to receive the
Merger Consideration unless and until the holder shall have failed to perfect,
or shall have effectively withdrawn or lost, his right to dissent from the
Merger under the IBCA and to receive such consideration as may be determined to
be due with respect to such Dissenting Shares pursuant to and subject to the
requirements of the IBCA. If any such holder shall have so failed to perfect or
have effectively withdrawn or lost such right, each share of such holder's
Megsinet Common Stock shall thereupon be deemed to have been converted into and
to have become, as of the Effective Time, without any interest thereon, the
right to receive the Merger Consideration, and, in such regard, shall be treated
as shares of Megsinet Common Stock for which Stock Consideration and Cash
Consideration are allocated on an equal basis without affecting the allocation
provided for on the Allocation Schedule. Megsinet shall give CoreComm (i) prompt
notice of any notice or demands for appraisal or payment for shares of Megsinet
Common Stock received by Megsinet and (ii) the opportunity to participate in and
direct all negotiations and proceedings with respect to any such demands or
notices. Megsinet shall not, without the prior written consent of CoreComm, make
any payment with respect to, or settle, offer to settle or otherwise negotiate,
any such demands.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
SECTION 3.1 Representations and Warranties of Megsinet. Except as
disclosed in the Disclosure Schedule delivered by Megsinet to CoreComm prior to
the execution of this Agreement (the "Megsinet Disclosure Schedule") and making
reference to the particular subsection of this Agreement to which exception is
being taken, Megsinet and, to the best of each of their knowledge the
Significant Stockholders, represents and warrants to CoreComm as follows:
(a) Organization, Standing and Corporate Power. (i) Each of Megsinet and
its subsidiaries (as defined in Section 8.3) is a corporation or other legal
entity duly organized, validly existing and in good standing (with respect to
jurisdictions which
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recognize such concept) under the laws of the jurisdiction in which it is
organized and has the requisite corporate or other power, as the case may be,
and authority to carry on its business as now being conducted, except, as to
subsidiaries, for those jurisdictions where the failure to be so organized,
existing or in good standing individually or in the aggregate would not have a
material adverse effect (as defined in Section 8.3) on Megsinet. Each of
Megsinet and its subsidiaries is duly qualified or licensed to do business and
is in good standing (with respect to jurisdictions which recognize such concept)
in each jurisdiction in which the nature of its business or the ownership,
leasing or operation of its properties makes such qualification or licensing
necessary, except for those jurisdictions where the failure to be so qualified
or licensed or to be in good standing individually or in the aggregate would not
have a material adverse effect on Megsinet.
(ii) Megsinet has delivered to CoreComm prior to the execution of this
Agreement complete and correct copies of its articles of incorporation and
by-laws, as amended to date.
(iii) In all material respects, the minute books of Megsinet contain
accurate records of all meetings and accurately reflect all other actions taken
by the stockholders, the Board of Directors and all committees of the Board of
Directors of Megsinet since January 1, 1995.
(b) Subsidiaries. Section 3.1(b) of the Megsinet Disclosure Schedule
lists all of the subsidiaries of Megsinet. All the outstanding shares of capital
stock of, or other equity interests in, each such subsidiary have been validly
issued and are fully paid and nonassessable and are owned directly or indirectly
by Megsinet, free and clear of all pledges, claims, liens, charges, encumbrances
and security interests of any kind or nature whatsoever (collectively, "Liens")
and free of any other restriction (including any restriction on the right to
vote, sell or otherwise dispose of such capital stock or other ownership
interests).
(c) Capital Structure. The authorized capital stock of Megsinet consists
of 30,000,000 shares of Megsinet Common Stock and 3,000,000 shares of Megsinet
preferred stock. Section 3.1(c) of the Megsinet Disclosure Schedule sets forth
the capital structure of Megsinet and a complete and correct list, as of
February 2, 1999, of the number of shares of Megsinet capital stock issued and
outstanding, reserved for issuance, or subject to employee stock options or
other rights to purchase or receive Megsinet Common Stock granted to employees,
consultants or directors under the Megsinet Stock Plan and the non-qualified
plan or otherwise (collectively, "Megsinet Stock Options"), the dates of grant
and exercise prices thereof. All outstanding shares of capital stock of Megsinet
are, and all shares which may be issued will be, when issued, duly authorized,
validly issued, fully paid and nonassessable and not subject to preemptive
rights. Except as set forth in this Section 3.1(c) or Section 3.1(c) of the
Megsinet Disclosure Schedule and except for changes since February 2, 1999
resulting from the issuance of shares of Megsinet Common Stock pursuant to the
Megsinet Stock Options or conversion of the Megsinet Convertible Securities, (x)
there are not issued, reserved for issuance or outstanding (A) any shares of
capital stock or other voting securities of Megsinet, (B) any securities of
Megsinet or any Megsinet subsidiary convertible into or exchangeable or
exercisable for shares of capital stock or voting securities of Megsinet, (C)
any warrants, calls, options or other rights to acquire from Megsinet or any
Megsinet subsidiary, and any obligation of Megsinet or any Megsinet subsidiary
to issue, any capital stock, voting securities or securities convertible into or
exchangeable or exercisable for capital stock or voting securities of Megsinet,
and (y) there are no outstanding obligations of Megsinet or any subsidiary of
Megsinet to
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repurchase, redeem or otherwise acquire any such securities or to issue, deliver
or sell, or cause to be issued, delivered or sold, any such securities. There
are no outstanding (A) securities of Megsinet or any Megsinet subsidiary
convertible into or exchangeable or exercisable for shares of capital stock or
other voting securities or ownership interests in any Megsinet subsidiary, (B)
warrants, calls, options or other rights to acquire from Megsinet or any
Megsinet subsidiary, and any obligation of Megsinet or any Megsinet subsidiary
to issue, any capital stock, voting securities or other ownership interests in,
or any securities convertible into or exchangeable or exercisable for any
capital stock, voting securities or ownership interests in, any Megsinet
subsidiary or (C) obligations of Megsinet or any Megsinet subsidiary to
repurchase, redeem or otherwise acquire any such outstanding securities of
Megsinet subsidiaries or to issue, deliver or sell, or cause to be issued,
delivered or sold, any such securities. Neither Megsinet nor any Megsinet
subsidiary is a party to any agreement restricting the transfer of, relating to
the voting of, requiring registration of, or granting any preemptive or, except
as provided by the terms of the Megsinet Stock Options and the Megsinet
Convertible Securities, antidilutive rights with respect to, any securities of
the type referred to in the two preceding sentences. Other than the Megsinet
subsidiaries, Megsinet does not directly or indirectly beneficially own any
securities or other beneficial ownership interests in any other entity except
for non-controlling investments made in the ordinary course of business in
entities which are not individually or in the aggregate material to Megsinet and
its subsidiaries as a whole.
(d) Authority; Noncontravention. Megsinet has all requisite corporate
power and authority to enter into this Agreement and, subject, in the case of
the Merger, to the Megsinet Stockholder Approval (as defined in Section 3.1(k))
to consummate the transactions contemplated by this Agreement. The execution and
delivery of this Agreement by Megsinet and the consummation by Megsinet of the
transactions contemplated by this Agreement have been duly authorized by all
necessary corporate action on the part of Megsinet, subject, in the case of the
Merger, to the Megsinet Stockholder Approval. This Agreement has been duly
executed and delivered by Megsinet and, assuming the due authorization,
execution and delivery by CoreComm and Sub, constitutes the legal, valid and
binding obligation of Megsinet, enforceable against Megsinet in accordance with
its terms. The execution and delivery of this Agreement do not, and the
consummation of the transactions contemplated by this Agreement and compliance
with the provisions of this Agreement will not, conflict with, or result in any
violation of, or default (with or without notice or lapse of time, or both)
under, or give rise to a right of termination, cancellation or acceleration of
any obligation or loss of a benefit under, or result in the creation of any Lien
upon any of the properties or assets of Megsinet or any of its subsidiaries
under, (i) the articles of organization or by-laws of Megsinet or the comparable
organizational documents of any of its subsidiaries, (ii) any loan or credit
agreement, note, bond, mortgage, indenture, lease or other agreement,
instrument, permit, concession, franchise, license or similar authorization
applicable to Megsinet or any of its subsidiaries or their respective properties
or assets or (iii) subject to the governmental filings and other matters
referred to in the following sentence, any judgment, order, decree, statute,
law, ordinance, rule or regulation applicable to Megsinet or any of its
subsidiaries or their respective properties or assets, other than, in the case
of clauses (ii) and (iii), any such conflicts, violations, defaults, rights,
losses or Liens that individually or in the aggregate would not (x) have a
material adverse effect on Megsinet or (y) reasonably be expected to impair the
ability of Megsinet to perform its obligations under this Agreement. Except as
may be required pursuant to the Hart-Scott-Rodino Antitrust Improvement Act of
1976, and the rules and regulations thereunder, or any successor law, rules or
regulations (the "HSR Act") (as to which Megsinet makes no
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representations or warranties), no consent, approval, order or authorization of,
action by or in respect of, or registration, declaration or filing with, any
federal, state, local or foreign government, any court, administrative,
regulatory or other governmental agency, commission or authority or any
nongovernmental self-regulatory agency, commission or authority (a "Governmental
Entity") is required by or with respect to Megsinet or any of its subsidiaries
in connection with the execution and delivery of this Agreement by Megsinet or
the consummation by Megsinet of the transactions contemplated by this Agreement,
except for the filing of a Registration Statement on Form S-4 with the
Securities and Exchange Commission ("SEC") in accordance with the Securities Act
of 1933, as amended (the "Securities Act"), the filing of the Articles of Merger
with the Secretary of State of Illinois and the Secretary of State of Delaware
and such filings with Governmental Entities to satisfy the applicable
requirements of state securities or "blue sky" laws.
(e) Financial Statements; Undisclosed Liabilities. The audited and
unaudited financial statements of Megsinet provided on Schedule 3.1(e) of the
Megsinet Disclosure Schedule comply as to form, as of their respective dates, in
all material respects with applicable accounting requirements, have been
prepared in accordance with GAAP applied on a consistent basis during the
periods involved (except as may be indicated in the notes thereto) and fairly
present the consolidated financial position of Megsinet and its consolidated
subsidiaries as of the dates thereof and the consolidated results of their
operations and cash flows for the periods then ended (subject, in the case of
unaudited statements, to normal year-end audit adjustments and the absence of
footnotes). Except (i) as reflected in such financial statements or in the notes
thereto; (ii) for liabilities incurred in connection with this Agreement or the
transactions contemplated hereby; (iii) for liabilities incurred in the ordinary
course from Cisco or Ascend neither Megsinet nor any of its subsidiaries has any
liabilities or obligations of any nature which, individually or in the
aggregate, would have a material adverse effect on Megsinet.
(f) Absence of Certain Changes or Events. Except for liabilities incurred
in connection with this Agreement or the transactions contemplated hereby and
except as permitted by Section 4.1(a), since September 30, 1998, Megsinet and
its subsidiaries have conducted their business only in the ordinary course and,
since January 1, 1998, there has not been (i) any material adverse change (as
defined in Section 8.3) in Megsinet, (ii) any declaration, setting aside or
payment of any dividend or other distribution (whether in cash, stock or
property) with respect to any of Megsinet's capital stock, (iii) any split,
combination or reclassification of any of Megsinet's capital stock or any
issuance or the authorization of any issuance of any other securities in respect
of, in lieu of or in substitution for shares of Megsinet's capital stock, except
for issuances of Megsinet Common Stock upon conversion of Megsinet Convertible
Securities, upon the exercise of Megsinet Stock Options (awarded prior to the
date hereof) in accordance with their present terms, (iv)(A) any granting by
Megsinet or any of its subsidiaries to any current or former director, executive
officer or other key employee of Megsinet or its subsidiaries of any increase in
compensation, bonus or other benefits, except for normal increases as a result
of promotions, normal increases of base pay in the ordinary course of business
or as was required under any employment agreements in effect as of January 1,
1998, (B) any granting by Megsinet or any of its subsidiaries to any such
current or former director, executive officer or key employee of any increase in
severance or termination pay, or (C) any entry by Megsinet or any of its
subsidiaries into, or any amendment of, any employment, deferred compensation,
consulting, severance, termination or indemnification agreement with any such
current or former director, executive officer or key employee,
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(v) except insofar as or required by a change in GAAP, any change in accounting
methods, principles or practices by Megsinet materially affecting its assets,
liabilities or business, (vi) any tax election that individually or in the
aggregate would have a material adverse effect on Megsinet or any of its tax
attributes or any settlement or compromise of any material income tax liability,
or (vii) any action taken by Megsinet or any of its subsidiaries during the
period from September 30, 1998 through the date of this Agreement that, if taken
during the period from the date of this Agreement through the Effective Time
would constitute a breach of Section 4.1(a).
(g) Compliance with Applicable Laws; Litigation. (i) Megsinet and its
subsidiaries hold all permits, licenses, variances, exemptions, orders,
registrations and approvals of all Governmental Entities which are required for
the operation of the businesses of Megsinet and its subsidiaries (the "Megsinet
Permits"), except where the failure to have any such Megsinet Permits
individually or in the aggregate would not have a material adverse effect on
Megsinet. Megsinet and its subsidiaries are in compliance with the terms of the
Megsinet Permits and all applicable statutes, laws, ordinances, rules and
regulations (including, without limitation, laws relating to environmental or
occupational health and safety conditions or standards), except where the
failure so to comply individually or in the aggregate would not have a material
adverse effect on Megsinet. As of the date of this Agreement, no action, demand,
requirement or investigation by any Governmental Entity and no suit, action or
proceeding by any person, in each case with respect to Megsinet or any of its
subsidiaries or any of their respective properties is pending or, to the
knowledge (as defined in Section 8.3) of Megsinet, threatened, other than, in
each case, those the outcome of which individually or in the aggregate would not
(A) have a material adverse effect on Megsinet or (B) reasonably be expected to
impair the ability of Megsinet to perform its obligations under this Agreement
or prevent or materially delay the consummation of any of the transactions
contemplated by this Agreement.
(ii) Neither Megsinet nor any subsidiary of Megsinet is subject to any
outstanding order, injunction or decree which has had or, insofar as can be
reasonably foreseen, individually or in the aggregate will have a material
adverse effect on Megsinet.
(h) Absence of Changes in Benefit Plans. Megsinet has delivered to
CoreComm true and complete copies of (i) all severance and employment agreements
of Megsinet with directors, executive officers or employees, (ii) all severance
or termination pay programs and policies of each of Megsinet and each Megsinet
subsidiary, (iii) all plans or arrangements of Megsinet and each Megsinet
subsidiary relating to its employees which contain change in control or similar
provisions and (iv) all Megsinet Benefit Plans (as defined below). Since January
1, 1998 there has not been any adoption or amendment in any material respect by
Megsinet or any of its subsidiaries of any collective bargaining agreement,
employment agreement, consulting agreement, severance agreement or any material
bonus, pension, profit sharing, deferred compensation, incentive compensation,
stock ownership, stock purchase, stock bonus, stock option, phantom stock,
equity compensation, retirement, vacation, severance, life insurance,
disability, death benefit, hospitalization, medical, surgical or other plan,
arrangement or understanding providing benefits to any current or former
employee, officer or director of Megsinet or any of its wholly owned
subsidiaries including, without limitation, each "employee benefit plan" within
the meaning of Section 3(s) of ERISA (as defined below) sponsored, reinstalled,
contributed to by or required to be contributed by for the benefit of the
employees or former employees of Megsinet or a Megsinet subsidiary by Megsinet
or by any trade or business, whether or not incorporated (an "ERISA Affiliate")
that together with Megsinet would be deemed a Single Employer within the meaning
of Section 4001(b) of the
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Employee Retirement Income Security Act of 1974, as amended ("ERISA")
(collectively, the "Megsinet Benefit Plans"), or any material change in any
actuarial or other assumption used to calculate funding obligations with respect
to any Megsinet pension plans, or any material change in the manner in which
contributions to any Megsinet pension plans are made or the basis an which such
contributions are determined and there is no commitment, plan or promise to make
any such material change, other than as contemplated by this Agreement.
(i) ERISA Compliance. (i) Except where such would not, individually or in
the aggregate, have a material adverse effect on Megsinet, with respect to the
Megsinet Benefit Plans, no event has occurred and, to the knowledge of Megsinet,
there exists no condition or set of circumstances, in connection with which
Megsinet or any of its subsidiaries could be subject to any liability under the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), the Code
or any other applicable law.
(ii) Except where such would not, individually or in the aggregate, have a
material adverse effect on Megsinet, each Megsinet Benefit Plan has been
administered in accordance with its terms. Megsinet, its subsidiaries and all
the Megsinet Benefit Plans have been operated, and are, in compliance with the
applicable provisions of ERISA, the Code and all other applicable laws and the
terms of all applicable collective bargaining agreements, except for any
failures to be in such compliance that individually or in the aggregate would
not have a material adverse effect on Megsinet. Each Megsinet Benefit Plan that
is intended to be qualified under Section 401(a) or 401(k) of the Code has
received a favorable determination letter from the IRS that it is so qualified
and each trust established in connection with any Megsinet Benefit Plan that is
intended to be exempt from federal income taxation under Section 501(a) of the
Code has received a determination letter from the IRS that such trust is so
exempt. To the knowledge of Megsinet, no fact or event has occurred since the
date of any determination letter from the IRS which is reasonably likely to
affect adversely the qualified status of any such Megsinet Benefit Plan or the
exempt status of any such trust.
(iii) No Megsinet Benefit Plan or any "pension" plan fund or program
(within the meaning of Section 3(2) of ERISA) of an ERISA Affiliate is or has
ever been subject to Title IV of ERISA.
(iv) No Megsinet Benefit Plan provides medical benefits (whether or not
insured), with respect to current or former employees after retirement or other
termination of service (other than coverage mandated by applicable law or
benefits, the full cost of which is borne by the current or former employee)
other than individual arrangements the amounts of which are not material.
(v) As of the date of this Agreement, neither Megsinet nor any of its
subsidiaries is a party to any collective bargaining or other labor union
contract applicable to persons employed by Megsinet or any of its subsidiaries
and no collective bargaining agreement is being negotiated by Megsinet or any of
its subsidiaries. As of the date of this Agreement, there is no labor dispute,
strike or work stoppage against Megsinet or any of its subsidiaries pending or,
to the knowledge of Megsinet, threatened which may interfere with the respective
business activities of Megsinet or any of its subsidiaries, except where such
dispute, strike or work stoppage individually or in the aggregate would not have
a material adverse effect on Megsinet. As of the date of this Agreement, to the
knowledge of Megsinet, none of Megsinet, any of its subsidiaries or any of their
respective representatives or employees has committed any material unfair labor
practice in connection with the operation of the respective businesses of
Megsinet or any of its
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subsidiaries, and there is no material charge or complaint against Megsinet or
any of its subsidiaries by the National Labor Relations Board or any comparable
governmental agency pending or, to the knowledge of Megsinet, threatened in
writing.
(vi) No employee of Megsinet will be entitled to any material payment,
additional benefits or any acceleration of the time of payment or vesting of any
benefits under any Megsinet Benefit Plan as a result of the transactions
contemplated by this Agreement (either alone or in conjunction with any other
event such as a termination of employment)
(vii) Neither Megsinet, nor any subsidiary, any Megsinet Benefit Plan, any
trust created thereunder, or any trustee or administrator thereof has engaged in
a transaction in connection with which Megsinet or any subsidiary, any Megsinet
Benefit Plan, any such trust, or any trustee or administrator thereof, or any
party dealing with any Megsinet Benefit Plan or any such trust could be subject
to either a civil penalty assessed pursuant to Section 409 or 502(i) of ERISA or
a tax imposed pursuant to Section 4975 or 4976 of the Code.
(viii) No amounts payable under the Megsinet Benefit Plans will fail to be
deductible for federal income tax purposes by virtue of Section 162(a)(1) or
162(m) of the Code.
(ix) There has been no material failure of a Megsinet Benefit Plan that is
a group health plan (as defined in Section 5000(b)(1) of the Code) to meet the
requirements of Section 4980B(f) of the Code with respect to a qualified
beneficiary (as defined in Section 4980B(g) of the Code). Neither Megsinet nor
any subsidiary has contributed to a nonconforming group health plan (as defined
in Section 5000(c) of the Code) and no ERISA Affiliate of Megsinet or any
subsidiary has incurred a tax under Section 5000(e) of the Code which is or
could become a liability of Megsinet or a subsidiary. There are no pending, or
to the knowledge of Megsinet, threatened or anticipated claims by or on behalf
of any Megsinet Benefit Plan, by any employee or beneficiary covered under any
such Megsinet Benefit Plan, or otherwise involving any such Megsinet Benefit
Plan (other than routine claims for benefits).
(j) Taxes. (1) Megsinet and its subsidiaries have filed all material Tax
Returns (as defined herein) required to be filed by them and all such Tax
Returns are complete and correct in all material respects, or requests for
extensions to file such Tax Returns have been timely filed, granted and have not
expired. Megsinet and its subsidiaries have paid or have made provision for the
payment of all Taxes (as defined herein) shown as due on such Tax Returns.
Neither Megsinet nor its subsidiaries has made, or is subject to, an election
under Section 341 of the Code.
(2) No deficiencies for any Taxes have been proposed, asserted or assessed
against Megsinet or any of its subsidiaries that are not adequately reserved
for, except for deficiencies that individually or in the aggregate would not
have a material adverse effect on Megsinet. No federal, state, local or foreign
audits or other administrative proceedings or court proceedings are presently
pending with regard to any Taxes of Megsinet or any of its subsidiaries.
(3) No claim has ever been made by an authority in a jurisdiction where
Megsinet has not filed Tax Returns that it or any of its subsidiaries is or may
be subject to taxation by that jurisdiction.
(4) Neither Megsinet nor any of its subsidiaries has any obligation to make
a payment that will not be deductible under Section 280G of the Code or Megsinet
will satisfy all the requirements of Section 280G(b)(5)(B) of the Code and Prop.
Treas. Reg.
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Section 1.280G-1(Q&A-7) such that Section 280G will not apply to any payments to
be made by Megsinet or any of its subsidiaries.
(5) Neither Megsinet nor any of its subsidiaries have (A) been a member of
an affiliated group as defined under Section 1504 of the Code (other than an
affiliated group of which the common parent was Megsinet) and (B) any liability
for Taxes of any person (other than Megsinet or any of its subsidiaries) under
Treas. Reg. Section 1.1502-6 (or any similar provision of state, local or
foreign law), as a transferee or successor, by contract or otherwise.
(6) As used in this Agreement, "Taxes" shall include all (x) federal,
state, local or foreign income, property, occupation, sales, use, service
occupation, service use, leasing, leasing use, excise, withholding, transfer,
recording and other taxes or similar governmental charges, including any
interest, penalties or additions with respect thereto, and (y) "Tax Return"
shall mean any report, return, document, declaration, information, return or
filing (including any related or supporting information) with respect to Taxes.
(7) (A) The aggregate fair market value of the Merger Consideration
(including any cash paid for fractional shares) will be approximately equal to
the fair market value of Megsinet stock surrendered therefor. The Merger
Consideration will be the sole consideration received for each such
shareholder's Megsinet Capital Stock, and the Megsinet Capital Stock surrendered
in exchange therefor will be the sole consideration delivered by such
shareholder for the Merger Consideration and the terms of such exchange were
arrived at through arm's length negotiations.
(B) There is no intercorporate indebtedness existing between CoreComm (or
any of its subsidiaries, including Sub) and Megsinet that was issued, acquired,
or will be settled at a discount.
(C) Megsinet is not an investment company as defined in Section
368(a)(2)(F)(iii) and (iv) of the Code.
(D) At the Effective Time, Sub will acquire at least 90 percent of the fair
market value of the net assets and at least 70 percent of the fair market value
of the gross assets held by Megsinet immediately prior to the Merger (for
purposes of this representation, amounts used by Megsinet to pay its
reorganization expenses, cash paid in lieu of fractional shares, and cash used
to pay dissenters and to make all redemptions and distributions by Megsinet
immediately preceding the transfer will be included as assets of Megsinet held
immediately prior to the Merger) (the "Substantially All Test").
(E) No assets of Megsinet have been or are proposed to be sold, transferred
or otherwise disposed of that would prevent Megsinet from continuing the
historic business of Megsinet or using a significant portion of Megsinet's
historic business assets in a business.
(F) The payment of cash in lieu of fractional shares of CoreComm Common
Stock is solely for the purpose of avoiding the expense and inconvenience to
CoreComm of issuing fractional shares of CoreComm Common Stock and does not
represent separately bargained-for consideration. The total cash consideration
to be paid in the Merger in lieu of fractional shares of CoreComm capital stock
will not exceed one percent of the total consideration in the Merger.
(G) (I) none of the compensation for services to Megsinet received (or to
be received) by any shareholder of Megsinet will be separate consideration for,
or allocable to, any of his Megsinet Capital Stock; (II) none of the CoreComm
Common Stock received by any shareholder of Megsinet pursuant to the Merger will
be separate consideration for,
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or allocable to, any employment, service or noncompetition agreement or
arrangement; and (III) the compensation paid to any shareholder of Megsinet who
also provides services to Megsinet will be commensurate with amounts that would
be paid to a third party bargaining at arm's length for similar services.
(H) Except as specifically set forth herein, Megsinet and the shareholders
of Megsinet will each pay their respective expenses, if any, incurred in
connection with the Merger and the transactions related hereto.
(I) (I) On the date hereof, there is no plan or intention on the part of
the Significant Stockholders, or to the knowledge of Megsinet or the Significant
Stockholders, any other shareholders of Megsinet to sell, exchange, transfer by
gift or otherwise dispose of any shares of CoreComm Common Stock to be received
pursuant to the Merger or to enter into any transactions which would have the
economic effect of a disposition of such Shares including, but not limited to,
any transactions described in Section 1259 of the Code or any other put, forward
sale, short-sale or equity swap types of arrangements, with respect to any such
shares of CoreComm Common Stock to be received pursuant to the Merger, (II)
neither Megsinet nor any person related to Megsinet within the meaning of Treas.
Reg. sec.1.368-1(e)(3), nor any predecessor or successor of Megsinet within the
meaning of Treas. Reg. sec.1.368-1(e)(5), has acquired or will acquire Megsinet
Capital Stock in contemplation of, or as part of, the Merger, and (III) Megsinet
has not made and will not make any distributions with respect to its stock in
contemplation of, or with respect to the Merger.
(J) The liabilities of Megsinet to be assumed by Sub and the liabilities to
which the transferred assets of Megsinet are subject were incurred by Megsinet
in the ordinary course of its business.
(K) The fair market value of the assets of Megsinet transferred to Sub will
equal or exceed the sum of the liabilities assumed by Sub, plus the amount of
liabilities, if any, to which the transferred assets are subject.
(L) Megsinet is not under the jurisdiction of a court in a Title 11 or
similar case within the meaning of Section 368(a)(3)(A) of the Code.
(M) Megsinet has no plan or intention to issue additional shares of its
stock (or securities, options or instruments giving the holder right to such
stock) that would (or if exercised would) result in CoreComm losing control of
Megsinet within the meaning of Section 368(c) of the Code. At the time of the
Merger, Megsinet will not have outstanding any warrants, options convertible
securities or any other type of right pursuant to which any person could acquire
stock in Megsinet that, if exercised or converted, would affect CoreComm's
acquisition or retention of control of Megsinet or its successor, as defined in
Section 368(c) of the Code.
(N) Apart from the Megsinet Capital Stock, the Ascend Warrant, the Pequot
Warrant, and conversion rights held by CISCO Systems, Inc., and the options
described in Section 5.5 hereof, Megsinet has no outstanding stock or debt that
could be treated as equity for Federal income tax purposes.
(O) Neither Megsinet nor any affiliate of Megsinet has any plan or
intention of taking any action prior to, at or after the Effective Time that is
contrary to any of representations of this Section 3.1(j)(7).
(k) Voting Requirements. The affirmative vote at the Megsinet Stockholders
Meeting (the "Megsinet Stockholder Approval") of the holders of two-thirds of
all
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outstanding shares of Megsinet Common Stock and 60% of all outstanding shares of
Series 1998A Preferred and 100% of the outstanding shares of Pequot Preferred to
adopt this Agreement are the only votes of the holders of any class or series of
Megsinet's capital stock necessary to approve and adopt this Agreement and the
transactions contemplated hereby, including the Merger. The affirmation vote of
the holders of a majority of all outstanding shares of Megsinet Common Stock are
the only votes of the holders of any class or series of Megsinet's capital stock
necessary to approve an amendment to Megsinet's Articles of Incorporation
necessary to reduce to a majority the number of shares of Megsinet Common Stock
required to vote affirmatively to adopt this Agreement and the transactions
contemplated hereby (the "Reduced Vote").
(l) Intellectual Property. Megsinet and its subsidiaries own or have a
valid license to use all trademarks, service marks, trade names, patents and
copyrights (including any registrations or applications for registration of any
of the foregoing) (collectively, the "Megsinet Intellectual Property") necessary
to carry on its business substantially as currently conducted, except for such
Megsinet Intellectual Property (i) the failure of which to own or validly
license individually or in the aggregate would not have a material adverse
effect on Megsinet or (ii) which is "off the shelf" or "shrink-wrapped"
software. Neither Megsinet nor any such subsidiary has received any notice of
infringement of or conflict with, and, to Megsinet's knowledge, there are no
infringements of or conflicts (i) with the rights of others with respect to the
use of, or (ii) by others with respect to, any Megsinet Intellectual Property
that individually or in the aggregate, in either such case, would have a
material adverse effect on Megsinet.
(m) Certain Contracts. Except for contracts and agreements set forth in
Section 3.1(m) of the Megsinet Disclosure Schedule, neither Megsinet nor any of
its subsidiaries is a party to or bound by (i) any contract providing for the
receipt or payment of more than $20,000 per 12 month period other than those
covered by the fourth sentence hereof, (ii) any lease of real or personal
property for more than $20,000 per 12 month period, (iii) any non-competition
agreement or any other agreement or obligation which purports to limit in any
material respect the manner in which, or the localities in which, all or any
material portion of the business of Megsinet and its subsidiaries (including,
for purposes of this Section 3.1(m), CoreComm and its subsidiaries, assuming the
Merger has taken place), taken as a whole, is or would be conducted, or (iv) any
contract or other agreement which would prohibit or materially delay the
consummation of the Merger or any of the transactions contemplated by this
Agreement (all contracts of the type described in clauses (i) and (ii) being
referred to herein as "Megsinet Material Contracts"). Each Megsinet Material
Contract is valid and binding on Megsinet (or, to the extent an Megsinet
subsidiary is a party, such subsidiary) and is in full force and effect, and
Megsinet and each Megsinet subsidiary have in all material respects performed
all obligations required to be performed by them to date under each Megsinet
Material Contract, except where such noncompliance, individually or in the
aggregate, would not have a material adverse effect on Megsinet. Neither
Megsinet nor any Megsinet subsidiary knows of, or has received notice of, any
violation or default under (nor, to the knowledge of Megsinet, does there exist
any condition which with the passage of time or the giving of notice or both
would result in such a violation or default under) any Megsinet Material
Contract except where such violation or default would not have a material
adverse effect on Megsinet. In addition, Megsinet has provided to CoreComm a
complete list as of December 31, 1998 of all charges related to Megsinet's
circuits which includes all charges incurred under any interconnection and/or
service agreements between Megsinet and any telecommunications company (the
"Circuit Schedule"). Megsinet has also provided in
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Section 3.1(m) of the Megsinet Disclosure Schedule, a complete list of any
provisions of any agreements reflected on the Circuit Schedule that provide for
(i) materially different pricing terms than the majority of the agreements on
the Circuit Schedule; (ii) "take or pay" commitments over $100,000 annually;
(iii) payment of more than $75,000 per 12 month period or (iv) terms that could,
individually or in the aggregate, have a material adverse effect on Megsinet.
(n) Subscribers. As of the Effective Time, Megsinet will have at least
40,000 Subscribers. As used herein, the term "Subscriber" means a customer of
Megsinet who (i) is currently connected to and receiving Internet access
services from the system and (ii) is being charged and is paying for such
services.
(o) Fixed Assets. Schedule 3.1(o) to the Megsinet Disclosure Schedule sets
forth a summary by category of all fixed assets owned by Megsinet. Such assets
are owned by Megsinet free and clear of any Liens, except for such Liens or
defects which, individually or in the aggregate, would not have a material
adverse effect on Megsinet.
(p) Brokers; Legal Expenses. No broker, investment banker, financial
advisor or other person, other than Mitchell Marks, the fees and expenses of
which will be paid by Megsinet's stockholders and will not exceed $250,000, is
entitled to any broker's, finder's, financial advisor's or other similar fee or
commission in connection with the transactions contemplated by this Agreement
based upon arrangements made by or on behalf of Megsinet or any stockholder of
Megsinet. In addition, the fees payable to the law firm of Gallop Johnson and
Neuman L.C. related to the transactions contemplated herein shall be paid by
Megsinet's stockholders.
(q) Registration Statement; Proxy/Prospectus. The information supplied by
Megsinet for inclusion in the registration statement on Form S-4 pursuant to
which shares of CoreComm Common Stock issued in the Merger will be registered
with the SEC (the "Registration Statement"), shall not at the time the
Registration Statement is declared effective by the SEC contain any untrue
statement of a material fact or omit to state any material fact required to be
stated in the Registration Statement or necessary in order to make the
statements in the Registration Statement, in light of the circumstances under
which they were made, not misleading. The information supplied by Megsinet for
inclusion in the Proxy/Prospectus (the "Proxy/Prospectus") to be sent to the
stockholders of Megsinet in connection with the solicitation of votes to approve
and adopt this Agreement shall not, on the date the Proxy/Prospectus is first
mailed to stockholders of Megsinet or at the Effective Time, contain any
statement which, at such time and in light of the circumstances under which it
is made, is false or misleading with respect to any material fact, or omit to
state any material fact necessary in order to make the statements made in the
Proxy/Prospectus not false or misleading or necessary to correct any statement
in any earlier communication with respect to the solicitation of votes which has
become false or misleading.
(r) Escrow of Irrevocable Proxies. As of the date hereof, the certificates
of shares of Megsinet Common Stock representing all of the shares of Megsinet
Common Stock that are subject to irrevocable proxies entered into between
certain Megsinet stockholders and CoreComm (the "Voting Proxies"), other than
for shares owned by Michael Henry, have been delivered to Douglas J. Bates as
escrow agent. A certification of such physical possession by Douglas J. Bates is
attached hereto as Annex B.
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(s) Voting Proxies. The Voting Proxies obtained by CoreComm when combined
with the shares intended to be issued to Pequot represent more than 50% of the
shares of Megsinet Common Stock entitled to vote on the Merger.
(t) Year 2000 Readiness Disclosure. Other than "off the shelf" or "shrink
wrapped" products, all of the computer software programs (including without
limitation software provided by Technology Applications Incorporated or Sun
Microsystems), databases, and compilations, computer firmware; computer hardware
(whether general or special purpose), and other similar or related items of
automated, computerized, and/or software system(s) that are to be used or relied
on by Megsinet or any of its subsidiaries in the conduct of their respective
businesses will not malfunction, will not cease to function, will not generate
incorrect data, and will not provide incorrect results when processing,
providing, and/or receiving date-related data into and between the twentieth and
twenty-first centuries as a result of the transition between such centuries.
SECTION 3.2 Representations and Warranties of CoreComm. Except as
disclosed in the CoreComm SEC Documents (as defined in Section 3.2(e)) or as set
forth on the Disclosure Schedule delivered by CoreComm to Megsinet prior to the
execution of this Agreement (the "CoreComm Disclosure Schedule") and making
reference to the particular subsection of this Agreement to which exception is
being taken, CoreComm represents and warrants to Megsinet as follows:
(a) Organization, Standing and Corporate Power. Each of CoreComm and its
subsidiaries (including Sub) is a corporation or other legal entity duly
organized, validly existing and in good standing (with respect to jurisdictions
which recognize such concept) under the laws of the jurisdiction in which it is
organized and has the requisite corporate or other power, as the case may be,
and authority to carry on its business as now being conducted, except, as to
subsidiaries, for those jurisdictions where the failure to be so organized,
existing or in good standing individually or in the aggregate would not have a
material adverse effect on CoreComm. Each of CoreComm and its subsidiaries is
duly qualified or licensed to do business and is in good standing (with respect
to jurisdictions which recognize such concept) in each jurisdiction in which the
nature of its business or the ownership, leasing or operation of its properties
makes such qualification or licensing necessary, except for those jurisdictions
where the failure to be so qualified or licensed or to be in good standing
individually or in the aggregate would not have a material adverse effect on
CoreComm.
(b) Subsidiaries. All the outstanding shares of capital stock of, or other
equity interests in, each Subsidiary of CoreComm have been validly issued and
are fully paid and nonassessable and are owned directly or indirectly by
CoreComm, free and clear of all Liens and free of any other restriction
(including any restriction on the right to vote, sell or otherwise dispose of
such capital stock or other ownership interests).
(c) Capital Structure. The authorized capital stock of CoreComm consists
of 75,000,000 shares of CoreComm Common Stock, par value $.01 per share and
1,000,000 shares of Series A Junior Participating Preferred Stock, par value
$.01 per share. At the close of business on February 3, 1999: (i) 13,199,586
shares of CoreComm Common Stock were issued and outstanding; (ii) zero shares of
CoreComm Common Stock were held by CoreComm in its treasury; (iii) 1,603,878
shares of CoreComm Common Stock were subject to options issued under CoreComm
employee option plans or agreements; and (iv) 2,735,125 shares of CoreComm
Common Stock were subject to warrants issued under a CoreComm employee option
plans or agreements. All outstanding shares of capital stock of CoreComm are,
and all shares which may be issued pursuant to this Agreement or
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otherwise will be, when issued, duly authorized, validly issued, fully paid and
nonassessable and not subject to preemptive rights. Except as set forth in this
Section 3.2(c) and except for changes since resulting from the issuance of
shares of CoreComm Common Stock pursuant to the CoreComm option plans, as of the
date hereof, (x) there are not issued, reserved for issuance or outstanding (A)
any shares of capital stock or other voting securities of CoreComm, (B) any
securities of CoreComm or any CoreComm subsidiary convertible into or
exchangeable or exercisable for shares of capital stock or voting securities of
CoreComm, (C) any warrants, calls, options or other rights to acquire from
CoreComm or any CoreComm subsidiary, and any obligation of CoreComm or any
CoreComm subsidiary to issue, any capital stock, voting securities or securities
convertible into or exchangeable or exercisable for capital stock or voting
securities of CoreComm, and (y) there are no outstanding obligations of CoreComm
or any CoreComm subsidiary to repurchase, redeem or otherwise acquire any such
securities or to issue, deliver or sell, or cause to be issued, delivered or
sold, any such securities. As of the date hereof, there are no outstanding (A)
securities of CoreComm or any CoreComm subsidiary convertible into or
exchangeable or exercisable for shares of capital stock or other voting
securities or ownership interests in any CoreComm subsidiary, (B) warrants,
calls, options or other rights to acquire from CoreComm or any CoreComm
subsidiary, and any obligation of CoreComm or any CoreComm subsidiary to issue,
any capital stock, voting securities or other ownership interests in, or any
securities convertible into or exchangeable or exercisable for any capital
stock, voting securities or ownership interests in, any CoreComm subsidiary or
(C) obligations of CoreComm or any CoreComm subsidiary to repurchase, redeem or
otherwise acquire any such outstanding securities of CoreComm subsidiaries or to
issue, deliver or sell, or cause to be issued, delivered or sold, any such
securities.
(d) Authority; Noncontravention. CoreComm and Sub each has all requisite
corporate power and authority to enter into this Agreement and to consummate the
transactions contemplated by this Agreement. The execution and delivery of this
Agreement by each of CoreComm and Sub and the consummation by each of CoreComm
and Sub of the transactions contemplated by this Agreement have been duly
authorized by all necessary corporate action on the part of CoreComm and Sub.
This Agreement has been duly executed and delivered by each of CoreComm and Sub
and, assuming the due authorization, execution and delivery by Megsinet,
constitutes the legal, valid and binding obligations of each of CoreComm and
Sub, enforceable against each of CoreComm and Sub in accordance with its terms.
The execution and delivery of this Agreement do not, and the consummation of the
transactions contemplated by this Agreement and compliance with the provisions
of this Agreement will not, conflict with, or result in any violation of, or
default (with or without notice or lapse of time, or both) under, or give rise
to a right of termination, cancellation or acceleration of any obligation or
loss of a benefit under, or result in the creation of any Lien upon any of the
properties or assets of CoreComm or any of its subsidiaries (including Sub)
under, (i) the memorandum of association or by-laws of CoreComm or the
comparable organizational documents of any of its subsidiaries (including Sub),
(ii) any loan or credit agreement, note, bond, mortgage, indenture, lease or
other agreement, instrument, permit, concession, franchise, license or similar
authorization applicable to CoreComm or any of its subsidiaries (including Sub)
or their respective properties or assets or (iii) subject to the governmental
filings and other matters referred to in the following sentence, any judgment,
order, decree, statute, law, ordinance, rule or regulation applicable to
CoreComm or any of its subsidiaries (including Sub) or their respective
properties or assets, other than, in the case of clauses (ii) and (iii), any
such conflicts, violations, defaults, rights, losses or Liens that
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individually or in the aggregate would not (x) have a material adverse effect on
CoreComm or (y) reasonably be expected to impair the ability of CoreComm to
perform its obligations under this Agreement. To the best of CoreComm's
knowledge, except as may be required pursuant to the HSR Act, and the rules and
regulations thereunder, and the Bermuda Exchange Control Act of 1972, no
consent, approval, order or authorization of, action by, or in respect of, or
registration, declaration or filing with, any Governmental Entity is required by
or with respect to CoreComm or any of its subsidiaries (including Sub) in
connection with the execution and delivery of this Agreement by each of CoreComm
or Sub or the consummation by CoreComm and Sub of the transactions contemplated
by this Agreement, except for (1) the filing of the Articles of Merger with the
Secretary of State of Illinois and the Secretary of State of Delaware such
filings with Governmental Entities to satisfy the applicable requirements of
state securities or "blue sky" laws; (2) the filing of a Registration Statement
on Form S-4 with the SEC in accordance with the Securities Act; (3) such filings
with and approvals of the NASDAQ to permit the shares of CoreComm Common Stock
that are to be issued in the Merger to be authorized for quotation on the
NASDAQ; and (4) such consents, approvals, orders or authorizations the failure
of which to be made or obtained individually or in the aggregate would not (x)
have a material adverse effect on CoreComm or (y) reasonably be expected to
impair the ability of CoreComm to perform its obligations under this Agreement.
(e) SEC Documents; Undisclosed Liabilities. CoreComm has filed all
required registration statements, prospectuses, reports, schedules, forms,
statements and other documents (including exhibits and all other information
incorporated therein) with the SEC since August 31, 1998 (together with
CoreComm's Form 10/A filed on August 31, 1998, the "CoreComm SEC Documents"). As
of their respective dates, the CoreComm SEC Documents complied in all material
respects with the requirements of the Securities Act or the Exchange Act, as the
case may be, and the rules and regulations of the SEC promulgated thereunder
applicable to such CoreComm SEC Documents, and none of the CoreComm SEC
Documents when filed contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading. The financial statements of CoreComm included in
the CoreComm SEC Documents comply as to form, as of their respective dates of
filing with the SEC, in all material respects with applicable accounting
requirements and the published rules and regulations of the SEC with respect
thereto, have been prepared in accordance with GAAP (except, in the case of
unaudited statements, as permitted by Form 10-Q of the SEC) applied on a
consistent basis during the periods involved (except as may be indicated in the
notes thereto) and fairly present the consolidated financial position of
CoreComm and its consolidated subsidiaries as of the dates thereof and the
consolidated results of their operations and cash flows for the periods then
ended (subject, in the case of unaudited statements, to normal year-end audit
adjustments). Except (i) as reflected in such financial statements or in the
notes thereto or (ii) for liabilities incurred in connection with this Agreement
or the transactions contemplated hereby, neither CoreComm nor any of its
subsidiaries has any liabilities or obligations of any nature which,
individually or in the aggregate, would have a material adverse effect on
CoreComm.
(f) Absence of Certain Changes or Events. Except for liabilities incurred
in connection with this Agreement or the transactions contemplated hereby, and
except as permitted by Section 4.1(b), since September 2, 1998, CoreComm and its
subsidiaries have conducted their business only in the ordinary course or as
disclosed in any CoreComm SEC Document filed since such date and prior to the
date hereof, and there
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has not been (i) any material adverse change in CoreComm, (ii) any declaration,
setting aside or payment of any dividend or other distribution (whether in cash,
stock or property) with respect to any of CoreComm's capital stock, (iii) any
split, combination or reclassification of any of CoreComm's capital stock or any
issuance or the authorization of any issuance of any other securities in respect
of, in lieu of or in substitution for shares of CoreComm's capital stock, except
for issuances of CoreComm Common Stock upon exercise of CoreComm Stock Options,
in each case, awarded prior to the date hereof in accordance with their present
terms or issued pursuant to Section 4.1(b), (iv) except insofar as may have been
disclosed in CoreComm SEC Documents filed and publicly available prior to the
date of this Agreement or required by a change in GAAP, any change in accounting
methods, principles or practices by CoreComm materially affecting its assets,
liabilities or business, (v) except insofar as may have been disclosed in the
CoreComm Filed SEC Documents, any tax election that individually or in the
aggregate would have a material adverse effect on CoreComm or any of its tax
attributes or any settlement or compromise of any material income tax liability
or (vi) any action taken by CoreComm or any of the CoreComm subsidiaries during
the period from September 2, 1998 through the date of this Agreement that, if
taken during the period from the date of this Agreement through the Effective
Time would constitute a breach of Section 4.1(b).
(g) Brokers. Other than Schneider & Company, which will be paid by
CoreComm, no broker, investment banker, financial advisor or other person is
entitled to any broker's, finder's, financial advisor's or other similar fee or
commission in connection with the transactions contemplated by this Agreement
based upon arrangements made by or on behalf of CoreComm.
(h) Taxes. (1) Prior to the Merger, CoreComm will be in control of Sub
within the meaning of Section 368(c)(1) of the Code. Following the Merger,
CoreComm has no plan or intention for Sub to issue additional shares of its
stock that would result in CoreComm losing control of Sub within the meaning of
Section 368(c)(1) of the Code.
(2) The aggregate fair market value of the Merger Consideration (including
any cash paid for fractional shares) will be approximately equal to the fair
market value of Megsinet stock surrendered therefor. The Merger Consideration
will be the sole consideration received for each such shareholder's Megsinet
Capital Stock, and the Megsinet Capital Stock surrendered in exchange therefor
will be the sole consideration delivered by such shareholder for the Merger
Consideration, and the terms of such exchange were arrived at through arm's
length negotiations.
(3) There is no intercorporate indebtedness existing between CoreComm or
any of its subsidiaries (including Sub) and Megsinet that was issued, acquired,
or will be settled at a discount.
(4) Neither CoreComm nor Sub is an investment company as defined in Section
368(a)(2)(F) (iii) and (iv) or the Code.
(5) Neither CoreComm nor any related person (within the meaning of Treasury
Regulations Section 1.368-1(e)(3)) has any plan or intention to redeem or,
actually or in substance directly or indirectly, acquire after the date of the
Merger any of the CoreComm Common Stock to be issued in the Merger. CoreComm has
no stock repurchase plan in effect and has no intent to create such a plan.
After the Merger, no dividends or distributions will be made to the former
owners of Megsinet, other than regular, normal dividends or distributions made
to all holders of CoreComm Common Stock.
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(6) CoreComm has no plan or intention to liquidate Sub, to merge Sub with
and into any other corporation, to sell or otherwise dispose of the stock of Sub
or to cause Sub to sell or otherwise dispose of any assets of Megsinet acquired
in the Merger, except for dispositions made in the ordinary course of business
or transfers described in Section 368(a)(2)(C) of the Code, in which latter case
the foregoing representations shall be deemed to apply to any transferee.
Following the Merger, CoreComm will not take any action that would cause Sub to
fail the Substantially All Test.
(7) Following the Merger, CoreComm will continue the historic business of
Megsinet or use a significant portion of Megsinet's business assets in a
business.
(8) The payment of cash in lieu of fractional shares of CoreComm Common
Stock is solely for the purpose of avoiding the expense and inconvenience to
CoreComm of issuing fractional shares of CoreComm Common Stock and does not
represent separately bargained-for consideration. The total cash consideration
to be paid in the Merger in lieu of fractional shares of CoreComm Capital Stock
will not exceed 1% of the total consideration in the Merger.
(9) (a) none of the compensation received (or to be received) by any
shareholder of Megsinet will be separate consideration for, or allocable to, any
of his Megsinet Capital Stock; (b) none of the CoreComm Common Stock received by
any shareholder of Megsinet pursuant to the Merger will be separate
consideration for, or allocable to, any employment, services or noncompetition
agreement or arrangement; and (c) the compensation paid to any shareholder of
Megsinet who provides services to Megsinet will be commensurate with amounts
that would be paid to a third party bargaining at arm's length for similar
services.
(10) Except as otherwise specifically set forth herein, Megsinet, Sub,
CoreComm and the shareholders of Megsinet will each pay their respective
expenses, if any, incurred in connection with the Merger and the transactions
related thereto.
(11) Prior to the Effective Time, CoreComm will be in control of Sub within
the meaning of Section 368(c) of the Code. No Sub capital stock will be issued
in the Merger. At no time prior to the Merger will has, or will Sub have had,
assets (other than nominal assets contributed upon the formation of Sub, which
assets will have been held by Sub following the Merger) or conducted any
business activities or operations.
(12) CoreComm has plan or intention to issue additional Sub stock (or
securities, options, warrants or instruments giving the holder the right to Sub
stock) that would (or if exercised would) result in CoreComm owning less than an
amount of stock constituting control under Section 368(c) of the Code.
(13) Neither CoreComm nor any of its subsidiaries (including Sub), nor any
entity in which CoreComm owns an equity interest, owns any stock of Megsinet.
(14) Except as expressly provided herein, neither CoreComm nor any
affiliate of CoreComm has any plan or intention of taking any action prior to,
at or after the Effective Time that is contrary to any of representations of
this Section 3.2(h).
ARTICLE IV
COVENANTS RELATING TO CONDUCT OF BUSINESS
SECTION 4.1 Conduct of Business. Except as set forth in Section 4.1(a) of
the Megsinet Disclosure Schedule, as otherwise expressly contemplated by this
Agreement or
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as consented to by CoreComm in writing, such consent not to be unreasonably
withheld or delayed, during the period from the date of this Agreement to the
Effective Time, Megsinet shall, and shall cause its subsidiaries to, carry on
their respective businesses in the ordinary course consistent with past practice
and in compliance in all material respects with all applicable laws and
regulations and, to the extent consistent therewith, use all reasonable efforts
to preserve intact their current business organizations, use reasonable efforts
to keep available the services of their current officers and other key employees
and preserve their relationships with those persons having business dealings
with them to the end that their goodwill and ongoing businesses shall be
unimpaired at the Effective Time. Without limiting the generality of the
foregoing (but subject to the above exceptions), during the period from the date
of this Agreement to the Effective Time, Megsinet shall not, and shall not
permit any of its subsidiaries to:
(i) other than dividends and distributions by a direct or indirect
wholly owned subsidiary of Megsinet to its parent, or by a subsidiary that
is partially owned by Megsinet or any of its subsidiaries, provided that
Megsinet or any such subsidiary receives or is to receive its
propor-tionate share thereof, (x) declare, set aside or pay any dividends
on, make any other distributions in respect of, or enter into any agreement
with respect to the voting of, any of its capital stock, (y) split, combine
or reclassify any of its capital stock or issue or authorize the issuance
of any other securities in respect of, in lieu of or in substitution for
shares of its capital stock, except for issuances of Megsinet Common Stock
upon conversion of Megsinet Convertible Securities or upon the exercise of
Megsinet Stock Options, in each case, outstanding as of the date hereof in
accordance with their present terms, or (z) purchase, redeem or otherwise
acquire any shares of capital stock of Megsinet or any of its subsidiaries
or any other securities thereof or any rights, warrants or options to
acquire any such shares or other securities;
(ii) issue, deliver, sell, pledge or otherwise encumber or subject to
any Lien any shares of its capital stock, any other voting securities or
any securities convertible into, or any rights, warrants or options to
acquire, any such shares, voting securities or convertible securities
(other than (x) the issuance of Megsinet Common Stock upon conversion of
Megsinet Convertible Securities in accordance with their present terms at
the option of the holders thereof, and (y) the issuance of Megsinet Common
Stock upon the exercise of Megsinet Stock Options, in each case,
outstanding as of the date hereof in accordance with their present terms);
(iii) amend its articles of organization, by-laws or other comparable
organizational documents;
(iv) acquire or agree to acquire by merging or consolidating with, or
by purchasing a substantial portion of the assets of, or by any other
manner, any business or any person;
(v) acquire or agree to acquire any assets with a value greater than
$20,000;
(vi) take any action to expand the states in which any of its
businesses currently operate, other than pursuant to public announcements
made prior to the date hereof or as may be required under agreements
entered into prior to the date hereof;
(vii) sell, lease, license, mortgage or otherwise encumber or subject
to any Lien or other wise dispose of any of its properties or assets
(including securitizations), other than in the ordinary course of business
consistent with past practice;
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(viii) take any action that would cause the representations and
warranties set forth in Section 3.1(f) (with each reference therein to
"ordinary course of business" being deemed for purposes of this Section
4.1(a)(vi) to be immediately followed by "consistent with past practice")
to no longer be true and correct;
(ix) incur any indebtedness for borrowed money or issue any debt
securities or assume, guarantee or endorse, or otherwise as an
accommodation become responsible for the obligations of any person for
borrowed money;
(x) other than for normal merit increases and for payment of any
previously disclosed year-end bonus, increase the benefits or compensation
of, or pay any bonus to, any employee of Megsinet, agree to do any of the
foregoing, or amend or enter into any other agreement or arrangement with
respect to employment or compensation or agreement with respect to
consultants; or
(xi) authorize, or commit or agree to take, any of the foregoing
actions;
provided that the limitations set forth in this Section 4.1(a) (other than
clause (iii)) shall not apply to any transaction between Megsinet and any wholly
owned subsidiary or between any wholly owned subsidiaries of Megsinet.
(b) Other Actions. Except as required by law, Megsinet and CoreComm shall
not, and shall not permit any of their respective subsidiaries to, voluntarily
take any action that would, or that could reasonably be expected to, result in
(i) any of the representations and warranties of such party set forth in this
Agreement that are qualified as to materiality becoming untrue at the Effective
Time, (ii) any of such representations and warranties that are not so qualified
becoming untrue in any material respect at the Effective Time, or (iii) any of
the conditions to the Merger set forth in Article VI not being satisfied.
(c) Advice of Changes. Megsinet and CoreComm shall promptly advise the
other party orally and in writing to the extent it has knowledge of (i) any
representation or warranty made by it contained in this Agreement that is
qualified as to materiality becoming untrue or inaccurate in any respect or any
such representation or warranty that is not so qualified becoming untrue or
inaccurate in any material respect, (ii) the failure by it to comply in any
material respect with or satisfy in any material respect any covenant, condition
or agreement to be complied with or satisfied by it under this Agreement and
(iii) any change or event having, or which, insofar as can reasonably be
foreseen, could reasonably be expected to have a material adverse effect on such
party or on the truth of their respective representations and warranties or the
ability of the conditions set forth in Article VI to be satisfied; provided,
however, that no such notification shall affect the representations, warranties,
covenants or agreements of the parties (or remedies with respect thereto) or the
conditions to the obligations of the parties under this Agreement.
SECTION 4.2 No Solicitation by Megsinet. (a) Megsinet shall not, nor
shall it permit any of its subsidiaries to, nor shall it authorize or permit any
of its directors, officers or employees or any investment banker, financial
advisor, attorney, accountant or other representative retained by it or any of
its subsidiaries to, directly or indirectly through another person, (i) solicit,
initiate or encourage (including by way of furnishing information), or take any
other action designed to facilitate, any inquiries or the making of any proposal
which constitutes any Megsinet Takeover Proposal (as defined below) or (ii)
participate in any discussions or negotiations regarding any Megsinet Takeover
Proposal. For purposes of this Agreement, "Megsinet Takeover Proposal" means any
inquiry, proposal or offer from any person relating to any direct or indirect
acquisition or purchase of a business that constitutes 10% or more of the net
revenues, net income or the
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assets of Megsinet and its subsidiaries, taken as a whole, or 10% or any equity
securities of Megsinet, any tender offer or exchange offer that if consummated
would result in any person beneficially owning any equity securities of
Megsinet, or any merger, consolidation, business combination, recapitalization,
liquidation, dissolution or similar transaction involving Megsinet (or any
Megsinet subsidiary whose business constitutes 10% or more of the net revenues,
net income or the assets of Megsinet and its subsidiaries, taken as whole) or
the Megsinet Common Stock, other than the transactions contemplated by this
Agreement.
(b) Neither the Board of Directors of Megsinet nor any committee thereof
shall (i) withdraw or modify, or propose to withdraw or modify, in a manner
adverse to CoreComm, the approval or recommendation by such Board of Directors
or such committee of the Merger or this Agreement, (ii) approve or recommend, or
propose publicly to approve or recommend, any Megsinet Takeover Proposal, or
(iii) cause Megsinet to enter into any letter of intent, agreement in principle,
acquisition agreement or other similar agreement (each, an "Megsinet Acquisition
Agreement") related to any Megsinet Takeover Proposal. Notwithstanding the
foregoing, nothing shall prohibit Megsinet from entering into an agreement for
the sale of the Pequot Preferred to Pequot Private Equity Fund, L.P. and Pequot
Offshore Private Equity Fund, Inc. (collectively "Pequot" and any such agreement
a "Pequot Transaction") provided such agreement complies with the requirements
of Section 5.16.
(c) In addition to the obligations of Megsinet set forth in paragraphs (a)
and (b) of this Section 4.2, Megsinet shall immediately advise CoreComm orally
and in writing of any request for information or of any Megsinet Takeover
Proposal, the material terms and conditions of such request or Megsinet Takeover
Proposal and the identity of the person making such request or Megsinet Take
over Proposal. Megsinet will keep CoreComm reasonably informed of the status and
details (including amendments or proposed amendments) of any such request or
Megsinet Takeover Proposal.
SECTION 4.3 Cooperation. CoreComm shall have the right to have its
designated representatives, as provided to Megsinet from time to time, (the
"Designated Purchaser Representatives") present within normal business hours and
without material disruption to the business of Megsinet for consultation at
Megsinet's principal offices from the date hereof until the Closing Date. Such
Designated Purchaser Representatives shall have the right to review and become
familiar with the conduct of the business of Megsinet and shall be available to
be consulted and shall have authority on behalf of CoreComm in regard to
consultation in regard to Material Decisions (as defined below in this Section
4.3). CoreComm shall take all reasonable actions necessary to ensure that its
Designated Purchaser Representatives will be readily available during normal
business hours. Without notice to and consultation with the Designated Purchaser
Representatives, Megsinet shall not take any action involving any Material
Decision. "Material Decision" shall mean, for purposes of this Agreement, any of
the following to the extent the same may affect the assets, the obligations or
the business of Megsinet following the date hereof: (i) any entering into,
termination or material amendment of, or waiver of any Megsinet's rights in
respect of, any Megsinet Material Contracts; (ii) any purchase order in excess
of $20,000 in any instance to be delivered, or the payment for which shall
become due, after the Closing Date; (iii) the acceptance of any material
customer contract that deviates from the terms and conditions of current pricing
policies; (iv) any action to respond to any material customer or regulatory
complaint outside of the ordinary course of business; (v) any general
communication with customers related to the business or to the Merger; or
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(vi) a material change in pricing, promotional, marketing or any other decision
that would affect any Megsinet's customary profit margins.
ARTICLE V
ADDITIONAL AGREEMENTS
SECTION 5.1 Megsinet Stockholders Meeting.
(i) Megsinet shall as promptly as practicable duly call, give notice
of, convene and hold a meeting of its stockholders (the "Megsinet
Stockholders Meeting") in accordance with the IBCA, and applicable federal
securities laws, for the purpose of obtaining the Megsinet Stockholder
Approval and shall, through its Board of Directors, recommend to its
stockholders the approval and adoption of this Agreement, the Merger and
the other transactions contemplated hereby. At the Megsinet Stockholders
Meeting, Megsinet shall recommend to its stockholders the approval and
adoption of an amendment to Megsinet's Articles of Incorporation providing
for the Reduced Vote. Such amendment shall be presented and entered into in
such a manner so as to be effective prior to obtaining the Megsinet
Stockholders Approval. Without limiting the generality of the foregoing,
Megsinet agrees that its obligations pursuant to the first sentence of this
Section 5.1 shall not be affected by the commencement, proposal, disclosure
or communication to Megsinet of any Megsinet Takeover Proposal.
(ii) If necessary to satisfy the representation supplied in Section
3.1(j)(iv), a stockholder vote satisfying the requirements of Section
280G(b)(5)(B) of the Code and Prop. Treas. Reg. Section 1.280G-1(Q&A-7)
shall be conducted.
SECTION 5.2 Access to Information; Confidentiality. (a) Subject to the
provisions of Section 5.2(b) (the "Confidentiality Agreement"), and subject to
restrictions contained in confidentiality agreements to which such party is
subject (which such party will use its best efforts to have waived) and
applicable law, each of Megsinet and CoreComm shall, and shall cause each of its
respective subsidiaries to, afford to the other party and to the officers,
employees, accountants, counsel, financial advisors and other representatives of
such other party, reasonable access during normal business hours during the
period prior to the Effective Time to all their respective properties, books,
contracts, commitments, personnel and records and, during such period, each of
Megsinet and CoreComm shall, and shall cause each of its respective subsidiaries
to, furnish promptly to the other party (a) a copy of each report, schedule,
registration statement and other document filed by it during such period
pursuant to the requirements of federal or state securities laws and (b) all
other information concerning its business, properties and personnel as such
other party may reasonably request. No review pursuant to this Section 5.2 shall
affect any representation or warranty given by the other party hereto. Each of
Megsinet and CoreComm will hold, and will cause its respective officers,
employees, accountants, counsel, financial advisors and other representatives
and affiliates to hold, any nonpublic information in accordance with the terms
of the Confidentiality Agreement.
(b) Each of Megsinet and CoreComm shall, and shall cause each of its
respective subsidiaries to, agree not to use one another's Evaluation Material
for any purpose other than in connection with this Agreement and the provisions
herein. Except as may otherwise be required under applicable law, the Evaluation
Material of each party shall remain confidential and shall not be disclosed to
any other party other than such party's representatives for the purpose of
fulfilling the provisions contained in this agreement.
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Each party shall use its best efforts to ensure that it is not obligated to
disclose any of the other party's Evaluation Material for any purpose.
"Evaluation Material" shall mean, with respect to each party, any
information which is non-public, confidential or proprietary in nature and which
has been made available to the other party (or any of its subsidiaries) in
connection with the signing of this Agreement and the transactions contemplated
hereby.
SECTION 5.3 Best Efforts. (a) Upon the terms and subject to the
conditions set forth in this Agreement, each of the parties agrees to use best
efforts to take, or cause to be taken, all actions, and to do, or cause to be
done, and to assist and cooperate with the other parties in doing, all things
necessary, proper or advisable to consummate and make effective, in the most
expeditious manner practicable, the Merger and the other transactions
contemplated by this Agreement, including (i) the obtaining of all necessary
actions or nonactions, waivers, consents and approvals from Governmental
Entities and the making of all necessary registrations and filings and the
taking of all steps as may be necessary to obtain an approval or waiver from, or
to avoid an action or proceeding by, any Governmental Entity, (ii) the obtaining
of all necessary consents, approvals or waivers from third parties, (iii) the
defending of any lawsuits or other legal proceedings, whether judicial or
administrative, challenging this Agreement or the consummation of the
transactions contemplated by this Agreement, including seeking to have any stay
or temporary restraining order entered by any court or other Governmental Entity
vacated or reversed, and (iv) the execution and delivery of any additional
instruments necessary to consummate the transactions contemplated by, and to
fully carry out the purposes of, this Agreement.
(b) In connection with and without limiting the foregoing, Megsinet and
CoreComm shall (i) take all action necessary to ensure that no state takeover
statute or similar statute or regulation is or becomes applicable to the Merger,
this Agreement, or any of the other transactions contemplated by this Agreement
and (ii) if any state takeover statute or similar statute or regulation becomes
applicable to the Merger, this Agreement, or any other transaction contemplated
by this Agreement, take all action necessary to ensure that the Merger and the
other transactions contemplated by this Agreement may be consummated as promptly
as practicable on the terms contemplated by this Agreement and otherwise to
minimize the effect of such statute or regulation on the Merger and the other
transactions contemplated by this Agreement.
SECTION 5.4 Stock Options. (a) As soon as practicable following the date
of this Agreement, the Board of Directors of Megsinet (or, if appropriate, a
committee of the Megsinet Board of Directors) shall adopt such resolutions or
take such other actions as may be required to effect the following:
(i) adjust the terms of all outstanding Megsinet Stock Options,
whether vested or unvested, as necessary to provide that, at the Effective
Time, each Megsinet Stock Option outstanding immediately prior to the
Effective Time shall be adjusted and thereafter represent an option to
acquire, on the same terms and conditions as were applicable under such
Megsinet Stock Option, the same number of shares of CoreComm Common Stock
as the holder of such Megsinet Stock Option would have been entitled to
receive pursuant to the Merger had such holder exercised such Megsinet
Stock Option in full immediately prior to the Effective Time, with any
fractional shares of CoreComm Common Stock resulting from such calculation
being rounded down to the nearest whole share, at a price per share of
CoreComm Common Stock equal to (A) the aggregate exercise price for the
shares of Megsinet
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Common Stock otherwise purchasable pursuant to such Megsinet Employee Stock
Option divided by (B) the aggregate number of shares of CoreComm Common
Stock deemed purchasable pursuant to such Megsinet Employee Stock Option,
rounding the exercise price thus determined down to the nearest whole cent
(each, as so adjusted, an "Adjusted Option"); and
(ii) take such other actions relating to the Megsinet Stock Plan as
Megsinet and CoreComm may agree are appropriate to give effect to the
Merger, including as provided in Section 5.7.
(b) As soon as practicable after the Effective Time, CoreComm shall deliver
to the holders of Megsinet Employee Stock Options appropriate notices setting
forth such holders' rights pursuant to the Megsinet Stock Plan and the
agreements evidencing the grants of such Megsinet Stock Options and that such
Megsinet Stock Options and agreements shall be assumed by CoreComm and shall
continue in effect on the same terms and conditions (subject to the adjustments
required by this Section 5.6 after giving effect to the Merger).
(c) A holder of an Adjusted Option may exercise such Adjusted Option in
whole or in part in accordance with its terms by delivering a properly executed
notice of exercise to CoreComm, together with the consideration therefor and the
federal withholding tax information, if any, required in accordance with the
Megsinet Stock Plan.
(d) Except as otherwise contemplated by this Section 5.5 and
notwithstanding any terms of the Megsinet Stock Options to the contrary, all
restrictions or limitations on transfer and vesting with respect to Megsinet
Stock Options awarded under the Megsinet Stock Plan or any other plan, program
or arrangement of Megsinet or any of its subsidiaries, to the extent that such
restrictions or limitations shall not have already lapsed, shall remain in full
force and effect with respect to such options after giving effect to the Merger
and the assumption by CoreComm as set forth above. Prior to the Effective Time,
Megsinet shall obtain, in a form reasonably acceptable to CoreComm, the consent
of each holder of a Megsinet Stock Option to the treatment set forth in this
Section 5.4, including, without limitation, a waiver by each such optionee of
any provision of any Megsinet Stock Option or any related agreement (including
any employment agreement) which would otherwise result in any lapse of
restrictions or acceleration of vesting or exercisability upon the signing of
this Agreement, the consummation of the transactions contemplated hereby, or any
other related event.
SECTION 5.5 Megsinet Stock Plan and Certain Employee Matters. (a) At the
Effective Time, by virtue of the Merger, each outstanding and unexercised
Megsinet Stock Option shall be assumed by CoreComm, with the result that all
obligations of Megsinet under such Megsinet Stock Options shall be obligations
of CoreComm following the Effective Time. Prior to the Effective Time, CoreComm
shall take all necessary actions (including, if required to comply with Section
162(m) or 422 of the Code (and the regulations thereunder) or applicable law or
rule of the NASDAQ, obtaining the approval of its stockholders at the next
regularly scheduled CoreComm stockholders meeting) for the assumption of the
Megsinet Stock Plan, including the reservation, issuance and authorization of
CoreComm Common Stock in a number at least equal to (x) the number of shares of
CoreComm Common Stock that will be subject to Adjusted Options and (y) the
product of the Exchange Ratio and the number of shares of Megsinet Common Stock
available for future awards under the Megsinet Stock Plan immediately prior to
the Effective Time. If necessary, CoreComm shall prepare and file with the SEC a
registration statement on Form S-8 (or another appropriate form) registering a
number of shares of
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CoreComm Common Stock determined in accordance with the preceding sentence. A
valid registration statement shall be kept effective at least for so long as
Adjusted Options remain outstanding and until such time as the shares of
CoreComm Common Stock subject to such Adjusted Options are no longer subject to
resale restrictions under the Securities Act.
(b) Following the Effective Time, CoreComm will honor all obligations of
Megsinet or its subsidiaries under the employment agreements in effect as of the
effective date of each such agreement, between Megsinet and each of Michael
Henry, Brian Clark and Scott Widham (the "Retained Executives"). However, the
titles and duties of these individuals may vary from those set forth in each of
their respective agreements, and Megsinet shall, prior to the Effective Time,
obtain agreements from the Retained Executives that such changes will not
constitute "Good Reason" as defined in the applicable employment agreements. In
addition, as soon as practicable after the date hereof but at least 14 business
days prior to the Closing Date, the Significant Stockholders and CoreComm will
agree to an amendment to each Significant Stockholder's employment agreement
providing for, customary "non-compete" provisions and customary "no
solicitation" provisions, each with a duration of 5 years. CoreComm and each of
the Significant Stockholders shall negotiate the precise terms of such
amendments in good faith, subject to the above general provisions. Other than as
specified in this Section 5.5(b), CoreComm does not intend to seek material
amendments to the Retained Executive's employment agreements.
SECTION 5.6 Fees and Expenses. Except as provided for in Section 3.1(p),
all fees and expenses incurred in connection with the Merger, this Agreement,
and the transactions contemplated by this Agreement shall be paid by the party
incurring such fees or expenses, whether or not the Merger is consummated.
SECTION 5.7 Public Announcements. CoreComm shall issue a press release
regarding this Agreement and the transactions contemplated hereby at such time
as CoreComm deems appropriate and in order to comply with applicable law.
Megsinet agrees not to make any public announcement regarding this Agreement or
the transactions contemplated hereby without prior consent from CoreComm.
SECTION 5.8 NASDAQ Quotation. CoreComm shall use best efforts to cause
the CoreComm Common Stock issuable under Article II and upon exercise of
Adjusted Options pursuant to Section 5.6 to be approved for quotation on the
NASDAQ, subject to official notice of issuance, within 12 months from the
Effective Time.
SECTION 5.9 Conveyance Taxes. CoreComm and Megsinet shall cooperate in
the preparation, execution and filing of all returns, questionnaires,
applications or other documents regarding any real property transfer or gains,
sales, use, transfer, value added, stock trans fer and stamp taxes, any
transfer, recording, registration and other fees or any similar taxes which
become payable in connection with the transactions contemplated by this
Agreement that are required or permitted to be filed on or before the Effective
Time. CoreComm and Megsinet shall each pay their own such taxes and fees.
SECTION 5.10 Proxy/Prospectus; Registration Statement.
(a) As promptly as practical after the execution of this Agreement,
Megsinet and CoreComm shall prepare and CoreComm shall file with the SEC the
Registration Statement and the Proxy/Prospectus to be included therein as a
prospectus. Megsinet and CoreComm shall use all reasonable efforts to cause the
Registration Statement to become effective as soon after such filing as
practicable. The Proxy/Prospectus shall include the
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recommendation of the Board of Directors of Megsinet in favor of the Agreement.
Megsinet shall furnish CoreComm with all information concerning Megsinet and the
holders of its capital stock and shall take such other action as CoreComm may
reasonably request in connection with the Registration Statement and the
issuance of the shares of CoreComm Common Stock. If at any time prior to the
Effective Time any event or circumstance relating to Megsinet, CoreComm or any
of their respective Subsidiaries, affiliates, officers or directors should be
discovered by such party which should be set forth in an amendment or a
supplement to the Registration Statement or Proxy/Prospectus, such party shall
promptly inform the other thereof and take appropriate action in respect
thereof. Megsinet shall make available to CoreComm as soon as practicable after
the date hereof audited financial statements for Megsinet for 1998, and, if
necessary, for 1997, each for inclusion in the Registration Statement and each
in conformity with SEC rules and regulations.
(b) Megsinet and CoreComm shall make any necessary filings with respect to
the Merger under the Securities Act and the Securities Exchange Act of 1934, as
amended (the "Exchange Act") and the rules and regulations thereunder and
CoreComm shall use its reasonable best efforts to take any action required to be
taken under state securities or "blue sky" laws in connection with the issuance
of the shares of CoreComm Common Stock in accordance with the provisions of this
Agreement.
SECTION 5.11 Ascend Warrant. Prior to the Effective Time, Megsinet will
amend the terms of the outstanding warrant issued to Ascend Communications, Inc.
(the "Ascend Warrant") such that Ascend will receive, upon the consummation of
the Merger, in exchange for its existing warrant, a warrant to purchase shares
of CoreComm Common Stock in which the exercise price and number of shares shall
be equitably determined to reflect the original terms of the Ascend Warrant. The
form of the amendment to the Ascend Warrant to be presented to Ascend by
Megsinet is attached hereto in Annex A.
SECTION 5.12 Pequot Warrant. Prior to the Effective Time, Megsinet will
ensure that or amend the terms of any warrant issued to Pequot (the "Pequot
Warrant"), such that (i) the Pequot Warrant shall be cancelled on or before the
Effective Time; (ii) Pequot will receive in exchange for such cancellation
35,000 shares of CoreComm Common Stock to be delivered to Pequot directly by
CoreComm which shares shall not be included in the Allocation Schedule or be
deemed part of the Stock Payment; and (iii)Pequot shall sign the Stockholders
Agreement contemplated by Section 5.17. The shares of CoreComm Common Stock to
be issued to Pequot pursuant to this section shall be included in the
Registration Statement and shall be issued only after the Registration Statement
has been declared effective.
SECTION 5.13 Allocation Schedule. As soon as practicable, Megsinet shall
deliver to CoreComm and to the Exchange Agent the Allocation Schedule. Megsinet
will take sole responsibility for producing such schedule. Other than for
dissenting shares, shares issued pursuant to Section 5.13, and fractional shares
or cash in lieu of fractional shares, the amount of Cash Consideration allocated
to Megsinet shareholders on the Allocation Schedule shall be equal to the Cash
Payment (as defined in Section 2.2(a)) and the Stock Consideration allocated to
Megsinet shareholders on the Allocation Schedule shall be equal to the Stock
Payment (as defined in Section 2.2(a)).
SECTION 5.14 Cisco Loan. CoreComm will, on or before the Effective time
use its best efforts to cause the release of the security interest held by Cisco
in Megsinet Common Stock owned by Michael Henry, on terms acceptable to Cisco.
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SECTION 5.15 Cisco and Ascend Credit Facilities. As soon as practicable
after the date hereof, but in no event later than seven days prior to the
Closing Date, Megsinet and the Significant Stockholders shall take all actions
necessary to amend each of (i) the letter agreement from Cisco Systems Capital
Corporation, dated as of September 29, 1998, and (ii) the Secured Promissory
Note issued to Ascend Communications, Inc., dated as of August 27, 1998, such
that each covenant (either affirmative or negative) set forth in such agreements
is satisfactory to CoreComm in its good faith business judgment. Forms of such
amendments are attached hereto in Annex A.
SECTION 5.16 Pequot Agreement. Megsinet will amend the terms of any and
all outstanding agreements and other instruments between Megsinet and Pequot,
including, but not limited to, the Pequot Preferred and the Pequot Warrants, or
ensure that in any agreement to be entered into, Pequot will not have any rights
superior or in addition to the other holders of Megsinet Common Stock, and all
covenants, representations, warranties, indemnifications and all other
provisions that survive the closing of the Pequot Transaction shall be
terminated and not survive the closing of the Merger. In no event will the
number of shares of Megsinet Common Stock into which the Pequot Preferred can
convert exceed 2 million.
SECTION 5.17 Stockholders Agreement. Prior to the closing, Megsinet shall
obtain the signatures of each holder of Megsinet Capital Stock that will receive
shares of CoreComm Common Stock pursuant to this Agreement, on a stockholders
agreement (the "Stockholders Agreement") providing that each such stockholder
shall not sell, transfer or otherwise dispose of any such shares of CoreComm
Common Stock for a period of 12 months from the Effective Time.
SECTION 5.18 NASDAQ Listing. CoreComm shall use its reasonable best
efforts to have authorized for listing on the NASDAQ National Market, upon
official notice of issuance, the shares of CoreComm Common Stock to be issued
pursuant to Article II or Adjusted Options, within 12 months from the Effective
Time.
SECTION 5.19 GMV Network LLC. As soon as practicable following the date
hereof, but in no event later than seven days prior to the Closing Date, each of
Megsinet and the Significant Stockholders shall divest any interest he or it
owns, whether directly or indirectly, in GMV Network, LLC.
SECTION 5.20 Interested Contracts. As soon as practicable following the
date hereof, but in no event later than seven days prior to the Closing Date,
Megsinet and the Significant Stockholders shall take all actions necessary to
amend the terms of any agreement or other instrument between Megsinet and
Capital Internet, L.L.C. or any other entity controlled by any Megsinet officer
or director or shareholder (including such persons) such that the terms of any
such agreements or instruments are revised, to the satisfaction of CoreComm, to
eliminate any conflict of interest or preferential treatment that might create a
conflict of interest.
SECTION 5.21 Personal Loans. As soon as practicable following the date
hereof, but in no event later than seven days prior to the Closing Date,
Megsinet and the Significant Stockholders shall take all actions necessary to,
and shall obtain full repayment of, any personal loans made by Megsinet to any
individuals, including, but not limited to, the parents of Michael Henry.
SECTION 5.22 Michael S. Nelson. Megsinet shall have, on or before the
Closing Date, taken all steps to resolve in its favor any claim, whether
threatened or pending, brought by Michael S. Nelson. The Significant
Stockholders agree that they will indemnify
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CoreComm for any breach of this Section 5.22 or any claim brought by Michael S.
Nelson regarding Megsinet Common Stock pursuant to the terms of Article VIII
herein and that for purposes of this Section 5.22 and any claim brought by
Michael Nelson, the Minimum, as otherwise defined in Article VIII, shall be
$100,000.
SECTION 5.23 Ameritech Interconnection. Megsinet shall use its best
efforts to (i) maintain the Interconnection Agreement, dated as of October 28,
1996, between Megsinet and Ameritech Information Industry Services (the
"Ameritech Agreement") on terms and conditions no less favorable than those in
the Ameritech Agreement as it exists on the date hereof; and (ii) obtain actual
physical interconnection as promptly as practicable with the facilities of
Ameritech Corporation in its Chicago, Illinois facilities under the terms of the
Ameritech Agreement or otherwise.
SECTION 5.24 Alternative Financing. In the event that the Pequot
Transaction does not occur, CoreComm will, at its sole election, provide a loan
to Megsinet in exchange for a Convertible Promissory Note, in a form mutually
agreed upon by the parties, which will provide for, among other things, the
right of CoreComm to convert such note into at least 4.5 million shares of
Megsinet Common Stock for total consideration consistent with this Agreement.
ARTICLE VI
CONDITIONS PRECEDENT
SECTION 6.1 Conditions to Each Party's Obligation to Effect the
Merger. The respective obligation of each party to effect the Merger is subject
to the satisfaction or waiver on or prior to the Closing Date of the following
conditions:
(a) Megsinet Stockholder Approval. The Megsinet Stockholder Approval
shall have been obtained, and no stockholder of Megsinet shall have
demanded appraisal under the IBCA.
(b) HSR Act. The HSR Act shall not be applicable to the Merger or, if
applicable, any waiting period (and any extension thereof) applicable to
the Merger under the HSR Act shall have been terminated or shall have
expired.
(c) Governmental and Regulatory Approvals. Other than the filing
provided for under Section 1.3 and filings pursuant to the HSR Act (which
are addressed in Section 6.1(b)), all consents, approvals and actions of,
filings with and notices to any Governmental Entity required of Megsinet,
CoreComm or any of their subsidiaries to consummate the Merger and the
other transactions contemplated hereby, the failure of which to be obtained
or taken (i) is reasonably expected to have a material adverse effect on
the Surviving Corporation and its prospective subsidiaries, taken as a
whole, or (ii) will result in a violation of any laws, shall have been
obtained, all in form and substance reasonably satisfactory to Megsinet and
CoreComm.
(d) No Injunctions or Restraints. No judgment, order, decree,
statute, law, ordinance, rule or regulation, entered, enacted, promulgated,
enforced or issued by any court or other Governmental Entity of competent
jurisdiction or other legal restraint or prohibition (collectively,
"Restraints") shall be in effect (i) preventing the consummation of the
Merger, or (ii) which otherwise is reasonably likely to have a material
adverse effect on Megsinet or CoreComm, as applicable; provided, however,
that each of the parties shall have used its best efforts to prevent the
entry of any
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such Restraints and to appeal as promptly as possible any such Restraints
that may be entered.
(e) Registration Statement. The Registration Statement shall have
become effective under the Securities Act and shall not be the subject of
any stop order or proceedings seeking a stop order.
SECTION 6.2 Conditions to Obligations of CoreComm and Sub. The
obligations of CoreComm and Sub to effect the Merger are further subject to
satisfaction or waiver of the following conditions:
(a) Representations and Warranties. The representations and
warranties of Megsinet set forth herein shall be true and correct both when
made and at and as of the Closing Date, as if made at and as of such time
(except to the extent expressly made as of an earlier date, in which case
as of such date), except where the failure of such representations and
warranties to be so true and correct (without giving effect to any
limitation as to "materiality" or "material adverse effect" set forth
therein) does not have, and is not likely to have, individually or in the
aggregate, a material adverse effect on Megsinet.
(b) Performance of Obligations of Megsinet. Megsinet shall have
performed in all material respects all obligations required to be performed
by it under this Agreement at or prior to the Closing Date.
(c) No Material Adverse Change. At any time after the date of this
Agreement there shall not have occurred any material adverse change
relating to Megsinet.
(d) Megsinet Stock Options. As of the Effective Time, the Megsinet
Employee Stock Options shall have been amended pursuant to Section 5.4(a).
(e) Megsinet Warrants. As of the Effective Time, the terms of the
Ascend Warrant and the Pequot Warrants shall have been amended pursuant to
Section 5.12 and 5.13 respectively.
(f) Tax Opinion. CoreComm shall have received an opinion of Skadden,
Arps, Slate, Meagher & Flom Illinois, special tax counsel to CoreComm, in
form and sub stance reasonably satisfactory to CoreComm, dated as of the
Effective Time, substantially to the effect that, on the basis of certain
facts, representations and assumptions set forth in such opinion, which are
consistent with the state of facts existing at the Effective Time, (A) the
Merger will be treated for federal income tax purposes as a reorganization
within the meaning of Section 368(a) of the Code, and (B) CoreComm, Sub,
and Megsinet will each be a party to that reorganization within the meaning
of Section 368(b) of the Code. In rendering the opinion described in the
preceding sentence, such counsel may require and rely upon representations
contained in certificates or other writings delivered by CoreComm, Sub,
Megsinet, or shareholders of Megsinet.
(g) Megsinet Opinion. CoreComm shall have received an opinion from
Amy Gross, Esq. in form and substance reasonably satisfactory to CoreComm,
dated as of the Effective Time, substantially to the effect that, on the
basis of certain facts, representations and assumptions set forth in such
opinion, which are consistent with the state of facts existing at the
Effective Time, that: (i) Megsinet and its subsidiaries have all necessary
Megsinet Permits (as defined in Section 3.1(g), and (ii) that the execution
and the delivery of this Agreement by Megsinet, and the consummation of the
transactions contemplated herein will not conflict with or result in any
violation of
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any judgement order, decree, statute, law, ordinance, rule or regulation
applicable to Megsinet or any of its subsidiaries or their respective
properties or assets, other than any such conflicts or violations that
individually or in the aggregate would not (x) have a material adverse
effect on Megsinet or (y) reasonably be expected to impair the ability of
Megsinet to perform its obligations under this Agreement.
(h) Stockholders Agreement. Each holder of Megsinet Capital Stock
that will receive shares of CoreComm Common Stock pursuant to this
Agreement shall have signed the Stockholders Agreement prior to the
Effective Time.
SECTION 6.3 Conditions to Obligations of Megsinet. The obligation of
Megsinet to effect the Merger is further subject to satisfaction or waiver of
the following conditions:
(a) Representations and Warranties. The representations and
warranties of CoreComm set forth herein shall be true and correct both when
made and at and as of the Closing Date, as if made at and as of such time
(except to the extent expressly made as of an earlier date, in which case
as of such date), except where the failure of such representations and
warranties to be so true and correct (without giving effect to any
limitation as to "materiality," or "material adverse effect" set forth
therein) does not have, and is not likely to have, individually or in the
aggregate, a material ad verse effect on CoreComm.
(b) Performance of Obligations of CoreComm. CoreComm shall have
performed in all material respects all obligations required to be performed
by it under this Agreement at or prior to the Closing Date.
(c) No Material Adverse Change. At any time after the date of this
Agreement there shall not have occurred any material adverse change
relating to CoreComm.
SECTION 6.4 Frustration of Closing Conditions. Neither CoreComm nor
Megsinet may rely on the failure of any condition set forth in Section 6.1, 6.2
or 6.3, as the case may be, to be satisfied if such failure was caused by such
party's failure to use best efforts to consummate the Merger and the other
transactions contemplated by this Agreement, as required by and subject to
Section 5.3.
ARTICLE VII
TERMINATION, AMENDMENT AND WAIVER
SECTION 7.1 Termination. This Agreement may be terminated at any time
prior to the Effective Time, whether before or after the Megsinet Stockholder
Approval:
(a) by mutual written consent of CoreComm and Megsinet;
(b) by either CoreComm or Megsinet:
(i) if the Merger shall not have been consummated by June 15, 1999,
provided, however, that the right to terminate this Agreement pursuant
to this Section 7.(b)(i) shall not be available to any party whose
failure to perform any of its obligations under this Agreement results
in the failure of the Merger to be consummated by such time; provided,
however, that this Agreement may be extended not more than 30 days by
either party by written notice to the other party if the Merger shall
not have been consummated as a direct result of CoreComm or Megsinet
having failed to receive all regulatory approvals required to be
obtained with respect to the Merger (an "Extension"). Notwithstanding
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any thing to the contrary herein, CoreComm may extend this Agreement for
up to three months following June 15, 1999 or any existing Extension.
(ii) if the Megsinet Stockholder Approval shall not have been
obtained at a Megsinet Stock holders Meeting duly convened therefor or
at any adjournment or postponement thereof;
(iii) if any Restraint having any of the effects set forth in
Section 6.1(d) shall be in effect and shall have become final and
nonappealable; provided, that the party seeking to terminate this
Agreement pursuant to this Section 7.1(b)(iii) shall have used best
efforts to prevent the entry of and to remove such Restraint;
(c) by CoreComm, if Megsinet shall have breached or failed to perform
in any material respect any of its representations, warranties, covenants
or other agreements contained in this Agreement, which breach or failure to
perform (A) would give rise to the failure of a condition set forth in
Section 6.2(a) or (b), and (B) is incapable of being cured by Megsinet or
is not cured within 45 days of written notice thereof.
(d) by Megsinet, if CoreComm shall have breached or failed to perform
in any material respect any of its representations, warranties, covenants
or other agreements contained in this Agreement, which breach or failure to
perform (A) would give rise to the failure of a condition set forth in
Section 6.3(a) or (b), and (B) is incapable of being cured by CoreComm or
is not cured within 45 days of written notice thereof.
SECTION 7.2 Effect of Termination. In the event of termination of this
Agreement by either Megsinet or CoreComm as provided in Section 7.1, this
Agreement shall forthwith become void and have no effect, without any liability
or obligation on the part of CoreComm or Megsinet, other than the provisions of
Section 3.1(n), Section 3.2(g), the last sentence of Section 5.2, Section 5.7,
this Section 7.2 and Article VIII, which provisions survive such termination,
and except to the extent that such termination results from the willful and
material breach by a party of any of its representations, warranties, covenants
or agreements set forth in this Agreement. If this Agreement is terminated by
CoreComm pursuant to Section 7.1(b)(ii), Megsinet shall pay to CoreComm a
termination fee of $1.5 million, within two business days from the date of such
termination.
SECTION 7.3 Amendment. This Agreement may be amended by the parties at
any time before or after the Megsinet Stockholder Approval provided, however,
that after any such approval, there shall not be made any amendment that by law
requires further approval by the stockholders of Megsinet without the further
approval of such stockholders. This Agreement may not be amended except by an
instrument in writing signed on behalf of each of the parties.
SECTION 7.4 Extension; Waiver. At any time prior to the Effective Time, a
party may (a) extend the time for the performance of any of the obligations or
other acts of the other parties, (b) waive any inaccuracies in the
representations and warranties of the other parties contained in this Agreement
or in any document delivered pursuant to this Agreement or (c) subject to the
proviso of Section 7.3, waive compliance by the other party with any of the
agreements or conditions contained in this Agreement. Any agreement on the part
of a party to any such extension or waiver shall be valid only if set forth in
an instrument in writing signed on behalf of such party. The failure of any
party to this Agreement to assert any of its rights under this Agreement or
otherwise shall not constitute a waiver of such rights.
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SECTION 7.5 Procedure for Termination, Amendment, Extension or Waiver. A
termination of this Agreement pursuant to Section 7.1, an amendment of this
Agreement pursuant to Section 7.3 or an extension or waiver pursuant to Section
7.4 shall, in order to be effective, require, in the case of CoreComm or
Megsinet, action by its Board of Directors or, with respect to any amendment to
this Agreement, the duly authorized committee of its Board of Directors to the
extent permitted by law.
ARTICLE VIII
GENERAL PROVISIONS
SECTION 8.1 Survival and Indemnification.
(a) Survival
(i) The representations and warranties of Megsinet and the Significant
Stockholders contained in this Agreement shall survive the Closing for a
period of one year and shall terminate and be of no further force or effect
as of the date one year after the Effective Time.
(ii) The respective covenants and agreements of Megsinet and the
Significant Stockholders contained in this Agreement shall survive the
Closing and shall be fully effective and enforceable for the periods
therein indicated or where not indicated, forever.
(iii) CoreComm shall not be entitled to any indemnification under
Section 8.1(b), with respect to any breach of a representation or warranty,
covenant or agreement after the termination thereof pursuant to Sections
8.1(a) (i) or (ii), except for claims previously asserted pursuant to
Section 8.1(c).
(b) Indemnification by the Significant Stock holders.
(i) The Significant Stockholders shall, jointly and severally,
indemnify CoreComm and its affiliates and their respective officers,
directors, employees and agents against and hold them harmless from any
loss, liability, damage, demand, claim, cost, suit, action or cause of
action, judgment, award, assessment, interest, penalty or expense
(including, without limitation, reasonable expenses of investigation and
reasonable attorneys' and consultants' fees) (any of the foregoing being
hereinafter referred to individually as a "Loss" and collectively, as
"Losses") suffered or incurred by CoreComm for or on account of or arising
from or in connection with (i) any breach of any representation or warranty
of Megsinet contained in this Agreement or (ii) any breach of any covenant
or agreement of Megsinet contained in this Agreement.
(ii) No indemnification for any Loss shall be made by the Significant
Stockholders pursuant to Section 8.1(b)(i) until the aggregate amount of
all Losses suffered or incurred by CoreComm or any of its affiliates or
their respective officers, directors, employees or agents first exceeds
$350,000 (the "Minimum"), in which event the Significant Stockholders shall
be liable for the aggregate amount of such Losses, which amount shall not
include the Minimum; provided, however, that the Maximum amount for which
any individual Significant Stockholder shall be liable shall be the amount
of Merger Consideration received by each such Significant Stockholder
pursuant to Article II, including any cash in lieu of fractional shares.
Such limitation shall not effect the joint and several nature of this
indemnification and shall be applied individually, not jointly.
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(iii) Signing of this Agreement by the Significant Stockholders shall
constitute such stockholders' express assumption of their respective
obligations pursuant to this Article VIII.
(c) Procedures Relating to Indemnification.
(i) CoreComm shall give prompt written notice to the Significant
Stockholders (the "Indemnifying Party") of any Loss in respect of which
such Indemnifying Party has a duty to indemnify CoreComm under Section
8.1(b) (a "Claim"), specifying in reasonable detail the nature of the Loss
for which indemnification is sought, the section or sections of this
Agreement to which the Claim relates and the amount of the Loss involved
(or, if not then determinable, a reasonable good faith estimate of the
amount of the Loss involved), except that any delay or failure so to notify
the Indemnifying Party shall only relieve the Indemnifying Party of its
obligations hereunder to the extent, if at all, that it is prejudiced by
reason of such delay or failure.
(ii) If a Claim results from any claim, suit, action or cause of
action brought or asserted by a third party (a "Third Party Claim"), the
Indemnifying Party shall assume the defense thereof, including the
employment of counsel reasonably satisfactory to CoreComm and the payment
of all expenses. CoreComm shall have the right to employ separate counsel
in such Third Party Claim and participate in such defense thereof, but the
fees and expenses of such counsel shall be at the expense of CoreComm. If
the Indemnifying Party fails to assume the defense of any Third Party Claim
within 10 days after notice thereof, CoreComm shall have the right to
undertake the defense, compromise or settlement of such Third Party Claim
for the account of the Indemnifying Party, subject to the right of the
Indemnifying Party to assume the defense of such Third Party Claim with
counsel reasonably satisfactory to CoreComm at any time prior to the
compromise, settlement or final determination thereof Anything in this
Section 8.1(c) to the contrary notwithstanding, the Indemnifying Party
shall not, without CoreComm's prior written consent, settle or compromise
any Third Party Claim or consent to the entry of any judgment with respect
to any Third Party Claim which would have an adverse effect on CoreComm.
The Indemnifying Party may, without CoreComm's prior written consent,
compromise or settle any such Third Party Claim or consent to entry of any
judgment with respect to any Third Party Claim which requires solely money
damages paid by the Indemnifying Party, and which includes as an
unconditional term thereof the release by the claim ant or the plaintiff of
CoreComm from all liability in respect of such Third Party Claim.
(iii) With respect to any Claim other than a Third Party Claim, the
Indemnifying Party shall have ten days from receipt of notice from CoreComm
of such Claim within which to respond thereto. If the Indemnifying Party
does not respond within such ten-day period, the Indemnifying Party shall
be deemed to have accepted responsibility to make payment and shall have no
further right to contest the validity of such Claim. If the Indemnifying
Party notifies CoreComm within such ten-day period that it rejects such
Claim in whole or in part, CoreComm shall be free to pursue such remedies
as may be available to CoreComm under applicable law.
SECTION 8.2 Notices. All notices, requests, claims, demands and other
communications under this Agreement shall be in writing and shall be deemed
given if delivered personally, telecopied (which is confirmed) or sent by
overnight courier (providing proof of
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delivery) to the parties at the following addresses (or at such other address
for a party as shall be specified by like notice):
(a) if to CoreComm or Sub, to:
CoreComm Limited
110 East 59th Street
New York, New York 10022
Facsimile No. (212) 752-1157
Attention: Jeffrey G. Wyman, Esq.
with a copy to:
Skadden, Arps, Slate, Meagher & Flom LLP
919 Third Avenue
New York, New York 10022
Facsimile No.: (212) 735-2000
Attention: Thomas H. Kennedy, Esq.
(b) if to Megsinet, to
Megsinet, Inc.
225 West Ohio Street Suite 200
Chicago, Illinois 60610
Attention: Michael Henry
with a copy to:
Gallop, Johnson & Neuman L.C.
Interco Corporate Tower
101 South Hanley
St. Louis, Missouri 63105
Attention: Douglas J. Bates, Esq.
SECTION 8.3 Definitions. For purposes of this Agreement:
(a) except for purposes of Section 5.11, an "affiliate" of any person means
another person that directly or indirectly, through one or more intermediaries,
controls, is controlled by, or is under common control with, such first person,
where "control" means the possession, directly or indirectly, of the power to
direct or cause the direction of the management policies of a person, whether
through the ownership of voting securities, by contract, as trustee or executor,
or otherwise;
(b) "material adverse change" or "material adverse effect" means, when used
in connection with Megsinet or CoreComm, any change, effect, event, occurrence
or state of facts that is, or would reasonably be expected to be, materially
adverse to the business, financial condition or results of operations of such
party and its subsidiaries taken as a whole; and the terms "material" and
"materially" have correlative meanings;
(c) "person" means an individual, corporation, partnership, limited
liability company, joint venture, association, trust, unincorporated
organization or other entity;
(d) a "subsidiary" of any person means another person, an amount of the
voting securities, other voting ownership or voting partnership interests of
which is sufficient to elect at least a majority of its Board of Directors or
other governing body (or, if there are no such voting interests, 50% or more of
the equity interests of which) is owned directly or indirectly by such first
person; and
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(e) "knowledge" of any person which is not an individual means the
knowledge of such person's executive officers or senior management of such
person's operating divisions and segments, in each case after reasonable
inquiry.
(f) The "Significant Stockholders" are Michael Henry, Brian L. Clark and
Scott R. Widham and have signed this Agreement.
SECTION 8.4 Interpretation. When a reference is made in this Agreement to
an Article, Section or Exhibit, such reference shall be to an Article or Section
of, or an Exhibit to, this Agreement unless otherwise indicated. The table of
contents and headings contained in this Agreement are for reference purposes
only and shall not affect in any way the meaning or interpretation of this
Agreement. Whenever the words "include", "includes" or "including" are used in
this Agreement, they shall be deemed to be followed by the words "without
limitation". The words "hereof", "herein" and "hereunder" and words of similar
import when used in this Agreement shall refer to this Agreement as a whole and
not to any particular provision of this Agreement. All terms defined in this
Agreement shall have the defined meanings when used in any certificate or other
document made or delivered pursuant hereto unless otherwise defined therein. The
definitions contained in this Agreement are applicable to the singular as well
as the plural forms of such terms and to the masculine as well as to the
feminine and neuter genders of such term. Any agreement, instrument or statute
defined or referred to herein or in any agreement or instrument that is referred
to herein means such agreement, instrument or statute as from time to time
amended, modified or supplemented, including (in the case of agreements or
instruments) by waiver or consent and (in the case of statutes) by succession of
comparable successor statutes and references to all attachments thereto and
instruments incorporated therein. References to a person are also to its
permitted successors and assigns.
SECTION 8.5 Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other parties.
SECTION 8.6 Entire Agreement; No Third-Party Beneficiaries. This
Agreement (including the documents and instruments referred to herein) and the
Confidentiality Agreement (a) constitute the entire agreement, and supersede all
prior agreements and understandings, both written and oral, between the parties
with respect to the subject matter of this Agreement and (b) except for the
provisions of Article II, Section 5.6 and Section 5.8, are not intended to
confer upon any person other than the parties any rights or remedies.
SECTION 8.7 Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of New York, regardless of
the laws that might otherwise govern under applicable principles of conflicts of
laws thereof.
SECTION 8.8 Assignment. Neither this Agreement nor any of the rights,
interests or obligations under this Agreement shall be assigned, in whole or in
part, by operation of law or otherwise by either of the parties hereto without
the prior written consent of the other party. Any assignment in violation of the
preceding sentence shall be void. Subject to the preceding two sentences, this
Agreement will be binding upon, inure to the benefit of, and be enforceable by,
the parties and their respective successors and assigns.
SECTION 8.9 Consent to Jurisdiction. Each of the parties hereto (a)
consents to submit itself to the personal jurisdiction of any federal court
located in the State of New
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York or any New York state court, in either case in the County of New York, in
the event any dispute arises out of this Agreement or any of the transactions
contemplated by this Agreement, (b) agrees that it will not attempt to deny or
defeat such personal jurisdiction by motion or other request for leave from any
such court, and (c) agrees that it will not bring any action relating to this
Agreement or any of the transactions contemplated by this Agreement in any court
other than a federal court sitting in the State of New York or a New York state
court, in either case in the County of New York.
SECTION 8.10 Headings. The headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
SECTION 8.11 Severability. If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by any rule of law
or public policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect. Upon such determination that any
term or other provision is invalid, illegal or incapable of being enforced, the
parties hereto shall negotiate in good faith to modify this Agreement so as to
effect the original intent of the parties as closely as possible to the fullest
extent permitted by applicable law in an acceptable manner to the end that the
transactions contemplated hereby are fulfilled to the extent possible.
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IN WITNESS WHEREOF, CoreComm, Sub and Megsinet have caused this Agreement
to be signed by their respec tive officers thereunto duly authorized, all as of
the date first written above.
CORECOMM LIMITED
By
-------------------------------------------
Title:
CORECOMM ACQUISITION SUB, INC.
By
-------------------------------------------
Title:
MEGSINET INC.
By
-------------------------------------------
Title:
Michael Henry
-------------------------------------------
Brian L. Clark
-------------------------------------------
Scott R. Widham
-------------------------------------------
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ANNEX B
IRREVOCABLE PROXY
B-1
<PAGE> 162
ANNEX B
STOCKHOLDERS IRREVOCABLE PROXY AGREEMENT
STOCKHOLDERS IRREVOCABLE PROXY AGREEMENT (this "Agreement"), dated as of
February , 1999, among CORECOMM LIMITED, a Bermuda company ("Parent"), and
each other person and entity listed on the signature pages hereof (each, a
"Stockholder").
W I T N E S S E T H:
WHEREAS, as of the date hereof each Stockholder owns (either beneficially
or of record) the number of shares of capital stock of the Company ("Company
Capital Stock"), set forth opposite such Stockholder's name on EXHIBIT A hereto
(all such shares of Company Capital Stock owned by the Stockholders and any
shares of Company Capital Stock hereafter acquired by the Stockholders prior to
the termination of this Agreement being referred to herein as the "Shares");
WHEREAS, MegsINet, Inc., an Illinois Company (the "Company"), and Parent,
among others, propose to enter into an Agreement and Plan of Merger, dated on or
about the date hereof (as the same may be amended from time to time, the "Merger
Agreement"; capitalized terms herein not otherwise defined herein shall have the
meanings ascribed thereto in the Merger Agreement), which provides, upon the
terms and subject to the conditions thereof, for the merger of a subsidiary of
Parent with the Company (the "Merger"); and
WHEREAS, as a condition to the willingness of Parent to enter into the
Merger Agreement, Parent has requested that each Stockholder agree, and, in
order to induce Parent to enter into the Merger Agreement, each Stockholder has
agreed, to grant Parent an irrevocable proxy coupled with an interest to vote
such Stockholder's Shares.
NOW, THEREFORE, in consideration of the premises and of the mutual
agreements and covenants set forth herein and in the Merger Agreement, the
parties hereto agree as follows:
ARTICLE I
TRANSFER AND VOTING OF SHARES
SECTION 1.01 Transfer of Shares. During the term of this Agreement, and
except as otherwise provided herein, each Stockholder shall not (a) sell, pledge
or otherwise dispose of any of its Shares if such transaction would result in
the Stockholder no longer having the power to vote or cause to be voted the
Shares, (b) deposit its Shares into a voting trust or enter into a voting
agreement or arrangement with respect to such Shares or grant any proxy with
respect thereto or (c) enter into any contract, option or other arrangement or
undertaking with respect to the direct or indirect acquisition or sale,
assignment, transfer or other disposition of any of the Company Capital Stock if
such transaction would result in the Stockholder no longer having the power to
vote or cause to be voted the Shares.
SECTION 1.02 Voting of Shares; Further Assurances. (a) Each Stockholder,
by this Agreement, with respect to those Shares that it owns of record, does
hereby constitute and appoint Parent, or any nominee of Parent, with full power
of substitution, during and for the term of this Agreement, as its true and
lawful attorney and proxy, for and in its
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name, place and stead, to vote each of such Shares as its proxy, at every
annual, special or adjourned meeting of the stockholders of the Company
(including the right to sign its name (as stockholder) to any consent,
certificate or other document relating to the Company that the law of Bermuda or
the State of Illinois may permit or require) (i) in favor of the adoption of the
Merger Agreement and approval of the Merger and the other transactions
contemplated by the Merger Agreement, (ii) against any proposal for any
recapitalization, merger, sale of assets or other business combination between
the Company and any person or entity (other than the Merger) or any other action
or agreement that would result in a breach of any covenant, representation or
warranty or any other obligation or agreement of the Company under the Merger
Agreement or which could result in any of the conditions to the Company's
obligations under the Merger Agreement not being fulfilled, and (iii) in favor
of any other matter relating to consummation of the transactions contemplated by
the Merger Agreement, including, but not limited to amending the certificate of
incorporation of the Company to reduce the vote required by the Company's
shareholders to approve a merger or consolidation. Each Stockholder further
agrees to cause the Shares owned by it beneficially to be voted in accordance
with the foregoing. Each Stockholder acknowledges receipt and review of a copy
of the Merger Agreement (in draft form substantially similar to the definitive
agreement).
(b) Each Stockholder shall perform such further acts and execute such
further documents and instruments as may reasonably be required to vest in
Parent (i) an irrevocable proxy coupled with an interest in accordance with
Section 7.50 of the Illinois Business Corporation Act and (ii) the power to
carry out the provisions of this Agreement.
(c) Nothing contained in this Agreement shall be deemed to restrict a
Stockholder who is also a director of the Company from taking actions in his
capacity as a director as may be permitted under the Merger Agreement.
SECTION 1.03 Term of Agreement. This Agreement shall be effective as of
the date hereof and shall expire on the earlier of (a) the Closing Date and (b)
the date of the termination of the Merger Agreement pursuant to its terms.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF STOCKHOLDERS
Each Stockholder, severally and not jointly, hereby represents and warrants
to Parent as follows:
SECTION 2.01 Due Organization, etc. Such Stockholder (if it is a
corporation, partnership or other legal entity) is duly organized and validly
existing under the laws of the jurisdiction of its organization. Such
Stockholder has full power and authority (corporate or otherwise) to execute and
deliver this Agreement and to consummate the transactions contemplated hereby.
The execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly authorized by all necessary
action (corporate or otherwise) on the part of such Stockholder. This Agreement
has been duly executed and delivered by or on behalf of such Stockholder and,
assuming its due authorization, execution and delivery by Parent constitutes a
legal, valid and binding obligation of such Stockholder, enforceable against
such Stockholder in accordance with its terms, subject to the effect of any
applicable bankruptcy, reorganization, insolvency, moratorium or similar laws
affecting creditors' rights generally and subject, as to enforceability, to the
effect of general principles of equity (regardless of whether such
enforceability is considered in a proceeding in equity or at law).
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SECTION 2.02 No Conflicts, Required Filings and Consents. (a) The
execution and delivery of this Agreement by such Stockholder do not, and the
performance of this Agreement by such Stockholder will not, (i) conflict with or
violate the Certificate of Incorporation or ByLaws or similar organizational
documents of such Stockholder (in the case of a Stockholder that is a
corporation, partnership or other legal entity), (ii) conflict with or violate
any law, rule, regulation, order, judgment or decree applicable to such
Stockholder or by which it or any of its properties is bound or affected, or
(iii) result in any breach of or constitute a default (or an event that with
notice or lapse of time or both would become a default) under, or give to others
any rights of termination, amendment, acceleration or cancellation of, or result
in the creation of a lien or encumbrance on any of the property or assets of
such Stockholder or (if such Stockholder is a corporation) any of its
subsidiaries pursuant to, any note, bond, mortgage, indenture, contract,
agreement, lease, license, permit, franchise or other instrument or obligation
to which such Stockholder is a party or by which such Stockholder or any of its
properties is bound or affected, except for any such breaches, defaults or other
occurrences that would not cause or create a material risk of non-performance or
delayed performance by such Stockholder of its obligations under this Agreement.
(b) The execution and delivery of this Agreement by such Stockholder do
not, and the performance of this Agreement by such Stockholder will not, require
any consent, approval, authorization or permit of, or filing with or
notification to, any governmental or regulatory authority, domestic or foreign,
except (i) for applicable requirements, if any, of the Exchange Act, and the HSR
Act and (ii) where the failure to obtain such consents, approvals,
authorizations or permits, or to make such filings or notifications, would not
prevent or delay the performance by such Stockholder of its obligations under
this Agreement.
SECTION 2.03 Title to Shares. Such Stockholder is the record or
beneficial owner of its Shares free and clear of any proxy or voting restriction
other than pursuant to this Agreement.
SECTION 2.04 Accredited Investor. Such Stockholder is an "accredited
investor" as such term is defined in Rule 501 of the Securities Act of 1933, as
amended.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PARENT
Parent hereby represents and warrants to each Stockholder as follows:
SECTION 3.01 Due Organization, etc. Parent is a corporation duly
organized and validly existing under the laws of Bermuda. Parent has all
necessary corporate power and authority to execute and deliver this Agreement
and to consummate the transactions contemplated hereby. The execution and
delivery of this Agreement and the consummation of the transactions contemplated
hereby by Parent have been duly authorized by all necessary corporate action on
the part of Parent. This Agreement has been duly executed and delivered by
Parent and, assuming its due authorization, execution and delivery by the
Stockholders, constitutes a legal, valid and binding obligation of Parent,
enforceable against Parent in accordance with its terms.
SECTION 3.02 No Conflict, Required Filings and Consents. (a) The
execution and delivery of this Agreement by Parent do not, and the performance
of this Agreement by Parent will not, (i) conflict with or violate the charter
of Parent, (ii) conflict with or violate any, law, rule, regulation, order,
judgment or decree applicable to Parent or by
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which Parent or any of its properties is bound or affected, or (iii) result in
any breach of or constitute a default (or an event that with notice or lapse of
time or both would become a default) under, or give to others any rights of
termination, amendment, acceleration or cancellation of, or result in the
creation of a lien or encumbrance on any of the property or assets of Parent
pursuant to, any note, bond, mortgage, indenture, contract, agreement, lease,
license, permit, franchise or other instrument or obligation to which Parent is
a party or by which it or any of its properties is bound or affected, except for
any such breaches, defaults or other occurrences that would not cause or create
a material risk of non-performance or delayed performance by Parent of its
obligations under this Agreement.
(b) The execution and delivery of this Agreement by Parent do not, and the
performance of this Agreement by Parent will not, require any consent, approval,
authorization or permit of, or filing with or notification to, any governmental
or regulatory authority, domestic or foreign, except (i) for applicable
requirements, if any, of the Exchange Act and the HSR Act and (ii) where the
failure to obtain such consents, approvals, authorizations or permits, or to
make such filings or notifications, would not prevent or delay the performance
by Parent of its obligations under this Agreement.
ARTICLE IV
GENERAL PROVISIONS
SECTION 4.01 Notices. All notices and other communications given or made
pursuant hereto shall be in writing and shall be deemed to have been duly given
or made as of the date delivered, mailed or transmitted, and shall be effective
upon receipt, if delivered personally, mailed by registered or certified mail
(postage prepaid, return receipt requested) to the parties at the following
addresses (or at such other address for a party as shall be specified by like
changes of address) or sent by electronic transmission to the telecopier number
specified below:
(a) If to Parent:
CoreComm Limited
110 East 59th Street
26th Floor
New York, New York 10022
Attention: General Counsel
Telecopier: (212) 752-1157
(b) If to a Stockholder, to such Stockholder's address on the books and
records of the Company.
SECTION 4.02 Headings. The headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
SECTION 4.03 Severability. If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by any rule of law
or public policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic or legal
substance of the transactions contemplated hereby is not affected in any manner
materially adverse to any party. Upon such determination that any term or other
provision is invalid, illegal or incapable of being enforced, the parties hereto
shall negotiate in good faith to modify this Agreement so as to effect the
original intent of the parties as closely as possible to the fullest extent
permitted by
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applicable law in an acceptable manner to the end that the transactions
contemplated hereby are fulfilled to the extent possible.
SECTION 4.04 Entire Agreement. This Agreement constitutes the entire
agreement of the parties and supersedes all prior agreements and undertakings,
both written and oral, between the parties, or any of them, with respect to the
subject matter hereof.
SECTION 4.05 Assignment. This Agreement shall not be assigned by
operation of law or otherwise; provided, however, that Parent may assign its
rights, interests and obligations hereunder to any successor or affiliate of
Parent whose shares are registered under Section 12 of the Exchange Act (or will
be so registered at the Closing).
SECTION 4.06 Parties in Interest. This Agreement shall be binding upon
and inure solely to the benefit of each party hereto, and nothing in this
Agreement, express or implied, is intended to or shall confer upon any person
any right, benefit or remedy of any nature whatsoever under or by reason of this
Agreement.
SECTION 4.07 Specific Performance. The parties hereto agree that
irreparable damage would occur in the event any provision of this Agreement was
not performed in accordance with the terms hereof and that the parties shall be
entitled to specific performance of the terms hereof, in addition to any other
remedy at law or in equity.
SECTION 4.08 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF ILLINOIS APPLICABLE TO
CONTRACTS EXECUTED AND TO BE PERFORMED ENTIRELY WITHIN THAT STATE. PARENT AND
EACH OF THE STOCKHOLDERS EACH HEREBY IRREVOCABLY SUBMITS TO THE JURISDICTION OF
ANY ILLINOIS STATE OR FEDERAL COURT SITTING IN THE CITY OF CHICAGO, ILLINOIS, IN
ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT, AND
PARENT AND EACH OF THE STOCKHOLDERS HEREBY IRREVOCABLY AGREES THAT ALL CLAIMS IN
RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN SUCH
ILLINOIS STATE COURT OR SUCH FEDERAL COURT. PARENT AND EACH OF THE STOCKHOLDERS
EACH HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT IT MAY EFFECTIVELY DO SO,
THE DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF SUCH ACTION OR
PROCEEDING.
SECTION 4.09 Counterparts. This Agreement may be executed in one or more
counterparts, and by the different parties hereto in separate counterparts, each
of which when executed shall be deemed to be an original but all of which taken
together shall constitute one and the same agreement.
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* * * *
IN WITNESS WHEREOF, the parties have caused this Irrevocable Proxy to be
executed as of the date first above written.
CORECOMM LIMITED
By:
----------------------------------------
Name:
Title:
----------------------------------------
Brian L. Clark
CLAYTON CAPITAL COMPANY, L.L.C.
By:
----------------------------------------
Name:
Title:
----------------------------------------
Michael Henry
----------------------------------------
Scott Widham
PEQUOT PRIVATE EQUITY FUND L.P.
By:
----------------------------------------
Name:
Title:
----------------------------------------
Patrick and Patricia Henry
Joint Tenants with Right of Survivor
MEGSINET INVESTORS PARTNERSHIP, L.P.
By:
----------------------------------------
Name:
Title:
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EXHIBIT A
<TABLE>
<CAPTION>
SHARES OF
MEGSINET, INC.
NAME BENEFICIALLY HELD
- ---- -----------------
<S> <C>
Brian L. Clark.................................. 94,571
Clayton Capital Company, L.L.C. ................ 562,500
Michael Henry................................... 2,016,000
Scott Widham.................................... 449,689
Pequot Private Equity Fund L.P. ................ 2,000,000
Patrick and Patricia Henry JTWROS............... 335,331
Megsinet Investors Partnership, L.P. ........... 650,000
</TABLE>
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ANNEX C
DISSENTERS' RIGHTS
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DISSENTERS' APPRAISAL RIGHTS UNDER SECTIONS 11.65
AND 11.70 OF THE ILLINOIS BUSINESS CORPORATION
ACT OF 1983, AS AMENDED
Section 11.65. Right to Dissent
Section 11.65. Right to Dissent. 108. A shareholder of a corporation is
entitled to dissent from, and obtain payment for his or her shares in the event
of any of the following corporate actions:
<TABLE>
<C> <S>
a. consummation of a plan of merger or consolidation or a plan
of share exchange to which the corporation is a party of i.
shareholder authorization is required for the merger or
consolidation or the share exchange by Section 11.20 or the
articles of incorporation or (ii) the corporation is a
subsidiary that is merged with its parent or another
subsidiary under Section 11.30;
b. consummation of a sale, lease or exchange of all, or
substantially all, of the property and assets of the
corporation other than in the usual and regular course of
business;
c. an amendment of the articles of incorporation that
materially and adversely affects rights in respect of a
dissenter's shares because it:
i. alters or abolishes a preferential right of such
shares;
ii. alters or abolishes a right in respect of redemption,
including a provision respecting a sinking fund for the
redemption or repurchase, of such shares;
iii. in the case of a corporation incorporated prior to
January 1, 1982, limits or eliminates cumulative voting
rights with respect to such shares; or
d. any other corporate action taken pursuant to a shareholder
vote if the articles of incorporation, by-laws, or a
resolution of the board of directors provide that
shareholders are entitled to dissent and obtain payment for
their shares in accordance with the procedures set forth in
Section 11.70 or as may be otherwise provided in the
articles, by-laws or resolution.
109. A shareholder entitled to dissent and obtain payment for his
or her shares under this Section may not challenge the
corporate action creating his or her entitlement unless the
action is fraudulent with respect to the shareholder or the
corporation or constitutes a breach of a fiduciary duty owed
to the shareholder.
110. A record owner of shares may assert dissenters' rights as to
fewer than all the shares recorded in such person's name
only if such person dissents with respect to all shares
beneficially owned by any one person and notifies the
corporation in writing of the name and address of each
person on whose behalf the record owner asserts dissenters'
rights. The rights of a partial dissenter are determined as
if the shares as to which dissent is made and the other
shares were recorded in the names of different shareholders.
A beneficial owner of shares who is not the record owner may
assert dissenters' rights as to shares held on such person's
behalf only if the beneficial owner submits to the
corporation the record owner's written consent to the
dissent before or at the same time the beneficial owner
asserts dissenters' rights.
</TABLE>
Section 11.70. Procedure to Dissent
Section 11.70. Procedure to Dissent. 1. If the corporate action giving
rise to the right to dissent is to be approved at a meeting of shareholders, the
notice of meeting shall inform the shareholders of their right to dissent and
the procedure to dissent. If, prior to
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the meeting, the corporation furnishes to the shareholders material information
with respect to the transaction that will objectively enable a shareholder to
vote on the transaction and to determine whether or not to exercise dissenters'
rights, a shareholder may assert dissenters' rights only if the shareholder
delivers to the corporation before the vote is taken a written demand for
payment for his or her shares if the proposed action is consummated, and the
shareholder does not vote in favor of the proposed action.
<TABLE>
<C> <S>
2. If the corporate action giving rise to the right to dissent
is not to be approved at a meeting of shareholders, the
notice to shareholders describing the action taken under
Section 11.30 or Section 7.10 shall inform the shareholders
of their right to dissent and the procedure to dissent. If,
prior to or concurrently with the notice, the corporation
furnishes to the shareholders material information with
respect to the transaction that will objectively enable a
shareholder to determine whether or not to exercise
dissenters' rights, a shareholder may assert dissenter's
rights only if he or she delivers to the corporation within
30 (days from the date of mailing the notice a written
demand for payment for his or her shares.
3. Within 10 days after the date on which the corporate action
giving rise to the right to dissent is effective or 30 days
after the shareholder delivers to the corporation the
written demand for payment, whichever is later, the
corporation shall send each shareholder who has delivered a
written demand for payment a statement setting forth the
opinion of the corporation as to the estimated fair value of
the shares, the corporation's latest balance sheet as of the
end of a fiscal year ending not earlier than 16 months
before the delivery of the statement, together with the
statement of income for that year and the latest available
interim financial statements, and either a commitment to pay
for the shares of the dissenting shareholder at the
estimated fair value thereof upon transmittal to the
corporation of the certificate or certificates, or other
evidence of ownership, with respect to the shares, or
instructions to the dissenting shareholder to sell his or
her shares within 10 days after delivery of the
corporation's statement to the shareholder. The corporation
may instruct the shareholder to sell only if there is a
public market for the shares at which the shares may be
readily sold. If the shareholder does not sell within that
10 day period after being so instructed by the corporation,
for purposes of this Section the shareholder shall be deemed
to have sold his or her shares at the average closing price
of the shares, if listed on a national exchange, or the
average of the bid and asked price with respect to the
shares quoted by a principal market maker, if not listed on
a national exchange, during that 10 day period.
4. A shareholder who makes written demand for payment under
this Section retains all other rights of a shareholder until
those rights are canceled or modified by the consummation of
the proposed corporate action. Upon consummation of that
action, the corporation shall pay to each dissenter who
transmits to the corporation the certificate or other
evidence of ownership of the shares the amount the
corporation estimates to be the fair value of the shares,
plus accrued interest, accompanied by a written explanation
of how the interest was calculated.
</TABLE>
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<TABLE>
<C> <S>
5. If the shareholder does not agree with the opinion of the corporation as to the estimated
fair value of the shares or the amount of interest due, the shareholder, within 30 days from
the delivery of the corporation's statement of value, shall notify the corporation in writing
of the shareholder's estimated fair value and amount of the interest due and demand payment
for the difference between the shareholder's estimate of fair value and interest due and the
amount of the payment by the corporation or the proceeds of sale by the shareholder,
whichever is applicable because of the procedure for which the corporation opted pursuant to
subsection (c).
6. If, within 60 days from delivery to the corporation of the shareholder notification of
estimate of fair value of the shares and interest due, the corporation and the dissenting
shareholder have not agreed in writing upon the fair value of the shares and interest due,
the corporation shall either pay the difference in value demanded by the shareholder, with
interest, or file a petition in the circuit court of the county in which either the
registered office or the principal office of the corporation is located, requesting the court
to determine the fair value of the shares and interest due. The corporation shall make all
dissenters, whether or not residents of this State, whose demands remain unsettled parties to
the proceeding as an action against their shares and all parties shall be served with a copy
of the petition. Nonresidents may be served by registered or certified mail or by publication
as provided by law. Failure of the corporation to commence an action pursuant to this Section
shall not limit or affect the right of the dissenting shareholders to otherwise commence an
action as permitted by law.
7. The jurisdiction of the court in which the proceeding is commenced under subsection (f) by a
corporation is plenary and exclusive. The court may appoint one or more persons as appraisers
to receive evidence and recommend decision on the question of fair value. The appraisers have
the power described in the order appointing them, or in any amendment to it.
8. Each dissenter made a party to the proceeding is entitled to judgment for the amount, if any,
by which the court finds that the fair value of his or her shares, plus interest, exceeds the
amount paid by the corporation or the proceeds of sale by the shareholder, whichever amount
is applicable.
9. The court, in a proceeding commenced under subsection (f), shall determine all costs of the
proceeding, including the reasonable compensation and expenses of the appraisers, if any,
appointed by the court under subsection (g), but shall exclude the fees and expenses of
counsel and experts for the respective parties. If the fair value of the shares as determined
by the court materially exceeds the amount which the corporation estimated to be the fair
value of the shares or if no estimate was made in accordance with subsection (c), then all or
any part of the costs may be assessed against the corporation. If the amount which any
dissenter estimated to be the fair value of the shares materially exceeds the fair value of
the shares as determined by the court, then all or any part of the costs may be assessed
against that dissenter. The court may also assess the fees and expenses of counsel and
experts for the respective parties, in amounts the court finds equitable, as follows:
a. Against the corporation and in favor of any or all dissenters if the court finds that the
corporation did not substantially comply with the requirements of subsections (a), (b), (c),
(d), or (f).
</TABLE>
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<TABLE>
<C> <S>
b. Against either the corporation or a dissenter and in favor
of any other party if the court finds that the party against
whom the fees and expenses are assessed acted arbitrarily,
vexatiously, or not in good faith with respect to the rights
provided by this Section.
</TABLE>
If the court finds that the services of counsel for any dissenter were of
substantial benefit to other dissenters similarly situated and that the fees for
those services should not be assessed against the corporation, the court may
award to that counsel reasonable fees to be paid out of the amounts awarded to
the dissenters who are benefitted. Except as otherwise provided in this Section,
the practice, procedure, judgment and costs shall be governed by the Code of
Civil Procedure.
<TABLE>
<C> <S>
10. As used in this Section:
a. "Fair value", with respect to a dissenter's shares, means
the value of the shares immediately before the consummation
of the corporate action to which the dissenter objects
excluding any appreciation or depreciation in anticipation
of the corporate action, unless exclusion would be
inequitable.
b. "Interest" means interest from the effective date of the
corporate action until the date of payment, at the average
rate currently paid by the corporation on its principal bank
loans or, if none, at a rate that is fair and equitable
under all the circumstances.
</TABLE>
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 98 of the Bermuda Act provides, in general, that a corporation
shall have the power to indemnify a director or officer of a company in respect
of any loss or liability incurred by the director or officer in relation to any
negligence, default, breach of duty or breach of trust in relation to the
company except where the loss or liability arises due to the fraud or dishonesty
of the director or officer.
Section 98A of the Bermuda Act provides, in general, that a corporation
shall have the power to purchase and maintain insurance on behalf of any person
who is or was a director or officer of the corporation against any liability
asserted against the person in any such capacity, or arising out of the person's
negligence, default, breach of duty or breach of trust.
CoreComm's by-laws 148 and 149 (incorporated by reference herein) provide
for indemnification of directors, officers and other persons as follows:
148. Subject to the proviso below, every director, officer of CoreComm and
member of a committee constituted under by-law 104 and any resident
representative shall be indemnified out of the funds of the company
against all liabilities, loss, damage or expense (including but not
limited to liabilities under contract, tort and statute or any
applicable foreign law or regulation and all reasonable legal and
other costs and expenses properly payable) incurred or suffered by
him as such director, officer, committee member or resident
representative and the indemnity contained in this by-law shall
extend to any person acting as a director, officer, committee member
or resident representative in the reasonable belief that he has been
so appointed or elected notwithstanding any defect in such
appointment or election provided always that the indemnity contained
in this by-law shall not extend to any matter which would render it
void pursuant to the Bermuda Act.
149. Every director, officer, member of a committee duly constituted under
by-law 104 or resident representative of the company shall be
indemnified out of the funds of CoreComm against all liabilities
incurred by him as such director, officer, committee member or
resident representative in defending any proceedings, whether civil
or criminal, in which judgement is given in his favor, or in which he
is acquitted, or in connection with any application under the Bermuda
Act in which relief from liability is granted to him by the court.
By-law 152 of CoreComm's by-laws (incorporated by reference herein)
provides that:
152. Subject to the Bermuda Act, expenses incurred in defending any civil
or criminal action or proceeding for which indemnification is
required pursuant to by-laws 148 and 149 shall be paid by CoreComm in
advance of the final disposition of such action or proceeding upon
receipt of an undertaking by or on behalf of the indemnified party to
repay such amount if it shall ultimately be determined that the
indemnified party is not entitled to be indemnified pursuant to
by-laws 148 and 149 provided that no monies shall be paid hereunder
unless payment of the same shall be authorized in the specific case
upon a determination that indemnification of the director or officer
would be proper in
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the circumstances because he has met the standard of conduct which
would entitle him to the indemnification thereby provided and such
determination shall be made:
(a) by the board, by a majority vote at a meeting duly constituted by a
quorum of directors not party to the proceedings or matter with regard
to which the indemnification is or would be, claimed; or
(b) in the case such a meeting cannot be constituted by lack of a
disinterested quorum, by independent legal counsel in a written
opinion; or
(c) by a majority vote of the shareholders.
Each shareholder of the company, by virtue of its acquisition and
continued holding of a share, shall be deemed to have acknowledged and agreed
that the advances of funds may be made by CoreComm as aforesaid and when made by
CoreComm under this by-law 152 are made to meet expenditures incurred for the
purpose of enabling such director, officer, or member of a committee duly
constituted under by-law 104 in properly perform his or her duties as an officer
of CoreComm.
The directors and officers of the CoreComm are covered by a policy of
liability insurance.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<C> <S>
2.1 Agreement and Plan of Merger, dated as of February 17, 1999,
by and among CoreComm Limited, CoreComm Acquisition Sub,
Inc. and MegsINet Inc. (included as Annex A to the proxy
statement-prospectus forming a part of this Registration
Statement and incorporated herein by reference).
3.1 Memorandum of Association of CoreComm Limited.(1)
3.2 By-Laws of CoreComm Limited.(1)
4.1 Rights Agreement between CoreComm and Continental Stock
Transfer & Trust Company, as Rights Agent.(1)
4.2 Form of Common Stock Certificate.(1)
5.1 Opinion of Appleby, Spurling & Kemp as to the legality of
the shares of CoreComm Limited common stock being registered
hereby.*
8.1 Opinion of Skadden, Arps, Slate, Meagher & Flom (Illinois)
regarding certain tax aspects of the merger.*
10.1 Form of Irrevocable Proxy (included in Annex B of this Form
S-4).
10.2 Form of Stockholders Agreement.*
23.1 Consent of Ernst & Young, LLP.
23.2 Consent of KPMG LLP.
23.3 Consent of Appleby, Spurling & Kemp (included as part of its
opinion filed as Exhibit 5.1 and incorporated herein by
reference).*
23.4 Consent of Skadden, Arps, Slate, Meagher & Flom (Illinois)
(included as part of its opinion filed as Exhibit 8.1 and
incorporated herein by reference).*
99.1 Form of Proxy.
</TABLE>
- ---------------
(1) Incorporated by reference from CoreComm's Registration Statement on Form 10,
File No. 0-24521.
* To be filed by amendment.
II-2
<PAGE> 176
ITEM 22. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) to respond to requests for information that is incorporated by
reference into the prospectus pursuant to Item 4, 10(b), 11 or 13 of
this Form S-4 under the Securities Act of 1933, within one business day
of receipt of any such request, and to send the incorporated documents
by first class mail or other equally prompt means, including
information contained in documents filed after the effective date of
the registration statement through the date of responding to such
request; and
(2) to supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved
therein, that was not the subject of and included in the registration
statement when it became effective.
Insofar as indemnification for liabilities under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the provisions described in Item 20 above,
or otherwise, the registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against
public policy as expressed in the Securities Act and is therefore
unenforceable. If a claim of indemnification against such liabilities
(other than the payment by the registrant of expenses incurred or paid
by a director, officer or controlling person of the registrant in a
successful defense of any action, suit or proceeding) is asserted by
such director, officer, or controlling person in connection with the
securities being registered, the registrant will, unless in the opinion
of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such
issue.
II-3
<PAGE> 177
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized in the City of New York,
State of New York, on the 22nd day of March, 1999.
CoreComm Limited
By /s/ RICHARD J. LUBASCH
------------------------------------
Richard J. Lubasch
Senior Vice President --
General Counsel and Secretary
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature
appears below constitutes and appoints Richard J. Lubasch his true and lawful
attorneys-in-fact and agents with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
and all amendments (including post-effective amendments) to this registration
statement and to file the same with all exhibits thereto, and all documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done,
as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents or any of
them, or their or his substitute or substitutes, may lawfully do or cause to be
done by virtue hereof. This power of attorney may be executed in counterparts.
Pursuant to the requirements of the Securities Act of 1993, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ GEORGE S. BLUMENTHAL Chairman of the Board and March 22, 1999
--------------------------------------- Director
George S. Blumenthal
/s/ J. BARCLAY KNAPP President, Chief Executive March 22, 1999
--------------------------------------- and Financial Officer and
J. Barclay Knapp Director
/s/ PATTY J. FLYNT Principal Operating Officer March 22, 1999
---------------------------------------
Patty J. Flynt
/s/ GREGG GORELICK Principal Accounting Officer March 22, 1999
---------------------------------------
Gregg Gorelick
</TABLE>
II-4
<PAGE> 178
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ TED. H. MCCOURTNEY Director March 22, 1999
---------------------------------------
Ted. H. McCourtney
/s/ SIDNEY R. KNAFEL Director March 22, 1999
---------------------------------------
Sidney R. Knafel
/s/ DEL MINTZ Director March 22, 1999
---------------------------------------
Del Mintz
/s/ ALAN J. PATRICOF Director March 22, 1999
---------------------------------------
Alan J. Patricof
/s/ WARREN POTASH Director March 22, 1999
---------------------------------------
Warren Potash
</TABLE>
II-5
<PAGE> 179
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<C> <S>
2.1 Agreement and Plan of Merger, dated as of February 17, 1999,
by and among CoreComm Limited, CoreComm Acquisition Sub,
Inc. and MegsINet Inc. (included as Annex A to the proxy
statement-prospectus forming a part of this Registration
Statement and incorporated herein by reference).
3.1 Memorandum of Association of CoreComm Limited.(1)
3.2 By-Laws of CoreComm Limited.(1)
4.1 Rights Agreement between CoreComm and Continental Stock
Transfer & Trust Company, as Rights Agent.(1)
4.2 Form of Common Stock Certificate.(1)
5.1 Opinion of Appleby, Spurling & Kemp as to the legality of
the shares of CoreComm Limited common stock being registered
hereby.*
8.1 Opinion of Skadden, Arps, Slate, Meagher & Flom (Illinois)
regarding certain tax aspects of the merger.*
10.1 Form of Irrevocable Proxy (included in Annex B of this Form
S-4).
10.2 Form of Stockholders Agreement.*
23.1 Consent of Ernst & Young, LLP.
23.2 Consent of KPMG LLP.
23.3 Consent of Appleby, Spurling & Kemp (included as part of its
opinion filed as Exhibit 5.1 and incorporated herein by
reference).*
23.4 Consent of Skadden, Arps, Slate, Meagher & Flom Illinois
(included as part of its opinion filed as Exhibit 8.1 and
incorporated herein by reference).*
99.1 Form of Proxy.
</TABLE>
- ---------------
(1) Incorporated by reference from CoreComm's Registration Statement on Form 10,
File No. 0-24521.
* To be filed by amendment.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement (Form S-4) and related Prospectus of CoreComm Limited for
the registration of 1,682,726 shares of its common stock and to the
incorporation by reference therein of our reports dated February 26, 1998, with
respect to the consolidated financial statements and schedule of CoreComm
Limited and its predecessor OCOM Corporation Telecoms Division included in its
Annual Report (Form 10-K) for the year ended December 31, 1998, filed with the
Securities and Exchange Commission.
ERNST & YOUNG LLP
New York, New York
March 19, 1999
<PAGE> 1
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
MegsINet, Inc.:
We consent to the use of our report included herein and to the reference to
our firm under the heading "Experts" in the proxy statement-prospectus.
KPMG LLP
St. Louis, Missouri
March 22, 1999
<PAGE> 1
Exhibit 99.1
PROXY MEGSINET INC.
PROXY FOR SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ________________, 1999
_______________ and _______________ or any of them with full power of
substitution, are hereby constituted and appointed the true and lawful
attorneys in fact, agents and proxies of the undersigned and are authorized to
represent and to vote, as designated on the reverse side, all of the
undersigned's shares of Common Stock at the special meeting of shareholders of
MegsINet Inc. ("MegsINet") to be held at the Chicago Athletic Association,
12 South Michigan Avenue, Chicago, Illinois, at ______ local time on _________,
1999, and at any adjournment or postponement thereof, upon the proposal set
forth on the reverse side and described in the Proxy Statement/Prospectus of
CoreComm Limited and MegsINet, and in their discretion with respect to such
other matters as may properly be brought before the meeting or any adjournment
or postponement thereof.
[X] PLEASE MARK VOTES AS IN THIS EXAMPLE.
1. MERGER AGREEMENT
Proposal to approve and adopt the Agreement and Plan of Merger (the "Merger
Agreement"), dated as of February 17, 1999, by and among CoreComm Limited
("CoreComm"), CoreComm Acquisition Sub, Inc. ("Subsidiary"), and MegsINet
Inc. ("MegsINet"), pursuant to which MegsINet will merge with and into
Subsidiary, with Subsidiary surviving the merger as a wholly-owned
subsidiary of CoreComm. In the Merger, holders of outstanding shares of
common stock, no par value per share, of MegsINet ("MegsINet Common Stock")
will elect to receive either $2.50 in cash, or 0.21 of a share of common
stock par value $.01 per share of CoreComm, for each share of MegsINet Common
Stock held by them or a combination of each. Approval and adoption of the
Merger Agreement will also constitute approval of the Merger and the other
transactions contemplated by the Merger Agreement.
[ ] [ ] [ ]
FOR AGAINST ABSTAIN
(CONTINUED AND TO BE SIGNED ON REVERSE SIDE)
<PAGE> 2
(Continued from other side)
You are encouraged to specify your choice by marking the appropriate box,
SEE REVERSE SIDE, but you need not mark any box if you wish to vote in
accordance with the board of directors' recommendation. The above named proxies
cannot vote your shares unless you sign and return this proxy.
MARK HERE FOR ADDRESS CHANGE AND NOTE AT LEFT [ ]
DATE , 1999
-----------------------------
----------------------------------------
----------------------------------------
PLEASE SIGN EXACTLY AS NAME APPEARS HEREON. Joint owners should each sign.
When signing as attorney, executor, administrator, trustee or guardian, please
give full title as such.
