<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 1, 1999
REGISTRATION STATEMENT NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
CORECOMM LIMITED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
BERMUDA 4812 NONE
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION 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 59TH STREET
NEW YORK, NEW YORK 10022
(212) 906-8485
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPY TO:
<TABLE>
<S> <C>
JOHN C. KENNEDY, ESQ. RICHARD J. LUBASCH, ESQ.
PAUL, WEISS, RIFKIND, WHARTON & GARRISON CORECOMM LIMITED
1285 AVENUE OF THE AMERICAS 110 EAST 59TH STREET
NEW YORK, NEW YORK 10019 NEW YORK, NEW YORK 10022
(212) 373-3000 (212) 906-8485
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: At such time or
times on and after which the Registration Statement becomes effective as the
Selling Stockholders may determine.
------------------------
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
------------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
------------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER SHARE PRICE REGISTRATION FEE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
6% Convertible Subordinated Notes due
2006............................... $175,000,000 100% $175,000,000 $48,650
- ---------------------------------------------------------------------------------------------------------------------------------
Common Stock, par value $0.01 per
share (1)............................ (2) -0- -0- -0-(3)
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The Common Stock includes common stock purchase rights (the "Rights"). The
Rights are associated with and trade with the Common Stock. The value, if
any, of the Rights will be reflected in the market price of the Common
Stock.
(2) Includes the shares of Common Stock initially issuable upon conversion of
the Convertible Notes at the rate of 24.3368 shares of Common Stock per
$1,000 principal amount of Convertible Notes. Pursuant to Rule 416 under the
Securities Act, such number of shares of Common Stock registered hereby
shall also include an indeterminate number of additional shares of Common
Stock that may be issued from time to time upon conversion of the
Convertible Notes by reason of adjustment of the conversion price in certain
circumstances outlined in the prospectus. See "Description of Convertible
Notes -- Conversion." Also includes such additional shares as may be issued
by reason of stock splits, stock dividends and similar transactions.
(3) Pursuant to Rule 457(i) under the Securities Act, there is no filing fee
with respect to the shares of Common Stock issuable upon conversion of the
Convertible Notes, because no additional consideration will be received in
connection with the exercise of the conversion privilege.
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 SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THE
SELLING SECURITYHOLDERS IDENTIFIED IN THIS PROSPECTUS MAY NOT SELL THESE
SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE
SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY
STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
Subject to completion, dated November 1, 1999
PROSPECTUS
CORECOMM LIMITED
-------------------------
6% CONVERTIBLE SUBORDINATED NOTES DUE 2006
AND SHARES OF COMMON STOCK
-------------------------
Selling securityholders who are identified in this prospectus may use this
prospectus to offer and sell an indeterminate number of:
- our 6% Convertible Subordinated Notes due 2006
- shares of our common stock which will be issued upon conversion of the
convertible notes
We will not receive any proceeds from the sale of convertible notes or
shares by the selling securityholders. The offering price for the convertible
notes is not set but will be determined according to negotiation between a
selling securityholder and the prospective purchaser. The offering price for the
common stock will be negotiated or, if sold on the Nasdaq National Market, at
the prevailing market price. We will pay all expenses (other than selling
commissions and fees and stock transfer taxes) of the registration and sale of
the convertible notes and the common stock.
Our common stock is traded on the Nasdaq National Market under the symbol
COMM. On October 28, 1999, the last reported sales price of the common stock was
$37.13 per share. There is no public market for the convertible notes, and we do
not intend to apply for listing of them on the Nasdaq National Market or any
other securities exchange or to seek approval for quotation of them through any
automated quotation system.
WE URGE YOU TO CAREFULLY READ THE "RISK FACTORS" SECTION BEGINNING ON PAGE
8, WHERE WE DESCRIBE SPECIFIC RISKS ASSOCIATED WITH THESE SECURITIES, BEFORE YOU
MAKE YOUR INVESTMENT DECISION.
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 PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is , 1999
<PAGE> 3
In this prospectus, the terms "Company," "CoreComm," "we," "us" and "our"
refer to CoreComm Limited and, unless the context requires otherwise, its
consolidated subsidiaries.
The term "Acquisitions" refers to the acquisitions of MegsINet Inc. and
certain assets of USN Communications, Inc. in May 1999, the assets of Stratos
Internet Group, Inc. in November 1998, the operating assets and related
liabilities of OCOM Corporation in June 1998, and Digicom, Inc. and the
operating assets of JeffRand Corp. (known as Wireless Outlet) in April 1998.
Neither the convertible notes nor the common stock have been recommended by
any federal or state securities commission or regulatory authority or the
Registrar of Companies of Bermuda or the Bermuda Monetary Authority.
Furthermore, these authorities have not confirmed that this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
-------------------------
WE HAVE NOT UNDERTAKEN ANY ACTION TO PERMIT A PUBLIC OFFERING OF THE SHARES
OUTSIDE THE UNITED STATES OR TO PERMIT THE POSSESSION OR DISTRIBUTION OF THIS
PROSPECTUS OUTSIDE THE UNITED STATES. PERSONS OUTSIDE THE UNITED STATES WHO COME
INTO POSSESSION OF THIS PROSPECTUS MUST INFORM THEMSELVES ABOUT AND OBSERVE ANY
RESTRICTIONS RELATING TO THE OFFERING OF THE SHARES AND THE DISTRIBUTION OF THIS
PROSPECTUS OUTSIDE OF THE UNITED STATES.
-------------------------
Smart LECSM is a service mark of CoreComm Limited.
<PAGE> 4
PROSPECTUS SUMMARY
This summary highlights information about us which is contained elsewhere
or incorporated by reference into this prospectus. This summary may not contain
all the information that is important to you. You should read the entire
prospectus, including the section entitled "Risk Factors" and the financial
statements and related notes, carefully before making a decision. Various
statements in this prospectus are forward-looking statements. Please refer to
the section entitled "Disclosure Regarding Forward-looking Statements." Smart
LEC(SM) is a service mark of CoreComm Limited.
CORECOMM LIMITED
We are a holding company whose main asset is our wholly-owned subsidiary,
CoreComm, Inc. We intend to pursue other opportunities (in addition to those
through CoreComm, Inc.) in the telecommunications industry as they arise.
CORECOMM, INC.
CoreComm, Inc. is an innovative communications company that provides
integrated telephone, Internet and data services to business and residential
customers in targeted markets throughout the United States. We are exploiting
the convergence of telecommunications and information services through our
"Smart Local Exchange Carrier," or "Smart LEC(SM)," network strategy and by
offering bundled packages of services which are intended to provide customers
greater choice, flexibility and value than typical offerings from other
operators. Our goal is to expand our facilities, geography and services to
become a leading switch-based communications provider in selected major markets
across the United States.
We currently offer local and long distance telephone, Internet access and
intend to offer high-speed data services to business and residential customers
located principally in the following states: Ohio, Illinois, Michigan, New York
and Massachusetts. As of June 30, 1999, we had a total of approximately 100,000
business and residential telephony access lines in service and approximately
80,000 Internet customers. We currently operate an asynchronous transport mode,
or "ATM," network, which connects more than 80 cities using approximately 20,000
route miles of leased broadband circuits, which we are expanding even further to
be national in scope. This will allow us to take advantage of economies of scale
in the delivery of voice, video and data. We have been developing our
multi-service offerings since 1996 and are in the process of expanding our
products to include high speed services utilizing Digital Subscriber Line, or
"DSL," technology. With DSL, a single copper loop can be used to deliver
telephony and high speed data services simultaneously. We are currently in
various stages of constructing our Smart LEC network in six of the largest
markets in the U.S., which represent approximately 18 million access lines.
Our success primarily depends upon our management's approach to our
network, back office and customer acquisition, as well as our ability to:
- target large, underserved segments in concentrated metropolitan areas,
addressing the underlying demand for consumer choice in traditional
telephony as well as growing demand for high-speed data services;
- capture multiple revenue streams through offering customers bundled
service offerings, differentiated from other providers;
- deliver "Internet Centric" product offerings and support to our
customers;
- leverage proven management talent; and
- utilize Smart LEC strategy to maximize speed to market and minimize
investment risk.
In May 1999, we completed two significant strategic acquisitions. We
acquired MegsINet Inc., a national Internet service provider with a national ATM
network and local telecommunications facilities in
1
<PAGE> 5
Chicago. We acquired MegsINet for $16.8 million in cash and 2.1 million shares
of common stock. In addition, we assumed or repaid $21.3 million of MegsINet
debt.
In addition to MegsINet, in May 1999, we acquired the wireline assets of
USN Communications, Inc., which was a competitive local exchange carrier that
operated on a resale basis. We purchased the USN assets for $26.4 million in
cash, warrants to purchase 525,000 shares of common stock and a potential
contingent payment to be paid in July 2000 (which is capped at $58.6 million).
The contingent payment is payable only if the USN assets meet or exceed
operating performance thresholds. We purchased the USN assets through the
bankruptcy court process.
Prior to our spinoff from Cellular Communications of Puerto Rico, Inc.,
which we refer to as "CCPR," in September 1998, CCPR contributed to us $181.0
million in cash, businesses, assets and licenses. The cash has been used to
finance our acquisitions of USN and MegsINet and for general corporate purposes.
In addition, we have issued shares of our common stock and options or warrants
to purchase our common stock in connection with those acquisitions, totaling
$43.2 million (as valued in accordance with GAAP). We have contributed all of
these assets to CoreComm, Inc., other than $40.0 million in cash.
-------------------------
Our common stock is listed on the Nasdaq National Market and trades under
the symbol "COMM." Our office is located at 110 East 59th Street, New York, New
York 10022, and our telephone number is (212) 906-8485. We also have offices at
Cedar House, 41 Cedar Avenue, Hamilton, HM, 12, Bermuda, (441) 295-2244.
2
<PAGE> 6
CORPORATE STRUCTURE
We are a Bermuda corporation that was formed in March 1998 as a subsidiary
of CCPR (formerly CoreComm Incorporated), which has since become a wholly-owned
subsidiary of SBC Communications, Inc. CCPR created us in order to pursue new
telecommunications opportunities. Prior to spinning us off, CCPR contributed to
us, which we then contributed to CoreComm, Inc., the operating assets of OCOM,
the capital stock of Digicom, the assets of Wireless Outlet and the subsidiary
that owns our LMDS licenses. CCPR spun us off in September 1998. We are a
holding company that conducts our operations through direct and indirect
subsidiaries.
The following chart sets forth our corporate structure:
[Flow Chart]
- ---------------
(1) We have other subsidiaries which are not material to our business.
(2) None of our subsidiaries are guaranteeing or providing credit support for
the convertible notes. We currently anticipate obtaining additional
financing at the subsidiary level in the future.
3
<PAGE> 7
THE OFFERING
Securities Offered............ Up to $175,000,000 aggregate principal amount
of our 6% Convertible Subordinated Notes due
2006 and up to 4,258,944 shares of our common
stock, plus such indeterminate number of
additional shares of common stock that may be
issued from time to time upon conversion of the
convertible notes by reason of adjustment to
the conversion price in certain circumstances
described in this prospectus.
Maturity...................... October 1, 2006
Interest...................... April 1 and October 1 of each year, commencing
April 1, 2000
Conversion.................... The convertible notes, unless previously
redeemed, will be convertible at the option of
the holder of them at any time after 90 days
following the date of their original issuance
and prior to maturity into shares of common
stock at a conversion price of $41.09 per
share, subject to adjustment in certain events.
Please refer to the section entitled
"Description of Convertible
Notes -- Conversion."
Optional Redemption........... On or after October 1, 2002, we may redeem some
or all of the convertible notes at any time at
the redemption prices, and subject to certain
limitations, described in the section
"Description of Convertible Notes" under the
heading "Optional Redemption."
Ranking....................... The convertible notes are general unsecured
obligations ranking junior to all of our
existing and future senior debt (as we define
it in this prospectus). In addition, they will
effectively rank behind all of our secured
debts to the extent of the value of the assets
securing those debts and all existing and
future debts and other liabilities of our
subsidiaries. As of June 30, 1999, assuming we
had completed this offering, the convertible
notes would have been effectively subordinated
to $19.9 million of indebtedness of our
subsidiaries and $48.4 million of other
liabilities of our subsidiaries.
As of June 30, 1999, CoreComm Limited had no
senior debt or secured debt outstanding. The
indenture governing the convertible notes does
not limit the amount of indebtedness that we or
our subsidiaries may incur in the future.
Change of Control............. If we experience specific kinds of changes in
control, we must offer to repurchase the
convertible notes at the prices listed in the
section "Description of Convertible Notes"
under the heading "Repurchase at the Option of
Holders."
Risk Factors.................. Please refer to "Risk Factors" for a discussion
of certain factors that should be considered in
evaluating an investment in the convertible
notes.
Use of Proceeds............... The selling securityholders will receive all of
the net proceeds from the sale of the offered
securities sold pursuant to this
4
<PAGE> 8
prospectus. We will not receive any proceeds
from sales by the selling securityholders of
the offered securities.
United States Federal Tax
Considerations.............. There are certain federal income tax
considerations associated with purchasing,
holding and disposing of the convertible notes
and our common stock. Please refer to "Certain
United States Federal Tax Considerations."
5
<PAGE> 9
SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The historical financial information presented below of the Company and its
predecessor, the operating assets of OCOM Corporation, which we refer to as the
"OCOM Corporation Telecoms Division," was derived from the consolidated
financial statements and the related notes included in this prospectus.
Operating results for the six months ended June 30, 1999 are not necessarily
indicative of the results that may be expected for the year ended December 31,
1999. The unaudited pro forma financial information gives effect to the
Acquisitions. The unaudited pro forma financial information is not necessarily
indicative of the actual results of operations that would have occurred had the
Acquisitions actually occurred on the assumed dates or expected future results.
You should read the following information in conjunction with the sections
entitled "Capitalization," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Unaudited Pro Forma Financial
Information," the consolidated financial statements and the related notes and
the other financial data appearing in this prospectus.
<TABLE>
<CAPTION>
HISTORICAL
----------------------------------------------------
THE PREDECESSOR
PRO FORMA COMPANY (OCOM)
----------------------------- ---------------------------------- ---------------
FOR THE PERIOD FROM
APRIL 1, 1998
SIX MONTHS SIX MONTHS (DATE OPERATIONS FOR THE
ENDED YEAR ENDED ENDED COMMENCED) TO PERIOD FROM
JUNE 30, DECEMBER 31, JUNE 30, DECEMBER 31, JANUARY 1, 1998
1999 1998 1999 1998(1) TO MAY 31, 1998
------------ -------------- ------------ ------------------- ---------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues....................... $ 55,736 $ 148,174 $ 16,032 $ 6,713 $ 1,452
Costs and expenses
Operating expenses........... 51,674 131,205 14,150 5,584 772
Selling, general and
administrative
expenses.................. 46,339 204,210 19,520 18,575(2) 3,205
Depreciation and
amortization.............. 8,968 13,656 2,882 980 257
Corporate expenses........... 4,143 -- 4,143 -- --
Nonrecurring charges......... -- 28,987(3) -- -- --
-------- --------- -------- -------- -------
Total costs and
expenses................ 111,124 378,058 40,695 25,139 4,234
-------- --------- -------- -------- -------
Operating loss................. (55,388) (229,884) (24,663) (18,426) (2,782)
Other income (expense), net.... 654 1,512 2,087 2,171 --
-------- --------- -------- -------- -------
Net loss....................... $(54,734) $(228,372) $(22,576) $(16,255) $(2,782)
======== ========= ======== ======== =======
Basic and diluted net loss per
share........................ $ (2.45) $ (10.43) $ (1.11) $ (.82) $ (.14)
Weighted average shares........ 22,331 21,896 20,421 19,785 19,776
OTHER DATA:
Capital expenditures........... N/A N/A $ 7,255 $ 2,344 $ 623
EBITDA(4)...................... $(42,277) $(187,241) $(17,638) $(12,860) $(2,525)
</TABLE>
6
<PAGE> 10
<TABLE>
<CAPTION>
AS OF JUNE 30, 1999
----------------------------
HISTORICAL AS ADJUSTED(5)
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and marketable securities............ $ 76,145 $244,833
Working capital............................................. 40,383 209,071
Fixed assets -- net......................................... 68,570 68,570
Total assets................................................ 271,205 446,205
Subsidiary debt and capital lease obligations (includes
current portion).......................................... 19,947 19,947
Convertible notes........................................... -- 175,000
Stockholders' equity........................................ 201,068 201,068
</TABLE>
- ---------------
(1) During the period from April 1, 1998 (date operations commenced) to December
31, 1998, CCPR made the following contributions to us prior to our spin-off
by CCPR: (a) businesses acquired by CCPR in April and June 1998 and (b) the
subsidiary that owns various LMDS licenses in Ohio that were acquired for an
aggregate of $25.2 million.
(2) Includes a compensation charge of $4.6 million from the issuance of our
stock options for the period from April 1, 1998 (the date our operations
commenced) to December 31, 1998.
(3) Nonrecurring charges were incurred by USN during the year ended December 31,
1998, primarily related to a restructuring plan.
(4) EBITDA consists of earnings (loss) before income taxes plus net interest
expense and depreciation and amortization expense. It also excludes
compensation charge from the issuance of stock options, corporate expenses
and nonrecurring charges. You should not think of EBITDA as an alternative
measure of operating results or cash flows from operating activities, as
determined in accordance with generally accepted accounting principles. We
have included EBITDA because it is a widely used financial measure of the
potential capacity of a company to incur and service debt. Our reported
EBITDA may not be comparable to similarly titled measures used by other
companies.
(5) The as adjusted balance sheet information gives effect to the offering of
convertible notes.
7
<PAGE> 11
RISK FACTORS
You should consider carefully all of the information set forth in this
prospectus and incorporated by reference in this prospectus. Please refer to
"Where You Can Find More Information About Us." You should particularly evaluate
the following risks before deciding to purchase the convertible notes or the
common stock issuable upon conversion of the convertible notes. Various
statements in this prospectus (including some of the following factors)
constitute forward-looking statements. Please refer to the section entitled
"Disclosure Regarding Forward-looking Statements."
RISK FACTORS RELATING TO THE CONVERTIBLE NOTES
OUR SUBSTANTIAL INDEBTEDNESS COULD ADVERSELY AFFECT OUR FINANCIAL HEALTH AND
PREVENT US FROM FULFILLING OUR OBLIGATIONS UNDER THE CONVERTIBLE NOTES.
We have substantial debt and debt service obligations. As of June 30, 1999,
we would have had $194.9 million of consolidated indebtedness outstanding and
$201.1 million of stockholders' equity giving effect to the issuance of the
convertible notes. We are also currently negotiating with equipment
manufacturers for significant vendor financing. In addition, from time to time,
we may pursue additional debt financing arrangements. The indenture governing
the convertible notes does not restrict our or our subsidiaries' ability to
incur additional indebtedness.
The substantial amount of debt that we have and that we or our subsidiaries
may incur in the future could have important consequences for you. For example,
it could:
- make it more difficult for us to satisfy our obligations with respect to
the convertible notes;
- limit our ability to obtain additional financing, if we need it, for
working capital, capital expenditures, acquisitions, debt service
requirements or other purposes;
- increase our vulnerability to adverse economic and industry conditions;
- require us to dedicate a substantial portion of our cash flow from
operations to payments on our debt, thereby reducing funds available for
operations, future business opportunities or other purposes;
- limit our flexibility in planning for, or reacting to, changes in our
business and the industry in which we compete; and
- place us at a competitive disadvantage compared to our competitors that
have less debt.
THE CONVERTIBLE NOTES ARE SUBORDINATED AND UNSECURED.
The convertible notes are general unsecured obligations ranking junior to
all our existing and future senior debt. In addition, the convertible notes are
effectively junior to all our existing and future secured indebtedness to the
extent of the value of the assets securing that indebtedness. As a result of
this subordination, in the event of our bankruptcy, liquidation or
reorganization or certain other events, our assets will be available to pay
obligations on the convertible notes only after all of our senior debt (as
defined in this prospectus) and all of our secured debt, to the extent of the
value of the assets securing that debt, has been paid in full, and there may not
be sufficient assets remaining to pay amounts due on any or all of the
convertible notes then outstanding. In addition, to the extent our assets cannot
satisfy in full the secured indebtedness, the holders of the secured
indebtedness would have a claim for any shortfall that would rank equally in
right of payment with the convertible notes. The indenture governing the
convertible notes does not prohibit or limit our or our subsidiaries' incurrence
of additional debt, including senior debt or secured debt, and the incurrence of
any such additional indebtedness could adversely affect our ability to pay our
obligations on the convertible notes.
8
<PAGE> 12
Please refer to the section entitled "Description of Convertible
Notes -- Subordination of Convertible Notes."
BECAUSE WE ARE A HOLDING COMPANY, YOUR RIGHT TO RECEIVE PAYMENT ON THE
CONVERTIBLE NOTES IS EFFECTIVELY JUNIOR TO OUR SUBSIDIARIES' EXISTING
INDEBTEDNESS AND POSSIBLY TO ALL OF OUR FUTURE BORROWINGS, AND PAYMENT ON THE
CONVERTIBLE NOTES EFFECTIVELY DEPENDS ON RECEIVING INCOME FROM OUR
SUBSIDIARIES WHICH HAVE NO OBLIGATIONS TO MAKE ANY PAYMENTS ON THE CONVERTIBLE
NOTES.
We are a holding company and we conduct our operations entirely through our
subsidiaries. We have few assets of significance other than the capital stock of
CoreComm, Inc. and our other subsidiaries. Consequently, we are dependent upon
dividends or other intercompany transfers of funds from our direct and indirect
subsidiaries to meet our debt service obligations, including those related to
the convertible notes. Our subsidiaries are separate legal entities that have no
obligation to pay any amounts due under the convertible notes. Our subsidiaries
do not guarantee the payment of the convertible notes. Furthermore, our
subsidiaries are not obligated to make funds available to us, and creditors of
our subsidiaries will have a superior claim to our subsidiaries' assets. In
addition, our subsidiaries' ability to make any payments to us will depend on
their earnings, the terms of their indebtedness, business and tax considerations
and legal restrictions.
Our subsidiaries are permitted to enter into various debt agreements that
restrict their ability to pay dividends, make advances or otherwise distribute
funds to us. We cannot assure you that CoreComm, Inc. or any of our other
subsidiaries will be able to pay dividends or otherwise distribute funds to us
in an amount sufficient to pay the principal of or interest on the convertible
notes.
The convertible notes are effectively junior in right of payment to all of
our subsidiaries' existing or future indebtedness and other liabilities. As of
June 30, 1999, our subsidiaries had $19.9 million of indebtedness and $48.4
million of other liabilities. Our subsidiaries intend to incur significant
indebtedness in the future (including vendor financing described in the section
entitled "Description of Our Other Indebtedness"). The indenture governing the
convertible notes permit our subsidiaries to incur indebtedness and other
liabilities without restriction. If indebtedness is issued by a subsidiary, the
holders' claim for any shortfall would effectively rank senior to the
convertible notes with respect to such subsidiary's assets. Accordingly, there
might only be a limited amount of assets available to satisfy your claims as a
holder of the convertible notes upon an acceleration of the maturity of the
convertible notes.
RESTRICTIONS IMPOSED BY OUR DEBT AGREEMENTS MAY SIGNIFICANTLY LIMIT OUR
ABILITY TO EXECUTE OUR BUSINESS STRATEGY AND INCREASE THE RISK OF DEFAULT
UNDER OUR DEBT OBLIGATIONS.
Any debt instruments for future indebtedness incurred by us or our
subsidiaries are expected to contain a number of covenants which may
significantly limit our or our subsidiaries' ability to, among other things:
- borrow additional money;
- make capital expenditures and other investments;
- pay dividends;
- merge, consolidate or dispose of our assets; and
- enter into transactions with related entities.
In addition, in the future our debt instruments or those of our
subsidiaries may contain financial maintenance covenants. If we fail to comply
with these covenants, we will be in default under the applicable debt
instrument. A default, if not waived, could result in acceleration of our
indebtedness, in which case the debt would become immediately due and payable.
If this occurs, we may not be able to repay our debt or borrow sufficient funds
to refinance it. Even if new financing is available, it may not be on terms that
are acceptable to us. In addition, complying with these covenants may cause us
to take actions that we otherwise would not take, or not take actions that we
otherwise would take. Please refer to the section entitled "Description of
Convertible Notes -- Certain Covenants."
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YOU MAY FIND IT DIFFICULT TO SELL YOUR CONVERTIBLE NOTES.
The initial purchasers of the convertible notes informed us that they
currently intend to make a market in the convertible notes. However, they are
not obligated to do so and any such market making may be discontinued at any
time without notice. We do not intend to apply for listing of the convertible
notes on any securities exchange or to seek approval for quotation through any
automated quotation system. Accordingly, we cannot assure you about the ongoing
development or liquidity of any market for the convertible notes. If an active
public market for the convertible notes does not develop or is interrupted, the
market price and liquidity of the convertible notes may be adversely affected.
The liquidity of any market for the convertible notes will depend upon
various factors, including:
- the number of holders of the convertible notes;
- the interest of securities dealers in making a market for the convertible
notes;
- the performance of the common stock into which the convertible notes may
be converted;
- our financial performance and prospects; and
- our industry's general outlook.
WE MAY BE UNABLE TO PAY OUR DEBT OBLIGATIONS IF A CHANGE OF CONTROL OCCURS
UNDER THE INDENTURE.
Upon certain change of control events, holders of the convertible notes may
require us to repurchase all or a portion of their convertible notes at a
purchase price equal to 101% of the principal amount of the convertible notes,
plus any additional amounts and any accrued and unpaid interest on the
convertible notes. Our ability to repurchase the convertible notes upon a change
of control event will be limited by the terms of our other debt agreements, if
any, and the debt agreements of our subsidiaries. Upon such a change of control
event, we may also be required immediately to repay the outstanding principal
and other amounts owed by us under our other financing agreements. In
particular, our subsidiaries could be required in the future to make a
repurchase offer to the holders of any indebtedness.
We may not be able to repay amounts outstanding under our other financing
agreements or the financing agreements of our subsidiaries, repurchase any
indebtedness of our subsidiaries or obtain necessary consents, if any, to
repurchase the convertible notes. Any requirement to offer to purchase the
convertible notes may result in our having to refinance our outstanding
indebtedness, which we may not be able to do. In addition, even if we were able
to refinance that debt, the financing may be on unfavorable terms.
RISK FACTORS RELATING TO THE COMMON STOCK
OUR ANTI-TAKEOVER DEFENSE PROVISIONS MAY DETER POTENTIAL ACQUIRORS AND MAY
DEPRESS OUR STOCK PRICE.
Our 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 us. These
provisions include the following:
- we may issue preferred stock with rights senior to those of our common
stock;
- we have a classified board of directors;
- our by-laws prohibit action by written consent by shareholders; and
- we require advance notice for nomination of directors and for shareholder
proposals.
The indenture for the convertible notes also contains 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 us. These
provisions would require us to make an offer to purchase all of the convertible
notes. Provisions such as these in our or our subsidiaries' indebtedness may
decrease the likelihood that stockholders will receive a possibly substantial
premium for their shares over then current market prices,
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and may limit the ability of stockholders to approve transactions that they may
deem to be in their best interest.
In addition, under our shareholder rights plan, holders of our 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 in this prospectus. The
preferred share purchase rights have the anti-takeover effect of causing
substantial dilution to a person or group that attempts to acquire us on terms
not approved by our board of directors. Those 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 our common stock. Please refer to the section entitled "Description of
the Capital Stock."
RESTRICTIONS ON DIVIDENDS.
We have never paid cash dividends on our common stock. In addition, the
payment of any dividends by us in the future will be at the discretion of our
board of directors and will depend upon, among other things, future earnings,
operations, capital requirements, our general financial condition, the general
financial condition of our subsidiaries and general business conditions.
In addition, our or our subsidiaries' future debt instruments may restrict
our payment of dividends or the payment of dividends or distributions to us by
our subsidiaries. Please refer to the sections entitled "--We expect to continue
to incur negative cash flow from operations and net losses. Specifically, we
expect our revenues from the USN assets will decline significantly" and
"Dividend Policy."
THE MARKET PRICE OF OUR COMMON STOCK AND THE CONVERTIBLE NOTES COULD BE
VOLATILE.
The market price of our common stock has been subject to volatility and, in
the future, the market price of our common stock and the convertible notes could
fluctuate widely in response to numerous factors, many of which are beyond our
control. These factors include, among other things, actual or anticipated
variations in our operating results, earnings releases by us and our
competitors, announcements of technological innovations, changes in financial
estimates by securities analysts, market conditions in the industry and the
general state of the securities markets, governmental legislation or regulation,
currency and exchange rate fluctuations, as well as general economic and market
conditions, such as recessions.
RISK FACTORS RELATING TO OUR BUSINESS
WE HAVE HAD MOSTLY NEW OR LIMITED OPERATIONS.
We have only recently begun to develop the requisite staff and plans
necessary to effectively manage and operate our businesses, which include:
- Smart LEC 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, including Centrex
service, which is centralized telecommunications for office buildings,
and
- Internet Service Provider Business;
- LMDS, which is a wireless system for delivery of multiple
telecommunications and television services; and
- Other businesses, including landline long distance service, paging and
cellular telephone service.
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.
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WE DO NOT HAVE MUCH HISTORY OPERATING AS AN INDEPENDENT COMPANY, WHICH MEANS
THAT FUTURE OPERATING RESULTS MAY DIFFER FROM THOSE PRESENTED HERE.
We were formed from various previously owned subsidiaries of another
company, CCPR, as well as from other independent businesses, and have only
approximately one 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.
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 services;
- 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
company.
WE EXPECT TO CONTINUE TO INCUR NEGATIVE CASH FLOW FROM OPERATIONS AND NET
LOSSES. SPECIFICALLY, WE EXPECT OUR REVENUES FROM THE USN ASSETS WILL DECLINE
SIGNIFICANTLY.
On a pro forma basis giving effect to the Acquisitions, we had net losses
for the six months ended June 30, 1999 and for the fiscal year ended December
31, 1998 of $54.7 million and $228.4 million, respectively. Capital and
operating expenditures for our Smart LEC network and other businesses will
result in negative cash flow, which we expect will continue at least until we
establish an adequate customer base. We also expect to incur substantial future
operating losses, and we cannot assure you that we will achieve or sustain
profitability in the future. If we fail to become profitable, it could adversely
affect our ability to sustain our operations and to obtain additional required
funds. In addition, failing to become profitable would adversely affect our
ability to pay the required payments on the convertible notes and our other
indebtedness. Please refer to the section entitled "-- Risk Factors Relating to
the Convertible Notes."
We expect that our revenues from our recently acquired USN assets will
decline significantly over the next several months as customers continue to
leave or "churn" off the service. Until we are satisfied with the quality of the
USN operations, we do not intend to actively sell additional lines through USN.
Thus, we expect an extended period of revenue declines associated with the USN
assets. The decline could be 40% of revenues or more compared with the first
half of fiscal year 1999 on an annualized basis. For more information, please
refer to the section entitled "Unaudited Pro Forma Financial Information."
WE MAY NOT BE ABLE TO SUCCESSFULLY IMPLEMENT OUR BUSINESS STRATEGY BECAUSE
DOING SO DEPENDS ON FACTORS BEYOND OUR CONTROL, WHICH COULD ADVERSELY AFFECT
OUR RESULTS OF OPERATIONS.
Our success depends on our ability to implement our business strategy in
order to increase our earnings and cash flow. Our results of operations and cash
flow will be adversely affected if we cannot fully implement our business
strategy. Successful implementation depends on factors specific to the
telecommunications industry and numerous other factors beyond our control. These
include changes in:
- general economic conditions;
- adverse changes in local markets;
- lack of attractiveness of a particular product;
- evolving consumer preferences;
- federal, state and local regulations;
- risks of product tampering; and
- our continued ability to hire and retain qualified management personnel.
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In addition, because of these and other factors, we may not be able to
construct our Smart LEC network within the time periods and costs described in
this prospectus. If we cannot construct our Smart LEC network or if there are
delays or cost overruns, our business, financial condition and results of
operations will be adversely affected.
TO DEVELOP OUR BUSINESS, FUND OUR CAPITAL COMMITMENTS AND SERVICE OUR
INDEBTEDNESS AND OTHER OBLIGATIONS, WE WILL REQUIRE A SIGNIFICANT AMOUNT OF
CASH.
The continued development, construction and operation of our business
requires substantial capital. Our Smart LEC strategy requires large amounts of
capital to build and maintain our network, which includes building through
acquisitions. In addition, our businesses that resell services provided by
larger, facilities-based companies, will require additional money to acquire new
customers and to finance our support of these new customers. Our businesses will
also require additional billing, customer service and other back-office
expenditures.
We cannot currently estimate the amount of the development costs of our
LMDS services. We anticipate, however, that the costs will be several times the
$25.2 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 building LMDS
networks for there to be a standard for costs of equipment, such as transmitters
needed to broadcast signals and receivers to receive the broadcasts.
In addition, we will require significant amounts of capital to finance our
other capital expenditures, meet our operating costs and meet all of our debt
service and other obligations as they become due, including a potential
contingent cash payment in July 2000 in connection with our acquisition of
certain assets of USN.
We intend to fund these requirements from cash, cash equivalents and
marketable securities on hand, future issuances of debt and equity and funds
internally generated by our operations. In particular, we expect our business to
depend on our ability to raise debt and equity through financings in the public
and private markets. We cannot give you any assurance that sufficient resources
will be available to meet our expected requirements and obligations. None of our
subsidiaries guaranteed or provided any credit support for the convertible
notes. Please refer to the section entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
As a result, we cannot assure you that we will be able to repay our
indebtedness, including the convertible notes. Accordingly, we may be required
to consider a number of measures, including:
- limiting or eliminating certain of our business projects, including,
without limitation, our entry into additional markets;
- refinancing all or a portion of our debt;
- seeking modifications of the terms of our debt;
- seeking additional debt financing, which would be subject to obtaining
necessary lender consents;
- seeking additional equity financing; or
- a combination of these measures.
We cannot assure you that any of the possible measures can be accomplished,
or can be accomplished in sufficient time to make timely payments with respect
to our indebtedness. In addition, we cannot assure you that any measures can be
accomplished on terms which are favorable to us and our subsidiaries.
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WE MAY NOT BE ABLE TO ASSIMILATE OUR RECENT ACQUISITIONS OR TO SUCCESSFULLY
IDENTIFY, MANAGE AND ASSIMILATE FUTURE ACQUISITIONS, INVESTMENTS AND STRATEGIC
ALLIANCES. FAILING TO DO SO WOULD ADVERSELY AFFECT OUR RESULTS OF OPERATIONS.
We entered into the Acquisitions to strengthen our positions in the
provision of both Internet and telephone services and to create the opportunity
for potential cost savings. Achieving the benefits of the Acquisitions will
depend in part on integrating technology, operations and personnel in a timely
and efficient manner to minimize the risk that the Acquisitions will result in
the unplanned 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 Acquisitions will not result in adverse changes in client
service standards or business focus and persuade our personnel that our business
cultures are compatible. We cannot assure you that the Acquisitions 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 our
business, financial condition and operating results.
In the future, we may acquire or try to acquire products and businesses
from, make investments in, or enter into strategic alliances with, companies
which have products or distribution networks in our current markets or in areas
into which we intend to expand our network. Any future acquisitions,
investments, strategic alliances or related efforts will be accompanied by risks
such as:
- the difficulty of identifying appropriate acquisition candidates;
- the difficulty of assimilating the operations of the respective entities;
- the potential disruption of our ongoing business;
- the inability of management to capitalize on the opportunities presented
by acquisitions, investments, strategic alliances or related efforts;
- the failure to successfully incorporate licensed or acquired trademarks
and technology rights into our manufacturing and distribution of our
products;
- the inability to maintain uniform standards, controls, procedures and
policies; and
- the impairment of relationships with employees and customers as a result
of changes in management.
We cannot assure you that we would be successful in overcoming these risks
or any other problems encountered with these acquisitions, investments,
strategic alliances or related efforts. Please refer to the sections entitled
"Business -- Business Strategy" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Acquisitions."
WE DEPEND ON THE SERVICES OF A SMALL NUMBER OF KEY MANAGEMENT PEOPLE.
We believe that our success depends to a significant extent upon the
abilities and continued efforts of our senior management, including George S.
Blumenthal, our Chairman of the Board of Directors, J. Barclay Knapp, our
President, Chief Executive Officer and Chief Financial Officer and Patty J.
Flynt, our Senior Vice President and Chief Operating Officer. 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 several members of
senior management are officers and/or directors of other companies and that none
of these individuals have entered into employment agreements with us.
MANY OF OUR OFFICERS AND DIRECTORS FACE POTENTIAL CONFLICTS OF INTEREST
BECAUSE THEY ARE OFFICERS AND DIRECTORS OF OTHER COMPANIES IN THE
TELECOMMUNICATIONS INDUSTRY, WHICH COULD IMPEDE THEIR ABILITY TO MAKE
DECISIONS FOR US. SOME OF OUR OFFICERS AND OTHER EMPLOYEES ARE EMPLOYED BY OUR
AFFILIATES.
Many of our directors and officers are also directors and officers of other
companies in our industry and some are employed by our affiliates. In addition,
some of our officers and all of our directors are also officers and directors of
NTL Incorporated, which is a telecommunications company that has historical ties
to us. From time to time, opportunities may arise that would be pursued by one
or more of these
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companies and us at the same time. In addition, as described in "Certain
Relationships and Related Transactions," we and NTL have entered into various
transactions and service arrangements. Because all of our directors are
directors of NTL, decisions about these opportunities or transactions 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 stockholders under the law.
Furthermore, many of our officers and employees allocate their business
time among us and NTL. These officers and employees will not be available on a
full-time basis to us in the future and they may have duties to these other
companies which may interfere with their duties to us.
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.
CLEC
In each of our markets, we face competition from larger, better capitalized
incumbent local exchange carriers, or "ILECs," including Ameritech and Bell
Atlantic, as well as other providers of telecommunications services, such as
GTE, other CLECs and cable television companies. We also face competition or
prospective competition from other telecommunications companies. 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, some of our
competitors, including AT&T, MCI WorldCom and Sprint, have entered into
interconnection agreements with Ameritech to provide local exchange service in
states in which we currently operate.
In addition to these long distance carriers, entities that currently offer
or are potentially capable of offering switched telecommunications services
include:
- other CLECs;
- other long distance carriers;
- wireless telephone system operators;
- large customers who build private networks;
- cable television companies; and
- other utilities.
Competition in the CLEC business will continue to intensify in the future
due to the increase in the size, resources and number of market participants.
Many facilities-based CLECs have committed substantial resources to building
their networks or to purchasing CLECs or inter-exchange carriers, 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, or "RBOCs," a facilities-based provider can
offer single source local and long distance services similar to those we offer.
These additional alternatives may provide these competitors with greater
flexibility and a lower cost structure than ours. 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 ours. These combined entities may provide a bundled package of
telecommunications products, including local and long distance telephone, that
is in direct competition with the products offered or planned to be offered by
us.
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INTERNET
The Internet services market is extremely competitive. 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 Internet Service Providers, or "ISPs," such
as MindSpring, Rocky Mountain Internet and Internet America;
- national telecommunications companies, such as AT&T and GTE;
- RBOCs, such as Ameritech and Bell Atlantic; and
- online cable services, such as Excite@Home and Roadrunner.
This competition will increase 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. As a result, our businesses may suffer.
Our DSL service offering will also face competition from traditional
telephone companies, cable modem service providers, competitive
telecommunications companies, traditional and new national long distance
carriers, other Internet service providers, on-line service providers and
wireless and satellite service providers. Many of these competitors have longer
operating histories, greater name recognition and better strategic relationships
than we do.
LMDS
Depending on the services ultimately offered through our LMDS business, it
could face the same competition as our CLEC business. In addition, to the extent
that it is used to deliver pay television, our planned LMDS business will
compete with franchised cable television systems and may face competition from
several other types of multichannel video service providers, "MVPDs," 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; and
- open video system operators.
MVPDs face competition from other sources of entertainment, such as movie
theaters and computer on-line (including Internet) services. Further, premium
movie services offered by MVPDs have encountered significant competition from
the home video industry. In areas where several off-air television broadcasts
can be received without the benefit of terrestrial distribution systems, MVPDs
have experienced competition from such broadcasters. Online services and ISPs
also serve as a source of competition to MVPDs.
The Telecommunications Act relaxed the regulatory barriers to entry by
ILECs into the provision of video programming in their local telephone service
areas, and substantially reduced current and future regulatory burdens on
franchised cable television systems, thus potentially resulting in significant
additional competition to LMDS operators from local telephone companies and
franchised cable television systems.
OTHER BUSINESSES
In addition to our CLEC, Internet and LMDS businesses, our other businesses
face strong competition as well. These competitive businesses include long
distance service, cellular service and paging service. Our long distance service
faces competition from long distance carriers, including facilities-based
carriers such as AT&T, MCI WorldCom and Sprint and resellers of long distance
service. Our cellular
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service faces competition from other cellular carriers, such as VodaFone
AirTouch and AT&T, and from "personal communications service", or "PCS,"
carriers, such as Sprint PCS. Our paging services are similarly exposed to
competition from other providers of paging services operating in the same local
markets, regionally or nationally.
GENERAL
Some of our present competitors and potential future competitors may have
greater financial, technical, marketing, personnel and other resources than us.
The competitive environment could have a variety of adverse effects on us. 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 our ability to generate greater revenues and profits
from sources other than our core local and long distance telephone,
cellular and Internet service businesses;
- limit our ability to develop new products and services;
- limit our ability to continue to grow our subscriber base; and
- result in attrition in our subscriber base.
Any of the above 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 our business, financial condition and operating
results.
OUR RELIANCE ON ILECS AND OTHER FACILITIES-BASED PROVIDERS OF
TELECOMMUNICATIONS SERVICES AND CHANGES TO OUR AGREEMENTS WITH SUCH PROVIDERS
COULD HAVE A MATERIAL ADVERSE EFFECT ON US.
We depend upon our agreements with the ILECs operating in our existing and
targeted markets. There are two primary types of agreements we enter into with
these providers:
- Interconnection agreements, which specify how we connect our network with
the network of the ILECs in each of our markets; and
- Resale agreements, through which we provide telecommunications services
on a resale basis.
Federal legislation regulating the telecommunications industry has enhanced
competition in the local service market by requiring the ILECs to provide access
to their networks through interconnection agreements and to offer unbundled
elements of their network and retail services at prescribed rates to other
telecommunications carriers. 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. We are presently renegotiating two of our interconnection agreements
under "renegotiation clauses" that either we or the ILECs have invoked.
Our interconnection agreements require the ILECs to provide sufficient
transmission capacity to keep blocked calls between our networks within industry
limits. Accordingly, we are partially dependent on the ILECs in our efforts to
provide our customers with superior service and avoid blocked calls. The failure
by the ILECs to comply with their obligations under our interconnection
agreements could result in customer dissatisfaction and the loss of existing and
potential customers. In addition, the rates charged to us under the
interconnection agreements may limit our flexibility to price our services at
rates that are low enough to attract a sufficient number of customers and permit
us to operate profitably.
Interconnection agreements are subject to review and approval by various
federal and state regulators. In addition, parties to the agreements may seek to
have the agreements modified based upon the outcome of regulatory or judicial
rulings occurring after the dates of the agreements. The outcome of these
rulings, or any modified agreements, could have a material adverse effect on us.
In addition, certain aspects of interconnection agreements, including the price
and economic terms of these agreements, have been subject to litigation and
regulatory action. Please refer to the section entitled "Regulation."
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We rely on telecommunications carriers to transmit our traffic over local
and long distance networks. Our dependence on other facilities-based carriers
means that we depend on the quality and condition of their networks. These
networks may experience disruptions that are not easily remedied. Thus, the
following conditions of the facilities-based carriers could cause interruption
in service and/or reduced capacity for our customers:
- physical damage;
- power loss; and
- software defects (including the inability to update their systems to be
Year 2000 compliant).
We depend upon cooperation with the ILECs and other providers for the
provision and repair of transmission facilities and to provide the services and
network components that we order. We may not be able to obtain the facilities
and services we require at satisfactory quality levels, rates, terms and
conditions, which could delay the buildout of our networks and degrade the
quality of service to our subscribers. In particular, we will depend upon the
quality of copper lines owned by telephone companies that deliver services to
our end users. Particularly sensitive to the quality of these lines will be our
planned DSL offering. The quality of service we will be able to provide through
that offering will depend in part on the quality of the copper lines.
In addition, we depend on certain suppliers of network services, 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.
The pace at which are able to add new customers and services could be
adversely affected if the ILECs do not provide us with necessary network
elements, collocation space, intercompany network connections and the means to
share information about customer accounts, service orders and repairs on a
timely basis. In addition, our ability to provide high-speed data services
through technologies such as DSL will be dependent on our obtaining space from
the various ILECs for collocation of our equipment in the ILECs' central offices
and elsewhere. In many instances the ILECs do not timely or fully comply with
these requirements. Also, the rules governing which elements the ILECs must
provide and the cost methodology for providing these elements are currently
under FCC and judicial review.
In the event that our long distance carriers are unable to handle the
growth in customer usage, we could try to transfer traffic to a carrier with
sufficient capacity, but we cannot be sure that additional capacity will be
available. If any of the local exchange carriers are unable to handle the growth
in customer usage, 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 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.
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 ability to bill our customers and, therefore, on our operating
results. Please refer to the section entitled "Business."
THE TELECOMMUNICATIONS INDUSTRY IS HIGHLY REGULATED BY THE FEDERAL GOVERNMENT
AND BY STATE GOVERNMENTS, AND POTENTIAL REGULATORY CHANGES COULD HAVE AN
ADVERSE EFFECT ON OUR OPERATIONS.
CLEC AND OTHER BUSINESSES
In our telephony businesses, 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. The FCC is currently considering various aspects of
local exchange competition, including pricing flexibility for ILECs with regard
to interstate access charges
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assessed on IXCs, universal service payments, eligibility to provide universal
service, access to telecommunications services by persons with disabilities,
telephone number portability, rates for resold services and unbundled network
elements, availability of various ILEC network elements, access to advanced
services (e.g., DSL) provided by ILECs, and reciprocal compensation for calls to
ISPs. An unfavorable decision on any one of these items could decrease our
revenues, increase our costs, and make it more difficult to attract and retain
customers. It is impossible to determine at this time how the FCC will rule on
any of these issues.
INTERNET
We provide Internet services through data transmissions over public
telephone lines and their networks. These transmissions are subject to
regulation of the FCC and state public utility commissions described above. As
an Internet service 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
online distribution of obscene materials. The law in this area is unsettled and
there may be new legislation and court decisions that expose ISPs 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, taxation,
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.
BECAUSE OF THE FAST PACE OF TECHNOLOGICAL CHANGE IN THE TELECOMMUNICATIONS
INDUSTRY, THERE IS A RISK THAT WE WILL FALL BEHIND OR WILL FAIL TO
SUCCESSFULLY ADDRESS CHANGE, WHICH COULD HARM OUR ABILITY TO COMPETE AND COULD
MATERIALLY AND ADVERSELY AFFECT OUR BUSINESS AND RESULTS OF OPERATIONS.
The telecommunications industry is subject to rapid and significant changes
in technology. We cannot predict the effect of technological changes on our
business. However, the cost of implementing emerging and future technologies may
be significant, and our ability to fund the implementation of those technologies
will depend on our ability to obtain additional financing.
The Internet services market is characterized by rapid technological
change, 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, develop our technical
expertise, enhance our existing services and 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 telecommunications industry. Our
failure to respond in a timely, cost-efficient 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
19
<PAGE> 23
interruptions, delays or cessation in service to our members, which could cause
them to terminate their membership or assert claims against us.
OUR INTERNET 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, 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.
OUR SERVICES DEPEND UPON OUR NETWORK INFRASTRUCTURE.
Success in our businesses depends, in part, on the capacity, reliability
and security of our Smart LEC network infrastructure. Currently, we provide
Internet service over our own network and, as explained more fully in the
section entitled "Business," we expect to provide telephony services over our
own network in the near future. Network capacity constraints may occur in the
future, both at the local and national levels. These capacity constraints would
result in slowdowns, delays or inaccessibility when members try to use a
particular service. Poor network performance could cause customers to
discontinue service with us. Reducing the incidence of such problems will
require constantly expanding and improving our infrastructure, which 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 occurrence at our switch or
collocation facilities, network operations center or points-of-presence 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 Internet services.
OUR PLANNED LMDS SYSTEM INVOLVES NEW AND LARGELY UNTESTED TECHNOLOGY, SO THERE
IS A RISK THAT UNANTICIPATED TECHNICAL PROBLEMS WILL CAUSE DIFFICULTIES FOR
THIS BUSINESS.
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 may be located in
"shadowed" areas capable of receiving the transmitted signal only with the
assistance of small, low cost "repeaters," which we may deploy. 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.
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 our board of
directors under Bermuda law are different from those applicable to a corporation
incorporated in the United States. Please refer to the section entitled
"Description of the Capital Stock."
20
<PAGE> 24
USE OF PROCEEDS
The selling securityholders will receive all of the proceeds from the sale
of the securities sold under this prospectus. We will not receive any of the
proceeds from sales by the selling securityholders of the offered securities.
PRICE RANGE OF COMMON STOCK
Our common stock is quoted and traded on the Nasdaq National Market under
the symbol "COMM." The following table provides, for the periods indicated, the
high and low last reported sales prices per share of our common stock as
reported on the Nasdaq National Market, as adjusted to give effect to a 3-for-2
stock split by way of stock dividend paid on September 2, 1999.
<TABLE>
<CAPTION>
COMMON STOCK
----------------
HIGH LOW
------ ------
<S> <C> <C>
1998
Third Quarter (beginning September 4, 1998).............. $10.00 $ 6.67
Fourth Quarter........................................... $11.50 $ 5.00
1999
First Quarter............................................ $26.08 $10.92
Second Quarter........................................... $33.00 $24.17
Third Quarter............................................ $38.25 $30.80
Fourth quarter (through October 28, 1999)................ $37.88 $35.75
</TABLE>
The market price of shares of our common stock may fluctuate. As a result,
you are urged to obtain current market quotations. On October 28, 1999, the last
reported sales price per share for our common stock, as reported on the Nasdaq
National Market, was $37.13. As of October 28, 1999, there were approximately
375 recordholders of our common stock. This figure does not reflect beneficial
ownership of shares held in nominee name.
DIVIDEND POLICY
Since our inception, we have not declared or paid any cash dividends on our
common stock. We currently intend to retain our earnings for future growth and,
therefore, we do not anticipate paying cash dividends in the foreseeable future.
Our or our subsidiaries' future debt instruments may restrict our payment of
dividends on our equity securities, including the common stock.
21
<PAGE> 25
CAPITALIZATION
The following table shows our cash, cash equivalents and marketable
securities, and capitalization as of June 30, 1999, and as adjusted to give
effect to the original offering of the convertible notes. You should read this
table together with the consolidated financial statements and related notes
incorporated in this prospectus and the information in the sections entitled
"Unaudited Pro Forma Financial Information," "Use of Proceeds" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
<TABLE>
<CAPTION>
AS OF JUNE 30, 1999
-----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Cash, cash equivalents and marketable securities............ $ 76,145 $244,833
======== ========
Current portion of long-term debt........................... $ 8,552 $ 8,552
======== ========
Long-term debt(1)
Subsidiary debt and capital lease obligations(2).......... $ 11,395 $ 11,395
Convertible notes......................................... -- 175,000
-------- --------
Total long-term debt................................... 11,395 186,395
-------- --------
Stockholder's equity:
Common stock, $0.01 par value, 75,000,000 shares
authorized; 24,221,000 issued and outstanding(3)....... 242 242
Additional paid-in capital................................ 239,657 239,657
(Deficit)................................................. (38,831) (38,831)
-------- --------
Total stockholder's equity............................. 201,068 201,068
-------- --------
Total capitalization................................... $212,463 $387,463
======== ========
</TABLE>
- ---------------
(1) We are negotiating with equipment manufacturers including Cisco Systems,
Inc., Lucent Technologies, Inc., and Nortel Networks Corporation for
significant vendor financing. The vendors may provide equipment financing to
our indirect, wholly owned subsidiary, CoreComm Operating Company, Inc. or
its subsidiaries. We cannot assure you that any of these negotiations will
result in an agreement. Please refer to the section entitled "Description of
Our Other Indebtedness."
(2) Represents $6,970,000 of indebtedness and $4,425,000 of capital lease
obligations of our subsidiaries that are payable to third parties.
(3) As adjusted for the 3-for-2 stock split by way of stock dividend paid on
September 2, 1999. Does not include 7,111,000 shares of common stock subject
to options or warrants and approximately 4,259 shares of common stock
subject to conversion of the convertible notes.
22
<PAGE> 26
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The unaudited pro forma financial information gives effect to (1) the
acquisition of the assets and related liabilities of OCOM Corporation in June
1998, (2) the acquisition of all of the outstanding capital stock of Digicom in
April 1998, (3) the acquisition of all of the operating assets of JeffRand Corp.
(known as Wireless Outlet) in April 1998, (4) the acquisition of Stratos in
November 1998, (5) the acquisition of MegsINet in May 1999 and (6) the
acquisition of certain assets of USN in May 1999. The pro forma financial
information is based on our historical financial statements and the historical
financial statements of OCOM, Digicom, Wireless Outlet, Stratos, MegsINet and
USN.
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 to us 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." Our 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 six months ended June 30, 1999 and for the year ended December 31, 1998
gives effect to the Acquisitions as if they had been consummated on January 1,
1998.
The pro forma adjustments are based upon available information and
assumptions that we believe are reasonable at the time made. We believe 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
our results of operations had the acquisitions occurred on the dates specified,
nor are they necessarily indicative of the 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 we
expect to realize. We cannot assure you as to the amounts of, or that any, cost
savings or revenue enhancements will be realized.
A significant component of the revenues included in the historical pro
forma results is associated with our acquisition of certain assets of USN.
Although USN quickly developed a large customer list and revenue base in 1997
and 1998, it had certain difficulties in providing services, including billing,
customer care and other operational areas, and filed for bankruptcy in February
1999. In May 1999, we purchased the wireline assets of USN out of bankruptcy for
$26.4 million in cash, warrants to purchase an aggregate of 525,000 shares of
its common stock and a contingent payment based on future operating results that
is capped at $58.6 million.
Since the acquisition, we have been focusing on improving the operations of
USN. We do not intend to actively sell additional lines through USN until we are
satisfied with the quality of the USN operations.
Consequently, consistent with our diligence, transaction structure and
purchase price, we expect that revenues associated with USN assets will decline
significantly over the next several months as customers continue to leave or
"churn" off the service. The decline could be as much as 40% of revenues or more
compared with the first half of fiscal year 1999 on an annualized basis.
However, we anticipate that the future operating results derived from the USN
assets will improve once the customer base is stabilized, although we have no
way of assuring this. Please refer to the section entitled "Disclosure Regarding
Forward-looking Statements."
The unaudited pro forma financial statements should be read in conjunction
with our financial statements and notes thereto, and with the financial
statements and notes thereto of OCOM (our predecessor), MegsINet and USN
appearing elsewhere in this prospectus.
23
<PAGE> 27
CORECOMM LIMITED
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
CORECOMM MEGSINET USN
HISTORICAL HISTORICAL HISTORICAL ADJUSTMENTS PROFORMA
---------- ---------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C>
Revenues............................ $ 16,032 $ 2,785 $ 36,919 $ -- $ 55,736
Operating expenses.................. 14,150 3,740 33,784 -- 51,674
Selling, general and administrative
expenses.......................... 19,520 3,489 23,330 -- 46,339
Corporate expenses.................. 4,143 -- -- -- 4,143
Depreciation........................ 1,710 1,679 4,803 (3,553)(D) 4,639
Amortization........................ 1,172 -- 80 3,077(A) 4,329
-------- ------- -------- ------ --------
Operating (loss).................... (24,663) (6,123) (25,078) 476 (55,388)
Interest income and other........... 2,305 27 (646) -- 1,686
Interest expense.................... (218) (814) (5,405) 5,405(C) (1,032)
-------- ------- -------- ------ --------
Net income (loss) before
reorganization items.............. $(22,576) $(6,910) $(31,129) $5,881 $(54,734)
======== ======= ======== ====== ========
Basic and diluted net (loss) per
share............................. $ (1.11) $ (2.45)
======== ========
Weighted average shares............. 20,421 1,910 22,331
======== ====== ========
</TABLE>
24
<PAGE> 28
CORECOMM LIMITED
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PROFORMA
PREDECESSOR FOR
(OCOM) ACQUISITIONS
JANUARY 1, COMPLETED
1998 PRIOR TO
CORECOMM TO MAY 31, OTHER DECEMBER 31, MEGSINET
HISTORICAL(1) 1998(2) ACQUISITIONS(3) ADJUSTMENTS 1998 HISTORICAL
------------- ----------- --------------- ----------- ------------ ----------
<S> <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
Non-recurring charges.......... -- -- -- -- -- --
Compensation charge from the
issuance of stock options.... 4,586 -- -- (4,586)(B) -- --
Depreciation................... 749 255 133 -- 1,137 1,082
Amortization................... 231 2 -- 195(A) 428 --
-------- ------- ------ ------- -------- -------
Operating income (loss)........ (18,426) (2,782) 99 4,391 (16,718) (4,516)
Interest income and other...... 2,192 -- -- -- 2,192 --
Interest expense............... (21) -- -- -- (21) (659)
-------- ------- ------ ------- -------- -------
Net income (loss) from
continuing
operations................... $(16,255) $(2,782) $ 99 $ 4,391 $(14,547) $(5,175)
======== ======= ====== ======= ======== =======
Basic and diluted net (loss)
per share.................... $ (.82) $ (.74)
======== ========
Weighted average shares........ 19,785 19,785
======== ========
<CAPTION>
USN
HISTORICAL ADJUSTMENTS PROFORMA
---------- ----------- ---------
<S> <C> <C> <C>
Revenues....................... $ 132,503 $ -- $ 148,174
Operating expenses............. 117,957 -- 131,205
Selling, general and
administrative expenses...... 183,200 -- 204,210
Non-recurring charges.......... 28,987 -- 28,987
Compensation charge from the
issuance of stock options.... -- -- --
Depreciation................... 9,317 (6,817)(D) 4,719
Amortization................... 252 8,257(A) 8,937
--------- ------- ---------
Operating income (loss)........ (207,210) (1,440) (229,884)
Interest income and other...... 14,973 (14,973)(C) 2,192
Interest expense............... (30,099) 30,099(C) (680)
--------- ------- ---------
Net income (loss) from
continuing
operations................... $(222,336) $13,686 $(228,372)
========= ======= =========
Basic and diluted net (loss)
per share.................... $ (10.43)
=========
Weighted average shares........ 2,111 21,896
======= =========
</TABLE>
- ---------------
(1) For the period from April 1, 1998 (date operations commenced) to December
31, 1998.
(2) Our predecessor for the period from January 1, 1998 to May 31, 1998.
(3) For the periods from January 1, 1998 to date of acquisition.
25
<PAGE> 29
CORECOMM LIMITED
PRO FORMA ADJUSTMENTS (UNAUDITED) (IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED
1998 JUNE 30, 1999
------------ -------------
<S> <C> <C> <C>
A. To record the amortization of intangibles(1)
Amortization of intangibles over 10 years:
For the acquisitions completed prior to December 31, 1998
(one year of amortization less the historical amount
recorded)................................................... $ 195 $ --
======= =======
For the MegsINet and USN acquisitions, less the historical
amount recorded............................................. $ 8,257 $ 3,077
======= =======
B. To adjust for compensation recorded in connection with our
spin off to the shareholders of CCPR........................ $(4,586) $ --
======= =======
C. To eliminate USN interest income and interest expense from
cash not acquired and debt not assumed
D. To adjust USN depreciation for fixed assets not acquired and
for the write down of the fixed assets acquired to fair
value....................................................... $(6,817) $(3,553)
======= =======
</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.
26
<PAGE> 30
SELECTED CONSOLIDATED FINANCIAL DATA
Our selected financial data that relate to the period from April 1, 1998 to
December 31, 1998 have been derived from our historical financial statements
audited by Ernst & Young LLP, independent auditors. The selected historical
financial data of OCOM that relate to the period from January 1, 1998 to May 31,
1998 and for the years ended December 31, 1997, 1996 and 1995 have been derived
from the historical financial statements of OCOM audited by Ernst & Young LLP,
independent auditors. The selected historical financial data of OCOM as of and
for the year ended December 31, 1994 is unaudited and has been derived from the
financial statements of OCOM. The accompanying unaudited interim financial
information as of June 30, 1999 and for the six months ended June 30, 1999
include all adjustments (consisting only of normal recurring accruals) which
are, in our opinion, necessary for a fair presentation of our results of
operations for those interim periods. Operating results for the six months ended
June 30, 1999 are not necessarily indicative of the results that may be expected
for the year ended December 31, 1999.
You should read the following information in conjunction with the sections
entitled "Capitalization," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Unaudited Pro Forma Financial
Information," the consolidated financial statements and the related notes and
the other financial data appearing in this prospectus.
<TABLE>
<CAPTION>
CORECOMM
LIMITED
----------------
FOR THE
PERIOD FROM
APRIL 1, 1998 THE PREDECESSOR (OCOM)
(DATE OPERATIONS ----------------------------------------
COMMENCED) TO YEAR ENDED DECEMBER 31,
DECEMBER 31, ----------------------------------------
1998(1) 1997 1996 1995(2) 1994
---------------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues............................ $ 6,713 $ 3,579 $ 5,103 $ 4,001 $ 3,690
Costs and expenses.................. 25,139 7,954 6,333 8,413 2,987
Net income (loss)................... (16,255) (4,379) (1,097) (4,154) 1,048
Basic and diluted net (loss) per
share............................. $ (.82) $ (.22) $ (.06) $ (.25) $ .07
Weighted average shares............. 19,785 19,613 19,794 16,605 14,801
OTHER DATA(3):
Capital expenditures.............. 2,344 1,435 183 180 81
Ratio of earnings to fixed
charges(4)..................... -- -- -- -- 22x
</TABLE>
<TABLE>
<CAPTION>
THE
PREDECESSOR
(OCOM)
FOR THE FOR THE
SIX MONTHS PERIOD FROM
ENDED JANUARY 1, 1998
JUNE 30, 1999 TO MAY 31, 1998
------------- ---------------
<S> <C> <C>
INCOME STATEMENT DATA:
Revenues.................................................... $ 16,032 $ 1,452
Costs and expenses.......................................... 40,695 4,234
Net loss.................................................... (22,576) (2,782)
Basic and diluted net (loss) per share...................... $ (1.11) $ (.14)
Weighted average shares..................................... 20,421 19,776
OTHER DATA:
Capital expenditures...................................... 7,255 623
Ratio of earnings to fixed charges(4)..................... -- --
</TABLE>
27
<PAGE> 31
<TABLE>
<CAPTION>
THE PREDECESSOR (OCOM)
CORECOMM LIMITED ------------------------------
------------------------ DECEMBER 31,
JUNE 30, DECEMBER 31, ------------------------------
1999 1998(1) 1997 1996 1995 1994
--------- ------------ ------ ----- ------ ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and marketable
securities......................... $ 76,145 $136,879 $ -- $ -- $ -- $ --
Working capital...................... 40,383 133,899 (950) (491) (42) 148
Fixed assets--net.................... 68,570 3,582 1,269 270 226 172
Total assets......................... 271,205 176,526 1,731 917 1,020 670
Subsidiary notes payable and capital
lease obligations (includes current
portion)........................... 19,947 634 -- -- -- --
Stockholders' equity................. 201,068 169,297 -- -- -- --
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 us prior to our spin-off
from CCPR: (a) a cash contribution of $150 million, (b) businesses acquired
by CCPR in April and June 1998 and (c) the subsidiary that owns various LMDS
licenses in Ohio that were acquired for an aggregate of $25,241,000.
(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) We have never declared or paid any cash dividends.
(4) For purposes of computing the ratio of earnings to fixed charges, earnings
consist of earnings before income taxes plus fixed charges. Fixed charges
consist of interest, amortization of debt issuance costs and the portion of
rental expense that represents the interest factor. Earnings were
insufficient to cover our fixed charges by $22,011,000 for the six month
period ended June 30, 1999; $15,815,000 for the period from April 1, 1998 to
December 31, 1998; $2,782,000 for OCOM's period from January 1, 1998 to May
31, 1998; and $4,379,000, $1,097,000 and $4,154,000 for the fiscal years
ended December 31, 1997, 1996 and 1995, respectively.
28
<PAGE> 32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis represents our financial condition
and results of operations and that of our consolidated subsidiaries. You should
read our consolidated financial statements, upon which this is based, included
elsewhere in this prospectus. As a result of the completion of the acquisitions
of 100% of the stock of MegsINet Inc. and the wireline assets of USN
Communications, Inc. in May 1999, we consolidated the results of operations of
these businesses from the dates of acquisition. The results of these businesses
are not included in the 1998 results. Various statements in the following
discussion and analysis are "forward-looking statements." Please refer to the
section entitled "Disclosure Regarding Forward-looking Statements."
OVERVIEW
We are an innovative communications company that provides integrated
telephone, Internet and data services to both business and residential customers
in targeted markets throughout the United States. We are a holding company and
have no independent business operations. All of our business operations are
conducted through our subsidiaries. We currently offer local and long distance
telephone, Internet access and intend to offer high-speed data services to
customers located principally in the following states: Ohio, Illinois, Michigan,
New York and Massachusetts. As of June 30, 1999, we had a total of approximately
100,000 business and residential telephony access lines in service and
approximately 80,000 Internet customers. We intend to pursue other opportunities
in the telecommunication industry as they arise.
We currently deliver our Internet services over our ATM network, which has
approximately 90 points of presence and approximately 20,000 route miles of
leased broadband circuits, which we are expanding even further to be national in
scope. We are also in the process of installing a switch-based Smart LEC network
to provide all of our integrated telecommunications and data services. While
this network is under construction, we are presently providing telephone
services to our customers principally through reselling services from the ILECs
and IXCs. Please refer to the section entitled "Business."
Prior to our spinoff from CCPR in September 1998, CCPR contributed to us
$181.0 million in cash, businesses, assets and licenses. The cash has been used
to finance our acquisitions of USN and MegsINet and for general corporate
purposes. In addition, we have issued shares of our common stock and options or
warrants to purchase our common stock in connection with those acquisitions,
totaling $43.2 million (as valued in accordance with GAAP). We have contributed
all of these assets to our subsidiary, CoreComm, Inc., other than $40.0 million
in cash.
We derive revenue principally from:
- Monthly recurring charges for the use of our services, including local
telephone, Internet access, data services and cellular and paging
services, and for the features associated with those services;
- Usage-based charges for additional use of our services, such as telephone
calls; and
- Non-recurring initial charges, such as installation charges and equipment
sales.
Since our acquisition of certain assets of USN, we have been focusing on
improving the operations of USN. We do not intend to actively sell additional
lines through USN until we are satisfied with the quality of the USN operations.
Consequently, consistent with our due diligence, transaction structure and
purchase price, we expect that revenues associated with the USN assets will
decline significantly over the next several months as customers continue to
leave or "churn" off the service. The decline could be as much as 40% of
revenues or more compared with the first half of fiscal year 1999 on an
annualized basis. However, we anticipate that the future operating results
derived from the USN assets will improve once the customer base is stabilized,
although we have no way of assuring this. Please refer to the section entitled
"Disclosure Regarding Forward-looking Statements."
29
<PAGE> 33
Our network and service costs are primarily from:
- The cost of leasing transport circuits for interconnection from the ILEC
and other service providers;
- The cost of resold services, such as local and long distance services;
- Costs related to the operation of our network; and
- Other costs related to providing services to our customers.
In connection with the expansion and development of our networks, we expect
to increase significantly our capital expenditures, our sales and marketing
expenditures, and our other operating expenditures as we deploy our networks and
support additional end-users. Accordingly, we expect to incur substantial and
increasing net losses for at least the next several years. Please refer to the
section entitled "Risk Factors--We expect to continue to incur negative cash
flow from operations and net losses. Specifically, we expect our revenues from
the USN assets will decline significantly."
The development and expansion of our business and the construction of our
Smart LEC networks will require significant expenditures. The deployment of our
network in a particular market requires up-front expenditures related to
operations as well as capital expenditures for equipment. Expenses related to
operations include regional management, sales and marketing expenses, facilities
expense and other costs related to providing and maintaining services prior to
reaching profitability. Capital expenditures include the costs and equipment
related to our regional switch site, including the Class 5 telephony switch, ATM
switches, routers, servers, modem banks and SONET Multiplexers. In our
collocated facilities, equipment to be purchased includes telephony access
equipment, DSLAMs, modem equipment and access concentrators, SONET Multiplexers
and POTS splitters. Once the network is in place, there will be additional
capital expenditures to support incremental end users.
ACQUISITIONS
We were formed by CCPR in March 1998 in order to succeed to the businesses
and assets that were operated by OCOM Corporation and to pursue new
telecommunications opportunities outside of Puerto Rico and the U.S. Virgin
Islands. We were formerly a wholly owned subsidiary of CCPR. Our CLEC, cellular
long distance, landline long distance and cellular long distance resale
businesses were formerly owned and operated by OCOM Corporation Telecoms
Division, which is our predecessor business. CCPR acquired the operating assets
and related liabilities of these businesses from OCOM on June 1, 1998 and prior
to spinning us off, CCPR contributed to us, and we subsequently contributed to
CoreComm, Inc., the operating assets of OCOM, the capital stock of Digicom, the
assets of Wireless Outlet and the subsidiary that owns our LMDS licenses.
In 1998 and 1999, we completed several acquisitions. In April 1998, we
purchased Digicom, Inc., a telecommunications provider based in Cleveland, Ohio
which provides telephony services to business customers and has
telecommunications facilities in several locations in the Cleveland area for
$2.1 million, and certain operating assets and related liabilities of JeffRand
Corp. (known as Wireless Outlet) for $400,000. In June 1998, we purchased a
portion of the assets of OCOM Corporation, a telecommunications reseller that
had been a subsidiary of NTL Incorporated, for $1.3 million. In November 1998,
we purchased the assets of Stratos Internet Group, Inc., an Internet service
provider based in Cleveland which offers dial up and dedicated Internet access,
as well as web hosting and other services, for $1.5 million.
In May 1999, two additional significant acquisitions were completed. We
acquired MegsINet Inc., a national Internet network service provider with a
national ATM network and local telecommunications facilities in Chicago. We
purchased 100% of MegsINet's stock for a total consideration of $16.8 million in
cash plus 2.1 million shares of our common stock. In addition, we assumed or
repaid $21.3 million of MegsINet debt.
We also acquired, in May 1999, the wireline assets of USN, which is based
in Chicago. As USN was in bankruptcy, we bought its wireless assets through the
bankruptcy court process. USN was a competitive local exchange carrier that
operates on a resale basis. We acquired USN for $26.4 million in cash, warrants
to purchase 375,000 shares of our common stock at a price of $20 per share and
150,000 shares
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at a price of $33 1/3 per share and a potential contingent additional cash
payment in July 2000 that is payable if the USN assets meet or exceed operating
performance thresholds. However, the total additional cash consideration we will
pay for the USN assets is capped at $58.6 million.
RESULTS OF OPERATIONS
The following discussion of our results of our operations includes a
comparison to the results of operations of OCOM, our predecessor business.
OCOM's primary historical business is its cellular long distance resale business
that has been and currently is a highly competitive segment of the long distance
telephone market. We have diversified into other telecommunications businesses.
In addition, our 1999 results of operations include our MegsINet and USN
acquisitions from the dates of acquisition in May 1999 and do not include the
results of our other Acquisitions for all of the relevant periods. Therefore,
our historical results will not be indicative of our future results.
We have issued, and in the future will issue, options to employees pursuant
to the CoreComm Limited 1998 Stock Option Plan. In addition, CoreComm, Inc. has
a stock option plan under which up to 30% of its capital stock (based on the
number of shares outstanding at the time of an initial public offering of its
common stock or its spin-off from us) is reserved for issuance pursuant to
option grants. Options granted under CoreComm, Inc.'s plan are not exercisable
unless and until an initial public offering of its common stock occurs or is
spun-off by us. If and when the options become exercisable, we may be required
to take a non-cash charge against earnings in an amount equal to the excess, if
any, of the fair market value of the common stock underlying the options over
the exercise price of the options. We expect that the amount of the non-cash
charge could be significant. Please refer to the section entitled "Disclosure
Regarding Forward-looking Statements."
SIX MONTHS ENDED JUNE 30, 1999 AND THE PERIOD FROM JANUARY 1, 1998 TO MAY 31,
1998 FOR THE PREDECESSOR (OCOM)
The increase in revenues to $16,032,000 from $1,452,000 is primarily due to
the acquisitions in 1999 and 1998, which accounted for $12,809,000 of the
increase. OCOM's revenues increased to $3,223,000 from $1,452,000 as a result of
an increase in CLEC revenues, offset by the decline in cellular long distance
revenue as a result of customers switching to other long distance providers. We
expect this trend in cellular long distance revenue to continue.
Operating costs increased to $14,150,000 from $772,000 primarily due to the
acquisitions in 1999 and 1998, which accounted for $10,878,000 of the increase.
Operating costs as a percentage of revenues increased to 88% from 53%. This
increase is the result of the increased proportion of CLEC business, which has
higher associated operating costs compared to cellular long distance.
Selling, general and administrative Expenses increased to $19,520,000 from
$3,205,000 primarily due to the acquisitions in 1999 and 1998, which accounted
for $7,610,000 of the increase. The remainder of the increase is a result of
increased selling and marketing costs and increased customer service costs.
These costs are expected to increase in the foreseeable future.
Corporate expenses include the costs of the Company's officers and
headquarters staff, the costs of operating the headquarters and costs incurred
for strategic planning and evaluation of business opportunities. OCOM did not
incur corporate expenses in the period from January 1, 1998 to May 31, 1998.
Depreciation expense increased to $1,710,000 from $255,000 as a result of
acquisitions in 1999 and 1998, which accounted for $996,000 of the increase and
an increase in fixed assets, primarily computer hardware and software.
Amortization expense increased to $1,172,000 from $2,000 due to the
amortization of goodwill from the acquisitions in 1999 and 1998.
Interest income and other, net, increased to income of $2,870,000 from zero
primarily due to interest income on our cash, cash equivalents and marketable
securities.
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Interest expense increased to $218,000 from zero due to interest on the
notes payable and capital leases.
The income tax provision of $565,000 in 1999 is for state and local income
tax.
PERIOD FROM APRIL 1, 1998 (DATE OPERATIONS COMMENCED) TO DECEMBER 31, 1998 AND
FOR THE YEAR ENDED DECEMBER 31, 1997
The increase in revenues to $6,713,000 from $3,579,000 is primarily due to
acquisitions in 1998, which accounted for $4,535,000 of the increase. OCOM's
revenues decreased to $2,178,000 from $3,579,000 because OCOM's revenues prior
to its acquisition in June 1998 of $1,452,000 are not included in the 1998
amount. OCOM's cellular long distance revenues continued to decline in 1998 as a
result of customers switching to other long distance providers, which trend is
expected to continue to occur. This reduction in revenues was offset by
increases in CLEC and cellular revenues.
Operating costs increased to $5,584,000 from $1,581,000 primarily due to
acquisitions in 1998, which accounted for $3,895,000 of the increase. Operating
costs as a percentage of revenues increased to 83% from 44%. This increase is
the result of the reduction in cellular long distance revenues which to date has
the highest gross margin of our telecommunications businesses.
Selling, general and administrative expenses increased to $13,989,000 from
$5,934,000 as a result of increased selling and marketing costs and increased
customer service costs. These costs are expected to increase in the foreseeable
future. These increases were offset by a reduction in billing costs due to the
implementation of in-house billing in the fourth quarter of 1997.
The compensation charge of $4,586,000 in 1998 is a non-cash charge recorded
in accordance with APB Opinion No. 25, "Accounting for Stock Issued to
Employees," as a one time charge related to the issuance of our warrants and
stock options to holders of CCPR's stock options in connection with the
spin-off.
Depreciation expense increased to $749,000 from $428,000 as a result of an
increase in fixed assets, primarily computer hardware and software.
Amortization expense increased from $231,000 from $11,000 due to the
amortization of goodwill from the acquisitions in 1998.
Interest income and other, net, increased to income of $2,632,000 from
expense of $4,000 primarily due to $2,585,000 of interest income on our cash,
cash equivalents and marketable securities.
Interest expense increased to $21,000 from zero due to interest on the note
payable and capital leases.
The income tax provision of $440,000 in 1998 is for state and local tax.
YEARS ENDED DECEMBER 31, 1997 AND 1996
Revenues decreased to $3,579,000 from $5,103,000 primarily due to a
reduction in cellular long distance revenues as a result of customers switching
to other long distance providers. The reduction in cellular long distance
revenues was partially offset by revenues from landline long distance and
cellular service, both of which were introduced subsequent to December 31, 1996.
Operating costs decreased to $1,581,000 from $3,065,000 as a result of the
decline in revenues. Operating costs as a percentage decreased to 44% from 60%
due to the improvement in the margin on cellular long distance as a result of a
reduction in the wholesale cost.
Selling, general and administrative expenses increased to $5,934,000 from
$3,119,000 as a result of increased selling and marketing costs, customer
service costs and management costs due to the increased efforts beginning in
late 1996 to grow and develop OCOM's business.
Depreciation expenses increased to $428,000 from $138,000 as a result of an
increase in fixed assets, primarily computer hardware and software.
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Interest income and other, net, decreased to expense of $4,000 from income
of $133,000 primarily due to the termination of OCOM's consulting agreement with
AT&T Wireless for assistance in marketing and implementing a cellular long
distance resale business.
LIQUIDITY AND CAPITAL RESOURCES
CAPITAL REQUIREMENTS
We will require significant resources to fund the construction of our
facilities based network, develop and expand our existing businesses and
licenses, acquire or develop additional telecommunications-related businesses,
and fund near term operating losses.
NETWORK CONSTRUCTION. We intend to significantly expand our
telecommunications infrastructure in the United States over the next several
years. We have already begun the process of installing switches, Internet
points-of-presence, and other telecommunications facilities in many states. The
anticipated amount of such expenditures have yet to be determined, and will be
related to the speed and location of equipment deployment, as well as the mix of
resold versus facilities-based services.
We are in the final stages of constructing Smart LEC networks in Cleveland,
Ohio; Columbus, Ohio; and Chicago, Illinois. We expect our Smart LEC network to
be operational in these markets and to begin migrating our existing customers
onto the network by the end of 1999. We are currently developing three
additional markets: Detroit, Michigan; New York, New York; and Boston,
Massachusetts, which we expect to be operational in 2000. These six markets
comprise approximately 18 million total access lines. In connection with these
markets, we are in the process of establishing collocation facilities in
approximately 129 ILEC central offices. We have also identified approximately 30
additional markets where we intend to deploy our Smart LEC networks in
2000-2002.
We believe that our Smart LEC strategy enables us to enter and construct
our networks into new cities with relatively low up-front expenditures and a
significant proportion of success-based capital expenditures. Depending on the
size of the market, we expect our up-front capital expenditures to be
approximately $7 to $10 million, which includes the costs of installing our
switch facility and our collocation facilities and other related initial set-up
and installation expenses.
The significant majority of the additional capital costs will be based on
subscriber levels. These costs will include equipment to increase network
capacity, such as ports and modems in our switch and access devices. These costs
will vary based on the type, volume and services of each customer, but are
estimated to be approximately $400-500 per line. For example, a sample target
market may have 1 million business lines and 2 million residential lines, for a
total of 3 million lines. Our total level of capital expenditures for that
market will depend on our level of penetration. If we are able to gain 3%
overall penetration of the market, we would serve approximately 90,000 lines,
and based on approximately $400-500 per line, we would spend approximately $35-
45 million on additional costs developing and expanding our networks in the
market. A lower or higher penetration would decrease or increase, respectively,
our additional capital costs.
The above summary of the cost structure of our entry into a typical market
does not purport to be indicative of our performance, but is provided solely as
a basis for understanding our basic cost structure for individual communications
services in a typical target market. You should be aware that our actual
expenditures, cost structure and performance could differ materially from our
current expectations. Please refer to the sections entitled "Risk Factors--We
may not be able to successfully implement our business strategy because doing so
depends on factors beyond our control, which could adversely affect our results
of operations" and "--We do not have much history operating as an independent
company, which means that future operating results may differ from those
presented here."
NETWORK MAINTENANCE. Our businesses will also consume capital to acquire
new customers and to finance the working capital required to support these new
customers. These businesses will also require additional billing, customer
service and other back-office infrastructure. These capabilities can be expanded
in-house or can be outsourced to reduce up-front capital requirements. To date,
our strategy has been to utilize the expertise developed by our management to
develop in-house billing and back-office capabilities.
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LMDS. The amount of capital required to construct the LMDS systems is not
easily quantifiable at this time, but is likely to be several times the cost of
the licenses. In addition to up-front network construction costs, a significant
ongoing capital requirement will be the cost to acquire customer premise
equipment to receive and transmit LMDS signals. The network and customer premise
equipment costs are not easily quantifiable because a de facto standard has yet
to emerge among the LMDS auction winners and because insufficient orders have
been placed with manufacturers who determine likely prices for equipment. As
license holders choose equipment manufacturers and one or more equipment
standard emerges, prices will become more easily quantifiable. We will deploy
this LMDS network only if we determine that we can achieve sufficient returns on
our capital invested, from reduced costs associated with providing our services
or from new services which we can offer through LMDS technology.
ACQUISITIONS. In May 1999, we acquired MegsINet and certain assets of USN.
The USN acquisition includes a contingent payment to be paid in July 2000 which
is payable only if the USN assets meet or exceed certain operating performance
thresholds. The total additional cash consideration that we may pay for the USN
assets is capped at $58.6 million. Also, we will require significant capital to
fund the expansion and operations related to those acquisitions. In the future,
we plan to make further appropriate acquisitions which may require significant
capital expenditures.
HISTORICAL USES OF CASH
For the six months ended June 30, 1999, cash used in operating activities
increased to $18,468,000 from the $3,638,000 used by OCOM in the period from
January 1, 1998 to May 31, 1998, primarily due to the increase in the net loss
to $22,576,000 from $2,782,000. For the fiscal year ended December 31, 1998,
cash used in operating activities increased to $12,322,000 from $3,477,000 in
the year ended December 31, 1997, primarily due to the increase in the net loss
to $16,255,000 from $4,379,000. In both periods, the net loss increased as a
result of acquisitions and an increase in selling and marketing costs and
customer service expenses.
For the six months ended June 30, 1999, cash used to purchase fixed assets
increased to $7,255,000 from the $623,000 used by OCOM in the period from
January 1, 1998 to May 31, 1998. For the fiscal year ended December 31, 1998,
cash used to purchase fixed assets increased to $2,344,000 from $1,435,000 in
the year ended December 31, 1997. The increase in both periods was due to
acquisitions and as a result of an increase in computer hardware and software
purchases.
SOURCES OF LIQUIDITY
We expect to experience substantial negative cash flow for the next several
years due to the continued development of our Smart LEC network and our other
businesses. Our cash flow requirements will depend upon:
- our network development schedules;
- operating results;
- acquisition opportunities; and
- technological developments.
We intend to fund our near term capital expenditures, operating losses and
working capital requirements with cash, cash equivalents and marketable
securities on hand and the net proceeds from the original offering of the
convertible notes. In addition, we currently anticipate obtaining additional
financing at the subsidiary level in the future.
Longer term, it is likely that we will be required to raise additional debt
and/or equity financing to fully realize our goals. We are currently negotiating
with equipment manufacturers, including Cisco Systems, Inc., Lucent
Technologies, Inc. and Nortel Networks Corporation, to provide us with vendor
financing. The vendors would provide financing to our indirect wholly owned
subsidiary, CoreComm Operating Company, Inc. or its subsidiaries in connection
with our purchase of certain equipment and services generally utilized in the
buildout of our voice data and networks. In the aggregate, these financings
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are anticipated to be significant. We are presently in the process of completing
negotiations on terms for these transactions and expect to enter into definitive
agreements upon completion of the negotiations. However, until definitive
agreements are reached with each vendor, we cannot be certain that the proposed
financings will occur, that the terms will not change or that any alternative
financing on terms satisfactory to us will be available.
Our ability to raise additional capital will depend upon a number of
factors, such as general economic and market conditions, which are beyond our
control. If we are unable to obtain additional financing or to obtain it on
favorable terms, we may be required to delay the construction of our Smart LEC
network, forego attractive business opportunities, or take other actions which
could adversely affect our business, results of operations and financial
condition. Please refer to the section entitled "Risk Factors--To develop our
business, fund our capital commitments and service our indebtedness and other
obligations, we will require a significant amount of cash."
We are a holding company with no significant assets other than investments
in and advances to our subsidiaries. We therefore depend upon receipt of funds
from our subsidiaries to meet our own obligations. However our subsidiaries'
debt agreements may prevent the payment of dividends, loans or other
distributions to us (except in certain limited circumstances).
YEAR 2000
We have mostly completed a comprehensive Year 2000 project designed to
identify and assess the risks associated with our information systems,
operations and infrastructure, suppliers, and customers that are not Year 2000
compliant, and to develop, implement and test remediation and contingency plans
to mitigate these risks. The project included four phases: (1) identification of
risks, (2) assessment of risks, (3) development of remediation and contingency
plans and (4) implementation and testing.
Our assessment was primarily focused on both our information technology, or
"IT," systems, in particular our billing, provisioning and customer service
systems, and the readiness of the significant facilities-based carriers that we
depend upon for our resale services. Our leased office space and other non-IT
equipment which may have embedded technology that may be affected by the Year
2000 problem was separately assessed.
- We have completed the assessment and upgrades of our financial IT
systems. The upgrades were supplied by vendors for nominal additional
cost.
- We completed the assessment, renovation and validation of the billing,
provisioning and customer service IT systems, except for the IT systems
of USN and MegsINet. We incurred nominal costs to complete the renovation
and validation of these systems since they are new systems that were
designed to be Year 2000 ready.
- The billing, provisioning and customer service IT systems used by USN and
MegsINet require more significant remediation at an estimated cost of
$300,000. The mission critical work is expected to be completed and
tested prior to December 1999. We do not expect any significant
remediation difficulties.
- Primarily all of the cost of upgrades and purchases of hardware and data
communications equipment to complete the implementation of Year 2000
readiness was part of our planned growth and upgrade capital expenditures
in 1999. The total cost was approximately $300,000. In addition, we
purchased a new server at USN for approximately $250,000 as part of the
Year 2000 project and for other uses.
- Our evaluation of the readiness of our significant vendors is mostly
completed. We requested information from these vendors in order to
determine the extent to which we may be vulnerable to their failure to
correct their own Year 2000 problems. We have received responses from
approximately all of these vendors.
- We currently believe the most reasonably likely worst case scenario with
respect to the Year 2000 is the failure of one or more of our significant
facilities-based vendors, including utilities, to be
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ready for the Year 2000. This could cause a temporary interruption in our
provision of service to customers or in our ability to bill our
customers, or both. Either or both could have a material adverse effect
on our operations, although it is not possible at this time to quantify
the amount of revenues and gross profit that might be lost, or the costs
that could be incurred. Our contingency plan to address some of these
risks involve switching customers to another wholesale provider, which
would require time to implement and may be constrained due to capacity
and/or training limitations.
As the Year 2000 project continues, we may discover additional problems,
may not be able to develop, implement or test remediation or contingency plans,
or may find that the costs of these activities exceed current expectations. In
many cases, we are relying on assurances form suppliers that their new and
upgraded information systems and other products will be Year 2000 ready. We have
tested primarily all such third-party systems and products. However, we cannot
be sure that our tests were adequate or that, if problems are identified in our
remaining testing, they will be addressed by the supplier in a timely and
satisfactory way.
Because we use a variety of information systems and have additional systems
embedded in our operations and infrastructure, we cannot be sure that all of our
systems will work together in a Year 2000-ready fashion. Furthermore, we cannot
be sure that we will not suffer business interruptions, either because of our
own Year 2000 problems or those of third-parties upon whom we rely on for
services. We are continuing to evaluate our Year 2000-related risks and
corrective actions. However, the risks associated with the Year 2000 problem are
pervasive and complex; they can be difficult to identify and address, and can
result in material adverse consequences to us.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The SEC's rule related to market risk disclosure requires that we describe
and quantify our potential losses from market risk sensitive instruments
attributable to reasonably possible market changes. Market risk sensitive
instruments include all financial or commodity instruments and other financial
instruments (such as investments and debt) that are sensitive to future changes
in interest rates, currency exchange rates, commodity prices or other market
factors. We are not exposed to market risks from changes in commodity prices. We
do not hold derivative financial instruments nor do we hold securities for
trading or speculative purposes. We do not currently believe it is necessary to
manage our exposure to interest rate or foreign currency exchange rate changes.
Under our current policies, we do not use derivative instruments to manage our
exposure to interest rate or foreign currency exchange rate changes.
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BUSINESS
CORECOMM LIMITED
We are a holding company whose main asset is our wholly-owned subsidiary,
CoreComm, Inc. We intend to pursue other opportunities (in addition to those
through CoreComm, Inc.) in the telecommunications industry as they arise.
CORECOMM, INC.
INTRODUCTION
CoreComm, Inc. is an innovative communications company that provides
integrated telephone, Internet and data services to business and residential
customers in targeted markets throughout the United States. We are exploiting
the convergence of telecommunications and information services through our
"Smart LECSM" network strategy and by offering bundled packages of services
which are intended to provide customers greater choice, flexibility and value
than typical offerings from other operators. Our Smart LEC network strategy
involves the ownership of switches and related equipment for the provisioning of
services, and the leasing of the unbundled local loop--or last mile--as made
possible by the Telecommunications Act of 1996, combined with the provisioning
of an IP based, national network. This configuration of local and national owned
and leased facilities allows us to deliver a wide range of communications
services over a network architecture which we design to be capital efficient and
primarily requires success-based incremental capital. Our goal is to expand our
facilities, geography and services to become a leading switch-based
communications provider in selected major markets across the United States.
We currently offer local and long distance telephone, Internet access and
intend to offer high-speed data services to business and residential customers
located principally in the following states: Ohio, Illinois, Michigan, New York
and Massachusetts. As of June 30, 1999, we had a total of approximately 100,000
business and residential telephony access lines in service and approximately
80,000 Internet customers. We currently operate an asynchronous transport mode
(ATM) network, which connects more than 80 cities using approximately 20,000
route miles of leased broadband circuits, which we are expanding even further to
be national in scope. This will allow us to take advantage of economies of scale
in the delivery of voice, video and data. We have been developing our
multi-service offerings since 1996 and are in the process of expanding our
products to include high speed services utilizing Digital Subscriber Line (DSL)
technology. With DSL, a single copper loop can be used to deliver telephony and
high speed data services simultaneously. We are currently in various stages of
constructing our Smart LEC network in six of the largest markets in the U.S.,
which represent approximately 18 million access lines.
Management's approach to its network, back office and customer acquisition
will be critical to our success, as well as the following key components of our
strategy:
- target large, underserved segments in concentrated metropolitan areas,
addressing the underlying demand for consumer choice in traditional
telephony as well as growing demand for high-speed data services;
- capture multiple revenue streams through offering customers bundled
service offerings, differentiated from other providers;
- deliver "Internet Centric" product offerings and support to our
customers;
- leverage proven management talent; and
- utilize Smart LEC strategy to maximize speed to market and minimize
investment risk.
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Business Strategy Overview
A core part of our business strategy is to offer bundled communications
services, including local and long distance telephony services, Internet access
and high speed data services, such as connectivity utilizing DSL technology, all
with a single bill. We believe that an integrated telephony and Internet
strategy utilizing DSL technology, which can be delivered over a single leased
copper loop, will be particularly appealing to our targeted customer base and
will significantly enhance our ability to attract, retain and gain additional
revenues from our subscribers.
Our service offerings, and in particular, DSL high-speed data services, are
based on the following customer proposition: "Customers buy what they need and
pay for what they get."
We believe there are several benefits to DSL, including:
- High bandwidth, high-speed, "always on" Internet connections;
- Dedicated, not shared bandwidth, which allows for "guaranteed"
performance levels;
- Ratable service, which allows us to tailor the service to the customers'
needs and allows the customers to determine how much money to expend for
the amount of high speed bandwidth they need;
- Ability to use the same loop for voice and data simultaneously;
- Enhanced security;
- Utilization of existing copper infrastructure, which allows faster
rollout and lowers deployment costs;
- Increased telephony margins as a result of packaging of services over a
single local loop; and
- Deployment with success-based capital expenditures.
We combine and price our products to give the customer increased
flexibility, choice, and "value for money," while also enhancing convenience and
simplicity. With this strategy, we believe that we can capture a larger share of
our customers' communications expenditures and increase customer retention. In
addition, we are currently investigating ways to add video services, including
multichannel television, as a part of our bundled offerings. Our bundling of
services can often be differentiated from other incumbent operators because we
face fewer regulatory requirements and from other operators because we are not
constrained by the technical limits or cost structure of a less advanced or less
capital efficient network architecture. We believe that our DSL proposition is
especially important as we compete against data service providers utilizing
cable modems, who have difficulty guaranteeing a direct correlation between
price paid and speed of access received.
The Internet is a key management tool in the marketing, provisioning and
billing of our services, as well as in the ongoing support of our customers. We
also intend to use the Internet as a sales tool by attracting customers through
our web site, www.core.com. We are actively developing and incorporating systems
to deliver "Internet Centric" operational support systems which are planned to
add functionality in the areas of electronic billing, web-based customer care
and e-commerce and e-services. We intend to use the Internet as an efficient
means of communication with our business and residential customers, providing
on-line sign-up and self-provisioning of services. We believe that using the
Internet to communicate with the customer will not only be convenient for the
customer, but will also increase our operating efficiency. We believe that by
encouraging the self-provisioning of communications products, especially in the
broader residential market, we will particularly attract the most data-intensive
and higher margin customers at lower customer acquisition costs.
We intend to focus on both residential and small to medium-sized business
customers, including the Small Office/Home Office (SOHO) market, located in
major metropolitan areas in the United States. These segments contain many
communications-intensive customers that we believe are often underserved by both
existing incumbent carriers and new entrants. We seek to attract customers in
these segments by
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offering innovative services, superior customer service and overall value. By
targeting both of these sectors, we expand our potential revenue base, leverage
our marketing costs over a greater number of potential customers and increase
network utilization with more subscribers. We believe that marketing through the
Internet utilizing the self-provisioning of services will allow us to deploy our
strategy more rapidly than we could with only a direct sales force.
Continuity of Management
Our management has extensive experience in developing and marketing bundled
communications services, building proprietary back office systems to support
residential and business customers, and designing and constructing large
integrated communications networks. Our management team's accomplishments in the
telecommunications industry span nearly 20 years. There are several members of
this team that have worked together for a decade or more:
- Our President and Chief Executive Officer, Barclay Knapp, was a member of
the original management team at Cellular Communications, Inc. (CCI),
which was an original applicant for cellular licenses in the United
States in 1982. Mr. Knapp is also the President and CEO of NTL
Incorporated.
- Our Chairman, George Blumenthal, was a member of the original management
team of Cellular Communications, Inc. Mr. Blumenthal also serves as the
Chairman of NTL.
- Our Chief Operating Officer, Patty Flynt, joined Cellular Communications,
Inc. in 1989, where she was the director of its Management Information
Services division. Ms. Flynt also served as the MIS director at NTL.
In the key areas of our operations, our management includes individuals who
have worked with CCI, NTL and their historical affiliates for many years and
have significant telecommunications industry experience. Below is a partial list
of several of those individuals and their area of expertise:
<TABLE>
<CAPTION>
PREVIOUS HISTORICAL
NAME OPERATIONAL AREA AFFILIATES YEAR JOINED
- ---- ------------------- ------------------- -----------
<S> <C> <C> <C>
Thomas S. DellaRocco...................... Networks CCI, NTL 1984
Stefan Eckert............................. Sales CCI 1985
Beth K. Fisher............................ Customer Operations CCI 1985
Kimberly K. Liston........................ MIS CCI, NTL 1990
Donald B. Miller.......................... Marketing CCI 1986
Paul J. Nelson............................ Sales CCI 1991
Chris Y. Skudder.......................... Customer Operations CCI, NTL 1992
Richard J. Lubasch........................ General Counsel CCI, NTL 1986
</TABLE>
The continuity of this team is due to their success in working together
throughout the corporate lineage that began with Cellular Communications, Inc.
in 1981. In addition to these individuals, there are other members of our
management team and staff who were part of CCI, or part of a later joint venture
between CCI and AirTouch Communications, Inc. that was formed in 1991. Several
of our directors have also been involved with each of these companies. CCI was
acquired by AirTouch Communications, Inc. in 1996.
Out of Cellular Communications, Inc., several publicly traded companies
were spun-off. Our management team developed these other communications
companies:
- NTL Incorporated, a telecommunications, cable television and Internet
provider which operates principally in the United Kingdom. Giving effect
to recently announced acquisition agreements, NTL's franchise areas cover
approximately 12 million homes, representing approximately 50% of the
homes and an even larger share of the businesses in the United Kingdom.
NTL has already
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<PAGE> 43
achieved an industry leading customer penetration rate of 46% in the
original areas it built-out and marketed.
- Cellular Communications of Puerto Rico, Inc. (CCPR), which operated the
dominant cellular business in Puerto Rico and the U.S. Virgin Islands,
and from which CoreComm Limited was spun-off in 1998.
- Cellular Communications International, Inc. (CCIL), which was a
co-founder of Ominitel Pronto Italia, spa, which owns the second cellular
license in Italy.
The core management team remained intact and guided the above companies to
substantial success, culminating in the acquisitions of each of CCI, CCIL and
CCPR by major telecommunications companies.
<TABLE>
<CAPTION>
COMPANY TRANSACTION
- ------- -----------
<S> <C>
Cellular Communications, Inc. Acquired by AirTouch for $2.5 billion (August
1996)
Cellular Communications International, Inc. Acquired by Mannesman and Olivetti for $1.8
billion (March 1999)
Cellular Communications of Puerto Rico, Inc. Acquired by SBC Communications, Inc. for $814
million (August 1999)
</TABLE>
Communications Industry
We are participating in the large and rapidly changing U.S. wireline
telecommunications industry. We believe that the wireline telecommunications
industry benefits from positive price elasticity, as well as growing,
non-cyclical demand for services. According to the U.S. Census Bureau, the total
wireline segment of the U.S. telecommunications market was estimated to be
approximately $193 billion in 1997. Approximately 50% of this revenue is derived
from local service and network access. In addition, demand for access to the
Internet and data services has a significant effect on the U.S. communications
industry, and is expected to continue its rapid growth. Various estimates
project this segment to grow significantly over the next several years.
As demonstrated on the chart below, as a wireline telecommunications
services provider, CoreComm is operating in the largest of the communications
related industries, which represents significant market opportunities for us:
<TABLE>
<CAPTION>
INDUSTRY U.S. MARKET SIZE HISTORY
- -------- ------------------- ---------
<S> <C> <C>
Wireline Telecommunications $193 billion(1997)(1) 120 years
TV Broadcasting 36 billion(1997)(2) 60 years
Cellular 33 billion(1997)(1) 17 years
Cable & Satellite 31 billion(1997)(2) 50 years
Radio 14 billion(1997)(2) 70 years
</TABLE>
- ---------------
(1) Source: U.S. Census Bureau
(2) Source: Euromonitor International Inc.
40
<PAGE> 44
AVERAGE MONTHLY HOUSEHOLD SPENDING
[AVERAGE MONTHLY HOUSEHOLD SPENDING GRAPH]
Source: PricewaterhouseCoopers
The Smart LEC (SM) Overview
Our Smart LEC strategy is designed to allow us to enter communications
markets rapidly and to offer a variety of operating benefits, including:
improved operating margins, enhanced control of the customer experience,
success-based capital expenditures, and higher overall returns on capital. In
addition, we believe that the efficiency and broad reach of this network
strategy, in conjunction with our diversified product offering, enable us to
operate under a business plan which requires only a small share of each of our
target markets for a successful return on investment.
The Smart LEC network strategy combines the building and owning of key
network facilities with the leasing of other services from the ILECs and other
telecommunications carriers under the following general principles:
We build those parts of the network which we believe:
- significantly improve operating margins (for example, Class 5 switches);
- are necessary to enhance the services to the customer (for example, DSL
equipment or DSLAMs); and
- are not generally available from other providers.
Conversely, we lease those portions of the network which we believe:
- are disproportionately expensive to build;
- are readily available to be leased economically from other providers; and
- do not impact our ability to interact with the customer.
We are in the final stages of constructing our Smart LEC network in
Cleveland, Ohio; Columbus, Ohio; and Chicago, Illinois. We expect our Smart LEC
network to be operational in these markets and to begin migrating our existing
customers onto the network by the end of 1999. We are currently developing three
additional markets: Detroit, Michigan; New York, New York; and Boston,
Massachusetts, which we
41
<PAGE> 45
expect to be operational in 2000. These six markets comprise approximately 18
million total access lines. In connection with these markets, we are in the
process of establishing collocation facilities in approximately 129 ILEC central
offices. We have also identified approximately 30 additional markets where we
intend to deploy our Smart LEC network in 2000-2002. Please refer to "Risk
Factors" beginning on page 11.
We currently deliver our Internet services over our broadband ATM network,
which has approximately 90 points of presence and approximately 20,000 route
miles of leased broadband circuits throughout the United States. Pending
installation of our switches and expansion of our ATM network, we are presently
providing telephony services to our customers through reselling services from
the ILECs and IXCs. We intend to migrate existing resale customers to our
switch-based networks as they are installed and operational.
Based upon our historical experience we are developing sophisticated
proprietary integrated systems and procedures that support all aspects of our
business, including customer provisioning systems, billing systems, and customer
care and collections support systems. Additionally, our systems support
electronic bonding with the ILEC in each of our markets. We believe that an
effective back office is essential to efficiently serving our customers and
achieving successful overall customer satisfaction and retention.
BUSINESS STRATEGY
Our objective is to become a leading provider of integrated communications
services in our target markets. We believe that we will successfully compete
with the incumbent operators and achieve attractive returns on capital by
pursuing the following key strategies:
Provide Services to both Business and Residential Customers. We focus on
marketing and packaging our services with product offerings that are tailored to
small-to-medium-sized business customers and communications-intensive
residential markets. Because our networks are capital efficient and because we
will lease the "last mile" to the customer, we believe that our business model
uniquely allows us to serve profitably both the business and residential
communities. We believe that each segment offers certain advantages: the
small-to-medium-sized business market offers high volume and revenue per
customer, as well as increased geographical concentration of users; the
residential market offers a large, underserved, growing market with
significantly less competition from other providers. For example, in Ohio we are
one of only a few competitive providers which markets local telecommunications
services to the residential market. In addition, targeting both sectors allows
us to leverage the fixed cost aspects of our network as well as our marketing
and packaging programs.
Offer Bundled Services. We provide our customers with "one-stop shopping,"
offering local and long distance telephony, Internet and data services. Our
services are packaged and priced in bundles which give the customer increased
flexibility, choice, and "value for money". We emphasize offerings which are
easy to value by the consumer, and allow them to "buy what they need and pay for
what they get." We typically offer a platform of basic services and then create
ways for customers to add additional services easily and conveniently according
to customer preferences. Our current service offerings include: local dial tone
and local calling; enhanced telephony features, such as call waiting; long
distance calling services; dial-up and dedicated Internet access; and data
services. Our integrated offerings enhance convenience by giving the customer
one point of contact for all of these services, providing the services on a
single bill and simplifying the decision-making process. In addition to
attracting customers, we believe this strategy also improves our profitability
by increasing our average revenue per customer with additional higher margin
services, reducing customer acquisition and other operating costs, and improving
customer retention.
Own and Operate Capital Efficient Networks. Our strategy is to provide our
full range of communications services over our capital efficient, switch-based
network infrastructure which combines the building of key network facilities
with the leasing of other elements from the ILEC or other telecommunications
carriers. We believe that our network strategy offers a variety of benefits
including: attractive operating margins, control of the customer experience,
greater speed to market, broad geographic
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<PAGE> 46
reach, ability to serve both businesses and residential customers, success-based
capital expenditures, and higher overall returns on capital.
"Internet Centric" Strategy. We use the Internet as a key tool of our
business strategy. First, Internet access is one of our core service offerings.
We believe that demand for access to the Internet will continue to grow rapidly
in both the business and residential markets, and that our bundled Internet and
telephony product offerings will be attractive to potential customers. Second,
we currently use our www.core.com web site as a sales tool to increase awareness
about CoreComm and our products and services, and to access the large and
growing number of users of the World Wide Web. We also intend to use the
Internet to efficiently communicate with our customers. In the future, we intend
to be able to communicate with virtually every CoreComm customer over the
Internet. We will provide on-line sign-up, feature selection, billing,
moves/adds/changes, and customer care. We currently offer customers the option
to receive their bills via e-mail, and are in the process of expanding our
systems for these additional on-line services. We believe that communicating
with the customer electronically will significantly increase our operating
efficiency by reducing our sales costs, customer service costs and billing
costs, as well as our bad debt expense. We also believe that this strategy will
provide added convenience for the customer, which will further differentiate us
from our competitors.
Effective Marketing Over Wide Areas. We intend to develop and utilize
effective marketing techniques to implement our business plan. We believe that
our efficient network will allow us to leverage our fixed cost infrastructure to
reach wide geographic areas within our target markets. The ability to resell
ILEC services expands our overall potential service area even further. Our
ability to offer targeted, customer-convenient services over wide areas enables
us to utilize mass marketing strategies and other efficient methods of
communicating our offerings to our potential customers. We believe that these
initiatives will increase the awareness of the CoreComm brand and attract new
customers in our target markets.
Distinguish CoreComm From Its Competitors. Our strategies seek to
differentiate us from other communications providers. To satisfy customer needs,
we offer an integrated bundle of services that is not typically offered by a
single provider, and package these services into product offerings that are
unique in their emphasis on choice and flexibility. We can differentiate our
service offerings in part because we are less constrained by regulatory
requirements than ILECs, and not as limited by less capital efficient networks
as other operators. In addition, we offer customer service and support which is
superior to what customers have often experienced in the past with their ILEC or
other providers. We have developed our own sophisticated back office systems to
enable us to do so effectively and efficiently. We believe that our on-line
billing and customer service will further differentiate the way we interact with
customers. Through these and other factors, we try to create an image for
CoreComm that emphasizes us as an important member of the community, offering
our services over broad areas, to both business and residential customers, with
superior reliability and service. We believe differentiating CoreComm in this
manner will help us attract and retain our customers.
Leverage Experience of Proven Management. Our management team has had
significant experience in developing several successful communications companies
in the U.S., the United Kingdom and other countries. We believe that our
management's experience will enhance our ability to execute our business plan,
and will contribute to our overall operational success and results. Our
management has designed attractive, bundled communications services and product
offerings. In addition, our management has previously developed its own internal
systems for billing, MIS and customer care. We believe that a high quality back
office is critical for effectively and efficiently serving the customer. Many
members of our management team have worked together for 10 to 15 years. Our
senior management founded and operates NTL Incorporated, a large
telecommunications, cable television and Internet provider which operates
principally in the United Kingdom. At NTL, management has had experience
competing against incumbent operators by offering business and residential
customers bundled packages of integrated communications services, including
telephony, cable TV and Internet access. NTL has developed creative marketing
and packaging strategies which have delivered industry leading customer
penetration rates (46% versus the industry average of 32%) and churn rates which
are less than half the industry average. Our
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<PAGE> 47
senior management has also been involved with other communications ventures,
including Cellular Communications, Inc., Cellular Communications of Puerto Rico,
Inc., and Cellular Communications International, Inc. which operated cellular
businesses in Ohio and Michigan, Puerto Rico, and Italy, respectively. In these
ventures, our management has typically achieved successful operating results,
developed significant experience competing against incumbent operators, built
and maintained sophisticated communications networks and back office support
systems, and gained recognition in the communications industry and the capital
markets. CoreComm represents an effort to capitalize on this history of
experience and operational success to exploit the significant communications
opportunities in the U.S.
Expand Through Strategic Acquisitions. We have expanded and grown our
operations through strategic acquisitions. We look for acquisitions that enhance
our ability to execute our business strategy, including adding complementary
network and facilities, increasing revenues, and gaining management talent. We
intend to continue to pursue such opportunities in order to accelerate the
growth and success of our operations.
THE SMART LEC(SM) NETWORK
The Smart LEC strategy allows us to implement our own switch-based
telecommunications network without the significant additional expense, time
commitment and general financial risk of building our own local loops and
transmission facilities. We believe this strategy will improve our overall
return on capital and lower the level of risk associated with the execution of
our business plan, based on the following general advantages:
- reduced capital expenditures associated with leasing rather than building
local loop and transport facilities;
- greater certainty of return from success-based capital spending;
- increased network utilization as a result of the access to multiple
revenue streams and the ability to increase leased capacity
incrementally; and
- lower overall market penetration requirements as a result of reduced
network costs.
Advantages of the Smart LEC network
We believe that this network strategy offers a variety of specific
benefits including:
Lower Overall Cost--We believe that the Smart LEC network can be
deployed at a much lower cost than building conventional networks. The cost
of conventional networks includes the cost of all of the network facilities
included in the Smart LEC build, plus the construction of conduit,
transport capacity and associated infrastructure to connect network access
points, switch facilities and customers. The deployment of these
transmission route components involves significant expense, and their
elimination under our strategy should considerably decrease our capital
expenditure requirements. Whereas the construction of full network
facilities has been estimated to cost between $1,000 to $3,000 per line,
depending on the specifications of the network, we estimate that our Smart
LEC network will cost less than $500 per line, while still providing
comparable basic telephony services and additional advanced services.
Lower Required Customer Penetration--Due to the reduced cost of
building the Smart LEC network, our business model requires a lower level
of customer penetration to be successful as compared to a full-facilities
network. Because there is a reduced amount of up-front investment, we
believe that we can gain profitability and a sufficient return on capital
with a relatively small percentage of market share. This advantage not only
lowers our exposure to risk, but also gives us the flexibility to design
our offerings to target a specific subscriber base of
communications-intensive users without the requirement of necessarily
attracting a large portion of the market. The ability to serve both
business and residential customers also increases our potential overall
market.
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<PAGE> 48
Success-based Capital Expenditures--An additional benefit of our Smart
LEC network is the "success-based" cost structure of the capital
expenditures as we can delay capital expenditures until after customers are
obtained. Conventional fiber networks typically require the network
construction to be fully completed in advance of obtaining customers,
generating high initial capital expenditures. Under our Smart LEC strategy,
certain switch and access facilities are installed ahead of time, but the
majority of capital is invested to increase the capacity of the network
based on our success in attracting customers. We can therefore enter a
market with a significantly lower up-front investment, and add facilities
and leased capacity over time as we grow our customer base. A significant
portion of our network expenses can therefore be incurred later and with
more certain returns.
Control of the Customer Experience--We believe that having greater
control over the services that we offer enhances our ability to improve the
overall customer experience. Through the facilities which we install, we
have control over the services provided to customers, including the
operation of features, phone numbers, and line testing and servicing.
Control over the implementation of the products enables us to better manage
the service and to more easily offer custom packages of products and
features. We believe that our delivery and marketing of targeted,
customer-convenient, easy-to-understand packages differentiates us from our
competition.
Ability to Serve Business and Residential Customers--Our Smart LEC
network architecture is designed to reach both business and residential
customers. Because we are leasing rather than building the local connection
to the customer, we believe we can economically reach the residential
market despite its lower density relative to the business market. As a
result, we are able to reach and serve the significant consumer segment,
which has typically had significantly fewer competitors than the business
segment. In addition, there are significant synergies which accrue from the
ability to serve both business and residential market segments, including
benefits to our marketing, service operations and network utilization.
Higher Operating Margins--We believe that deploying key network
infrastructure will enable us to achieve significantly higher gross margins
than the margins obtained under total service resale. Total service resale,
which is the resale of complete services from ILECs without installing
owned facilities, typically generates gross profit margins of approximately
20-25%. Under the Smart LEC strategy, rather than reselling the entire
service, we will be leasing only certain unbundled network elements, such
as local loops and transport. We will use our own facilities for network
interconnection, switching, features, and other network elements. By
design, the facilities which we own and install are those which have a
significant positive impact on our gross margins. By utilizing our own
facilities for certain key portions of the network, we believe that we can
increase our operating margins significantly above the margins which can be
achieved with resale.
Increased Speed to Market--The Smart LEC strategy will also increase
the speed at which we can enter additional markets. The time needed to
construct a conventional network is extended by factors such as civil
construction, the permit application process, certifications, and network
management. Although constructing the Smart LEC network involves certain
similar procedures, the majority of the installation work takes place in
our own facilities and leased collocations of the ILECs, and significant
route network construction elements are eliminated, which should contribute
to an increased speed to market under our strategy. Whereas conventional
networks typically take between 18 to 24 months to construct, we believe
our networks can generally be installed in a 6 to 12 month time frame.
Access to Wide Geographical Areas--We believe the cost structure of
the Smart LEC network will enable us to enter target areas which may not be
economical for a full facilities network. When building a conventional
network, density is a critical factor because the distance between the
local switch and customers has a significant impact on build costs. In the
Smart LEC network, although density is still important, it is less critical
because the local loops are already built and are simply leased from ILECs.
The ability to lease certain portions of the network therefore expands the
potential territories that can be economically served by our network. In
addition, we can offer total
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<PAGE> 49
service resale in areas that are not yet served by our network, which
expands our operating territory even further. Because ILECs are typically
connected to all businesses and residences in its region, our ability to
lease or resell these connections gives us considerable geographic
flexibility and reach within our target markets. We believe that we will
realize several advantages from having the ability to serve broad
geographical areas, including operating synergies, marketing efficiencies
and the enhancement of our overall company image presented to potential
customers.
Network Development and Architecture
Under our Smart LEC strategy, we build those portions of the network that
we believe will significantly increase our gross margins, are necessary to
control the services provided to the customer, and can be deployed rapidly and
efficiently. We lease those portions of the network that are readily available
to be leased economically from other providers. Accordingly, we are building the
Smart LEC network in each target market through a combination of the following
three central elements:
- Installing telephony and data equipment in our target metropolitan areas,
including: Class 5 telephony switches, ATM switches and Internet
point-of-presence equipment in our own facilities, along with telephony
access devices, DSL access equipment, modems and other equipment in
facilities collocated with the ILEC. These devices switch and route voice
and data transmissions across the network.
- Leasing the "last mile" or "local loop" (the portion of the network
extending from the end-office to the customer's premises). This local
connection is leased by us from the ILECs as an "Unbundled Network
Element" as provided under the Telecommunications Act of 1996. These
local loops are used to transport voice and data services, for Internet
access services, as well as for DSL and other high capacity voice and
data applications. For larger customers or concentrated groups of users
(such as multi-dwelling units), we lease circuits with greater bandwidth
for this local connection.
- Leasing the transport capacity to carry voice and data both regionally
(between our collocated facilities and our regional switch) and
nationally (between our regional switches, our national Internet
points-of-presence, other carriers, and the Internet). We will lease
these services from ILECs, CLECs, IXCs, Competitive Access Providers
(CAPs) and other providers. We use these leased circuits to transport our
own voice and data traffic and deliver it to the most economical point of
interconnection with other carriers. These leased circuits are
interconnected using our national ATM facilities.
As a complement to the network described above, we also resell complete
services from ILECs (total service resale). Although we intend to serve
customers primarily over our own network, resale allows us to expand our target
markets by adding service areas where our facilities are not yet installed. This
enables us to market our services prior to and during the installation of our
network, and then connect customers to our facilities once they are in place.
Resale also allows us to serve customers that may not be within economical reach
of our switch-based network. Although providing customers service on a resale
basis generates lower gross margins, we believe that there are advantages to
offering comprehensive geographical coverage within our target markets,
particularly when competing with an ILEC.
We believe that the quantity of existing and planned fiber transport
facilities available from other carriers will be sufficient to satisfy our need
for leased transport facilities and permit us to obtain these facilities at
competitive prices for the foreseeable future. Several factors contribute to
this view: there is significant transport capacity in place today and we often
have the ability to choose from multiple providers including the ILECs; the
number of new providers building networks continues to increase; most providers
are consistently increasing their network capacity; and advances in wave
division multiplexing technology have continued to increase the capacity of
existing fiber plant. In addition, the ability to lease transport from the ILECs
gives us broad geographic coverage. As the volume of our traffic grows, however,
in the future it may become economical to build our own transport facilities in
certain markets.
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<PAGE> 50
We currently lease transport capacity from multiple carriers across our
regional and national networks, including, among others:
<TABLE>
<CAPTION>
ILECS OTHER CARRIERS
<S> <C>
Ameritech ICG
Bell Atlantic IXC
Bell South Level 3
Frontier MCI WorldCom
SBC NEXTLINK
US West Qwest
</TABLE>
Below is an overall diagram of the CoreComm Smart LEC(SM) network. We
generally lease the local loop and transport portions of the network and
own the access, connection and switching points:
[CoreComm SMART LEC Network Illustration]
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<PAGE> 51
Nationally, as we construct regional Smart LEC networks, our ATM network
will interconnect these local networks and other points-of-presence
across the U.S. over leased circuits to provide national data, voice and
Internet connectivity. Below is a diagram which generally depicts these
connections:
[National ATM map]
Network Technologies
Our Smart LEC network will be capable of carrying both voice and data
communications using the following technologies:
- Standard Telephony--the traditional, reliable transmission of voice over
local loop copper wire and regional and national 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 messages can be routed
simultaneously over the same transmission facilities, resulting in
greatly improved efficiency. This technology is currently being developed
to be used reliably for voice service.
- Digital Subscriber Line (DSL)--a transmission technology that allows for
the transport of significant levels of voice and data at high speeds over
conventional, copper phone lines. These higher transmission rates can be
used for high-speed Internet access, to transport multiple voice lines
over a single loop, or for both simultaneously.
- Asynchronous Transfer Mode (ATM)--a transport protocol that supports many
types of high-speed transmissions including voice, data, video, audio and
imaging. ATM allows for the use of individual circuits for multiple
simultaneous purposes, increasing network efficiency.
- Digital Loop Carrier (DLC)--an access technology allowing us to aggregate
and concentrate the voice traffic collected at the collocation facility
to more efficiently transport this traffic to our switches.
Local and Regional Network Deployment
We have identified six major metropolitan areas as the initial target
markets for the rollout of our regional Smart LEC networks. We are in the final
stages of constructing our Smart LEC network in the following three markets:
Cleveland, Ohio; Columbus, Ohio; and Chicago, Illinois. We expect our Smart
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<PAGE> 52
LEC network to be operational in these markets and to begin migrating our
existing customers onto the network by the end of 1999. In addition, we are
currently constructing our network in three additional markets: Detroit,
Michigan; New York, New York; and Boston, Massachusetts. We expect the networks
in these markets to be operational in 2000. These six markets comprise
approximately 18 million total access lines. We are in the process of
establishing collocation facilities in approximately 129 ILEC central offices in
these markets. The significant majority of these are physical collocations,
under which we have space within the central office that is dedicated to our
exclusive use.
We have also identified more than 30 additional markets where we intend to
deploy our Smart LEC network in 2000, 2001, and 2002. These markets are in
several states, including: Pennsylvania, Maryland, Connecticut, Indiana,
Missouri, Florida, Texas and California, among others. We expect to deploy some
of these additional markets to be operational in 2000. The buildout schedule, as
well as the final selection of our markets, will depend on a number of factors,
including the success and speed of the rollout of the initial six markets, ILEC
interconnection agreements, and other factors. We will continue to offer our
Internet services nationally over our leased ATM network. Please refer to "Risk
Factors" beginning on page 11.
Key data for our initial six markets is listed in the following table:
<TABLE>
<CAPTION>
DATE OF ESTIMATED
SMART LEC BUSINESS ESTIMATED COLLOCATIONS IN
CITY BUILDOUT(1) LINES(2) RESIDENTIAL LINES(2) TOTAL LINES(2) PROGRESS(3)
- ---- ----------- --------- -------------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Cleveland, OH.................... 1999 423,733 922,473 1,346,206 14
Columbus, OH..................... 1999 273,345 597,662 871,007 12
Chicago, IL...................... 1999 1,893,902 3,022,030 4,915,932 33
Detroit, MI...................... 2000 851,821 1,775,068 2,626,889 24
New York, NY..................... 2000 1,782,190 3,858,804 5,640,994 26
Boston, MA....................... 2000 859,422 1,492,218 2,351,640 20
--------- ---------- ---------- ---
Total.................. 6,084,413 11,668,255 17,752,668 129
</TABLE>
- ---------------
(1) Based on our current buildout schedule.
(2) Company estimates based on FCC, iMarket and TargetPro. Represents estimated
lines within the MSA.
(3) We are in various stages of the collocation process depending on the market
and its priority in our buildout schedule. Our collocation process consists
of the following basic phases:
- Gathering of demographic data for each region and selection of
specific ILEC facilities for collocation;
- Filing applications with the appropriate ILECs for collocation
rights at each selected location;
- Upon receipt of each approval, doing an evaluation of each
facility;
- Building by the ILEC of a "cage" or preparation of space in which
our equipment will be placed; and
- Installing and testing of our equipment.
We have at least obtained approval of our application for all collocations
in progress.
In determining our target markets, we prepare detailed analyses of
telecommunications and demographic data. Our target markets are chosen based on
a number of factors, including:
- Overall size of the telecommunications market;
- Concentration of business and residential customers;
- The availability of local transport networks and providers;
- Demographic statistics;
- The locations of our existing resale customers;
- Our relationship with the ILEC and interconnection terms; and
- Regulatory environment.
We are currently certified to operate as a CLEC and/or long distance
telecommunications provider in 18 U.S. states.
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<PAGE> 53
We believe that our Smart LEC strategy enables us to enter and construct
our network into new cities with relatively low up-front capital expenditures,
and a significant proportion of success-based capital expenditures. Depending on
the size of the market and other factors, our up-front costs to enter a market
are expected to be approximately $7 to $10 million, which includes initial
set-up costs associated with entering a market, such as the installation of our
switch and collocation facilities. Additional capital expenditures will be based
on subscriber levels and services offered and are estimated to be approximately
$400-500 per line. Therefore, a significant portion of the total capital
expenditures in a given market will be incurred only as we increase our
subscriber base and the related capacity of the network.
National Network
We currently have in place an ATM network which connects more than 80 U.S.
cities. We have facilities located in each of these points of presence, and have
leased DS-1 to DS-3 circuits to interconnect this network and to reach the major
national Internet access points. Approximately 20 owned ATM switches are now
being used across our network, with additional switches scheduled to be deployed
throughout 1999. The ATM switches allow us to carry multiple services
efficiently over our circuits. We directly peer with major backbone providers
including MCI WorldCom and PSINet. These peering arrangements help us maintain a
competitive low cost network. This national network will interconnect our local
Smart LEC networks as they are deployed.
Our national network currently interconnects our point-of-presence
facilities in the following cities:
Akron, OH
Albuquerque, NM
Atlanta, GA
Austin, TX
Birmingham, AL
Boise, ID
Boston, MA
Champaign, IL
Charlotte, NC
Chicago, IL
Cincinnati, OH
Cleveland, OH
Colorado Springs, CO
Columbia, SC
Columbus, OH
Corpus Christie, TX
Dallas/Ft. Worth, TX
Dayton, OH
Denver, CO
Des Moines, IA
Detroit, MI
El Paso, TX
Flint, MI
Grand Rapids, MI
Green Bay, WI
Greensboro, NC
Greenville, SC
Houston, TX
Indianapolis, IN
Irvine, CA
Jackson, MS
Kansas City, MO
Knoxville, TN
Lansing, MI
Las Vegas, NV
Laurel, MD
Lexington, KY
Little Rock, AR
Los Angeles, CA
Louisville, KY
Madison, WI
Memphis, TN
Merriville, IN
Milwaukee, WI
Minneapolis/St. Paul, MN
Montgomery, AL
Nashville, TN
New Orleans, LA
New York, NY
Oklahoma City, OK
Omaha, NE
Peoria, IL
Philadelphia, PA
Phoenix, AZ
Pittsburgh, PA
Portage, IN
Portland, OR
Raleigh/Durham, NC
Reno, NV
Richmond, VA
Rochester, NY
Rockford, IL
Sacramento, CA
Salt Lake City, UT
San Antonio, TX
San Diego, CA
San Francisco, CA
San Jose/Mae West, CA
South Bend, IN
Spokane, WA
Springfield, IL
St. Louis, MO
Stamford, CT
Tallahassee, FL
Toledo, OH
Topeka, KS
Traverse City, MI
Tucson, AZ
Tulsa, OK
Washington, DC
Our national leased circuits currently cover approximately 6,500 miles of
DS-3 circuits and approximately 13,300 miles of DS-1 circuits. As we further
increase the capacity and reach of our network over the next 12 months, we
expect to contract for the lease of additional approximately 10,000 miles of
additional OC-3 circuits, DS-3 circuits and DS-1 circuits.
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The following map illustrates the reach of our ATM network today:
[CURRENT ATM NETWORK GRAPHIC]
LMDS Broadband Wireless Spectrum
As a complement to our Smart LEC network, we own LMDS licenses for the
broadband wireless spectrum. Our licenses cover nearly all of the state of Ohio
and represent more than 10.5 million "POPs". With 1,150 MHz of spectrum, these
licenses have much greater bandwidth than cellular or PCS licenses (up to 30
MHz) or other fixed wireless licenses (80-400 MHz). We are the fourth largest
holder of this spectrum in North America. NEXTLINK Communications, Inc. is the
largest license holder, and has licenses for major U.S. population centers
outside of Ohio.
LMDS is a newly authorized fixed broadband wireless service that may be
used to provide high-speed data transfer, telephone service, telecommunications
network transmission, Internet access, video broadcasting, video conferencing,
and other services. LMDS uses frequencies in the 28GHz to 31GHz range. The
spectrum is useable for communication services from a fixed antenna, but is not
suitable for mobile or portable communications. The service is subject to line
of site limitations and rain attenuation, but current systems seek to reduce
these impediments through advanced system architecture and the strategic
placement of transmitters. The point-to-multipoint technology of LMDS allows a
single hub site antenna to be used to form multiple paths with customer antennas
at numerous locations. LMDS can thus be used to provide a wireless high-capacity
broadband service for the "last mile" to a subscriber's home or office.
As LMDS technology advances, we intend to use this spectrum to offer
additional communications services and to expand the reach of our network. For
some locations, we believe that LMDS may offer a substantially lower cost
solution for providing high-quality broadband services than other competing
delivery systems such as fiber or copper extensions. LMDS equipment is not in
general commercial service at this time, but technology is currently in
development and we have established relationships with several equipment
vendors.
Through a wholly owned subsidiary, in June 1998, we were awarded the
following A-Block licenses in 15 markets in Ohio with a total of 10,573,982 POPs
(representing more than 95% of the POPs in Ohio). Each LMDS license covers a
defined Basic Trading Area, and our A-Block LMDS licenses consist of 1,150 MHz
of spectrum. CoreComm bid $25.2 million for such licenses, for an average of
$2.39 per POP.
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<TABLE>
<CAPTION>
OHIO MARKETS POPS(1)
- ------------ ----------
<S> <C>
Cleveland-Akron............................................. 2,894,133
Cincinnati.................................................. 1,990,451
Columbus.................................................... 1,477,891
Dayton-Springfield.......................................... 1,207,689
Toledo...................................................... 782,184
Canton-New Philadelphia..................................... 513,623
Youngstown-Warren........................................... 492,619
Lima........................................................ 249,734
Mansfield................................................... 221,514
Zanesville-Cambridge........................................ 178,179
Findlay-Tiffin.............................................. 147,523
Sandusky.................................................... 133,019
Ashtabula................................................... 99,821
Chillicothe................................................. 93,579
Marion...................................................... 92,023
----------
Total.................................................. 10,573,982
==========
</TABLE>
- ---------------
(1) POPs are the estimated population of a market. The number of POPs owned by
an operator does not represent the number of users of its services and is
not necessarily indicative of the number of potential subscribers. Rather,
this term is used only as a basis for comparison of the current size of
system operators. The FCC used POPs in the LMDS auction for determining
initial payments, bidder eligibility, and minimum bids. The POPs in this
chart are based upon the April 1, 1990 U.S. Department of Commerce, Bureau
of the Census data. Total POPs in the state of Ohio according to this data
are 11,079,503.
The Telecommunications Act of 1996
Our ability to lease unbundled network elements from incumbent providers is
the result of the Telecommunications Act of 1996. The Telecommunications Act
opened up the local telecommunications exchange market to competition, creating
an attractive opportunity for us and other carriers. The Telecommunications Act
requires that ILECs offer the use of their networks for total resale or the
lease of unbundled network elements, and that ILECs permit other carriers to
collocate and interconnect their equipment within the ILECs' central offices.
Moreover, an ILEC is prohibited from entering the long distance market in its
home region until it is determined that there is a significant level of
competition in its local service market.
PRODUCTS AND SERVICES
We currently offer our business and residential customers an extensive
array of voice and data services in order to satisfy and capture all of their
communications needs.
Bundled Packages
In our current service offerings, we bundle communications products and
services in order to give our customers increased convenience, flexibility and
choice, at good "value for money." We typically offer a platform of basic
services, which represents a minimum selection of services to be offered, and
then create ways for the customers to easily and conveniently increase the other
services purchased according to their tastes.
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For example, in our current residential service offering, we combine a
basic package with the concept of "Feature Points" as follows:
<TABLE>
<S> <C> <C> <C> <C>
Home Option: Option 1: Option 2: Option 3:
Monthly Price: Add:
$19.95 $28.95 $42.95 -----
Internet
Includes: Dialtone Dialtone Dialtone
Second Line
Local Calls Local Calls Local Calls
Feature Points: 2 5 10
</TABLE>
<TABLE>
<CAPTION>
FEATURES FEATURE POINTS
- -------- --------------
<S> <C>
Long Distance (30 minutes).................................. 1
Long Distance (100 minutes)................................. 3
Call Waiting, 3-way Calling, Call Forwarding (each)......... 1
Caller ID, Voicemail, Pager (each).......................... 2
</TABLE>
According to these offerings, customers can choose the amount they would
like to spend on telephone services, determine the package that they would like
to subscribe to, and then have the flexibility to choose which features they
would like included as part of the bundle. For example, if a customer chooses
Home Option 2, they would pay $28.95 per month, and receive five free feature
points to "spend" in any way they would like. They could choose 100 minutes of
free long distance plus voicemail, or 30 minutes of long distance, plus call
waiting, 3-way calling, and a pager (or any other combination of features with
five feature points).
We are continually refining our product offerings, and the services listed
above are currently being modified to include our Internet services, second line
options, and other related products. For example, we are currently finalizing
plans to offer Internet access service as part of our bundled offerings, which
is expected to include the ability to buy Internet access and a second line for
a combined price, the ability to select Internet access using the feature points
described above, and other flexible alternatives and features such as, unlimited
and measured access, various e-mail options, and bundled web page hosting.
Although the specific components of our offerings will change, we will continue
our strategy of designing attractive marketing packages which give the customer
flexibility and choice, with convenient ways to subscribe to additional
services.
Voice and Data Services
We currently offer the following voice, data and Internet services to
business and residential customers in our markets:
- Local Exchange Services -- including standard dial tone, local calling,
Centrex services, Emergency 911 services, operator assisted calling,
access to the long distance network, and other related services.
- Custom Calling Features -- including call waiting, call forwarding,
caller ID, voice mail, conference calling and other enhanced features.
- Long Distance Services -- including 1+ interLATA calls (which are calls
across Local Access and Transport Areas), intraLATA calls, international
calls, 800/888/877 toll free services, calling cards and other related
services.
- Internet Access Services -- including dial-up and dedicated access to the
Internet over conventional modems, ISDN, T-1, DS-3 and higher speed
connections.
- Web Site Hosting and Design -- including dedicated and shared site
hosting and, typically through third parties, web site design.
- Data Networking Services -- including a variety of data circuits and
networking solutions.
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DSL Offering
DSL is a transmission technology that allows for the high speed transport
of significant levels of voice and data over conventional, copper phone lines.
DSL can deliver speeds of up to 7 Mbits per second, which is the equivalent of
more than 100 voice grade circuits, over a single copper loop.
The higher speed provided by DSL technology enables consumers to transfer
data or access the Internet at high speeds. In addition to significantly
increasing data transfer rates, DSL technology provides an alternative for
providing multiple voice lines or voice and data carried over the same pair of
twisted copper wire. By using DSL, businesses can obtain the same number of
voice lines over a single loop that would normally be obtained using a more
expensive standard T1 or other circuit. DSL technology also makes it possible
for business or residential customers to obtain telephone service and high-speed
data service simultaneously over a standard copper telephone line.
We believe there are several benefits to DSL, including:
- High bandwidth, high-speed, "always on" Internet connections;
- Dedicated, not shared bandwidth, which allows for "guaranteed"
performance levels;
- Ratable service, which allows us to tailor the service to the
customers' needs and allows the customers to determine how much money
to expend for the amount of high speed bandwidth they need;
- Ability to use the same loop for voice and data simultaneously;
- Enhanced security;
- Utilization of existing copper infrastructure, which allows faster
rollout and lowers deployment costs;
- Increased telephony margins as a result of packaging of services over
a single local loop; and
- Deployment with success-based capital expenditures.
We believe our Smart LEC network is well suited to capitalize on DSL
technology. In our own switch facilities and our collocation facilities, we are
deploying DSL access equipment. DSLAMs are connected to the copper loops at the
end office, and aggregate and concentrate the data traffic from the end user.
DSL technology is limited by the length of the loop being used, which typically
must be less than three miles, as well as other factors such as the condition
and quality of the copper line. We are planning to rollout our DSL network and
services simultaneously with the telephony network, beginning in our initial
markets in 1999 and 2000. We intend to use DSL to provide high-speed Internet
access and data services, combined data and voice services over a single copper
loop, and voice circuit trunking to connect multiple access lines.
We intend to deploy multiple forms of DSL in order to provide a broad
service offering to our customers and to expand the DSL coverage of our target
markets. Our offerings are expected to include different forms of Asymmetric DSL
(ADSL) including Rate Adaptive DSL (RADSL) and G.lite, Symmetric DSL (SDSL) and
Integrated DSL (IDSL). We believe that a widely accepted standard, such as
G.lite, will enhance our ability to penetrate our target markets with DSL
services.
Other Related Services
Cellular and Paging Services. As a complement to our voice and data
services, we also offer cellular and paging services. Although these are not
core products and do not utilize our own networks, they are offered as an
additional service for our business and residential customers for added choice
and convenience. We are currently offering cellular services in Ohio and
Michigan, and may choose to add other markets in the future. Our paging service
is available nationally. We have resale agreements with the three major
providers of cellular service in Michigan and Ohio: AirTouch Cellular, GTE
Mobilenet Inc. and Ameritech Mobile Communications, Inc. In addition, we sell
retail cellular long distance telephone services to cellular customers of
various local cellular service providers who have chosen us as their long
distance service provider.
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IP Telephony. With recent advancements in the development of telephony
equipment using Internet Protocol, the overall quality of telephone calls
delivered over an IP network has become increasingly reliable and has become
more equivalent to the circuit-switched network. Although we are not currently
using this technology to deliver our voice traffic, our local and national
networks have been designed to allow for the use of IP telephony when and if
reliable technology becomes available.
Under this technology, our platform would compress and convert voice into
IP packets using voice compression algorithms, digital signal processors and
ancillary software. These packets would then be transmitted via our national IP
network. Due to its scalability and compression features, this technology would
allow a greater quantity of simultaneous voice calls and data to be carried over
the network compared to traditional circuit switching, thus utilizing
significantly less bandwidth. Potential services offered under this technology
would include local and long distance calling, fax transmission, call
termination, national voicemail, and other related services.
SALES AND MARKETING
Our marketing strategy is to provide business and residential customers a
bundled package of high quality telecommunications services at competitive
prices, delivered with quality care and service to the customer.
In its prior experience, our management has had significant success in
marketing integrated communications products in several other operations both in
the U.S. and abroad. We believe much of this success was due to our management's
ability to creatively and effectively design and market integrated
communications products and services. We intend to capitalize on this experience
to develop service offerings to attract and retain business and residential
customers in our target markets.
A core part of our strategy is to offer our customers bundled
telecommunications, Internet and data services. Our integrated service offerings
are packaged and priced to give the customer increased flexibility, choice, and
"value for money", while also enhancing convenience. Our offerings can be
created to allow flexibility to meet individual customer needs, and are
conveniently offered on a single bill. We believe that offering combined
packages of local and long distance telephony, Internet access and data services
is attractive to the potential business and residential customers in our target
markets. In addition to attracting customers, we believe this strategy also
improves our profitability by increasing average revenue per customer, reducing
customer acquisition costs and other operating costs, and improving customer
retention.
The broad reach of the Smart LEC network enables us to market our services
over wide geographical areas. By using a combination of resold and switch-based
services, we will not be limited to offering services only in areas where we
have built our own networks. We intend to capitalize on our ability to market
over wide areas by utilizing mass marketing strategies and other efficient
methods of communicating with our potential customer base. For example, we have
contracted to be one of only four gate sponsors for the new football stadium for
the Cleveland Browns. Under this agreement, we have prominent placement of
advertisements throughout the stadium, an entry gate known as the CoreComm Gate,
game giveaway opportunities, and other related advertising benefits. The broad
reach of our network across the Cleveland area allows us to take advantage of
such mass market opportunities. We believe that these and other initiatives will
increase the awareness of the CoreComm brand and will attract new business and
residential customers in our target markets. We believe that the ability to
market over larger areas will increase the efficiency and effectiveness of our
marketing and advertising programs.
In the business market, we will focus on a direct sales approach, targeting
small and medium-sized businesses. We believe that small to medium-sized
businesses represent a large and growing market which is currently underserved
by the ILECs and competitive providers. We seek to attract these target
customers with customer-convenient bundles, providing simplicity, flexibility
and ease of decision-making. We use our sales force to sell directly to
customers, to establish a relationship with telecoms managers, and to better
understand and service their communications needs. We generally employ sales
people with significant experience in the telecommunications industry. In order
to effectively incentivize our sales force, a large portion of their
compensation is performance-based and focused on sales and customer retention.
We try to attract and retain qualified sales people by offering them the
opportunity to work with a
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successful management team in an entrepreneurial environment, with equity
participation through stock options.
CUSTOMER INTERFACE AND PROPRIETARY SYSTEMS
We believe that the customer experience must be easy, enjoyable, and
exceptional. We have developed integrated systems and procedures that will
substantially support all aspects of our business, including provisioning,
billing, customer care and collections. Our information services and customer
care operations are closely linked to ensure that all related operations are
effectively integrated. We believe this focus on the customer experience will
provide us with a competitive advantage in attracting and retaining customers.
"Internet Centric" Approach
We are in the process of actively developing and incorporating systems to
deliver "Internet Centric" operational support systems. These customer-facing
systems are expected to add functionality in the areas of electronic billing,
web-based customer care and e-commerce. We are preparing to support a
substantial portion of our customer interactions over the World Wide Web. Our
customers will be able to order new services, view and pay their bill online,
and interact with our customer care department on a 24 x 7 x 365 basis, all
without using the telephone. We believe that this method of communicating with
the customer will not only be convenient for the customer, but will also
increase our operating efficiency.
We intend to employ a variety of techniques to effectively and efficiently
serve the customer, including:
Efficient Fulfillment of Services--Our systems support electronic
tracking of orders from provisioning through installation. Service
orders will flow directly from the consumer to our back office, and then
on to the ILEC. Administrative controls in our support systems are
designed to provide timely identification and resolution of customer
concerns and issues.
Low-cost Billing--We have developed a customer friendly, fully
integrated billing statement covering all of the communications services
supplied. The statement currently can be delivered electronically via
e-mail. Customers may elect to pay their bill automatically via credit
card or direct debit. We are further developing web-based electronic
bill presentment and payment capabilities. These services will reduce
billing costs while providing value-added services to customers such as
the ability to sort billing data and create customized reports.
Smart Customer Care--We intend to continue to develop sophisticated
customer care systems that will increase our use of the Internet as a
means of communicating with our customers. We will soon be making
customer care available via e-mail, which will allow for simple requests
and changes to be processed without use of the phone and for customer
care associates to work from outside of our facilities. These and other
initiatives are expected to improve the efficiency of our customer care
resources by developing on-line tools which will enable customers to
communicate more efficiently with us and even service themselves when
appropriate.
Electronic Bonding & Proprietary Systems
We are currently bonded electronically with Ameritech and Bell Atlantic.
This electronic interface allows for timely and accurate service ordering and
provisioning of our customers. We have real-time access to customer information
as well as real-time order entry and confirmation. We provision service to
customers through our proprietary systems, which are designed to interface with
the ILECs' systems through a variety of delivery mechanisms. Our systems and
processes have been developed to decrease the risk of human error associated
with provisioning customers by manual keying or fax.
Our customer interface systems have been developed and continue to be
enhanced in a client/server environment that allows for flexibility to
accommodate an expanding customer base, efficient entry into new markets,
switch-based services, and rapid development of additional functionality. Our
proprietary systems handle all pre-ordering activities, including obtaining
customer service records (CSR), finding and
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reserving telephone numbers, verifying customer addresses, validating due dates,
searching the ILEC's switches for feature availability (COFA), and yellow page
listings.
In addition, we have developed proprietary methods of ordering and
provisioning services through ILECs by formatting and sending electronic data
interchange (EDI) messages. These systems use common software for the actual
sending and receiving of purchase orders and acknowledgements, but use custom
code for the content of these messages. We typically use off-the-shelf software
for standard processes that is readily available, and develop proprietary
systems when such processes need to be modified to meet our needs.
We intend to continue to commit significant resources to develop our
electronic interfaces with ILECs as we provide additional services. We view the
efficiency and the accuracy of our communications and interface with ILECs as an
important strategic priority.
COMMUNICATIONS INDUSTRY
We are participating in the large and rapidly changing U.S. wireline
telecommunications industry. We believe that the wireline telecommunications
industry benefits from positive price elasticity, as well as growing,
non-cyclical demand for services. According to the U.S. Census Bureau, the total
market size of the telecommunications services industry (which excludes cable
television and Internet access) has increased from approximately $160 billion in
1990 to approximately $256 billion in 1997. This represents growth of 60% over
this period. The wireline segment of this market accounts for approximately $193
billion, or 75% of the total telecommunications services market in 1997.
Approximately 50% of wireline segment revenues are derived from local service
and network access.
According to FCC data, the total local revenue generated by the CLECs and
competitive access providers was less than 2% of the total U.S. local revenues
in 1997. As of June 30, 1998, CLEC lines (resold and switched) constituted
approximately 1.6% of the total switched lines in the U.S.
The emergence of the Internet and demand for data services has had a
significant effect on the U.S. communications industry. The use of the Internet
in both businesses and residences has been increasing rapidly, and is expected
to continue its growth. Forrester Research projects that revenues from Internet
access services will grow from $10.3 billion in 1998 to $61.8 billion in 2003 in
the U.S. They also project that web hosting revenues will increase from $900
million in 1998 to $14.7 billion in 2003 in the U.S. Frost and Sullivan project
that the total U.S. market for high-speed and switched data services will grow
at an annual rate of approximately 17%, from $18.0 billion in 1997 to
approximately $40 billion by 2002. The Gartner Group forecasts data traffic to
grow more than five times faster than voice traffic through 2002, and that DSL
revenue will grow at an annual rate of over 200% from 1998 to 2003, to reach
$18.0 billion.
We believe the overall size and growth of the U.S. communications market
presents a significant opportunity for competitive communications providers.
There are several factors which we believe will enhance the ability for
competitive providers to compete with the incumbent operators, including general
market receptivity to alternative providers, the desire in the business market
to diversify services to multiple suppliers, and the ability of competitive
providers to attractively bundle services and to offer improved customer
service.
OUR OTHER BUSINESSES
We are exploring other telecommunications opportunities both domestically
and internationally, including offering prepaid cellular telephone services and
other telecommunications opportunities.
To this end, in August 1999, we acquired a 53% equity stake in Q-east
Holding Limited, a Taiwan-based startup reseller of telephone services. Q-east
provides long distance service to American consumers calling into Greater China
on a pre-paid basis, via pre-paid calling cards, and on a post-paid basis to
Taiwanese businesses. Q-east also provides termination services into Greater
China for Tier 1 and Tier 2 telecommunications carriers. Q-east is in the
process of building a network in Asia to support voice, fax and data services
for carriers, ISPs and end users. Q-east is also exploring other
telecommunications
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opportunities throughout Greater China's markets. To date, CoreComm has invested
approximately $2.5 million into Q-east Holding Limited.
COMPETITION
The telecommunications industry and all of its segments are highly
competitive and many of our existing and potential competitors have greater
financial, marketing, technical and other resources than we do. Please refer to
the section entitled "Risk Factors--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." Competition for our products and
services is based on price, quality, network reliability, service features and
responsiveness to customers' needs.
CLEC
In each of our markets, we face competition from ILECs, including Ameritech
and Bell Atlantic, as well as other providers of telecommunications services,
such as GTE, other CLECs and cable television companies. In the local exchange
markets, our principal competitor will be the ILECs. We also face competition or
prospective competition from one or more CLECs. For example the following
companies have each begun to offer local telecommunications services in major
U.S. markets using their own facilities or by resale of the incumbent local
exchange carrier's services or other providers' services: AT&T, MCI WorldCom,
ICG, NEXTLINK and Sprint.
Some of our competitors, including AT&T, MCI WorldCom and Sprint, have
entered into interconnection agreements with Ameritech in states in which we
operate. These competitors either have begun or in the near future likely will
begin offering local exchange service in those states. In addition to these long
distance service providers and existing CLECs, entities that currently offer or
are potentially capable of offering switched telecommunications services
include:
- wireless telephone system operators;
- large customers who build private networks;
- cable television companies; and
- other utilities.
Competition in our CLEC business will continue to intensify in the future
due to the increase in the size, resources and number of market participants.
Many facilities-based CLECs 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 RBOCs and IXCs, a provider can offer
single source local and long distance services similar to those offered by us.
Such additional alternatives may provide such competitors with greater
flexibility and a lower cost structure than us. Some of these CLECs and other
facilities-based providers of local exchange service are acquiring or being
acquired by IXCs. 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
us.
Under the Telecommunications Act and related federal and state regulatory
initiatives, barriers to local exchange competition are being removed. The
availability of broad-based local resale and introduction of facilities-based
local competition are required before the RBOCs may provide in-region long
distance services originating in their traditional service area. The RBOCs are
currently allowed to offer certain in-region "incidental" long distance services
(such as cellular, audio and visual programming and certain interactive storage
and retrieval functions) and to offer out-of-region landline long distance
services.
Section 271 of the Telecommunications Act prohibits a RBOC from providing
long distance service that originates (or in certain cases terminates) in one of
its in-region states until the RBOC has satisfied certain statutory conditions
in that state and has received the approval of the FCC. The FCC to date has
denied each application for such approval, including the application of
Ameritech for in-region long distance authority in Michigan. We anticipate that
a number of RBOCs, including Ameritech, will file
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additional applications for in-region long distance authority in certain states.
The FCC will have 90 days from the date an application for in-region long
distance authority is filed to decide whether to grant or deny the application.
Based on continuing legal challenges, we do not believe that any RBOC will
provide in-region long distance services on a significant basis prior to the
year 2000.
Once the RBOCs are allowed to offer widespread in-region long distance
services, they will be in position to offer single-source local and long
distance services similar to those offered by CoreComm and the largest IXCs.
While new business opportunities have been made available to us through the
Telecommunications Act and other federal and state regulatory initiatives,
regulators are likely to provide the ILECs with an increased degree of
flexibility with regard to pricing of their services as competition increases.
The Ameritech resale agreement contains certain pricing protections, including
adjustments in the wholesale rates to be consistent with any changes in the
Ameritech retail rates. Nevertheless, if the ILECs elect to lower their rates
and sustain lower rates over time, this may adversely affect our revenues from
and place downward pressure on the rates we can charge. We believe the effect of
lower rates may be offset by the increased revenues available by offering new
products and services to our target customers as well as increased usage, but we
cannot be sure that this will occur. In addition, future regulatory decisions
may afford the ILECs excessive pricing flexibility or other regulatory relief
which could have a material adverse effect on us.
INTERNET
The Internet services market is also extremely competitive. 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 as AT&T and GTE;
- RBOCs, such as Ameritech and Bell Atlantic; and
- online cable services, such as Excite@Home and Roadrunner.
This competition will increase 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. As a result, our businesses may suffer.
Our DSL service offering will also face competition from the traditional
telephone companies, cable modem service providers, competitive
telecommunications companies, traditional and new national long distance
carriers, other Internet service providers, on-line service providers and
wireless and satellite service providers.
LMDS
Depending on the services ultimately offered through our LMDS business, it
could face the same competition as outlined above. In addition, the extent it is
used it deliver pay television, our planned LMDS business will compete with
franchised cable television systems and also may face competition from several
other types of MVPDs:
- Multichannel Multipoint Distribution Systems;
- Satellite Master Antenna Television Systems;
- DBS and other television receive-only satellite dishes;
- video service from telephone companies; and
- open video system operators.
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MVPDs face competition from other sources of entertainment, such as movie
theaters and computer on-line services. Further, premium movie services offered
by MVPDs have encountered significant competition from the home video industry.
In areas where several off-air television broadcasts can be received without the
benefit of terrestrial distribution systems, MVPDs have experienced competition
from such broadcasters. Online services and ISPs also serve as a source of
competition to MVPDs.
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 to LMDS operators from local telephone companies and
franchised cable television systems.
OTHER BUSINESSES
In addition to our CLEC, Internet and LMDS businesses, our other businesses
face strong competition as well. These competitive businesses include long
distance service, cellular service and paging service. Our long distance service
faces competition from long distance carriers, including facilities-based
carriers such as AT&T, MCI WorldCom and Sprint and resellers of long distance
service. Our cellular service faces competition from other cellular carriers,
such as Vodafone AirTouch and AT&T, and from PCS carriers, such as Sprint PCS.
Our paging services are similarly exposed to competition from other providers of
paging services operating in the same local markets, regionally or nationally.
CUSTOMER DEPENDENCE AND SEASONALITY
We do not depend upon any single customer for any significant portion of
our business. Neither our business nor the telecommunications industry are
generally characterized as having a material seasonal element, and we do not
expect our business or the industry to become seasonal in the foreseeable
future.
EMPLOYEES
As of September 30, 1999, we had an aggregate of approximately 800
employees. None of our employees are represented by any labor organization. We
believe that our relationship with our employees is excellent.
PROPERTIES
Some of our subsidiaries lease office space which we believe is adequate to
serve our present business operations and our needs for the foreseeable future.
Please refer to the notes to our consolidated financial statements, included
elsewhere in this Offering Memorandum, for information concerning our lease
commitments.
LEGAL PROCEEDINGS
We are not involved in any legal disputes that are expected to have a
material adverse effect on our financial condition.
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REGULATION
OVERVIEW
The telecommunications services we provide are subject to regulation by
federal, state and local government agencies. The following summary does not
purport to describe all current and proposed regulations and laws affecting the
telecommunications industry. Other existing federal and state regulations and
legislation are the subject of judicial proceedings, legislative hearings and
administrative proposals, which could change in varying degrees the manner in
which this industry operates. Neither the outcome of these proceedings nor their
impact on the telecommunications industry or our business can be determined at
this time. Future federal or state regulations and legislation may be less
favorable to us than current regulation and legislation and therefore may have a
material and adverse impact on our business and financial prospects. In
addition, we may expend significant financial and managerial resources to
participate in proceedings setting rules at either the federal or state level,
without achieving a favorable result.
At the federal level, the FCC has jurisdiction over interstate and
international services and interstate services are communications that originate
in one state and terminate in another. Intrastate services are communications
that originate and terminate in a single state and state public service
commissions exercise jurisdiction over intrastate services. Municipalities and
other local government agencies may also regulate limited aspects of our
business, such as use of government-owned rights-of-way and construction
permits. Our networks are also subject to numerous local regulations such as
building codes, franchise and right-of-way licensing requirements.
TELECOMMUNICATIONS ACT OF 1996
The federal Telecommunications Act, enacted in 1996, has resulted and will
continue to result in substantial changes in the marketplace for
telecommunications services. These changes include, at present, opening local
exchange services to competition and, in the future, a substantial increase in
the addressable services for us. Among its more significant provisions, the
Telecommunications Act:
- removes legal barriers to entry into all telecommunications services,
such as long distance and local exchange services;
- requires ILECs (e.g., Ameritech or Bell Atlantic) to "interconnect" with
and provide services for resale by competitors;
- establishes procedures for ILECs to enter into new services, such as long
distance and cable television;
- relaxes regulation of telecommunications services provided by ILECs and
all other telecommunications service providers; and
- directs the FCC to establish an explicit subsidy mechanism for the
preservation of universal service.
The FCC was also directed by Congress to revise and make explicit subsidies
inherent in the access charge paid by IXCs for use of local exchange carriers'
services.
REMOVAL OF ENTRY BARRIERS
The provisions of the Telecommunications Act should enable us to provide a
full range of local telecommunications services in any state. Although we will
be required to obtain certification from state public service commissions in
almost all cases, the Telecommunications Act should limit substantially the
ability of a state public service commission to deny a request for
certification. The provisions of the Telecommunications Act also reduce the
barriers to entry by other potential competitors and therefore increase the
level of competition we will likely face in all markets affected by the Act.
Please refer to the section entitled "Business--Competition."
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INTERCONNECTION WITH LOCAL EXCHANGE CARRIER FACILITIES
A company cannot compete effectively with the ILECs in the switched local
telephone services market unless it is able to connect its facilities with the
ILEC's facilities and obtain access to certain essential services and resources
under reasonable rates, terms and conditions. The Telecommunications Act imposes
a number of access and interconnection requirements on all local exchange
providers, including CLECs, with additional requirements imposed on non-rural
ILECs. These requirements are intended to provide access to certain networks
under reasonable rates, terms and conditions. Specifically, ILECs must provide
the following:
UNBUNDLING OF NETWORK ELEMENTS. ILECs must offer access to various
unbundled elements of their network. This requirement allows new entrants to
purchase at cost-based rates elements of an ILEC's network that may be necessary
to provide service to a new entrant's customers.
DIALING PARITY. All local exchange carriers must provide dialing parity,
which means that a customer calling to or from a CLEC network cannot be required
to dial more digits than is required for a comparable call originating and
terminating on the ILEC's network.
TELEPHONE NUMBER PORTABILITY. Telephone number portability enables a
customer to keep the same telephone number when the customer switches local
exchange carriers.
RECIPROCAL COMPENSATION. The duty to provide reciprocal compensation means
that local exchange carriers must terminate calls that originate on competing
networks in exchange for a given level of compensation and that they are
entitled to termination of calls that originate on their network, for which they
must pay a given level of compensation.
RESALE. All local exchange carriers generally may not prohibit or place
unreasonable restrictions on the resale of their services. In addition, ILECs
must offer local exchange services to resellers at a wholesale rate that is less
than the retail rate charged to end users.
ACCESS TO RIGHTS-OF-WAY. All ILECs, CLECs and certain other utilities must
provide access to their poles, ducts, conduits and rights-of-way on a
reasonable, nondiscriminatory basis.
ILECs are required to negotiate in good faith with other carriers that
request any or all of the arrangements discussed above. If a requesting carrier
is unable to reach agreement with the ILEC within a prescribed time, either
carrier may request arbitration by the applicable state commission.
While the Telecommunications Act generally requires ILECs to offer
interconnection, unbundled network elements and resold services to CLECs,
ILEC-to-CLEC interconnection agreements may have short terms, requiring the CLEC
to renegotiate the agreements. ILECs may not provide timely provisioning or
adequate service quality, thereby impairing a CLEC's reputation with customers
who can easily switch back to the ILEC. In addition, the prices set in the
agreements may be subject to significant rate increases if state regulatory
commissions establish prices designed to pass on to the CLECs part of the
intrastate cost of providing universal service.
In January 1999, the United States Supreme Court upheld the FCC's authority
to adopt pricing rules for interconnection services unbundled network elements
and resale by CLECs. However, the Supreme Court instructed the FCC to reconsider
aspects of its 1996 order regarding the extent to which ILECs are required to
unbundle elements of their networks. The FCC's pricing rules are also subject to
further judicial review. On remand from the Supreme Court, the FCC adopted an
order on September 15, 1999, which specified the unbundled elements that ILECs
must make available to competitors. The FCC reaffirmed that incumbents must
provide unbundled access to six of the seven network elements that were listed
in the FCC's 1996 order. According to the FCC, the seventh item, operator and
directory assistance services, are no longer necessary to permit competition.
The FCC's order also added additional unbundled elements to the list-subloops,
portions of loops, dark fiber optic loops and transport-but declined, except in
limited circumstances, to require ILEC's to unbundle the facilities used to
provide high-speed Internet access and other data services. In addition, the FCC
initiated a further rulemaking proceeding to consider
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whether carriers should be able to use certain unbundled elements as a
substitute for the ILEC's special access services.
In February 1999, the FCC determined that calls to ISPs are interstate in
nature, thus falling under the FCC's jurisdiction. The FCC's February 1999
ruling has been appealed by several parties. The FCC has since initiated a
review of compensation arrangements between ILECs and CLECs for calls to ISPs.
This review could adversely affect the compensation that CLECs, including us,
receive for carrying such traffic. In addition, certain state regulatory
commission decisions regarding reciprocal compensation for termination of calls
to ISPs could lead to lower revenues for CLECs.
Several ILECs have filed petitions at the FCC and have initiated
legislative efforts to effect a waiver of the obligation to unbundle and offer
services for resale with regard to high-speed data or "advanced" services. In
addition, the ILECs are seeking to provide such services on an interLATA (long
distance) basis before they have been granted approval by the FCC pursuant to
Section 271 of the Communications Act to enter the long distance market.
Although the FCC has held that advanced services continue to be subject to the
resale and unbundling obligations of the Act, it has commenced a proceeding to
determine whether ILECs can create separate affiliates for advanced services
that would be free of these obligations. In addition, the FCC recently obtained
a voluntary remand from the U.S. Court of Appeals for the D.C. Circuit of a case
initiated by US West to consider further the issue of whether an ILEC's advanced
services fall into the category of "telephone exchange service" or "exchange
access service." If the FCC agrees with US West that advanced services are
neither telephone exchange or exchange access services, it could mean that
advanced services are not subject to the resale, unbundling, and other
provisions of Sections 251(b) and (c) of the 1996 Act. Even if the FCC does not
support US West's view on this matter, if it fails to support its decision
properly during the remand period, it could be reversed by the Court of Appeals.
Either of these results would make it more difficult for us to obtain access to
an ILEC's advanced services.
There are also numerous bills being considered by Congress that would
deregulate the provision of advanced services by ILECs. These regulatory or
legislative outcomes could have an adverse effect on our ability to obtain
access to the network elements necessary for the provision of advanced services
to our customers or to compete with ILECs in the provision of such services.
LOCAL EXCHANGE CARRIER ENTRY INTO NEW MARKETS
Our principal competitor in each market we enter is the ILEC. Prior to the
enactment of the Telecommunications Act, the RBOCs generally were prohibited by
the consent decree that broke up the Bell System from providing long distance
services. The Telecommunications Act established procedures under which a RBOC
can provide landline long distance services originating from (and in certain
cases, terminating in) its traditional telephone service area after receiving
approval from the FCC. The interconnection offered or provided by the RBOC must
comply with a competitive checklist that incorporates the interconnection
requirements discussed above. Please refer to the section entitled
"--Interconnection with Local Exchange Carrier Facilities." RBOCs are currently
permitted to provide landline long distance services to customers outside of
their local service areas and in conjunction with their mobile telephone service
offerings.
Approval from the FCC will enable a RBOC to provide customers with a full
range of local and long distance telecommunications services. The provision of
landline long distance services by RBOCs is expected to reduce the market share
of the major long distance carriers, which may be significant customers of our
services. Consequently, the entry of the RBOCs into the long distance market may
have adverse consequences on the ability of CLECs both to generate access
revenues from the IXCs and to compete in offering a package of local and long
distance services. To date, the FCC has denied each application for in-region
long distance service. More RBOC requests to provide in-region long distance
service are expected to be filed with the FCC in the near future.
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RELAXATION OF REGULATION
A goal of the Telecommunications Act is to increase competition for
telecommunications services, thereby reducing the need for regulation of these
services. To this end, the Telecommunications Act requires the FCC to streamline
its regulation of ILECs and permits the FCC to forbear from regulating
particular classes of telecommunications services or providers. Since we are a
non-dominant carrier and, therefore, are not heavily regulated by the FCC, the
potential for regulatory forbearance likely will be more beneficial to the ILECs
than to us in the long run.
The Communications Act requires all common carriers to charge just and
reasonable rates for their services and to file schedules of these rates with
the FCC. These schedules are known as "tariffs" and they represent a contract
between a carrier and its customers. The Telecommunications Act permits the FCC
to "forbear" from enforcing certain provisions of the Communications Act and the
FCC has used this authority to determine that it is in the public interest to
prohibit carriers from filing tariffs for their interstate services. This
decision of the FCC and its "mandatory detariffing" has been stayed by the U.S.
Court of Appeals for the D.C. Circuit. If the FCC is successful in its attempt
to preclude telecommunications providers from filing tariffs, it may increase
our exposure to litigation. Currently, tariffs contain provisions limiting
carriers' liability on a variety of issues. In the absence of filed tariffs,
carriers would have to rely on negotiated contracts with each customer to
provide such liability limitations.
Another FCC decision permits, but does not require, CLECs to file tariffs
for the charges that they levy on interstate long distance carriers for
completing calls to CLEC customers (refer to the discussion of "access charges"
below). In the absence of a tariff, a carrier depends on a contract with its
customers to determine the rates and conditions of service.
UNIVERSAL SERVICE AND ACCESS CHARGE REFORM
On May 8, 1997, the FCC issued an order implementing the provisions of the
Telecommunications Act relating to the preservation and advancement of universal
telephone service. This order requires all telecommunications carriers providing
interstate telecommunications services, including us, to contribute to universal
service support. Our share of the contributions used to support schools,
libraries and rural health care programs is based on our share of the total
industry end user telecommunications revenues. Our share of the federal
high-cost fund is based on our share of total interstate telecommunications
revenue. Although we have already begun contributing to the federal universal
service fund, the amount of our required contribution changes each quarter.
Several parties have appealed the FCC's May 8, 1997 order. The appeals have been
consolidated and are pending in the United States Court of Appeals for the Fifth
Circuit. A number of states have their own universal service programs. In May
1999, the FCC adopted a framework for a new, forward-looking, high-cost support
mechanism that will provide support for non-rural telecommunications carriers.
The FCC stated that the support mechanism will be used only to determine federal
support and will not impose any obligation on a state to impose intrastate
surcharges. It is not possible to determine at this time what effect this ruling
will have on the level of contributions we are required to make to either the
federal or various state universal service programs, or if it will become easier
for us to become qualified as recipients of universal service funds when we
serve high-cost areas.
In a related proceeding, on May 16, 1997, the FCC issued an order
implementing certain reforms to its access charge rules. Access charges are
charges imposed by local exchange carriers on long distance providers for access
to the local exchange network, and are designed to compensate the local exchange
carrier for its investment in the local network. The FCC regulates interstate
access and the states regulate intrastate access. This order required ILECs to
substantially decrease over time the prices they charge for switched and special
access and changed how access charges are calculated. These changes are intended
to reduce access charges paid by IXCs to local exchange carriers and shift
certain usage-based charges to flat-rated, monthly per-line charges. To the
extent that these rules are effective in reducing access charges, our ability to
offer customers lower-cost access services might be impaired. Additionally, the
FCC ruled that ILECs may no longer impose certain interconnection charges on
competitive providers that interconnect with the ILEC at the end offices but do
not use the transport facilities.
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On August 27, 1999, the FCC issued an order implementing further reforms to
its access charge rules. The FCC's order granted price cap LECs greater pricing
flexibility, and instituted other access charge reforms designed to increase
competition and reduce access charges. These changes could impair our ability to
offer customers lower-cost access services. The FCC also issued a notice of
proposed rulemaking, proposing additional pricing flexibility. In addition, the
FCC stated that it is considering whether to adopt rules constraining CLEC
access charges. To the extent CLEC access charges are reduced, our revenue could
decrease.
Some state public service commissions have adopted rules or are currently
considering actions to preserve universal services and promote the public
interest.
FEDERAL REGULATION GENERALLY
Through a series of proceedings, the FCC has established different levels
of regulation for "dominant carriers" and "non-dominant carriers." Only ILECs
are classified as dominant; all other providers of domestic interstate services
are classified as non-dominant carriers. As a non-dominant carrier, we are
subject to relatively limited regulation by the FCC. However, at a minimum, we
must offer interstate services at just and reasonable rates in a manner that is
not unreasonably discriminatory.
The FCC has adopted rules requiring ILECs to provide collocation to CLECs
for the purpose of interconnecting their competing networks. Under the rules
adopted by the Local Competition Orders, ILECs are required to provide either
physical collocation or virtual collocation at their switching offices.
Recently, the FCC established new rules designed to make it easier and less
expensive for CLECs to obtain collocation at ILEC central offices by, among
other things, restricting the ILECs' ability to prevent certain types of
equipment from being collocated and requiring ILECs to offer alternative
collocation arrangements to CLECs. While these rules are likely to benefit us,
it is uncertain whether they will be implemented by ILECs in a favorable manner.
In addition, ILECs have asked the FCC to reconsider aspects of the new
collocation rules.
All local exchange carriers, including CLECs, must:
- make their services available for resale by other carriers;
- provide nondiscriminatory access to rights-of-way;
- offer reciprocal compensation for termination of traffic; and
- provide dialing parity and telephone number portability.
In addition, the Telecommunications Act requires all telecommunications
carriers to contribute to the universal service mechanism established by the FCC
and to ensure that their services are accessible to and usable by persons with
disabilities. Moreover, the FCC is considering the regulatory implications of
various aspects of local exchange competition. Any or all of these proceedings
may negatively affect CLECs, including us.
The May 21, 1997 order reforming the FCC's price cap formula and the August
27, 1999 order granting ILECs substantial pricing flexibility with regard to
interstate access services afford ILECs greater flexibility in establishing
rates and provide additional incentives to foster efficiency. Because these
regulatory initiatives enable ILECs to offer selectively reduced rates for
access services, the rates we may charge for access services could be
constrained. Our rates also will be constrained by our competitors which,
excluding the ILECs, are subject to the same streamlined regulatory regime as us
and can price their services to meet competition.
The FCC is currently examining intercarrier compensation for the
termination of calls to ISPs, which could affect both CLECs' and ISPs' costs.
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STATE REGULATION GENERALLY
Most state public service commissions require companies to be certified to
provide common carrier services. These certifications generally require a
showing that the carrier has adequate financial, managerial and technical
resources to offer the proposed services in a manner consistent with the public
interest.
In addition to obtaining certification, in each state, we must negotiate
terms of interconnection with the incumbent local exchange carrier before we can
begin providing switched services. Under the Telecommunications Act, the FCC has
adopted interconnection requirements, certain portions of which have been upheld
by the United States Supreme Court and other portions of which are subject to
reconsideration by the FCC or further judicial review. Please refer to the
section entitled "--Interconnection with Local Exchange Carrier Facilities."
State public utility commissions are required to approve interconnection
agreements before they become effective and must arbitrate disputes among the
parties upon request. We have already entered into interconnection agreements
with Ameritech and Cincinnati Bell Telephone. In addition, we have acquired
MegsINet which also has an interconnection agreement with Ameritech. We have
also initiated the process of negotiations with Ameritech and Bell Atlantic for
additional interconnection agreements. Regulatory changes could require
renegotiation of relevant portions of existing interconnection agreements, or
subject them to additional court and regulatory proceedings.
Some recent state regulatory commission decisions regarding the
applicability of the Telecommunications Act's reciprocal compensation provisions
to the termination of calls placed to ISPs could result in lower revenues for
CLECs in those states. The issue remains undecided in various other states.
We are not presently subject to price regulation based on costs or
earnings. Most states require CLECs to file tariffs setting forth the terms,
conditions and prices for intrastate services. Some states permit tariffs to
list a rate range or set prices on an individual case basis.
Several states provide ILECs with flexibility for their rates, special
contracts (selective discounting) and tariffs, particularly for services deemed
subject to competition. This pricing flexibility increases the ability of the
incumbent local exchange carrier to compete with us and constrains the rates we
may charge for its services. In light of the additional competition that is
expected to result from the Telecommunications Act, states may grant ILECs
additional pricing flexibility. At the same time, some ILECs may request
increases in certain local exchange rates to offset revenue losses due to
competition.
REGULATION OF RESELLERS
The FCC has defined resale as any activity in which a party (the reseller)
subscribes to the services or facilities of a facilities-based provider (or
another reseller) and then reoffers communications services to the public for
profit, with or without adding value. Resellers are common carriers generally
subject to all rules and regulations placed on providers of the underlying
services by either the FCC or the states in which they operate. The FCC has held
that prohibitions on the resale of common carrier services are unjust,
unreasonable, and unlawfully discriminatory in violation of the Communications
Act. Accordingly, all common carriers must make their services available for
resale at rates, terms, and conditions that do not unreasonably discriminate
against resellers. The Telecommunications Act imposes the additional duty upon
incumbent local exchange carriers to make their services available for resale at
wholesale rates. The FCC adopted specific requirements for determining such
wholesale rates for local telecommunications services. While the United States
Supreme Court upheld the FCC's authority to adopt these rules, the FCC's
specific pricing rules are subject to further judicial review. As to other
telecommunications services, however, there is no regulation that requires
discounts to resellers below those offered to end users of the same quantities
of like services. The FCC has determined that because of the competitive
development of broadband commercial mobile radio service, it will eliminate the
explicit requirement that those services be offered for resale after November
24, 2002.
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LOCAL GOVERNMENT AUTHORIZATIONS
Many jurisdictions where we may provide service require license or
franchise fees based on a percentage of certain revenues. Because the
Telecommunications Act specifically allows municipalities to charge fees for use
of the public rights-of-way, it is likely that jurisdictions that do not
currently impose fees will seek to impose fees in the future. However, the
amount and basis of these fees have been successfully challenged by several
telecommunications service providers. Federal courts have struck down municipal
ordinances that (1) do not relate the fees imposed under the ordinance to the
extent of a provider's use of the rights-of-way; (2) do not relate the fees
imposed under the ordinance to the costs incurred by the local government in
maintaining the rights-of-way; or (3) seek to impose fees based on a concept of
the "value" of the use to the provider by relating the fees to provider
revenues. Additionally, because the Telecommunications Act requires
jurisdictions to charge non-discriminatory fees to all telecommunications
providers, telecommunications providers are challenging municipal fee structures
that excuse other companies, particularly the ILECs, from paying license or
franchise fees, or allow them to pay fees that are materially lower than those
that are required from new competitors such as CoreComm. A number of these
decisions have been appealed and, in any event, it is uncertain how quickly
particular jurisdictions will respond to the court decisions without a specific
legal challenge initiated by us or another CLEC to the fee structure at issue.
LOCAL MULTIPOINT DISTRIBUTION SERVICE
The FCC has established a new wireless service named local multipoint
distribution service, or "LMDS." The FCC allocated two frequency blocks in each
of 493 Basic Trading Areas in the U.S. to LMDS: Block A with 1,150 MHz of
spectrum in the 28 GHz and 31 GHz bands, and Block B with 150 MHz in the 31 GHz
band. LMDS licenses are awarded for ten-year terms with renewal expectancies
provided to licensees that make a showing of substantial service in their
licensed areas.
LMDS may be used to provide any kind of communications service on a common
carrier or non common-carrier basis. Radio frequencies in the 28 and 31 GHz
bands are generally capable of only "line-of-sight" transmission and reception,
are subject to interference from certain weather conditions, and do not lend
themselves to mobile applications. LMDS is expected to be used for the delivery
of various broadband services to homes and offices, including
telecommunications, Internet access, and two-way video. At least seven other
countries, including Canada and Mexico, have licensed LMDS on either a permanent
or experimental basis. LMDS licensees are expected to be able to provide a wide
array of services, two-way capabilities, and high capacity through the use of
newer digital equipment and transmission mechanisms. The FCC expects that
Block-A LMDS licensees especially, by applying cellular-style frequency re-use
technology to an already large frequency bandwidth, have the potential to become
competitors to ILECs and cable operators. Accordingly, the LMDS rules prohibit
ownership of Block-A licenses by ILECs and incumbent cable operators prior to
July 2000, but permit an applicant that would otherwise be prohibited from
holding a Block-A license to apply for a waiver of the ownership restriction by
showing that it does not have market power in its telephone or cable service
area.
The FCC held a simultaneous, multiple-round auction for the 986 LMDS
licenses which closed on March 25, 1998. 104 winning participants bid a total of
$578,663,029 for 864 licenses. No auction participant placed the minimum opening
bid on any of the remaining 122 licenses, which were reauctioned in April and
May, 1999. In the initial auction, we won 15 Block-A licenses for Basic Trading
Areas encompassing substantially all population centers in the state of Ohio,
for a total bid of $25,241,133. Auction participants that had average gross
revenues for the previous three years of $75 million or less, when aggregated
with all commonly controlled affiliates, were entitled to bidding credits of
25%, 35%, or 45%. We did not qualify for any bidding credit. The FCC has since
granted our 15 LMDS licenses with an effective date of June 8, 1998.
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FUTURE INTERNATIONAL OPERATIONS
We may ultimately expand our operations to other countries and currently
provides international resale services. The FCC requires every carrier that
intends to originate international telecommunications from within the U.S.,
either through the use of its own facilities or on a resale basis, to secure in
advance an authorization from the FCC under Section 214 of the Communications
Act. Additionally, these carriers must file with the FCC a tariff containing the
rates, terms, and conditions of their international service offerings. In
applying for a 214 Authorization, a carrier must disclose any affiliations with
or special concessions from foreign carriers or nations. The FCC has streamlined
its procedures for granting 214 Authorizations, providing a routine grant of
such authorizations in 35 days unless an application is formally opposed or the
applicant is affiliated with a carrier that controls bottleneck
telecommunications facilities in a foreign country, in which case the applicant
may be subject to more stringent regulation as a "dominant" carrier.
Additionally, applicants affiliated with foreign carriers in countries that are
signatories to the Telecommunications Annex to the World Trade Organization
General Agreement of Trade in Services, including Canada, have a reduced burden
of demonstrating their "non-dominance." Carriers that have received 214
Authorizations are subject to certain reporting requirements, must file
contracts with foreign correspondents, and are restricted in the provision of
certain services to certain nations, such as the use of resold private lines for
switched services and the provision of any services to countries on the FCC's
"exclusion list." We hold a 214 Authorization for both facilities-based and
resale international services and has filed a tariff for its international
resale services.
INTERNET REGULATION
The FCC currently does not regulate the provision of Internet service,
although it does regulate common carriers that provide elements of the
"backbone" networks on which the Internet is based. Similarly, state public
utility commissions generally do not regulate Internet service, except in some
limited circumstances where incumbent local exchange carriers provide Internet
services. The FCC and some states, however, are reviewing the development of the
Internet and the types of services that are provided through it. For example, if
the FCC should determine that an Internet service provider offers a service that
is an exact substitute for long distance telephone service with the sole
distinction that it is based on a packet-switched network rather than a
circuit-switched network, the FCC may determine that it should provide
regulatory parity for the services
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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND OTHER KEY EMPLOYEES
The following table provides information about our directors and executive
officers:
DIRECTORS AND EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
NAME AGE TITLE
- ---- --- -----
<S> <C> <C>
George S. Blumenthal...................... 55 Chairman of the Board of Directors
J. Barclay Knapp.......................... 42 President, Chief Executive Officer, Chief
Financial Officer and Director
Patty J. Flynt............................ 48 Senior Vice President -- Chief Operating Officer;
President of Operating Company
Richard J. Lubasch........................ 53 Senior Vice President -- General Counsel and
Secretary
Gregg Gorelick............................ 40 Vice President -- Controller and Treasurer
Alan J. Patricof.......................... 64 Director
Warren Potash............................. 67 Director
Sidney R. Knafel.......................... 68 Director
Ted H. McCourtney......................... 60 Director
Del Mintz................................. 71 Director
</TABLE>
The CoreComm Limited Certificate of Incorporation provides for a classified
Board of Directors consisting of three classes as nearly equal in number as
possible with the directors in each class serving staggered three year terms.
The Class I directors will be George S. Blumenthal and J. Barclay Knapp; the
Class II directors will be Alan J. Patricof and Warren Potash and the Class III
directors will be Sidney R. Knafel, Ted H. McCourtney and Del Mintz. The terms
of the Class I, Class II and Class III Directors will expire in 2000, 2001 and
2002, respectively. At each annual meeting of the stockholders, the successors
to the class of directors whose term expires will be held in the third year
following their election.
The following is a brief description of the present and past business
experience of each of the persons who serve as our directors and executive
officers:
DIRECTORS AND EXECUTIVE OFFICERS:
GEORGE S. BLUMENTHAL has been our director since March 1998. Mr. Blumenthal
was Chairman, Treasurer and a director of CCPR from February 1992 until its sale
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 Cellular Communications International from its organization until
April 1994. Mr. Blumenthal was also Chairman, Treasurer and a director of
Cellular Communications from its founding in 1981 until its merger in 1996 into
a subsidiary of AirTouch Communications, Inc., which we refer to as the "CCI
Merger." Mr. Blumenthal's term as our director expires at our annual meeting in
2000.
J. BARCLAY KNAPP has been our President, Chief Executive Officer, Chief
Financial Officer and director since March 1998. Mr. Knapp was appointed
President of CCPR in March 1994 and Chief Executive Officer in March 1998, and
remained in those positions until the sale of CCPR. Mr. Knapp has been a
director of Cellular Communications of Puerto Rico since February 1992 and was
Chief Financial Officer from that date to 1997. Mr. Knapp was Executive Vice
President, Chief Operating Officer and a director of Cellular Communications
International from July 1991 until June 1998. He is President, Chief Executive
Officer and a director of NTL. Mr. Knapp was also Executive Vice President,
Chief Operating Officer, Chief Financial Officer and a director of Cellular
Communications until the CCI Merger. Mr. Knapp's term as our director expires at
our annual meeting in 2000.
69
<PAGE> 73
PATTY J. FLYNT has served as our Senior Vice President--Chief Operating
Officer and President of our operating company since 1998. She has worked with
CoreComm and its historical affiliates since 1989. She previously served as
Group Managing Director--Information Systems for NTL, and Vice President of
Information Systems for Cellular Communications. Prior to joining Cellular
Communications, she served in the Information Services division of Blue
Cross/Blue Shield of Ohio for 17 years.
RICHARD J. LUBASCH has been our Senior Vice President--General Counsel and
Secretary since March 1998. Additionally, Mr. Lubasch was CCPR's Senior Vice
President-- General Counsel and Secretary from February 1992 until its sale. He
was also the Senior Vice President--General Counsel, Secretary and Treasurer of
Cellular Communications International from July 1991 until its sale, is
Executive Vice President--General Counsel and Secretary of NTL and has been
Senior Vice President--General Counsel and Secretary of NTL since its formation.
Mr. Lubasch was Vice President--General Counsel and Secretary of Cellular
Communications from July 1987 until the CCI Merger.
GREGG GORELICK has been our Vice President--Controller and Treasurer since
March 1998. Mr. Gorelick was CCPR's Vice President--Controller from February
1992 until its sale, held that position at Cellular Communications International
from July 1991 until its sale and has held that position 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 Cellular Communications from 1986 until the CCI Merger.
ALAN J. PATRICOF has been our director since March 1998. Mr. Patricof is
Co-Chairman of Patricof & Co. Ventures, Inc., a venture capital firm he founded
in 1969. Mr. Patricof was a director of Cellular Communications International
from July 1991 until its sale in March 1999 and was a director of CCPR from
February 1992 until its sale. Additionally, Mr. Patricof has been a director of
NTL since its formation and is a director of other privately owned companies.
Mr. Patricof's term as our director expires at our annual meeting in 2001.
WARREN POTASH has been our director since March 1998. Mr. Potash retired in
1991 as President and Chief Executive Officer of the Radio Advertising Bureau, 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 sine
1970. Mr. Potash was also a director of Cellular Communications International
from July 1991 until its sale, and was a director of CCPR from February 1992
until its sale and of NTL since its formation. Mr. Potash's term as our director
expires at our annual meeting in 2001.
SIDNEY R. KNAFEL has been our director since March 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, was a director of Cellular Communications
International from July 1991 until its sale, was a director of CCPR from
February 1992 until its sale and of NTL since its formation. Mr. Knafel's term
as our director expires at our annual meeting in 2002.
TED H. MCCOURTNEY has been our director since March 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. Mr.
McCourtney's term as our director expires at our annual meeting in 2002.
DEL MINTZ has been our director since March 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
70
<PAGE> 74
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 was also a
director of Cellular Communications International from July 1991 until its sale,
and was a director of CCPR from February 1992 until its sale. Additionally, Mr.
Mintz has been a director of NTL since its formation and is a director of
several privately owned companies. Mr. Mintz's term as our director expires at
our annual meeting in 2002.
BERMUDA RESIDENT REPRESENTATIVE AND SECRETARY
We are required, as a matter of Bermuda law, to maintain a representative
presence in Bermuda and have 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, our Bermuda legal
advisor, is also our initial resident representative.
CLAIRE SOUSA is employed by A.S. & K. Services Ltd., a Bermuda Corporation,
and an affiliate of Appleby, Spurling & Kempe, as a corporate administrator and
serves as our Secretary resident in Bermuda.
EXECUTIVE COMPENSATION
The table below discloses compensation received by our Chief Executive
Officer and our four other most highly paid executive officers for the period
from March 16, 1998 (the date that we were formed) through December 31, 1998. In
addition, the executive officers may also receive options under our stock option
plan described in the section entitled "--Stock Option Plans."
SUMMARY COMPENSATION TABLE(1)
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION -------------
----------------------------------- COMMON
OTHER ANNUAL STOCK ALL OTHER
COMPENSATION UNDERLYING COMPENSATION
YEAR SALARY($) BONUS($) ($) OPTIONS(#)(4) ($)
---- --------- -------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
J. Barclay Knapp................... 1998 21,200 -- -- 926,478 --
President and Chief
Executive and Financial Officer
George S. Blumenthal(2)............ 1998 20,600 -- -- 846,813 --
Chairman
Richard J. Lubasch................. 1998 17,300 -- -- 201,685 --
Senior Vice President -- General
Counsel and Secretary
Patty J. Flynt..................... 1998 183,600 131,400 -- 36,250 --
Senior Vice President
Chief Operating Officer
Gregg Gorelick..................... 1998 10,000 -- 57,900(3) 78,404 --
Vice President -- Controller and
Treasurer
</TABLE>
- ---------------
(1) NTL provides us with management, financial, legal and technical services.
Amounts charged to us consist of salaries and direct costs allocated to us.
In 1998, NTL charged us $313,000. It is not practicable to determine the
amounts of these expenses that would have been incurred had we operated as
an unaffiliated entity. However, we believe the allocation method is
reasonable. The named executives, except Ms. Flynt, receive salaries from
NTL and spend portions of their time providing executive management to NTL
and us.
71
<PAGE> 75
(2) Mr. Blumenthal resigned as Chief Executive Officer in March 1998, and Mr.
Knapp was appointed Chief Executive Officer in March 1998.
(3) Other annual compensation consists of relocation expenses of $57,900.
(4) 1998 option grants do not include an aggregate of 225,880 options issued to
the named executives as a result of an adjustment to pre-existing options in
CCPr as a consequence of the spin-off.
OPTION GRANTS TABLE
The following table provides information on stock option grants during 1998
to the named executive officers.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------------
% OF POTENTIAL REALIZABLE
TOTAL VALUE AT ASSUMED
NUMBER OF OPTIONS ANNUAL RATE OF STOCK
SECURITIES GRANTED PRICE APPRECIATION FOR
UNDERLYING TO OPTION TERM
OPTIONS EMPLOYEES EXERCISE OR ----------------------
GRANTED IN FISCAL BASE PRICE EXPIRATION 5% ($) 10%($)
(#) YEAR ($/SHARE)(1) DATE $21.47 $34.19
---------- --------- ------------ ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
J. Barclay Knapp............... --(2) --% -- -- -- --
George S. Blumenthal........... --(3) -- -- -- -- --
Richard J. Lubasch............. --(4) -- -- -- -- --
Patty J. Flynt(5).............. 30,000(6) 0.88 13.18 08/20/08 248,707 630,268
Gregg Gorelick(5).............. 5,000(7) 0.15 13.18 03/12/08 41,451 105,045
20,000(7) 0.59 13.18 08/20/08 165,804 420,178
</TABLE>
- ---------------
(1) Our common stock began trading on the Nasdaq National Market on September 4,
1998. The closing price on September 4, 1998 was $14.25.
(2) Does not include 818,750 warrants and 107,728 options as a result of an
adjustment to pre-existing options in CCPR as a consequence of our spin-off.
(3) Does not include 818,750 warrants and 28,063 options as a result of an
adjustment to pre-existing options in CCPR as a consequence of our spin-off.
(4) Does not include 171,250 warrants and 30,435 options as a result of an
adjustment to pre-existing options in CCPR as a consequence of our spin-off.
(5) All options were granted on March 13, 1998 or August 21, 1998; 20% were
exercisable upon issuance, 20% became exercisable on January 1, 1999 and an
additional 20% will become exercisable on each of January 1, 2000, 2001 and
2002. Upon a change of control of us, all unvested options become fully
vested and exercisable.
(6) Does not include 6,250 options as a result of an adjustment to pre-existing
options in CCPR as a consequence of our spin-off.
(7) Does not include 53,404 options as a result of an adjustment to pre-existing
options in CCPR as a consequence of our spin-off.
72
<PAGE> 76
OPTION EXERCISES AND YEAR-END VALUE TABLE
The following table provides information on stock option exercises during
1998 by the named executive officers and the value at December 31, 1998 of
unexercised in-the-money options held by each of the named executive officers.
None of the named executive officers exercised options during 1998.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR-END AND
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY
AT FY-END(#) OPTIONS AT FY-END($)(1)
EXERCISABLE(E)/ EXERCISABLE(E)/
NAME UNEXERCISABLE(E) UNEXERCISABLE(U)
- ---- -------------------- ------------------------
<S> <C> <C>
J. Barlclay Knapp................................... 926,478(E) 3,767,036(E)
0(U) 0(U)
George S. Blumenthal................................ 28,063(E) 426,586(E)
0(U) 0(U)
Richard J. Lubasch.................................. 201,685(E) 904,961(E)
0(U) 0(U)
Patty J. Flynt...................................... 12,250(E) 110,233(E)
24,000(U) 61,680(U)
Gregg Gorelick...................................... 41,904(E) 437,506(E)
36,500(U) 93,805(U)
</TABLE>
- ---------------
(1) Based on the closing price on the Nasdaq National Market on December 31,
1998 of $15.75.
STOCK OPTION PLANS
In 1998, our Board of Directors adopted the CoreComm Limited 1998 Stock
Option Plan, reserving under it shares for issuances to employees and directors.
The purpose of our 1998 Stock Option Plan is intended to encourage stock
ownership by our employees and non-employee directors, and the employees and
non-employee directors of our divisions, subsidiary corporations and other
affiliates, so as to encourage our employees to continue being employed by us
and to put forth maximum efforts for the success of our business. Under our 1998
Stock Option Plan, grants may be made of options to acquire shares of our common
stock. The options may be "incentive stock options" within the meaning of
Section 422 of the Internal Revenue Code. The terms of options granted under our
1998 Stock Option Plan, including provisions regarding vesting, exercisability,
exercise price and duration, are generally set by the Compensation Committee of
our Board of Directors.
In addition, in January 1999, CoreComm, Inc., one of our wholly-owned
subsidiaries, adopted a stock option plan. Options granted under that plan will
not become exercisable unless and until there is either a registered public
offering of CoreComm, Inc.'s common stock or we spin-off CoreComm, Inc. The
purpose of CoreComm, Inc.'s option plan is to encourage stock ownership by its
employees and non-employee directors, and the employees and non-employee
directors of its divisions, subsidiary corporations and other affiliates, so as
to encourage its employees to continue being employed by CoreComm, Inc. and to
put forth maximum efforts for the success of its business. Under the plan,
options to purchase up to a maximum of 30% percent of the common stock of
CoreComm, Inc. may be issued (based on the number of shares outstanding at the
time of CoreComm, Inc.'s initial public offering or its spin-off from us). No
single individual may be granted in any calendar year options to purchase more
than 80% of the shares of common stock available for issuance under CoreComm,
Inc.'s option plan. In general, options under both plans are 20% vested at grant
and vest 20% each January 1 after they are granted, until they are fully vested.
73
<PAGE> 77
CoreComm, Inc.'s option plan is administered by the Compensation and Option
Committee of its Board of Directors or any other committee that is appointed by
its Board of Directors or its Compensation and Option Committee. The Option
Committee has the right, subject to the terms of the option plan, to grant
options, determine which options will be incentive stock options and which will
be nonqualified stock options, determine the purchase price of shares of common
stock covered by each option, determine the persons to whom such options will be
granted, the time or times at which options will be granted and the number of
shares covered by each option.
74
<PAGE> 78
SECURITY OWNERSHIP
The following table provides, as of October 28, 1999 information regarding
the beneficial ownership of our common stock by (i) each of our executive
officers and directors, (ii) all such directors and executive officers as a
group and (iii) each person known by us to be the beneficial owner of more than
5% of any class of our voting securities as calculated in accordance with Rule
13d-3 of the Exchange Act.
<TABLE>
<CAPTION>
PRESENTLY
EXERCISABLE
EXECUTIVE OFFICERS, DIRECTORS COMPANY OPTIONS AND
AND PRINCIPAL STOCKHOLDERS(1) STOCK WARRANTS(2) TOTAL PERCENT(2)(3)
- ----------------------------- --------- ----------- --------- -------------
<S> <C> <C> <C> <C>
J. Barclay Knapp(4)............................ 961,293 414,521 1,375,814 5.31%
George S. Blumenthal(5)........................ 1,183,246 287,720 1,470,966 5.71
Richard J. Lubasch............................. 200,720 102,029 302,749 1.18
Patty J. Flynt................................. 0 87,376 87,376 *
Gregg Gorelick................................. 59,267 51,599 110,866 *
Sidney R. Knafel............................... 276,263 36,786 313,049 1.23
Ted H. McCourtney(6)........................... 489,033 27,036 516,069 2.02
Del Mintz(7)................................... 988,725 53,822 1,042,547 4.08
Alan J. Patricof(7)............................ 116,801 36,786 153,587 *
Warren Potash(9)............................... 46,976 52,464 99,440 *
Ronald Baron(10)............................... 3,579,600 243,368 3,822,968 14.86
Baron Capital Group, Inc.(10)
Bamco, Inc.(10)
Baron Capital Management, Inc.(10)
Baron Asset Fund(10)
767 Fifth Avenue
New York, NY 10153
Snyder Capital Management, L.P.(11)............ 2,966,343 0 2,966,343 11.64
Snyder Capital Management, Inc.(11)
350 California Street, Suite 1460
San Francisco, CA 94104
NWQ Investment Management Company(12).......... 1,326,732 0 1,326,732 5.21
2049 Century Park East, 4th Floor
Los Angeles, CA 90067
Wallace R. Weitz & Company(13)................. 1,278,450 0 1,278,450 5.02
1125 South 103rd Street, Suite 600
Omaha, NE 68124-6008
All directors and officers as a group (ten in
number)...................................... 4,322,324 1,150,139 5,472,463 20.55
</TABLE>
- ---------------
* Represents less than one percent.
(1) Unless otherwise noted, the business address of each person is 110 East
59th Street, New York, NY, 10022.
(2) Includes shares of common stock purchased upon the exercise of options
which are exercisable or become so in the next 60 days, which we refer to
as "presently exercisable options," shares of common stock purchased upon
the exercise of warrants and common stock issuable upon conversion of
convertible notes.
(3) Includes common stock, presently exercisable options and warrants and
common stock issuable upon conversion of convertible notes.
75
<PAGE> 79
(4) Includes $300,000 of the convertible notes, convertible into 7,301 shares
of common stock.
(5) Includes 2,970 shares of common stock owned by trusts for the benefit of
Mr. Blumenthal's children. An additional 4,500 shares of common stock are
owned by Mr. Blumenthal's wife, as to which shares Mr. Blumenthal disclaims
beneficial ownership. Also includes 389,893 shares of common stock and
56,034 options held by Grantor Retained Annuity Trusts.
(6) Includes 411,000 shares of common stock held by various entities of which
Mr. McCourtney is a general partner, as to which shares Mr. McCourtney
disclaims beneficial ownership except to the extent of his pro-rata
interest. An additional 780 shares of common stock are held by trusts for
the benefit of Mr. McCourtney's children, as to which shares Mr. McCourtney
disclaims beneficial ownership.
(7) Includes 38 shares of common stock owned by Mr. Mintz's wife, as to which
shares Mr. Mintz disclaims beneficial ownership. Also includes $700,000 of
the convertible notes, convertible into 17,036 shares of common stock.
(8) Includes 1,597 shares of common stock owned by Mr. Patricof's wife, as to
which shares Mr. Patricof disclaims beneficial ownership.
(9) Includes $250,000 of convertible notes, convertible into 6,084 shares of
common stock.
(10) Based solely upon Schedule 13-G (Amendment No. 1), dated February 8, 1999,
filed by Ronald Baron, Baron Capital Group, Inc., Bamco, Inc., Baron
Capital Management, Inc. and Baron Asset Fund with the SEC and $10,000,000
of the convertible notes, convertible into 243,368 shares of common stock.
(11) Based solely upon Schedule 13-G, dated February 8, 1999, filed by Snyder
Capital Management, L.P. and Snyder Capital Management, Inc. with the SEC.
(12) Based solely upon Schedule 13-G, dated February 16, 1999, filed by NWQ
Investment Management Company with the SEC.
(11) Based solely upon Schedule 13-G, dated February 9, 1999, filed by Wallace
R. Weitz & Company with the SEC.
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<PAGE> 80
SELLING SECURITYHOLDERS
The following table provides, as of October 28, 1999, the respective
principal amount of convertible notes beneficially owned and offered by each
selling securityholder, the common stock owned by each selling securityholder
and the common stock issuable upon conversion of the convertible notes, which
may be sold from time to time by such selling securityholder under this
prospectus. This information has been obtained from the selling securityholders.
Selling securityholders representing up to an additional $58,508,000 aggregate
principal amount of convertible notes will be added to the table prior to the
effectiveness of the registration statement of which this prospectus forms a
part.
<TABLE>
<CAPTION>
PERCENT OF
PRINCIPAL AMOUNT OF COMMON TOTAL
CONVERTIBLE NOTES PERCENT OF TOTAL COMMON STOCK STOCK TO BE OUTSTANDING
BENEFICIALLY OWNED OUTSTANDING OWNED PRIOR TO REGISTERED COMMON
SELLING SECURITYHOLDERS AND OFFERED CONVERTIBLE NOTES ORIGINAL OFFERING HEREBY(1) STOCK(2)
- ----------------------- ------------------- ----------------- ----------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Reliance Insurance Company... $ 25,000,000 14.3% 0 608,421 2.0%
Donaldson, Lufkin & Jenrette
Securities Corporation..... 20,000,000 11.4 0 486,737 1.6
Deutsche Bank Securities
Inc........................ 14,250,000 8.1 0 346,800 1.2
New York Life Insurance
Company.................... 9,300,000 5.3 0 226,332 *
Baron Capital Partners,
L.P........................ 7,000,000 4.0 0 170,358 *
Baron Growth Fund Series of
Baron Asset Fund........... 5,000,000 2.9 0 121,685 *
Baron Small Cap Series of
Baron Asset Fund........... 5,000,000 2.9 0 121,685 *
MainStay Convertible Fund.... 5,000,000 2.9 0 121,685 *
CIBC World Markets
International Arbitrage
Corp....................... 4,500,000 2.6 0 109,516 *
Van Kampen Harbor
Fund Inc................... 3,877,000 2.2 0 94,354 *
IBM Retirement Plan.......... 3,161,000 1.8 0 76,929 *
Chase Manhattan N.A., Trustee
for IBM Retirement Plan Dtd
12/18/45................... 3,161,000 1.8 0 76,929 *
Bankers Trust, Trustee for
Chrysler Corp. Emp. #1
Pension Plan Dtd 4/1/89.... 2,294,000 1.3 0 55,829 *
New York Life Insurance and
Annuity Corporation........ 1,700,000 * 0 41,373 *
Van Kampen Utility Fund...... 1,380,000 * 0 33,585 *
State Street Bank, Custodian
for GE Pension Trust....... 1,216,000 * 0 29,594 *
State of Connecticut Combined
Investment Funds........... 1,070,000 * 0 26,040 *
Chrysler Corporation Master
Retirement Trust........... 920,000 * 0 22,390 *
Van Kampen Convertible
Securities Fund............ 743,000 * 0 18,082 *
Del Mintz.................... 700,000 * 0 17,035 *
Vanguard Convertible
Securities Fund, Inc....... 630,000 * 0 15,332 *
TQA Master Fund, Ltd......... 500,000 * 0 12,169 *
Forest Global Convertible
Fund Series A-5............ 510,000 * 0 12,412 *
</TABLE>
77
<PAGE> 81
<TABLE>
<CAPTION>
PERCENT OF
PRINCIPAL AMOUNT OF COMMON TOTAL
CONVERTIBLE NOTES PERCENT OF TOTAL COMMON STOCK STOCK TO BE OUTSTANDING
BENEFICIALLY OWNED OUTSTANDING OWNED PRIOR TO REGISTERED COMMON
SELLING SECURITYHOLDERS AND OFFERED CONVERTIBLE NOTES ORIGINAL OFFERING HEREBY(1) STOCK(2)
- ----------------------- ------------------- ----------------- ----------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Bancroft Convertible Fund,
Inc........................ 500,000 * 0 12,169 *
Ellsworth Convertible Growth
and Income Fund, Inc....... 500,000 * 0 12,169 *
Lazard Freres et Compagnie... 500,000 * 0 12,169 *
OCM Convertible Trust........ 495,000 * 0 12,047 *
State Employees' Retirement
Fund of the State of
Delaware................... 490,000 * 0 11,925 *
Partner Reinsurance Company
Ltd........................ 480,000 * 0 11,682 *
Forest Fulcrum Fund LP....... 400,000 * 0 9,735 *
TQA Master Plus Fund, Ltd.... 350,000 * 0 8,518 *
Warren Potash & Marie C.
Potash Co-Trustees under
Potash Living Trust Dtd
10/18/95................... 250,000 * 40,375 6,084 *
Value Line Convertible
Fund, Inc.................. 200,000 * 0 4,868 *
Radix Associates............. 200,000 * 0 4,868 *
Franklin & Marshall
College.................... 174,000 * 0 4,235 *
Penn Treaty Network America
Insurance Co............... 155,000 * 0 3,773 *
LDG Limited.................. 150,000 * 0 3,650 *
Motion Picture Industry
Health Plan -- Active
Member Fund................ 110,000 * 0 2,677 *
Bill W. Mintz TTEE Revocable
Living Trust............... 100,000 * 29,700 2,434 *
Gary L. Mintz................ 100,000 * 2,612 2,434 *
Mark Mintz................... 100,000 * 1,562 2,434 *
Deltec Asset Management
Corporation................ 100,000 * 0 2,434 *
Stuart Schapiro.............. 100,000 * 0 2,434 *
Joan Schapiro................ 100,000 * 0 2,434 *
Motion Picture Industry
Health Plan -- Retiree
Member Fund................ 55,000 * 0 1,338 *
Forest Alternative Strategies
Fund II LP Series A5I...... 30,000 * 0 730 *
Sylvan IMA Ltd. c/o Forest
Investment Management LLC.. 20,000 * 0 487 *
Forest Alternative Strategies
Fund II LP A5M............. 15,000 * 0 365 *
</TABLE>
78
<PAGE> 82
<TABLE>
<CAPTION>
PERCENT OF
PRINCIPAL AMOUNT OF COMMON TOTAL
CONVERTIBLE NOTES PERCENT OF TOTAL COMMON STOCK STOCK TO BE OUTSTANDING
BENEFICIALLY OWNED OUTSTANDING OWNED PRIOR TO REGISTERED COMMON
SELLING SECURITYHOLDERS AND OFFERED CONVERTIBLE NOTES ORIGINAL OFFERING HEREBY(1) STOCK(2)
- ----------------------- ------------------- ----------------- ----------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
------------
Total................... $175,000,000
</TABLE>
- ---------------
* Less than one percent.
(1) The shares of common stock to be registered by this prospectus are
calculated on an "as converted" basis using the conversion rate described in
this prospectus.
(2) Assumes conversion of all common stock registered by this prospectus.
Except as described below, none of the selling securityholders listed above
has, or within the past three years has had, any position, office or other
material relationship with us or any of our predecessors or affiliates. Because
the selling securityholders may offer all or some portion of the above
referenced securities under this prospectus or otherwise, no estimate can be
given as to the amount or percentage of the securities that will be held by the
selling securityholders upon termination of any sale. In addition, the selling
securityholders identified above may have sold, transferred or otherwise
disposed of all or a portion of such securities since October 6, 1999 in
transactions exempt from the registration requirements of the Securities Act.
The selling securityholders may sell all, part or none of the securities listed
above.
Del Mintz and Warren Potash have been our directors since March 1998. They
were also directors of CCPR from February 1992 until its sale in 1999. Bill W.
Mintz is the brother of Del Mintz. Mark Mintz and Gary L. Mintz are sons of Del
Mintz. Donaldson, Lufkin & Jenrette Securities Corporation was an initial
purchaser of the initial offering of the convertible notes, and has informed us
that it expects to make a market in the convertible notes. Please refer to the
section entitled "Risk Factors -- You may find it difficult to sell your
convertible notes." Baron Capital Partners, L.P., Baron Growth Fund Series of
Baron Asset Fund and Baron Small Cap Series of Baron Asset Fund are affiliates
of Ronald Baron, Baron Capital Group, Inc., Bamco, Inc., Baron Capital
Management, Inc. and Baron Asset Fund, which beneficially own 14.86% of our
common stock.
Generally, only selling securityholders identified in the foregoing table
who beneficially own the offered securities set forth opposite their respective
names may sell offered securities under the registration statement, of which
this prospectus forms a part. We may from time to time include additional
selling securityholders in supplements to this Prospectus.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CONFLICTS OF INTEREST
Many of our officers and directors are also officers and directors of other
companies in our industry and some are employed by our affiliates. Their duties
to these companies may require significant amounts of their attention and may
also present conflicts of interest, either of which may impede their ability to
make decisions for us. Please refer to the section entitled "Risk
Factors -- Many of 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. Some of our
officers and other employees are employed by our affiliates."
SERVICES PROVIDED BY NTL
NTL provides us and our subsidiaries with management, financial, legal and
technical services, access to office space and equipment and use of supplies.
Amounts charged to us by NTL consist of salaries and direct costs allocated to
us where identifiable, and a percentage of the portion of NTL's corporate
overhead which cannot be specifically allocated to NTL (which is agreed upon by
our Board of Directors and the Board of Directors of NTL). It is not practicable
to determine the amounts of these expenses that would have been incurred had we
operated as an unaffiliated entity. In our opinion, this allocation method is
reasonable. For the six months ended June 30, 1999 and the year ended December
31, 1998, NTL charged us $817,000 and $313,000, respectively.
In 1998, the percentage of NTL's non-allocated overhead that was charged to
us was 30 percent. We anticipate that this percentage will increase because two
other companies that have been sharing these expenses either have been sold or
are expected to be sold shortly. Future payments to NTL will be allocated based
on revenues.
OTHER SERVICES
Through our subsidiary, CoreComm Newco, Inc., we currently provide billing
and software development services to subsidiaries of NTL, and historically
provided such services to CCPR. We believe that these transactions are priced on
an arm's length basis. Profits of $346,000 were realized from providing these
services for the six months ended June 30, 1999. The recent sale of CCPR will
not have a significant impact on these profits. Profits of $138,000 were
realized from providing these services from January 1, 1998 to May 31, 1998, and
profits of $217,000 were realized from providing these services for the year
ended December 31, 1997.
ADMINISTRATIVE SERVICES AGREEMENT
We and CoreComm, Inc. intend to enter into an administrative services
agreement whereby the parties will agree to allocate the expenses described in
"-- Services provided by NTL" and CoreComm, Inc. will agree to provide
operational personnel and services to us as described in "-- Other Services"
above. The allocation of cost and expenses will be substantially the same as the
historical allocation among the parties.
TAX DISAFFILIATION AGREEMENT
Under the terms of the Tax Disaffiliation Agreement between CCPR and us,
CCPR agreed to pay and indemnify us against all federal, state and local
domestic taxes relating to the businesses of CCPR and its subsidiaries before
our spin-off. We will similarly pay and indemnify CCPR against those taxes
relating to our businesses and the businesses of our subsidiaries before the
spin-off. Based on current information available to us, it is unlikely that we
will be required to pay any amounts.
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ASSIGNMENT AND ASSUMPTION AGREEMENT
As we have contributed the acquired USN assets to one of our subsidiaries,
that subsidiary has entered into an Assignment and Assumption Agreement with us
under which the USN assets were transferred to the subsidiary and our remaining
obligations under the asset purchase agreement were assumed by the subsidiary.
In addition, CoreComm, Inc. agreed to pay or reimburse us for any contingent
payment that must be paid in connection with the purchase of the USN assets.
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DESCRIPTION OF CONVERTIBLE NOTES
GENERAL
The convertible notes were issued under an indenture, dated as of October
6, 1999, between us and The Chase Manhattan Bank, as trustee. The following
description is a summary of the material provisions of the indenture. It does
not restate this agreement in its entirety. We urge you to read the indenture
and registration rights agreement because they, and not this description, define
your rights as holders of these convertible notes. A copy of the indenture is
filed as an exhibit to the registration statement of which this prospectus forms
a part.
You can find the definitions of certain terms used in this description
under the subheading "Definitions." In this section of the prospectus entitled
"Description of Convertible Notes" when we refer to CoreComm, or "we", "our", or
"us", we are referring only to CoreComm Limited and not any of its subsidiaries.
The convertible notes are unsecured obligations, subordinated in right of
payment to all our existing and future Senior Debt as described under
"--Subordination of Convertible Notes" and convertible into our common stock as
described under "--Conversion." The indenture does not contain any financial
covenants or restrictions on the payment of dividends, the incurrence of Senior
Debt or issuance or repurchase of our securities. The indenture contains no
covenants or other provisions to afford protection to holders of the convertible
notes in the event of a highly leveraged transaction by us except to the extent
described under "--Repurchase at the Option of Holders." The convertible notes
are not guaranteed by any of our subsidiaries.
We conduct all of our operations through our subsidiaries. We depend upon
the cash flow of our subsidiaries to meet our obligations, including our
obligations under the convertible notes. As a result, the convertible notes are
effectively subordinated to all existing and future indebtedness and other
liabilities and commitments of our subsidiaries with respect to the cash flow
and assets of those subsidiaries.
PRINCIPAL, MATURITY AND INTEREST
The convertible notes are limited to $175,000,000 aggregate principal
amount. The convertible notes mature on October 1, 2006. Interest on the
convertible notes accrues at a rate of 6% per annum from the date of original
issuance, payable semiannually on April 1 and October 1, commencing on April 1,
2000. We will make each interest payment to the holders of record of the
convertible notes on the immediately preceding March 15 and September 15.
Interest is computed on the basis of a 360-day year comprised of twelve 30-day
months.
We are required to pay special interest on the convertible notes under
various circumstances, all as further described under the caption "Registration
Rights." All references in this section to interest on the convertible notes
include any special interest that may be payable and all references to a payment
of principal include any premium that may be payable.
The convertible notes are payable both as to principal and interest on
presentation of the convertible notes if in certificated form at the offices or
agencies we maintain for such purpose within the City and State of New York or,
at our option, payment of interest may be made by check mailed to the holders of
the convertible notes at their respective addresses set forth in the register of
holders of convertible notes or, if a holder who holds an aggregate principal
amount of at least $5.0 million of convertible notes so requests, by wire
transfer of immediately available funds to an account previously specified in
writing by such holder to us and the trustee. Until otherwise designated by us,
our office or agency in New York, will be the offices of the trustee maintained
for such purpose. The convertible notes are issued in registered form, without
coupons, and in denominations of $1,000 and integral multiples of $1,000.
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CONVERSION
The holder of any convertible note has the right, exercisable at any time
after 90 days following the date of original issuance of the convertible note
and prior to its maturity, to convert the principal amount of the convertible
note (or any portion of it that is an integral multiple of $1,000) into shares
of our common stock at the conversion price set forth on the cover page of this
prospectus, subject to adjustment as described below, which we refer to as the
"Conversion Price," except that if a convertible note is called for redemption,
the conversion right will terminate at the close of business on the business day
immediately preceding the date fixed for redemption. Upon conversion, no
adjustment or payment will be made for interest, but if any holder surrenders a
convertible note for conversion after the close of business on the record date
for the payment of an installment of interest and prior to the opening of
business on the next interest payment date, then, notwithstanding conversion,
the interest payable on the interest payment date will be paid to the registered
holder of the convertible note on the record date. In that event, convertible
notes, when surrendered for conversion, need not be accompanied by payment of an
amount equal to the interest payable on the interest payment on the portion
converted. No fractional shares will be issued upon conversion but a cash
adjustment will be made for any fractional interest.
The Conversion Price is subject to adjustment upon the occurrence of
certain events, including:
(1) the issuance of shares of common stock as a dividend or distribution on
the common stock;
(2) the subdivision or combination of the outstanding common stock;
(3) the issuance to substantially all holders of common stock of rights or
warrants to subscribe for or purchase common stock (or securities
convertible into common stock) at a price per share less than the then
current market price per share, as defined;
(4) the distribution of shares of our capital stock (other than common
stock), evidences of indebtedness or other assets (excluding dividends
in cash, except as described in clause (5) below) to all holders of
common stock;
(5) the distribution, by dividend or otherwise, of cash to all holders of
common stock in an aggregate amount that, together with the aggregate
of any other distributions of cash that did not trigger a Conversion
Price adjustment to all holders of our common stock within the 12
months preceding the date fixed for determining the stockholders
entitled to such distribution and all Excess Payments in respect of
each tender offer or other negotiated transaction by us or any of our
Subsidiaries for common stock concluded within the preceding 12 months
not triggering a conversion price adjustment, exceeds 15% of the
product of the current market price per share (determined as set forth
below) on the date fixed for the determination of stockholders entitled
to receive such distribution times the number of shares of common stock
outstanding on such date;
(6) payment of an Excess Payment in respect of a tender offer or other
negotiated transaction by us or any of our subsidiaries for common
stock, if the aggregate amount if such Excess Payment, together with
the aggregate amount of cash distributions made within the preceding 12
months not triggering a conversion price adjustment and all Excess
Payments in respect of each tender offer or other negotiated
transaction by us or any of our subsidiaries for common stock concluded
within the preceding 12 months not triggering a conversion price
adjustment, exceeds 15% of the product of the current market price per
share on the expiration of the tender offer or the consummation of the
other negotiated transaction, as the case may be, times the number of
shares of common stock outstanding on that date; and
(7) the distribution to substantially all holders of common stock of rights
or warrants to subscribe for securities (other than those referred to
in clause (3) above). In the event of a distribution to substantially
all holders of common stock of rights to subscribe for additional
shares of our capital stock (other than those referred to in clause (3)
above), we may, instead of making any adjustment in the Conversion
Price, make proper provision so that each holder of a convertible
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note who converts the convertible note after the record date for the
distribution and prior to the expiration or redemption of the rights
will be entitled to receive upon that conversion, in addition to shares
of common stock, an appropriate number of rights. No adjustment of the
Conversion Price will be made until cumulative adjustments amount to
one percent or more of the Conversion Price as last adjusted.
If we reclassify or change our outstanding common stock, or consolidate
with or merge into or transfer or lease all or substantially all of our assets
to any person, or we are a party to a merger that reclassifies or changes our
outstanding common stock, the convertible notes will become convertible into the
kind and amount of securities, cash or other assets which the holders of the
convertible notes would have owned immediately after the transaction if the
holders had converted the convertible notes immediately before the effective
date of the transaction.
The indenture also provides that if rights, warrants or options expire
unexercised the Conversion Price shall be readjusted to take into account the
actual number of warrants, rights or options which were exercised.
In the indenture, the "current market price" per share of common stock on
any date is deemed to be the average of the daily market prices for the shorter
of (1) 10 consecutive business days ending on the last full trading day on the
exchange or market referred to in determining the Daily Market Prices prior to
the time of determination (as defined in the indenture) or (2) the period
commencing on the date next succeeding the first public announcement of the
issuance of rights or warrants or distribution through the last full trading day
prior to the time of determination.
We are permitted to make such reductions in the Conversion Price as we, in
our discretion, determine to be advisable in order that any stock dividend,
subdivision of shares, distribution or rights to purchase stock or securities or
distribution of securities convertible into or exchangeable for stock made by us
to our stockholders will not be taxable to the recipients.
SUBORDINATION OF CONVERTIBLE NOTES
The convertible notes are subordinate in right of payment to all of our
existing and future Senior Debt. The indenture does not restrict the amount of
Senior Debt or other Indebtedness of us or any Subsidiary of us. As of June 30,
1999, assuming the original issuance of the convertible notes had been
completed, the convertible notes would effectively rank junior to $19.9 million
of indebtedness of our subsidiaries and $48.4 million of other liabilities of
our subsidiaries. We have no debt outstanding other than the convertible notes.
The payment of the principal of, interest on or any other amounts due on
the convertible notes is subordinated in right of payment to the prior payment
in full of all our Senior Debt. No payment on account of principal of,
redemption of, interest on or any other amounts due on the convertible notes,
including, without limitation, any payments on the Change of Control Offer, and
no redemption, purchase or other acquisition of the convertible notes may be
made unless
(1) full payment of amounts then due on all Senior Debt have been made or
duly provided for pursuant to the terms of the instrument governing
that Senior Debt, and
(2) at the time for, or immediately after giving effect to, any such
payment, redemption, purchase or other acquisition, there does not
exist under any Senior Debt or any agreement under which any Senior
Debt has been issued, any default that has not been cured or waived and
which has resulted in the full amount of the Senior Debt being declared
due and payable. In addition, the indenture provides that if any of the
holders of any issue of Senior Debt notify (the "Payment Blockage
Notice") us and the trustee that a default has occurred giving the
holders of the Senior Debt the right to accelerate the maturity of the
convertible notes, no payment on account of principal, redemption,
interest, special interest, if any, or any other amounts due on the
convertible notes and no purchase, redemption or other acquisition of
the convertible notes will
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be made for the period (the "Payment Blockage Period") commencing on
the date notice is received and ending on the earlier of:
(A) the date on which the default was cured or waived, or
(B) 180 days from the date notice is received. Notwithstanding the
foregoing, only one Payment Blockage Notice with respect to the
same event of default or any other events of default existing and
unknown to the person giving notice at the time of notice on the
same issue of Senior Debt may be given during any period of 360
consecutive days unless the event of default or other events of
default have been cured or waived for a period of not less than 90
consecutive days. No new Payment Blockage Period may be commenced
by the holders of Senior Debt during any period of 360 consecutive
days unless all events of default which triggered the preceding
Payment Blockage Period have been cured or waived.
Upon any distribution of its assets in connection with any dissolution,
winding-up, liquidation or reorganization of us or acceleration of the principal
amount due on the convertible notes because of any Event of Default, all Senior
Debt must be paid in full before the holders of the convertible notes are
entitled to any payments whatsoever.
As a result of these subordination provisions, in the event of our
insolvency, holders of the convertible notes may recover ratably less than our
general creditors.
If the payment of the convertible notes is accelerated because of an Event
of Default, we or the trustee shall promptly notify the holders of Senior Debt
or the trustee(s) for the Senior Debt of the acceleration. We may not pay the
convertible notes until five days after the holders or trustee(s) of Senior Debt
receive notice of the acceleration and, after which we may pay the convertible
notes only if the subordination provisions of the indenture otherwise permit
payment at that time.
In the event that notwithstanding anything to the contrary contained in
this section, the trustee or any holder of convertible notes receives any
payment or distribution of our assets of any kind in contravention of any of the
terms of the indenture, whether in cash, property or securities, including,
without limitation by way of set-off or otherwise, in respect of the convertible
notes before all Senior Debt is paid in full, then the payment or distribution
will be held by the recipient in trust for the benefit of holders of Senior
Debt, and will be immediately paid over or delivered to the holders of Senior
Debt or their representative or representatives to the extent necessary to make
payment in full of all Senior Debt remaining unpaid, after giving effect to any
concurrent payment or distribution, or provision therefor, to or for the holder
of Senior Debt.
The convertible notes are our exclusive obligations. Since our operations
are conducted through our Subsidiaries, our cash flow and our consequent ability
to service debt, including the convertible notes, depends upon the earnings of
our Subsidiaries and the distribution of those earnings to, or under loans or
other payments of funds by those Subsidiaries to, us. The payment of dividends
and the making of loans and advances to us by our Subsidiaries may be subject to
statutory or contractual restrictions, depend upon the earnings of those
Subsidiaries and are subject to various business considerations.
Our right to receive assets of any of our Subsidiaries upon their
liquidation or reorganization (and the consequent right of the holders of the
convertible notes to participate in those assets) is effectively subordinated to
the claims of that Subsidiary's creditors (including trade creditors), except to
the extent that we are recognized as a creditor of that Subsidiary, in which
case our claims would still be subordinate to any security interests in the
assets of that Subsidiary and any indebtedness of that Subsidiary senior to that
held by us.
The indenture does not limit the amount of additional indebtedness,
including Senior Debt, which we can create, incur, assume or guarantee, nor will
the indenture limit the amount of indebtedness and other liabilities which any
Subsidiary can create, incur, assume or guarantee.
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OPTIONAL REDEMPTION
Except as set forth under "--Optional Tax Redemption," the convertible
notes are not redeemable at our option prior to October 1, 2002. After that
date, the convertible notes are subject to redemption at our option, in whole or
in part, after not less than 30 nor more than 60 days' notice, at the redemption
prices set forth below, expressed as percentages of principal amount plus
accrued and unpaid interest on those amounts, in each case, to the applicable
redemption date, if redeemed during the twelve-month period beginning on October
1 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ---- ----------
<S> <C>
2002...................................................... 103.429%
2003...................................................... 102.571%
2004...................................................... 101.714%
2005...................................................... 100.857%
2006...................................................... 100.000%
</TABLE>
In each case of a redemption of any convertible notes referred to under
"-- Optional Tax Redemption," redemption of the convertible notes will be made
at their principal amount together with accrued and unpaid interest and special
interest, if any, to the applicable redemption date.
OPTIONAL TAX REDEMPTION
The convertible notes may be redeemed at our option, in whole but not in
part, after not less than 30 nor more than 60 days' prior notice, at any time at
a redemption price equal to their principal amount together with accrued and
unpaid interest to the date fixed for redemption if there has occurred any
change in or amendment to the laws (or any regulations or official rulings) of
Bermuda or any Other Relevant Jurisdiction (as defined below), or any change in
or amendment to the official application or interpretation of those laws,
regulations or rulings (a "Change in Tax Law"), which become effective after the
Issuance Date, as a result of which we are or would be required on the next
succeeding Interest Payment Date to pay Additional Amounts with respect to the
convertible notes with respect to withholding taxes imposed by Bermuda or any
Other Relevant Jurisdiction, (or any political subdivision or taxing authority
thereof or therein) (a "Withholding Tax") and the Withholding Tax is imposed at
a rate that exceeds the rate (if any) at which Withholding Tax was imposed on
the Issuance Date; provided, however, that
(1) this paragraph does not apply to the extent that, at the Issuance Date
it was known or would have been known had professional advice of a
nationally recognized accounting firm in Bermuda or any Other Relevant
Jurisdiction, as the case may be, been sought, that a Change in Tax Law
in Bermuda or any Other Relevant Jurisdiction, was to occur after the
Issuance Date;
(2) no notice of redemption may be given earlier than 90 days prior to the
earliest date on which we would be obliged to pay the Additional
Amounts were a payment in respect of the convertible notes then due;
(3) at the time the notice of redemption is given, the obligation to pay
the Additional Amounts remains in effect; and
(4) the payment of the Additional Amounts cannot be avoided by the use of
any reasonable measures available to us.
The convertible notes may also be redeemed, in whole but not in part, at
any time at a redemption price equal to their principal amount plus accrued and
unpaid interest and special interest, if any, to the date fixed for redemption
if the person formed after the Issuance Date by a consolidation, amalgamation,
reorganization or reconstruction (or other similar arrangement) of us or the
person into which we are merged after the Issuance Date or to which we convey,
transfer or lease our properties and assets after the Issuance Date
substantially in entirety (collectively, a "Subsequent Consolidation") is
required, as
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consequence of the Subsequent Consolidation and as a consequence of a Change in
Tax Law in Bermuda or any Other Relevant Jurisdiction occurring after the date
of the Subsequent Consolidation to pay Additional Amounts with respect to
Withholding Tax on the convertible notes and the Withholding Tax is imposed at a
rate that exceeds the rate (if any) at which Withholding Tax was or would have
been imposed on the date of the Subsequent Consolidation; provided, however,
that this paragraph does not apply to the extent that, at the date of the
Subsequent Consolidation it was known or would have been known had professional
advice of a nationally recognized accounting firm in Bermuda or any Other
Relevant Jurisdiction been sought, that a Change in Tax Law in Bermuda or any
Other Relevant Jurisdiction was to occur after that date. We will also pay, or
make available for payment, to holders on the redemption date any Additional
Amounts (as described, but subject to the exceptions referred to, under
"Additional Amounts") resulting from the payment of the redemption price.
MANDATORY REDEMPTION AND REPURCHASE
We are not required to make mandatory redemption or sinking fund payments
with respect to the convertible notes. We are required to make a Change of
Control Offer with respect to a repurchase of the convertible notes under the
circumstances described under the caption "Repurchase at the Option of Holders."
REPURCHASE AT THE OPTION OF HOLDERS
If a Change of Control occurs, each holder of convertible notes has the
right to require us to repurchase all or any part of the holder's convertible
notes equal to $1,000 or an integral multiple of $1,000, under the Change of
Control Offer at a purchase price equal to 101% of the principal amount, plus
accrued and unpaid interest, if any, as of the date of purchase. We refer to the
payment as the Change of Control Payment. Within 40 days following any Change of
Control, we will mail a notice to each holder, stating:
(1) that the Change of Control Offer is being made under the covenant
entitled "Change of Control" and that all convertible notes tendered
will be accepted for payment;
(2) the purchase price and the purchase date, which will be no earlier than
30 days nor later than 40 days from the date the notice is mailed. This
date is referred to as the Change of Control Payment Date;
(3) that interest will continue to accrue on any convertible notes not
tendered, as provided in the convertible notes;
(4) that, unless we default in the payment of the Change of Control
Payment, with respect to all convertible notes accepted for payment
under the Change of Control Offer, interest will cease to accrue after
the Change of Control Payment Date;
(5) that holders electing to have any convertible notes purchased under a
Change of Control Offer will be required to surrender the convertible
notes, with the form entitled Option of Holder to Elect Purchase on the
reverse of the convertible notes completed, to the paying agent at the
address specified in the notice prior to the close of business on the
third Business Day preceding the Change of Control Payment Date;
(6) that holders will be entitled to withdraw their election if the paying
agent receives, not later than the close of business on the second
Business Day preceding the Change of Control Payment Date, a telegram,
telex, facsimile transmission or letter setting forth the name of the
holder, the principal amount of convertible notes delivered for
purchase, and a statement that the holder is withdrawing his election
to have the convertible notes purchased; and
(7) that holders whose convertible notes are being purchased only in part
will be issued new convertible notes equal in principal amount to the
unpurchased portion of the convertible notes surrendered, which
unpurchased portion must be equal to $1,000 in principal amount.
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We will comply with the requirements of Rules 13e-4 and 14e-1 under the
Exchange Act and any other securities laws and regulations to the extent those
laws and regulations are applicable in connection with the repurchase of the
convertible notes in connection with a Change of Control.
On the Change of Control Payment Date, we will, to the extent lawful,
(1) accept for payment convertible notes or portions of convertible notes
tendered under the Change of Control Offer,
(2) deposit with the paying agent an amount equal to the Change of Control
Payment in respect of all convertible notes or portions of convertible
notes tendered and
(3) deliver or cause to be delivered to the trustee the convertible notes
accepted together with an Officers' Certificate stating the convertible
notes or portions of convertible notes tendered to us.
The paying agent will promptly mail to each holder of convertible notes
accepted, or, if the holder requests, wire transfer immediately available funds
to an account previously specified in writing by the holder to us and the paying
agent, payment in an amount equal to the purchase price for the convertible
notes. The trustee will promptly authenticate and mail to each holder a new
convertible note equal in principal amount to any unpurchased portion of the
convertible notes surrendered, if any; provided that each new convertible note
will be in a principal amount of $1,000 or an integral multiple of $1,000. We
will publicly announce the results of the Change of Control Offer on or as soon
as practicable after the Change of Control Payment Date.
Except as described above with respect to a Change of Control, the
indenture does not contain any other provision that permits the holders of the
convertible notes to require that we repurchase or redeem the convertible notes
in the event of a takeover, recapitalization or similar restructuring. The
Change of Control Offer requirement of the convertible notes may, in certain
circumstances, make more difficult or discourage a takeover of us, and, thus,
the removal of incumbent management. Management has not entered into any
agreement or plan involving a Change of Control, although it is possible that we
would decide to do so in the future. Subject to the limitations discussed below,
we could, in the future, enter into various transactions including acquisitions,
refinancings or other recapitalizations, that would not constitute a Change of
Control under the indenture, but that could increase the amount of indebtedness
outstanding at that time or otherwise affect our capital structure or credit
ratings.
Our ability to pay cash to the holders of convertible notes under a Change
of Control Offer may be limited by our then existing financial resources. See
"Risk Factors." Any future credit facilities or other agreements relating to our
or our subsidiaries' indebtedness may contain prohibitions or restrictions on
our ability to effect a Change of Control Payment. In the event a Change of
Control occurs at a time when such prohibitions or restrictions are in effect,
we could seek the consent of our lenders to the purchase of convertible notes
and other Indebtedness containing change of control provisions or could attempt
to refinance the borrowings that contain those prohibitions or restrictions. If
we do not obtain such consents or repay such borrowings, we will be effectively
prohibited from purchasing the convertible notes. In that case, our failure to
purchase tendered convertible notes would constitute an Event of Default under
the indenture. Moreover, the events that constitute a Change of Control under
the indenture may constitute events of default under our future debt instruments
or credit agreements of us or our subsidiaries. Those events of default may
permit the lenders under the debt instruments or credit agreements to accelerate
the debt and, if that debt is not paid or repurchased, to enforce their security
interests in what may be all or substantially all of the assets of our
Subsidiaries. Therefore, our ability to raise cash to repay or repurchase the
convertible notes may be limited.
We will not be required to make a Change of Control Offer in the event we
enter into a transaction with management or our affiliates who are Permitted
Holders. The definition of Change of Control includes a phrase relating to the
sale, lease, transfer, conveyance or other disposition of all or substantially
all of our assets. Although there is a developing body of case law interpreting
the phrase substantially all, there is no precise established definition of the
phrase under applicable law. Accordingly, the ability of a holder of convertible
notes to require us to repurchase those convertible notes as a result of a sale,
lease,
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transfer, conveyance or other disposition of less than all of the assets of us
and our Subsidiaries to another Person may be uncertain.
ADDITIONAL AMOUNTS
All payments made by us on the convertible notes will be made without
deduction or withholding, for or on account of, any and all present or future
taxes, duties, assessments, or governmental charges of whatever nature unless
the deduction or withholding of the taxes, duties, assessments or governmental
charges is required by law. If any deduction or withholding for or on account of
any present or future taxes, assessments or other governmental charges of
Bermuda or any other jurisdiction (other than the United States) in which we or
a successor corporation is organized (or any political subdivision or taxing
authority thereof or therein) ("Other Relevant Jurisdiction") is at any time
required in respect of any amounts to be paid by us under the convertible notes,
we will pay or cause to be paid the additional amounts ("Additional Amounts") as
may be necessary in order that the net amounts received by a holder of a
convertible note after the deduction or withholding is not less than the amounts
specified in the convertible note to which the holder is entitled; provided,
however, that we are not required to make any payment of Additional Amounts for
or on account of:
(a) any tax, assessment or other governmental charge to the extent such
tax, assessment or other governmental charge would not have been
imposed but for (i) the existence of any present or former connection
between the holder (or between a fiduciary, settlor, beneficiary,
member or shareholder of, or possessor of a power over, the holder, if
the holder is an estate, nominee, trust, partnership or corporation),
other than the holding of a convertible note or the receipt of amounts
payable in respect of a convertible note and Bermuda or any Other
Relevant Jurisdiction or any political subdivision or taxing authority
thereof or therein, including, without limitation, the holder (or the
fiduciary, settlor, beneficiary, member, shareholder or possessor)
being or having been a citizen or resident thereof or being or having
been present or engaged in trade or business therein or having or
having had a permanent establishment therein or (ii) the presentation
of a convertible note (where presentation is required) for payment on
a date more than 30 days after the date on which the payment became
due and payable or the date on which payment thereof is duly provided
for, whichever occurs later, except to the extent that the holder
would have been entitled to Additional Amounts had the convertible
note been presented on the last day of that period of 30 days;
(b) any tax, assessment or other governmental charge that is imposed or
withheld by reason of the failure to comply by the holder of a
convertible note, or, if different, the beneficial owner of the
interest payable on a convertible note, with a timely request of us
addressed to the holder or beneficial owner to provide information,
documents or other evidence concerning the nationality, residence,
identity or connection with the taxing or jurisdiction of the holder
or beneficial owner which is required or imposed by a statute,
regulation or administrative practice of the taxing jurisdiction as a
precondition to exemption from all or part of that tax, assessment or
governmental charge;
(c) any estate, inheritance, gift, sales, transfer, personal property or
similar tax, assessment or other governmental charge;
(d) any tax, assessment or other governmental charge which is collectible
otherwise than by withholding from payments of principal amount at
maturity, redemption amount, Change of Control Payment, interest with
respect to a convertible note or withholding from the proceeds of a
sale or exchange of a convertible note;
(e) any tax, assessment or other governmental charge imposed on a holder
that is not the beneficial owner of a convertible note to the extent
that the beneficial owner would not have been entitled to the payment
of any Additional Amounts had the beneficial owner directly held the
convertible note;
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(f) any tax, assessment or other governmental charge required to be
withheld by any paying agent from any payment of principal amount at
maturity, redemption amount, Change of Control Payment or interest
with respect to a convertible note, if the payment can be made, and is
in fact made, without the withholding by any other paying agent
located inside the United States; and
(g) any combination of items (a), (b), (c), (d), (e) and (f) above.
If any deduction or withholding for or on account of any present or future
taxes, assessments or other governmental charges are imposed by any taxing
jurisdiction but that deduction or withholding could be reduced or eliminated
under a statute, regulation or administrative practice of the taxing
jurisdiction if certain information, document or other evidence is provided by
holders or beneficial owners of the convertible notes, we shall provide a timely
request addressed to the holders or beneficial owners to provide that
information, document or other evidence.
All references to interest on the convertible notes in the indenture or the
convertible notes include any Additional Amounts payable to us under this
paragraph.
SELECTION AND NOTICE
If less than all of the convertible notes are to be redeemed at any time,
selection of convertible notes for redemption will be made by the trustee in
compliance with the requirements of any securities exchange on which the
convertible notes are listed. In the absence of any requirements of any
securities exchange or if the convertible notes are not listed, selection of the
convertible note to be redeemed will be made on a pro rata basis, provided that
no convertible notes of $1,000 or less will be redeemed in part. Notice of
redemption will be mailed by first class mail at least 30 but not more than 60
days before the redemption date to each holder of convertible notes to be
redeemed at its registered address. If any convertible note is to be redeemed in
part only, the notice of redemption that relates to that convertible note will
state the portion of the principal amount to be redeemed. A new convertible note
in principal amount equal to the unredeemed portion will be issued in the name
of the holder upon cancellation of the original convertible note. On and after
the redemption date, interest ceases to accrue on convertible notes or portions
of them called for redemption.
COVENANTS
SALE OF ASSETS
The indenture provides that we may not sell, assign, transfer, lease,
convey or otherwise dispose of all or substantially all of our properties or
assets in any one or more related transactions to another corporation, Person or
entity unless:
(1) The entity or Person to which that sale, assignment, transfer, lease,
conveyance or other disposition is made is a corporation organized or
existing under the laws of the United States, or any state, the
District of Columbia or the laws of the United Kingdom, the
Netherlands, the Netherlands Antilles, Bermuda or the Cayman Islands;
(2) The entity or Person to which that sale, assignment, transfer, lease,
conveyance or other disposition will have been made assumes all
Obligations pursuant to a supplemental indenture, in a form reasonably
satisfactory to the trustee, under the convertible notes and the
indenture; and
(3) Immediately after that transaction no Default or Event of Default
exists.
Limitation on Status as Investment Company
The indenture provides that we will not, and will not permit any Subsidiary
to, conduct its business in a fashion that would cause us to be required to
register as an "investment company" (as that term is defined in the Investment
Company Act of 1940.
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Reports
Whether or not required by the rules and regulations of the SEC, so long as
any convertible notes are outstanding, we will file with the SEC and furnish to
the holders of convertible notes all quarterly and annual financial information
required to be contained in a filing with the SEC on Forms 10-Q and 10-K,
including a "Management's Discussion and Analysis of Results of Operations and
Financial Condition" and, with respect to the annual information only, a report
by our certified independent accountants, in each case, as required by the rules
and regulations of the SEC as in effect on the Issuance Date.
EVENTS OF DEFAULT AND REMEDIES
The indenture provides that each of the following constitutes an Event of
Default:
(1) default for 30 days in the payment when due of interest on the
convertible notes;
(2) a default in the payment of principal of any convertible note when due
at its stated maturity, upon optional redemption, in connection with a
Repurchase Offer, upon declaration, or otherwise;
(3) the failure by us to comply for 30 days after notice with any of our
obligations under the covenants described under "Repurchase at the
Option of Holders" and "Sale of Assets" (in each case, other than a
failure to purchase convertible notes in connection with a Repurchase
Offer);
(4) failure by us for 60 days after notice to comply with certain other
covenants and agreements contained in the indenture or the convertible
notes;
(5) default under any mortgage, indenture or instrument under which there
may be issued or by which there may be secured or evidenced any
Indebtedness for money borrowed by us or any of our Subsidiaries that
is a Significant Subsidiary or any group of two or more Subsidiaries
that, taken as a whole, would constitute a Significant Subsidiary, or
the payment of which is guaranteed by us or any of our Subsidiaries
that is a Significant Subsidiary or any group of two or more
Subsidiaries that, taken as a whole, would constitute a Significant
Subsidiary, whether such Indebtedness or guarantee now exists, or is
created after the Issuance Date, which default
(a) is caused by a failure to pay when due principal or interest on that
Indebtedness within the grace period provided in that Indebtedness,
which payment default continues beyond any applicable grace period
or
(b) results in the acceleration of that Indebtedness prior to its
express maturity and, in each case, the principal amount of that
Indebtedness, together with the principal amount of any other
Indebtedness under which there has been a payment default or the
maturity of which has been so accelerated, aggregates $20.0 million
or more;
(6) failure by us or any Subsidiary of us that is a Significant Subsidiary
or any group of two or more Subsidiaries that, taken as a whole, would
constitute a Significant Subsidiary to pay final judgments for the
payment of money (other than any judgment as to which a reputable
insurance company has accepted liability subject to customary terms)
aggregating in excess of $10.0 million, which judgments are not paid,
wired, discharged or stayed within 60 days after their entry; and
(7) certain events of bankruptcy or insolvency with respect to us or any of
our Subsidiaries that is a Significant Subsidiary or any group of two
or more Subsidiaries that, taken as a whole, would constitute a
Significant Subsidiary.
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(8) The approval by our shareholders of any merger, amalgamation or
consolidation by us (whether or not we are the surviving corporation)
and whether or not such merger, amalgamation or consolidation is in one
or more related transactions if:
- the successor corporation, Person or entity
(A) does not assume all the Obligations, under a supplemental
indenture in a form reasonably satisfactory to the trustee, under
the convertible notes and the indenture; and
(B) is not a corporation, Person or entity organized or existing
under the laws of the United States, any state, the District of
Columbia or the laws of the United Kingdom, the Netherlands, the
Netherlands Antilles, Bermuda or the Cayman Islands, or
- immediately after that transaction, any Default or Event of Default
exists.
If any Event of Default occurs and is continuing, the trustee or the
holders of at least 25% in principal amount of the then outstanding convertible
notes may declare all the convertible notes to be due and payable immediately,
subject to the provisions limiting payment described in "--Subordination."
Notwithstanding the foregoing, in the case of an Event of Default arising from
(i) the events described in clause (8) above or (ii) certain events of
bankruptcy or insolvency, with respect to us or any Significant Subsidiary, all
outstanding convertible notes will become due and payable without further action
or notice. Holders of the convertible notes may not enforce the indenture or the
convertible notes except as provided in the indenture. Subject to certain
limitations, holders of a majority in principal amount of the then outstanding
convertible notes may direct the trustee in its exercise of any trust or power.
The trustee may withhold from holders of the convertible notes notice of any
continuing Default or Event of Default, except a Default or Event of Default
relating to the payment of principal or interest, if it determines that
withholding notice is in their interest.
In the event of a declaration of acceleration of the convertible notes
because an Event of Default has occurred and is continuing as a result of the
acceleration of any Indebtedness described in clause (5) above, the declaration
of acceleration of the convertible notes will be automatically annulled if:
(1) the holders of any Indebtedness described in such clause (5) have
rescinded the declaration of acceleration in respect of that
Indebtedness within 30 days after the date of the declaration,
(2) the annulment of the acceleration of the convertible notes would not
conflict with any judgment or decree of a court of competent
jurisdiction, and
(3) all existing Events of Default, except for nonpayment of principal of
or interest on the convertible notes that became due solely because of
the acceleration of the convertible notes, have been cured or waived.
The holders of a majority in aggregate principal amount of the then
outstanding convertible notes by notice to the trustee may on behalf of all of
the holders waive any existing Default or Event of Default and its consequences
under the indenture except a continuing Default or Event of Default in the
payment of interest on or the principal of the convertible notes.
We are required to deliver to the trustee annually a statement regarding
compliance with the indenture, and upon becoming aware of any Default or Event
of Default, to deliver to the trustee a statement specifying such Default or
Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND SHAREHOLDERS
None of our directors, officers, employees, incorporators or shareholders
has any liability for any of our Obligations under the convertible notes or the
indenture or for any claim based on, in respect of, or by reason of, such
Obligations or their creation. Each holder of the convertible notes by accepting
a convertible note waives and releases all such liability. The waiver and
release are part of the consideration
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for issuance of the convertible notes. Such waiver may not be effective to waive
liabilities under the federal securities laws, and it is the view of the SEC
that a waiver of such liabilities is against public policy.
UNCLAIMED MONEY; PRESCRIPTION
If money deposited with the trustee or paying agent for the payment of
principal or interest remains unclaimed for two years, the trustee and the
paying agent shall pay the money back to us at our written request. After that,
holders of convertible notes entitled to the money must look to us for payment
unless an abandoned property law designates another person and all liability of
the trustee and the paying agent will cease. Other than as set forth in this
paragraph, the indenture does not provide for any prescription period for the
payment of interest and principal on the convertible notes.
BOOK-ENTRY, DELIVERY AND FORM
We will issue the convertible notes in fully registered form, without
coupons, in integral multiples of $1,000.
The convertible notes that were sold to qualified institutional buyers are
evidenced by global notes and were deposited with, or on behalf of, DTC and
registered in the name of Cede & Co. as DTC's nominee. Except as set forth
below, a global note may be transferred, in whole or in part, only to another
DTC nominee or to a successor of DTC or its nominee.
Convertible notes that were sold to "accredited investors" (as defined in
Rule 501(a)(1), (2), (3), (4), (5), (6) and (7) under the Securities Act) were
initially issued in global form, but were promptly exchanged into registered,
certificated form without interest coupons.
After a sale of convertible notes under this shelf registration statement,
convertible notes that were held as global notes with DTC will remain as global
notes and convertible notes that were held in certificated form may either be
held as global notes with DTC or as notes in certificated form.
Persons may hold their interests in a global note directly through DTC if
they are participants in DTC, or indirectly through organizations that are
participants in DTC. Transfers between participants will be effected in
accordance with DTC rules and will be settled in clearing house funds.
Persons who are not DTC participants may own interests in global notes only
through DTC participants or certain banks, brokers, dealers, trust companies and
other parties that clear through or maintain a custodial relationship with a DTC
participant. So long as Cede & Co., as the nominee of DTC, is the registered
owner of a global note, we will consider Cede & Co. for all purposes to be the
sole holder of the global note. Except as provided in this section or as
described in "Exchange of Global Notes for Certificated Notes," owners of
beneficial interests in a global note will not have certificates registered in
their names, will not receive physical delivery of certificates in definitive
registered form, and will not be considered the holders of the convertible
notes.
We will pay interest on and the redemption price or repurchase price of a
global note to Cede & Co., as the registered owner, by wire transfer of
immediately available funds on each interest payment, redemption or repurchase
date. We and the trustee have no responsibility or liability for any aspect of
the records relating to or payments made on account of beneficial ownership
interests in a global note.
DTC has informed us that its practice is to credit participants' accounts
on the payment date with payments in amounts proportionate to their beneficial
interests in the global note, unless it has reason to believe that it will not
receive payment. Only the DTC participants are responsible for payments to
owners of beneficial interests held through them.
Because DTC can only act on behalf of participants, who in turn act on
behalf of indirect participants and certain banks, a person having a beneficial
interest in the principal amount represented by a global note may be unable to
pledge its interest to persons or entities that do not participate in the DTC
system, due to the lack of a physical certificate evidencing its interest.
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We are not responsible for the performance by DTC or its participants or
indirect participants of their obligations. The trustee is also not responsible
for such performance. DTC has advised us that it will take any action permitted
to be taken by a holder of notes, only at the direction of one or more
participants with an interest in a global note, and only with respect to the
principal amount as to which the participants have given it a direction.
DTC has advised us that it is a limited purpose trust company organized
under the laws of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the Uniform Commercial Code and a "clearing
agency" registered under the provisions of Section 17A of the Exchange Act. DTC
was created to hold securities for its participants and to facilitate the
clearance and settlement of securities transactions between participants through
electronic book-entry changes to the accounts of its participants, thereby
eliminating the need for physical movement of certificates. Participants include
securities brokers and dealers, banks, trust companies and clearing corporations
and may include certain other organizations such as the initial purchasers of
the convertible notes. Certain participants (or their representatives), together
with other entities, own DTC. Indirect access to the DTC system is available to
others such as banks, brokers, dealers and trust companies that clear through,
or maintain a custodial relationship with, a participant, either directly or
indirectly.
Although DTC has agreed to the foregoing procedures to facilitate transfers
of interests in global notes among participants, it has no obligation to perform
or continue to perform these procedures. These procedures may be discontinued at
any time.
EXCHANGE OF GLOBAL NOTES FOR CERTIFICATED NOTES
A global note is exchangeable for definitive convertible notes in
registered certificated form if:
(1) DTC (a) notifies us that it is unwilling or unable to continue as
depositary for the global notes and we fail to appoint a successor
depositary or (b) has ceased to be a clearing agency registered under
the Exchange Act;
(2) we, at our option, notify the trustee in writing that we elect to cause
the issuance of the certificated notes; or
(3) there shall have occurred and be continuing a Default or Event of
Default with respect to the convertible notes.
In addition, beneficial interests in a global note may be exchanged for
certificated notes upon prior written notice given to the trustee by or on
behalf of DTC in accordance with the indenture. In all cases, Certificated Notes
delivered in exchange for any global note or beneficial interests in global
notes will be registered in the names, and issued in any approved denominations,
requested by or on behalf of the depositary (in accordance with its customary
procedures).
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next succeeding paragraph, the indenture or the
convertible notes may be amended or supplemented with the consent of the holders
of at least a majority in aggregate principal amount of the outstanding
convertible notes, as applicable, including consents obtained in connection with
a tender offer or exchange offer for the convertible notes, and any existing
default or compliance with any provision of the indenture or the convertible
notes may be waived with the consent of the holders of a majority in aggregate
principal amount of then outstanding convertible notes, including consents
obtained in connection with a tender offer or exchange offer for the convertible
notes.
Without the consent of each holder affected, an amendment or waiver may
not:
(1) reduce the amount of convertible notes whose holders must consent to
an amendment, supplement or waiver,
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(2) reduce the principal of or change the fixed maturity of any
convertible note or alter the provisions with respect to the
redemption of the convertible notes, except for repurchases of the
convertible notes under the covenant described above under the caption
"-- Repurchase at the Option of Holders,"
(3) reduce the rate of or change the time for payment or accrual of
interest on any convertible note,
(4) waive a default in the payment of principal of or interest on any
convertible notes, except a rescission of acceleration of the
convertible notes by the holders of at least a majority in aggregate
principal amount of the convertible notes and a waiver of the payment
default that resulted from such acceleration,
(5) make any convertible note payable in money other than that stated in
the convertible notes,
(6) make any change in the provisions of the indenture relating to waivers
of past Defaults or the rights of holders of convertible notes to
receive payments of principal of or interest on the convertible notes,
(7) waive a redemption payment with respect to any convertible note,
(8) impair the right to convert the convertible notes into common stock,
(9) modify the conversion or subordination provision of the indenture in a
manner adverse to the holders of the convertible notes, or
(10) make any change in the foregoing amendment and waiver provisions.
Notwithstanding the foregoing, without the consent of any holder of
convertible notes, CoreComm and the trustee may amend or supplement the
indenture or the convertible notes to cure any ambiguity, defect or
inconsistency, to provide for uncertificated convertible notes in addition to or
in place of certificated convertible notes, to provide for the assumption of
CoreComm's obligations to holders of the convertible notes in the case of a
merger or consolidation or certain transfers or leases, to make any change that
would provide any additional rights or benefits to the holders of the
convertible notes or that does not adversely affect the legal rights under the
indenture of any such holder, or to comply with requirements of the SEC in order
to maintain the qualification of the indenture under the Trust Indenture Act.
GOVERNING LAW AND JUDGMENTS
The convertible notes and the indenture will be governed exclusively by and
construed in accordance with the laws of the State of New York without giving
effect to applicable principles of conflicts of laws to the extent that the
application of the law of another jurisdiction would be required thereby.
CoreComm will submit to the jurisdiction of the United States federal and
New York state courts located in the Borough of Manhattan, City and State of New
York for purposes of all legal actions and proceedings instituted in connection
with the convertible notes and the indenture. CoreComm has appointed National
Registered Agents, Inc. as its authorized agent upon which process may be served
in any such action.
CONCERNING THE TRUSTEE
The indenture contains limitations on the rights of the trustee, should it
become a creditor of CoreComm, to obtain payment of claims in certain cases, or
to realize on certain property received in respect of any such claim as security
or otherwise. The trustee will be permitted to engage in other transactions;
however, if it acquires any conflicting interest it must eliminate such conflict
within 90 days, apply to the SEC for permission to continue or resign.
The holders of the majority in aggregate principal amount of the then
outstanding convertible notes will have the right to direct the time, method and
place of conducting any proceeding for exercising any
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remedy available to the trustee under the indenture, subject to certain
exceptions. The indenture provides that if an Event of Default occurs, which is
not cured or waived, the trustee will be required, in the exercise of its power,
to use the degree of care of a prudent man in the conduct of his own affairs.
Subject to these provisions, the trustee will be under no obligation to exercise
any of its rights or powers under the indenture at the request of any holder of
convertible notes, unless such holder has offered to the trustee security and
indemnity satisfactory to it against any loss, liability or expense.
DEFINITIONS
Set forth below are selected defined terms used in the indenture. Reference
is made to the indenture for a full definition of all terms, as well as certain
other terms used in this description of the convertible notes for which no
definition is provided.
"Capital Stock" means any and all shares, interests, participations, rights
or other equivalents, however designated, of corporate stock, including, without
limitation, partnership interests.
"Change of Control" means
(1) the sale, lease or transfer of all or substantially all of the assets
of CoreComm to any "Person" or "group," within the meaning of Sections
13(d)(3) and 14(d)(2) of the Exchange Act or any successor provision to
either of the foregoing, including any group acting for the purpose of
acquiring, holding or disposing of securities within the meaning of
Rule 13D-5(b)(1) under the Exchange Act, other than any Permitted
Holder,
(2) the approval by the requisite stockholders of CoreComm of a plan of
liquidation or dissolution of CoreComm,
(3) any "Person" or "group," within the meaning of Sections 13(d) and
14(d)(2) of the Exchange Act or any successor provision to either of
the foregoing, including any group acting for the purpose of acquiring,
holding or disposing of securities within the meaning of Rule
13d-5(b)(1) under the Exchange Act, other than any Permitted Holder,
becomes the "beneficial owner", as defined in Rule 13d-3 under the
Exchange Act, of more than 50% of the total voting power of all classes
of the voting stock of CoreComm and/or warrants or options to acquire
such voting stock, calculated on a fully diluted basis, unless, as a
result of such transaction, the ultimate direct or indirect ownership
of CoreComm is substantially the same immediately after such
transaction as it was immediately prior to such transaction, or
(4) during any period of two consecutive years, individuals who at the
beginning of such period constituted CoreComm's board of directors,
together with any new directors whose election or appointment by such
board or whose nomination for election by the shareholders of CoreComm
was approved by a vote of a majority of the directors then still in
office who were either directors at the beginning of such period or
whose election or nomination for election was previously so approved,
cease for any reason to constitute a majority of CoreComm's board of
directors then in office.
"Default" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock, but excluding any Indebtedness that is
convertible into, or exchangeable for, Capital Stock.
"Excess Payment" means the excess of (A) the aggregate of the cash and
value of other consideration paid by CoreComm or any of its Subsidiaries with
respect to shares acquired in a tender offer or other negotiated transaction
over (B) the market value of such acquired shares after giving effect to the
completion of a tender offer or other negotiated transaction.
"Exchange Rate Contract" means, with respect to any Person, any currency
swap agreements, forward exchange rate agreements, foreign currency futures or
options, exchange rate collar agreements, exchange
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rate insurance and other agreements or arrangements, or combination thereof, the
principal purpose of which is to provide protection against fluctuations in
currency exchange rates. An Exchange Rate Contract may also include an Interest
Rate Agreement.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as approved by a significant segment of the accounting profession,
which are in effect on the Issuance Date and are applied on a consistent basis.
"Guarantee" means a guarantee, other than by endorsement of negotiable
instruments for collection in the ordinary course of business, direct or
indirect, in any manner, including, without limitation, letters of credit and
reimbursement agreements in respect thereof, of all or any part of any
Indebtedness.
"Indebtedness" means, with respect to any Person, any indebtedness of such
Person, whether or not contingent, in respect of borrowed money or evidenced by
bonds, notes, debentures or similar instruments or letters of credit, or
reimbursement agreements in respect thereof, or representing the balance
deferred and unpaid of the purchase price of any property (which purchase price
is due more than six months after the placing into service or delivery of such
property) including pursuant to capital leases and sale-and-leaseback
transactions, or representing any hedging obligations under an Exchange Rate
Contract or an Interest Rate Agreement, except any such balance that constitutes
an accrued expense or trade payable, if and to the extent any of the foregoing
indebtedness, other than obligations under an Exchange Rate Contract or an
Interest Rate Agreement, would appear as a liability upon a balance sheet of
such Person prepared in accordance with GAAP, and also includes, to the extent
not otherwise included, the Guarantee of items which would be included within
this definition. The amount of any Indebtedness outstanding as of any date shall
be the accreted value thereof, in the case of any Indebtedness issued with
original issue discount. Indebtedness shall not include liabilities for taxes of
any kind.
"Interest Rate Agreement" means, with respect to any Person, any interest
rate swap agreement, interest rate cap agreement, interest rate collar agreement
or other similar agreement the principal purpose of which is to protect the
party indicated therein against fluctuations in interest rates.
"Issuance Date" means the date on which the convertible notes are first
authenticated and issued.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Permitted Designee" means
(1) a spouse or a child of a Permitted Holder,
(2) trusts for the benefit of a Permitted Holder or a spouse or child of a
Permitted Holder,
(3) in the event of the death or incompetence of a Permitted Holder, his
estate, heirs, executor, administrator, committee or other personal
representative or
(4) any Person so long as a Permitted Holder owns at least 50% of the
voting power of all classes of the voting stock of such Person.
"Permitted Holders" means George S. Blumenthal, J. Barclay Knapp and their
Permitted Designees.
"Repurchase Offer" means a Change of Control Offer.
"Senior Debt" means the principal of, interest on and other amounts due on
(1) our Indebtedness, whether outstanding on the date of the indenture or
thereafter created, incurred, assumed or guaranteed by us, for money
borrowed from banks or other financial institutions;
(2) our Indebtedness, whether outstanding on the date of the indenture or
thereafter created incurred, assumed or guaranteed by us; and
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(3) our indebtedness under interest rate swaps, caps or similar hedging
agreements and foreign exchange contracts, currency swaps or similar
agreements: unless, in the instrument creating or evidencing or under
which Indebtedness under (1) or (2) is outstanding, it is expressly
provided that such Indebtedness is not senior in right of payment to
the convertible notes.
Senior Debt includes, with respect to the obligations described in clauses
(1) and (2) above, interest accruing, pursuant to the terms of such Senior Debt,
on or after the filing of any petition in bankruptcy or for reorganization
relating to us, whether or not post-filing interest is allowed in such
proceeding, at the rate specified in the instrument governing the relevant
obligation. Notwithstanding anything to the contrary in the foregoing, Senior
Debt shall not include: (a) Indebtedness of or amounts owed by us for
compensation to employees, or for goods or materials purchased in the ordinary
course of business, or for services; and (b) Indebtedness of CoreComm to a
Subsidiary of CoreComm.
"Significant Subsidiary" means any Subsidiary of CoreComm which is a
"significant subsidiary" as defined in Rule 1-02(v) of Regulation S-X under the
Securities Act and the Exchange Act, as such Regulation is in effect on the date
of the indenture.
"Subsidiary" means any corporation, association or other business entity of
which more than 50% of the total voting power of shares of Capital Stock
entitled, without regard to the occurrence of any contingency, to vote in the
election of directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by any Person or one or more of the other
Subsidiaries of that Person or a combination thereof.
REGISTRATION RIGHTS
The following summary of certain provisions of the registration rights
agreement is not complete and is subject to, and is qualified in its entirety by
reference to, all the provisions of the registration rights agreement, which is
incorporated by reference into the registration statement of which this
prospectus forms a part.
We entered into the registration rights agreement under which we agreed, at
our expense, for the benefit of the holders of the offered securities, to file
with the SEC the registration statement covering resale of the offered
securities. We will use our best efforts to cause the registration statement to
become effective as promptly as is practicable, but in any event within 180
days, and to keep the registration statement effective until the earlier of
(1) the sale under the registration statement of all the offered securities
registered under the registration statement and
(2) subject to certain exceptions, the second anniversary of the issuance
of the convertible notes.
We will be permitted to suspend the use of this prospectus under certain
circumstances relating to pending corporate developments, public filings with
the SEC and similar events. We have agreed to pay predetermined special interest
as described in this prospectus with respect to each 90-day period, to holders
of offered securities if the registration statement is not timely filed or made
effective or if this prospectus is unavailable for periods in excess of those
described in the registration rights agreement. Special interest will accrue
until the failure to file or become effective or unavailability is cured in
respect of any convertible note, at a rate per annum equal to 0.25% for the
first 90 day period after the occurrence of the event and with respect to each
subsequent 90-day period an amount equal to an increase in the annual interest
rate on the convertible notes of 0.25% until all registration defaults have been
cured up to a maximum increase in the annual rate of interest on the convertible
notes equal to 1.0%.
Selling securityholders must complete and deliver to us a notice and
questionnaire, the form of which was sent to all holders of record known to us,
at least three business days prior to any intended distribution of offered
securities under the registration statement. Holders of offered securities are
required to complete and deliver the questionnaire prior to the effectiveness of
the registration statement so that holders may be named as selling
securityholders in this prospectus at the time of effectiveness. Upon receipt of
a
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completed questionnaire, together with other information as may be reasonably
requested by us, from a selling securityholder following the effectiveness of
the registration statement, we will, as promptly as practicable but in any event
within five business days of receipt, file such amendments to the registration
statement or supplements to this prospectus as are necessary to permit selling
securityholders to deliver this prospectus, including any supplements, to
purchasers of offered securities (subject to our right to suspend the use of
this prospectus as described above). We have agreed to pay special interest in
the amount set forth above to holders of offered securities if we fail to make a
filing in the time required.
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DESCRIPTION OF CAPITAL STOCK
AUTHORIZED CAPITAL STOCK
Our authorized capital stock consists of seventy-five million (75,000,000)
shares of common stock and one million (1,000,000) shares of Series A Junior
Participating Preferred Stock. On October 28, 1999, there were 25,479,942 shares
of common stock outstanding. The following description is qualified in all
respects by reference to our Memorandum of Association and our by-laws.
COMMON STOCK
All shares of our common stock participate equally in dividends payable to
holders of our common stock when and as declared by the Board of Directors and
in net assets available for distribution to holders of our common stock on
liquidation or dissolution, have one vote per share on all matters submitted to
a vote of our shareholders and do not have cumulative rights in the decision of
directors. All issued and outstanding shares of common stock are fully paid and
nonassessable, and the holders of them do not have pre-emptive rights.
TRANSFER AGENT
Continental Stock Transfer & Trust Company is the transfer agent and
registrar for our common stock.
CERTAIN SPECIAL PROVISIONS OF THE BY-LAWS
Certain provisions contained in our by-laws could make the acquisition of
control of us by means of a tender offer, open market purchases, a proxy contest
or otherwise more difficult. Described below are these provisions. The
description is intended as a summary only and is qualified in its entirety by
reference to our by-laws.
Classified Board of Directors: The by-laws provide that the Board of
Directors will be divided into three classes of directors, with the classes to
be as nearly equal in number as possible. The Board of Directors consists of the
persons referred to as such in the section entitled "Management." At each annual
meeting of shareholders, one class of directors will be elected, each year for a
three-year term.
We believe that the classified board provision of the by-laws is
advantageous to us and our shareholders because, by providing that directors
will serve three-year terms rather than one-year terms, it will enhance the
likelihood of continuity and stability in the composition of the Board of
Directors and in the policies formulated by the Board of Directors. We believe
that this, in turn, will permit the Board to represent more effectively the
interests of all shareholders.
With a classified Board of Directors, it will generally take a majority
shareholder two annual meetings of shareholders to elect a majority of the Board
of Directors. As a result, a classified board may discourage proxy contests for
the election of directors or purchases of a substantial block of shares because
its provisions could operate to prevent obtaining control of the board in a
relatively short period of time. The classification provisions could also have
the effect of discouraging a third party from making a tender offer or otherwise
attempting to obtain control of us, even though such an attempt might be
beneficial to us and our shareholders. In addition, because under the by-laws
directors may be removed only for cause, a classified board would delay
shareholders who do not agree with the policies of the Board of Directors from
replacing a majority of the Board of Directors for two years, unless they can
demonstrate the directors should be removed for cause and obtain the requisite
vote.
Number of Directors; Removal; Filling Vacancies: The by-laws provide that
the number of directors shall consist of not more than fifteen nor less than
three directors. In addition, pursuant to authority conferred under a
shareholders resolution, and subject to any rights of holders of any shares of
preferred stock, if any, a majority of the Board of Directors then in office is
empowered to fill any vacancies on the Board of Directors. Accordingly, the
Board of Directors could temporarily prevent any shareholder from
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obtaining majority representation on the Board by enlarging the size of the
board and filling the new directorships with its own nominees.
Under the Bermuda Companies Act, 1981, as amended, (the "Companies Act") a
director serving on a classified board may be removed by the shareholders only
for cause. Moreover, our by-laws provide that directors may be removed only by
the affirmative vote of holders of at least a majority of the voting power of
all the then outstanding shares of shares entitled to vote generally in the
election of directors, voting together as a single class.
Advance Notice Provisions for Shareholder Nominations: The by-laws
establish an advance notice procedure with regard to the nomination, other than
by or at the direction of the Board of Directors, of candidates for election as
directors.
The nomination procedure provides that, subject to the rights of holders of
any series of preferred stock, if any, only persons who are nominated by or at
the direction of the Board of Directors or by a shareholder who has given timely
written notice to the Secretary prior to the meeting at which directors are to
be elected, will be eligible for election as our directors. Under the nomination
procedure, to be timely, notice must be received by us at least 75 days, but not
more than 90 days, prior to the annual or special meeting of shareholders,
provided, however, that if less than 90 days' notice or prior public disclosure
of the meeting date is given or made to shareholders, notice by the shareholder
to be timely must be received within fifteen days following the day on which the
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 us proposing to
nominate a person for election as a director must contain certain information
(i) about each proposed nominee, including, without limitation, (a) the name,
age, business address and residence address of the nominee, (b) the principal
occupation or employment of the nominee, (c) the class, series and number of
shares of our capital stock which are beneficially owned by the nominee, and (d)
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 (including the person's
written consent to being named in the proxy statement as a nominee and to
serving as director if elected) and (ii) about the shareholder proposing to
nominate the person, including, without limitation, the name and record address
of the shareholder and the class, series and number of shares of our capital
shares which are beneficially owned by the shareholder. We may require any
proposed nominee to furnish any other information as we may reasonably require
to determine the eligibility of the proposed nominee to serve as our director.
If the officer presiding at a meeting determines that a person was not nominated
in accordance with the nomination procedure, the person will not be eligible for
election as a director and their nomination will be disregarded.
By requiring advance notice of nominations by shareholders, the nomination
procedure will afford the Board of Directors a meaningful opportunity to
consider the qualifications of the proposed nominees and, to the extent deemed
necessary or desirable by the Board of Directors, to inform shareholders about
that qualification. Although the by-laws do not give the Board of Directors any
power to approve or disapprove shareholder nominations for the election of
directors or proposals for action, they may have the effect of precluding a
contest for the election of directors if the proper procedures are not followed,
and of discouraging or deterring a third party from conducting a solicitation of
procedures to elect its own slate of directors without regard to whether
consideration of its nominees might be harmful or beneficial to us and our
shareholders.
Preferred Stock: The by-laws authorize the Board of Directors to issue one
or more series of preferred stock and to determine, with respect to any series
rights, if any, and their qualifications, limitations or restrictions, as are
stated in resolutions adopted by the Board of Directors providing for the issue
of the series and as are permitted by the Companies Act.
We believe that the ability of the Board of Directors to issue one or more
series of preferred stock will provide increased flexibility in structuring
possible future financings and acquisitions and in meeting
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other corporate needs which might arise. The authorized shares of preferred
stock, as well as shares of our common stock, will be available for issuance
without further action by our shareholders, unless such action is required by
applicable law or the rules of any shares exchange on which our securities may
be listed or applicable rules of any self-regulatory organization. If the
approval of our shareholders is not required for the issuance of shares of
preferred stock or our common stock, the Board of Directors does not intend to
seek shareholder approval. The Board of Directors will make any determination to
issue the shares based on its judgment as to our best interests and the best
interests of our shareholders. The Board of Directors, in so acting, could issue
preferred stock having terms that could discourage an acquisition attempt or
other transaction that some or a majority of the shareholders might believe to
be in their best interests or in which shareholders might receive a premium for
their shares over the then current market price of such shares.
Voting Requirements of Certain Business Combinations: The by-laws also
provide that, in addition to any affirmative vote required by law, the
affirmative vote of holders of two-thirds of our voting power is necessary to
approve any "business combination" (as defined) proposed by an "interested
shareholder" (as defined). The additional voting requirements will not apply,
however, if: (a) the business combination was approved by not less than a
majority of the continuing directors or (ii) a series of conditions are
satisfied requiring (in summary) (a) that the consideration to be paid to our
shareholders in the business combination must be at least equal to the higher of
(i) the highest per-share price paid by the interested shareholder in acquiring
any of our common shares during the two years prior to the announcement date of
the business combination or in the transaction in which it becomes an interested
shareholder (the "determination date") whichever is higher or (ii) the fair
market value per share of common shares on the announcement date or
determination date, whichever is higher, in either case appropriately adjusted
for any stock dividend, stock split, combination of shares or similar event
(non-cash consideration is treated similarly) and (b) certain "procedural"
requirements are complied with, such as the solicitation of proxies under the
rules of the Commission and no decrease in regular dividends (if any) after the
interested shareholder becomes an interested shareholder (except as approved by
a majority of the continuing directors).
An "interested shareholder" is defined as anyone who is or has announced
the intention to become the beneficial owner of a 10% or more of the voting
shares and other than any employee share plan sponsored by us and includes any
person who is our affiliate and at any time within the prior two-year period
prior to the date in question and was the beneficial owner of 10% or more of the
voting shares. The term "beneficial owner" includes a person directly and
indirectly owning or having the right to acquire or vote the shares. Interested
shareholders participate fully in all shareholder voting.
A "business combination" includes the following transactions: (a) a merger
or consolidation or amalgamation of us or any subsidiary with an interested
shareholder or with any other corporation or entity which is, or after the
merger or consolidation or amalgamation would be, an affiliate of an interested
shareholder; (b) the sale or other disposition by us or a subsidiary of assets
having a fair market value of $5,000,000 or more if an interested shareholder
(or an affiliate of the interested shareholder) is a party to the transaction;
(c) the adoption of any plan or proposal for the liquidation or dissolution of
us or for amendment of the by-laws; or (d) 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 our outstanding stock (or securities convertible into stock) or the
stock of a subsidiary owned by an interested shareholder (or an affiliate of the
interested shareholder). Determinations of the fair market value of non-cash
consideration are made by a majority of the continuing directors.
The term "continuing directors" means any member of our Board of Directors
while that person is a member of the Board of Directors, who is not an affiliate
or associate or representative of the interested shareholder and was a member of
the Board of Directors prior to the time that the interested shareholder became
an interested shareholder, and any successor of a continuing director while that
successor is a member of the Board of Directors, who is not an affiliate or
associate or representative of the interested
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shareholder and is recommended or elected to succeed the continuing director by
a majority of continuing directors.
SHAREHOLDER PROPOSALS
Under the Companies Act we must circulate notice of a properly supported
shareholder requisition moving a resolution to be passed at our next annual
general meeting, together with a statement of up to 1,000 words about the
proposed resolution. The resolution must be supported by the lesser of: 100
shareholders or shareholders representing 5% of the total voting rights eligible
at the meeting at which the resolution is proposed to be passed. The resolution
and notice will be circulated at the expense of the shareholders making the
requisition, unless we otherwise resolve. The requisition proposing a resolution
must be deposited at our registered office of at least six weeks before the
general meeting.
AMENDMENT OF CERTAIN CHARTER AND BY-LAW PROVISIONS
Under the Companies Act, the directors may amend the by-laws of a company
subject to the approval of the company's shareholders. Our by-laws provide that
they may be amended in the manner provided under the Companies Act, provided
that the provisions contained in the by-laws relating to the election and term
of directors, the indemnification rights of directors, the amendment of the
by-laws and the restrictions on certain business combinations may be amended
only by the directors, with the approval by affirmative vote of the holders of
at least 66.667% of the voting shares.
SHAREHOLDER RIGHTS PLAN
The following description of our Rights Agreement is qualified in its
entirety by reference to the Rights Agreement.
The Rights Agreement provides that one right will be issued with each share
of the common stock issued (whether originally issued or from our treasury) on
or after the date of the distribution and prior to the rights distribution date
(as defined below). 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 us as described below. When exercisable, each right
entitles the owner to purchase from us one-hundredth of a share of Series A
Junior Participating Preferred Stock.
Except as described below, the rights will be evidenced by all our 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 (i) 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 the common stock (the "shares acquisition date") or (ii)
10 business days (or a later date determined by our 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 the 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 issuable upon exercise of
the rights will be entitled to a minimum preferential 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 the common stock. Each share of Series A Junior Participating Preferred
Stock will have 100 votes and will vote together with the 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
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amount received per share of the 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 approximate the value of one share
of the 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 of the right
at the then current exercise price, the common stock (or, in certain
circumstances, cash, property or other of our securities) having a value equal
to two times the exercise price of the right. Notwithstanding any of the
foregoing, 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 (or certain related parties) will be
null and void. However, rights are not exercisable following the occurrence of
the event described above until the rights are no longer redeemable by us as
described below.
In the event that, at any time following the shares acquisition date, (i)
we are acquired in a merger or other business combination transaction in which
we are not the surviving corporation or the common stock is changed or exchanged
(other than a merger which follows a qualifying offer and satisfies certain
other requirements) or (ii) 50% or more of our assets or earning power is sold
or transferred, each holder of a right (except rights which previously have been
voided as described above) shall then have the right to receive, upon the
exercise of them at the then current exercise price, common stock of the
acquiring company having a value equal to two times the exercise price of the
right.
At any time prior to the earlier of (i) until 10 days following the shares
acquisition date, or (ii) the final expiration date, we may redeem the rights in
whole, but not in part, at a price of $.01 per right. Immediately upon the
action of the Board of Directors ordering redemption of the rights, the rights
will terminate and the only right of the holders of the rights will be to
receive the $.01 redemption price.
Until a right is exercised, the holder of it, as such, will have no right
as our shareholder, 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 us, shareholders may, depending upon the circumstances,
recognize taxable income in the event that the rights become exercisable for the
common stock (or other consideration) or for common stock of the acquiring
company as described 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.
The rights have certain anti-takeover effects as they will cause
substantial dilution to a person or group that acquires a substantial interest
in us without the prior approval for the Board of Directors. Among the effects
is that the rights could discourage a takeover attempt that might otherwise
allow the holders of common stock to sell their common stock at a premium to the
then current market price or which might otherwise be beneficial to
shareholders.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Companies Act permits us to indemnify our directors or officers in
their capacity as directors or officers in connection with any loss arising or
liability attaching to them by virtue of any rule of law in connection with any
negligence, default, breach of duty or breach of trust of which a director or
officer may be guilty in relation to us other than in connection with his own
fraud or dishonesty.
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The by-laws provide that every one of our directors, officers, committee
members and any of our resident representatives be indemnified against any
liabilities, loss, damage or expense incurred or suffered in that capacity,
subject to limitations imposed in the Companies Act.
The by-laws further provide that to the extent that any of our directors,
officers, committee members or resident representatives is successful in
defending any proceedings, whether civil or criminal, we will indemnify the
individual for all liabilities incurred in that capacity.
By-law 151 stipulates that we and each shareholder agree to waive any claim
or right of action against any director, officer, or committee member, in
connection with any failure to act or any action taken by that director, officer
or committee member in the performance of his duties with or for us. The waiver
does not extend to claims, rights of action arising from the fraud of the
director, officer, committee member or to recover any gain, personal profit or
advantage to which that individual is not legally entitled.
Our by-laws permit us to advance the expenses incurred in defending any
civil or criminal action for which indemnification is required against an
undertaking of the indemnified party to repay the amount advanced if it is
ultimately determined that 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.
There has not been in the past and there is not presently pending any
litigation or proceeding involving any director, officer, employee or agent
which could give rise to an indemnification obligation on the part of us. In
addition, except as described in this Offering Memorandum, the Board of
Directors is not aware of any threatened litigation or proceeding which may
result in a claim for indemnification.
INTERESTED DIRECTORS
The by-laws provide that any transaction entered into by us in which a
director has an interest is not voidable by us nor can that director be liable
to us for any profit realized in connection with that transaction provided the
nature of the interest is disclosed at the first opportunity at a meeting of
directors, or in writing to the directors.
MERGERS AND SIMILAR ARRANGEMENTS
We may acquire the business of another Bermuda company similarly exempt
from Bermuda taxes or a company incorporated outside Bermuda and carry on their
business when it is within the objects of our Memorandum of Association. We may
also amalgamate with another Bermuda company or with a body incorporated outside
Bermuda upon the approval of the Board of Directors and the holders of a simple
majority of votes cast by the shareholders of our outstanding shares, including
any votes cast by the holders of shares that would otherwise be non-voting
shares. In the case of an amalgamation, a shareholder may apply to a Bermuda
court for a proper valuation of the shareholder's shares if the shareholder is
not satisfied that fair value has been paid for the shares. The court ordinarily
would not set aside the transaction on that ground absent evidence of fraud or
bad faith.
TAKEOVERS
Bermuda law provides that where an offer is made for shares of another
company and, within four months of the offer, the holders of not less than 90%
of the shares which are the subject of the offer accept, the offeror may by
notice require the non-tendering shareholders to transfer their shares on the
terms of the offer. Dissenting shareholders may apply to the court within one
month of the notice objecting to the transfer. The burden is on the dissenting
shareholders to show that the court should exercise its discretion to stop the
required transfer, which the court will be unlikely to do unless there is
evidence of fraud or bad faith or collusion between the offeror and the holders
of the shares who have accepted the offer as a means of unfairly forcing out
minority shareholders.
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SHAREHOLDER'S SUIT
A shareholder who considers that our affairs are being conducted in a
manner which is unfairly prejudicial or oppressive to the interests of some of
the shareholders may apply to the Bermuda court for relief under the Companies
Act. The court may grant such relief as it considers fit. Class actions and
derivative actions are generally not available to shareholders under the laws of
Bermuda. However, the Bermuda courts ordinarily would be expected to follow
English case law precedent, which would permit a shareholder to commence an
action in the name of our company to remedy a wrong done to the company where
the act complained of is alleged to be beyond the corporate power of the company
or is illegal or would result in the violation of the Memorandum of Association
or By-laws. Furthermore, consideration would be given by the court to acts that
are alleged to constitute a fraud against the minority shareholders or where an
act requires the approval of a greater percentage of the company's shareholders
than actually approved it. The winning party in such an action generally would
be able to recover a portion of attorneys' fees incurred in connection with such
action.
INSPECTION OF CORPORATE RECORDS
Members of the general public have the right to inspect our public
documents available at the office of the Registrar of Companies in Bermuda,
which will include our Memorandum of Association (including its objects and
powers) and any alteration to the Memorandum of Association and documents
relating to any increase or reduction of authorized capital. The shareholders
have the additional right to inspect or obtain copies of our by-laws, minutes of
general meetings and audited financial statements, which must be presented to
the annual general meeting of shareholders. Our register of shareholders is also
open to inspection by shareholders without charge, and to members of the public
for a fee. We are required to keep at our registered office a register of our
directors and officers which is open for inspection by members of the public
without charge. Bermuda law does not, however, provide a general right for
shareholders to inspect or obtain copies of any other corporate records.
BERMUDA TAXATION
Under current Bermuda law, there is no Bermuda income tax, withholding tax,
capital gains tax or capital transfer tax levied on us or our shareholders.
We and our Bermuda subsidiaries have obtained a written undertaking from
the Minister of Finance of Bermuda under the Exempted Undertakings Tax
Protection Act 1996 (as amended) that, in the event of there being enacted in
Bermuda any legislation imposing tax computed on profits or income, or computed
on any capital asset, gain or appreciation, or any tax in the nature of estate
duty or inheritance tax such tax shall not, until March 28, 2016, be applicable
to us or any of our operations, or to our shares, debentures or other
obligations except insofar as the tax applied to persons ordinarily resident in
Bermuda and holding our shares, debentures or other obligations or to any land
leased or let to us.
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DESCRIPTION OF OUR OTHER INDEBTEDNESS
VENDOR FINANCING
We are currently negotiating with equipment manufacturers, including Cisco
Systems, Inc., Lucent Technologies, Inc. and Nortel Networks Corporation, to
provide us with vendor financing. The vendors would provide financing to our
indirect, wholly owned subsidiary, CoreComm Operating Company, Inc. or its
subsidiaries in connection with our purchase of certain equipment and services
generally utilized in the buildout of our voice data and networks. In the
aggregate, such financings are anticipated to be significant. We cannot assure
you that we will be successful in obtaining any vendor financing.
OTHER INDEBTEDNESS
Certain of our other indirect subsidiaries have $19.9 million of
indebtedness and capital lease obligations outstanding as of June 30, 1999. For
more information, see our historical financial statements and the related notes.
In addition, our subsidiaries may incur substantial indebtedness in the future.
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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is a summary of certain United States federal
income tax considerations that may be relevant to the purchase, ownership and
disposition of the convertible notes and our common stock by U.S. and non-U.S.
holders, each as defined below. This discussion does not purport to be a full
description of all United States federal income tax considerations that may be
relevant to the purchase, holding and disposition of the convertible notes or
our common stock and does not address any other taxes that might be applicable
to a holder of the convertible notes or our common stock, such as tax
consequences arising under the tax laws of any state, locality or foreign
jurisdiction. In the opinion of Paul, Weiss, Rifkind, Wharton & Garrison, our
special United States tax counsel, the discussion accurately reflects the
material United States federal income tax consequences to U.S. and non-U.S.
holders of the purchase, ownership and disposition of the convertible notes and
our common stock. We cannot assure you that the United States Internal Revenue
Service will take a similar view of these consequences. Further, this discussion
does not address all aspects of taxation that may be relevant to particular
holders of convertible notes or common stock in light of their personal
circumstances and does not deal with persons that are subject to special tax
rules, such as dealers in securities, financial institutions, insurance
companies, tax-exempt entities, persons holding the convertible notes as part of
a hedging or conversion transaction, a straddle or constructive sale and persons
whose functional currency is not the United States dollar or that own or are
treated as owning 10% or more of our voting shares. The discussion below assumes
that the convertible notes and our common stock are held as capital assets
within the meaning of section 1221 of the Internal Revenue Code.
The discussion of the United States federal income tax considerations below
is based on currently existing provisions of the Internal Revenue Code, the
applicable Treasury regulations promulgated and proposed under the Internal
Revenue Code, judicial decisions and administrative interpretations, all of
which are subject to change, possibly on a retroactive basis. Because individual
circumstances may differ, you are strongly urged to consult your tax advisor
with respect to your particular tax situation and the particular tax effects of
any state, local, non-United States or other tax laws and possible changes in
the tax laws.
As used herein, a U.S. holder means a beneficial owner of a convertible
note or common stock who is, for United States federal income tax purposes:
- a citizen or resident of the United States;
- a corporation or partnership created or organized in or under the laws of
the United States or of any political subdivision thereof;
- an estate the income of which is subject to United States federal income
taxation regardless of its source; or
- a trust if either (a) a court within the United States is able to
exercise primary supervision over the administration of the trust and one
or more United States persons have the authority to control all
substantial decisions of the trust or (b) the trust has a valid election
in effect under applicable Treasury regulations to be treated as a United
States person.
As used herein, a non-U.S. holder means a beneficial holder who is not a
U.S. holder.
TAXATION OF OUR COMPANY AND ITS SUBSIDIARIES
Our company normally will be subject to United States federal income tax
only to the extent our company has income which has its source in the United
States or is effectively connected with the conduct of a United States trade or
business. We currently anticipate that most of our income will consist of
dividends received by our company from its United States subsidiaries, which
will constitute United States source income, and that our income will not be
effectively connected with the conduct of a United States trade or business. On
the other hand, the United States subsidiaries of our company are subject to
United
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States federal income tax on their worldwide income regardless of its source and
dividend distributions by such United States subsidiaries to our company will be
subject to United States withholding taxes.
TAXATION OF HOLDERS OF CONVERTIBLE NOTES
U.S. HOLDERS
STATED INTEREST. A U.S. holder will be required to include in gross income
the stated interest on a convertible note in accordance with the U.S. holder's
regular method of accounting for federal income tax purposes. With some
exceptions applicable if U.S. holders hold, or are treated as holding, 50
percent or more of our stock, this interest will be treated as foreign source
income for United States foreign tax credit purposes. In computing the separate
foreign tax credit limitations, the interest usually will be treated as passive
or financial services income.
MARKET DISCOUNT AND BOND PREMIUM. If a U.S. holder purchases a convertible
note for an amount that is less than its principal amount, the difference
normally will be treated as market discount. In that case, any partial principal
payment on, gain realized on the sale, exchange or retirement of the convertible
note and unrealized appreciation on some nontaxable dispositions of the
convertible note will be treated as ordinary income to the extent of the market
discount that has not previously been included in income and that is treated as
having accrued on the convertible note prior to the payment or disposition. The
U.S. holder also might be required to defer all or a portion of the interest
expense on any debt incurred or continued to purchase or carry the convertible
note. If the U.S. holder has made an election to include the market discount in
income as it accrues, the two preceding sentences will not apply. Unless the
U.S. holder elects to treat market discount as accruing on a constant yield
method, market discount will be treated as accruing on a straight-line basis
over the remaining term of the convertible note. An election made to include
market discount in income as it accrues will apply to all debt instruments
acquired by the U.S. holder on or after the first day of the first taxable year
to which the election applies and may be revoked only with the consent of the
Internal Revenue Service.
If a U.S. holder purchases a convertible note for an amount in excess of
all amounts payable on the convertible note after the purchase date, other than
payments of stated interest, such excess will be treated as bond premium. A U.S.
holder usually can elect to amortize bond premium over the remaining term of the
convertible note on a constant yield method. The amount of bond premium
allocable to any accrual period is offset against the stated interest allocable
to the period and, with certain limitations, any excess may be deducted. An
election to amortize bond premium applies to all debt instruments held at the
beginning of the first taxable year to which the election applies and acquired
after such date by the U.S. holder and may be revoked only with the consent of
the Internal Revenue Service.
DISPOSITION. A U.S. holder of a convertible note will recognize gain or
loss upon the sale, exchange, redemption or other taxable disposition of the
convertible note in an amount equal to the difference between (i) the amount of
cash plus the fair market value of any property received, other than an amount
received in respect of accrued interest, which will be taxable as interest if
not previously included in income and (ii) the U.S. holder's tax basis in the
convertible note. A U.S. holder's tax basis in a convertible note will be its
cost, increased by any accrued market discount included in income and reduced by
any amortized bond premium. Subject to the application of the "passive foreign
investment company" rules discussed below and the market discount rules
discussed above, gain or loss recognized on the taxable disposition of a
convertible note normally will be capital gain or loss. In the case of a
noncorporate U.S. holder, the federal tax rate applicable to capital gains will
depend upon the holder's holding period for the convertible notes, with a
preferential rate available for convertible notes held for more than one year,
and upon the holder's marginal tax rate for ordinary income. The deductibility
of capital losses is subject to limitations. Gain realized by a U.S. holder upon
the taxable disposition of a convertible note normally will be treated as from
sources within the United States. Under temporary Treasury regulations, loss
realized by a U.S. holder on a taxable disposition of a convertible note also
will be treated as from sources within the United States, with specified
exceptions relating to unamortized premium, accrued but unpaid interest,
offsetting positions and certain other situations.
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CONVERSION. A U.S. holder of a convertible note will not recognize gain or
loss on the conversion of a convertible note solely into our common stock except
with respect to cash in lieu of fractional shares and except to the extent that
the common stock issued upon conversion is treated as attributable to accrued
interest on the convertible note. To the extent that common stock is received by
a holder without recognition of gain or loss, the holding period of the common
stock received upon conversion will include the period during which the
convertible note was held, and the holder's aggregate tax basis in the common
stock received upon conversion of the convertible note will be equal to the
holder's aggregate tax basis in the convertible note at the time of conversion,
less any portion allocable to any fractional share. A U.S. holder of a
convertible note will recognize gain or loss for federal income tax purposes
upon the receipt of cash in lieu of a fractional share of our common stock in an
amount equal to the difference between the amount of cash received and the
holder's tax basis in such fractional share. This gain or loss should be capital
gain or loss, and should be taxable as described above under "Disposition." The
fair market value of shares of common stock received, which is attributable to
accrued interest, will be taxable as ordinary interest income.
The conversion price of the convertible notes is subject to adjustment
under specified circumstances. Under section 305 of the Internal Revenue Code
and applicable Treasury regulations, adjustments or the failure to make
adjustments to the conversion price of the convertible notes may result in a
taxable constructive distribution to U.S. holders of convertible notes,
resulting in ordinary income to the extent of our earnings and profits, as
determined in accordance with United States federal income tax principles, if,
and to the extent that, these adjustments in the conversion price increase the
proportionate interest of a U.S. holder of a convertible note in our fully
diluted common stock, whether or not the holder ever converts the convertible
notes into our common stock.
NON-U.S. HOLDERS
Subject to the discussion below concerning information reporting and backup
withholding, a non-U.S. holder will not be subject to United States federal
income tax on payments of interest on, or on any gain on the sale of, a
convertible note, unless the holder held the convertible note in connection with
a United States trade or business carried on by such holder, or in the case of a
sale of convertible notes by a non-U.S. holder who is an individual, or the
individual was present in the United States for 183 days or more during the
taxable year in which the gain is realized and other specified conditions are
met.
TAXATION OF HOLDERS OF COMMON SHARES
U.S. HOLDERS
DISTRIBUTIONS. Subject to the application of the "passive foreign
investment company" rules discussed below, a distribution by our company with
respect to our common stock will be treated for United States federal income tax
purposes as ordinary dividend income to the extent that such distributions do
not exceed our earnings and profits as determined under United States federal
income tax principles. To the extent a distribution exceeds our earnings and
profits, it will be treated first as a tax-free return of the U.S. holder's tax
basis in the common stock to the extent of the holder's tax basis, and then will
be treated as gain from the sale of a capital asset. With some exclusions based
on the United States source income of our company for any taxable year that
apply if U.S. holders hold, or are treated as holding, 50 percent or more of our
stock, dividends paid by our company normally will be treated as foreign source
dividend income and U.S. holders that are corporations will not be entitled to
the dividends received deduction available for dividends received from domestic
corporations. In computing the separate foreign tax credit limitations,
dividends from our company usually will be treated as passive or financial
services income. Our company presently does not anticipate paying cash dividends
in the foreseeable future.
DISPOSITION. Subject to the application of the "passive foreign investment
company" rules discussed below, a U.S. holder of our common stock will recognize
capital gain or loss upon the sale or other taxable disposition of the common
stock in an amount equal to the difference between the amount of cash plus the
fair market value of any property received and the U.S. holder's tax basis in
the common stock. The
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tax basis of a U.S. holder in shares of our common stock purchased from a
selling securityholder hereunder will be the amount paid for such shares. The
taxation of such capital gains and the deductibility of capital losses will be
as described above under "Taxation of Holders of Convertible Notes -- U.S.
Holders -- Disposition."
NON-U.S. HOLDERS
Subject to the discussion below concerning information reporting and backup
withholding, a non-U.S. holder normally will not be subject to United States
federal income tax on dividends on, or gain realized on the sale of, our common
shares, unless the holder held the common shares in connection with a United
States trade or business carried on by such holder, or in the case of a sale of
our common shares by a non-U.S. holder who is an individual, such individual was
present in the United States for 183 days or more during the taxable year in
which the gain is realized and certain other conditions are met.
PASSIVE FOREIGN INVESTMENT COMPANY
If either 75% or more of the gross income of our company for a taxable year
were passive income or the assets of our company that produced or were held for
the production of passive income were to equal or exceed 50% of our total
assets, we would be a passive foreign investment company for United States
federal income tax purposes. If our company were a passive foreign investment
company, U.S. holders of our convertible notes or common stock would be required
to pay a special tax and interest charge on gain recognized upon the disposition
of our convertible notes or common stock and U.S. holders of our common stock
would be required to pay the tax and interest charge upon the receipt of a
distribution that exceeded 125% of the average amount of our distributions in
the preceding three years.
A U.S. holder of shares of our common stock that are treated as "marketable
stock" under the passive foreign investment company rules may be able to avoid
the imposition of the special tax and interest charge by making a mark-to-market
election. Pursuant to this election, the holder would include in ordinary
income, for each taxable year during which the common stock was held, an amount
equal to the increase in value of the common stock, which will be determined by
reference to the value of such common stock at the end of the current taxable
year as compared with its value at the end of the prior taxable year. Although a
mark-to-market election is not currently permitted with respect to our
convertible notes, future regulations might permit this election, possibly on a
retroactive basis. Holders desiring to make the mark-to-market election should
consult their tax advisors with respect to the application and effect of making
the election for our common stock and convertible notes.
In the case of a U.S. holder who holds common stock and who does not make a
mark-to-market election, the holder may be able to avoid the imposition of the
special tax and interest charge by making a "qualified electing fund" election
to include in income currently the holder's pro rata share of the passive
foreign investment company earnings, whether or not such earnings are
distributed in any given year. Under current Treasury regulations, a qualified
electing fund election cannot be made with respect to our convertible notes.
The tests for determining whether our company would be a passive foreign
investment company for any taxable year are applied on an annual basis and it is
difficult to make accurate predictions relevant to this determination. Although
based on our current estimates we do not presently expect to be a passive
foreign investment company for our 1999 taxable year or for future taxable
years, the determination for any year will be made after the taxable year has
ended and will be based on a number of factors including the sources of our
income and the nature of our assets, the value and trading volume of our common
stock and the use of debt proceeds by our company and our subsidiaries. As a
result, there can be no assurance that our company will not be treated as a
passive foreign investment company.
In the event that our company is treated as a passive foreign investment
company, we will comply with applicable information reporting requirements for
U.S. holders to make a qualified electing fund election and will promptly supply
a passive foreign investment company annual information statement to any U.S.
holder that requests such statement, as well as any other requested information
that is required to
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give effect to a qualified electing fund election. Holders should consult their
tax advisors with respect to their eligibility for, and the manner and
advisability of making, a qualified electing fund election if our company is
treated as a passive foreign investment company.
UNITED STATES INFORMATION REPORTING AND BACKUP WITHHOLDING
Under current United States federal income tax law, payments of interest
and dividends made to, and the proceeds of sales by, specified U.S. holders
might be subject to information reporting and might be subject to a backup
withholding tax at the rate of 31%, if these persons fail to supply correct
taxpayer identification numbers and other required information in the specified
manner. Such payments made to and proceeds of sales by non-U.S. holders usually
will not be subject to these information reporting requirements or backup
withholding, provided that the non-U.S. holders comply with any certification
and identification procedures that may be required or otherwise establishes an
applicable exemption.
Any amounts withheld under the backup withholding rules from payment to a
holder of convertible notes or common stock will be refunded or credited against
the holder's United States federal income tax liability provided that the
required information is furnished to the United States Internal Revenue Service.
New Treasury regulations applicable to payments made after December 31,
2000 normally will not alter the treatment of non-U.S. holders who provide the
required information.
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PLAN OF DISTRIBUTION
The offered securities are being registered to permit public secondary
trading of them by the holders of them from time to time after the date of this
prospectus. We will not receive any of the proceeds from the sale by the selling
securityholders of the offered securities. We will bear all fees and expenses
incident to our obligation to register the offered securities.
The selling securityholders may sell all or a portion of the offered
securities beneficially owned by them and offered by this prospectus from time
to time directly through one or more underwriters, broker-dealers or agents. If
the offered securities are sold through underwriters or broker-dealers, the
selling securityholder will be responsible for underwriting discounts or
commissions or agent's commissions. Offered securities may be sold in one or
more transactions at fixed prices, at prevailing market prices at the time of
the sale, at varying prices determined at the time of sale, or at negotiated
prices. Sales may be effected in transactions (which may involve crosses or
block transactions)
(1) on any national securities exchange or quotation service on which the
offered securities may be listed or quoted at the time of sale
(including, without limitation, the Nasdaq National Market for the
common stock);
(2) in the over-the-counter market;
(3) in transactions otherwise than on those exchanges or services or in the
over-the-counter market; or
(4) through the writing of options (whether the options are listed on an
options exchange or otherwise).
In connection with sales of the offered securities or otherwise, the
selling securityholder may enter into hedging transactions with broker-dealers,
which may in turn engage in short sales of the offered securities in the course
of hedging in positions they assume. The selling securityholder may also sell
offered securities short and deliver offered securities to close out short
positions, or loan or pledge offered securities to broker-dealers that in turn
may sell the offered securities. If the selling securityholders effect such
transactions by selling offered securities to or through underwriters,
broker-dealers or agents, such underwriters, brokers, dealers or agents may
receive commissions in the form of discounts, concessions or commissions from
the selling securityholders or commissions from purchasers of offered securities
for whom they may act as agent or to whom they may sell as principal (which
discounts, concessions or commissions as to particular underwriters,
brokers-dealers or agents may be in excess of those customary in the types of
transactions involved).
The outstanding common stock is listed for trading on the Nasdaq National
Market under the symbol "COMM." We do not intend to apply for listing of the
convertible notes on any securities exchange or for quotation through the
National Association of Securities Dealers Automated Quotation System.
Accordingly, we cannot assure you about the development of liquidity or any
trading market for the convertible notes. Please refer to the section entitled
"Risk Factors."
The selling securityholders and any broker-dealer participating in the
distribution of the offered securities may be deemed to be "underwriters" within
the meaning of the Securities Act, and any commissions paid, or any discounts or
concessions allowed to any of the broker-dealers may be deemed to be
underwriting commissions or discounts under the Securities Act.
Under the securities laws of certain states, the offered securities may be
sold in those states only through registered or licensed brokers or dealers. In
addition, in certain states the offered securities may not be sold unless the
offered securities have been registered or qualified for sale in the state or an
exemption from registration or qualification is available and is complied with.
We cannot assure you that any selling securityholder will sell any or all
of the convertible notes or offered securities registered under the shelf
registration statement, of which this prospectus forms a part.
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In addition, any securities covered by this prospectus that qualify for sale
under Rule 144 or Rule 144A of the Securities Act may be sold under Rule 144 or
Rule 144A rather than under this prospectus.
The selling securityholders and any other person participating in the
distribution will be subject to applicable provisions of the Exchange Act and
the rules and regulations under the Exchange Act, including, without limitation,
Regulation M of the Exchange Act, which may limit the timing of purchases and
sales of any of the offered securities by the selling securityholders and any
other relevant person. Furthermore, Regulation M may restrict the ability of any
person engaged in the distribution of the offered securities to engage in
market-making activities with respect to the particular offered securities being
distributed. All of the above may affect the marketability of the offered
securities and the ability of any person or entity to engage in market-making
activities with respect to the offered securities.
All expenses of the registration of the convertible notes and common stock
under the registration rights agreement will be paid by us, including, without
limitation, SEC filing fees and expenses of compliance with state securities or
"blue sky" laws; provided, however, that the selling securityholders will pay
all underwriting discounts and selling commissions, if any. The selling
securityholders will be indemnified by us against certain civil liabilities,
including certain liabilities under the Securities Act, or will be entitled to
contribution in connection with those liabilities. We will be indemnified by the
selling securityholders against certain civil liabilities, including certain
liabilities under the Securities Act, or will be entitled to contribution in
connection with those liabilities.
Upon sale under the shelf registration statement, of which this prospectus
forms a part, the offered securities will be freely tradable in the hands of
persons other than our affiliates.
ENFORCEABILITY OF CIVIL LIABILITIES
We are incorporated under the laws of Bermuda, so 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 our board of directors under Bermuda law are
different from those applicable to a corporation incorporated in the United
States.
LEGAL MATTERS
The validity of the convertible notes will be passed upon for us by Paul,
Weiss, Rifkind, Wharton & Garrison, New York, New York. The validity of the
common stock issuable upon conversion of the convertible notes and certain other
legal matters relating to the offering will be passed upon for us by Appleby,
Spurling & Kempe. A member and an affiliate of Appleby, Spurling & Kempe acts as
our representatives in Bermuda. Please refer to the section entitled
"Management -- Bermuda Representative and Secretary."
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements at December 31, 1998 and for the period from April 1, 1998
(date operations commenced) to December 31, 1998, as set forth in their report.
We've included our financial statements in the registration statement in
reliance on Ernst & Young LLP's report, given on their authority as experts in
accounting and auditing.
Ernst & Young LLP, independent auditors, have audited our predecessor, OCOM
Corporation Telecoms Division, as of December 31, 1997 and for the period from
January 1, 1998 to May 31, 1998 and the years ended December 31, 1997 and 1996,
as set forth in their report. We've included our financial statements in the
registration statement in reliance on Ernst & Young LLP's report, given on their
authority as experts in accounting and auditing.
KPMG LLP, independent auditors, have audited the consolidated financial
statements of MegsINet Inc. as of December 31, 1998 and 1997 and for the year
ended December 31, 1998, as set forth in their
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report. We've included these financial statements in the registration statement
in reliance on KPMG LLP's report, given on their authority as experts in
accounting and auditing.
Ernst & Young LLP, independent auditors, have audited the consolidated
financial statements of USN Communications, Inc. as of December 31, 1998 and for
the year then ended, as set forth in their report. We've included these
financial statements in the registration statement in reliance on Ernst & Young
LLP's report, given on their authority as experts in accounting and auditing.
The consolidated balance sheet of USN Communications, Inc. and subsidiaries
as of December 31, 1997, and the related consolidated statements of operations,
redeemable preferred stock, common stockholders' deficit and cash flows for each
of the two years in the period ended December 31, 1997 have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their report appearing
in this prospectus, and are included in reliance upon the report of such firm
given their authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement on Form S-3 regarding the offering
with the Securities and Exchange Commission. We are currently subject to the
informational requirements of the Securities Exchange Act of 1934. This
prospectus, which is a part of the registration statement, does not contain all
of the information included in the registration statement, and you should refer
to the registration statement and its exhibits to read that information.
References in this prospectus to any of our contracts or other documents are not
necessarily complete, and you should refer to the exhibits attached to the
registration statement for copies of the actual contract or document. You may
read and copy the registration statement, the related exhibits and the other
materials we file with the SEC at the public reference facilities the SEC
maintains at:
Judiciary Plaza
Room 1024
450 Fifth Street, N.W.
Washington, D.C. 20549
Citicorp Center
500 West Madison Street
Suite 1400
Chicago, Illinois 60661
Seven World Trade Center
13th Floor
New York, New York 10048
Our common stock is quoted on the Nasdaq National Market. Reports, proxy
statements and other information concerning us may also 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 us. The address of the SEC website is http://www.sec.gov.
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In addition, in the indenture for the convertible notes we have agreed
that, whether or not we are required to do so by the rules and regulations of
the SEC, for so long as any of the convertible notes remain outstanding, we will
furnish the trustee and will, if permitted, file with the SEC:
- all quarterly and annual financial information that would be required to
be contained in a filing with the SEC on Forms 10-Q and 10-K if we were
required to file such forms;
- with respect to our annual financial information only, a report on the
information by our certified independent accountants; and
- all reports that would be required to be filed with the SEC on Form 8-K
if we were required to file such reports.
INCORPORATION OF DOCUMENTS BY REFERENCE
The SEC allows us to incorporate by reference some information about us
that we file with the SEC. This allows us to disclose important information to
you by referencing those filed documents. Any information that we reference this
way is considered part of this prospectus.
The following documents filed by us with the SEC are incorporated by
reference into this prospectus:
(a) our Annual Report on Form 10-K for the year ended December 31, 1998;
(b) our Quarterly Reports on Form 10-Q for the three months ended June 30,
1999 and March 31, 1999;
(c) our Current Reports on Form 8-K dated October 6, 1999 (filed October
12, 1999), October 1, 1999 (filed October 4, 1999), September 15, 1999
(filed September 29, 1999), August 18, 1999 (filed September 17, 1999),
May 26, 1999 (filed June 8, 1999) as amended by Form 8-K/A, dated May
26, 1999 (filed July 9, 1999) and February 17, 1999 (filed February 24,
1999);
(d) our Definitive Proxy Statement on Schedule 14A dated April 28, 1999;
and
(e) the description of our common stock contained in our Form 10-12G filed
on June 24, 1998, as amended on August 19, 1998 and August 31, 1998.
We incorporate by reference the documents listed above and any future
filings made by us with the SEC pursuant to Sections 13(a), 13(c), 14 or 15(d)
of the Exchange Act until selling securityholders sell all of the securities
covered by this prospectus. Any information incorporated by reference this way
will automatically be deemed to update and supersede earlier filed or
incorporated information.
We will provide you without charge on your oral or written request, a copy
of any or all documents which are incorporated by reference into this
prospectus, except for exhibits which are specifically incorporated by reference
into those documents. You should direct your request to:
CoreComm Limited
110 E. 59th Street
New York, NY 10022
Attention: Investor Relations
You should rely only on the information contained in this prospectus or any
prospectus supplement. We have not authorized any other person to provide you
with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not making an offer
of the convertible notes in any jurisdiction where the offer or sale is not
permitted. You should assume that the information appearing in this prospectus
is accurate as of the date on the front cover of this prospectus only. Our
business, financial condition, results of operations and prospects may have
changed since that date.
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DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
Any statements in this prospectus about our expectations, beliefs, plans,
objectives, assumptions or future events or performance are not historical facts
and are forward-looking statements. These statements are often, but not always,
made through the use of words or phrases such as "believe," "anticipate,"
"should," "intend," "plan," "will," "expects," "estimates," "projects,"
"positioned," "strategy," "outlook" and similar expressions. Accordingly, these
statements involve estimates, assumptions and uncertainties which could cause
our actual results to differ materially from those expressed in the statements.
Any forward-looking statements are qualified in their entirety by reference to
the factors discussed throughout this prospectus. The following cautionary
statements identify important factors that could cause our actual results to
differ materially from those projected in the forward-looking statements made in
this prospectus. Among the key factors that have a direct impact on our results
of operations are:
- the risks and other factors described under the caption "Risk Factors" in
this prospectus;
- general economic and business conditions;
- industry trends;
- our ability to continue to design network routes, install facilities,
obtain and maintain any required government licenses or approvals and
finance construction and development, all in a timely manner, at
reasonable costs and on satisfactory terms and conditions;
- our assumptions about customer acceptance, churn rates, overall market
penetration and competition from providers of alternative services;
- our actual funding requirements;
- Year 2000 readiness; and
- availability, terms and deployment of capital.
Because the risk factors referred to above could cause our actual results
or outcomes to differ materially from those expressed in any forward-looking
statements made by us, you should not place undue reliance on any such
forward-looking statements. Further, any forward-looking statement speaks only
as of the date on which it is made and we undertake no obligation to update any
forward-looking statement or statements to reflect events or circumstances after
the date on which such statement is made or to reflect the occurrence of
unanticipated events. New factors emerge from time to time, and it is not
possible for use to predict which will arise. In addition, we cannot assess the
impact of each factor on our business or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from those
contained in any forward-looking statements.
117
<PAGE> 121
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
CORECOMM LIMITED
Report of Independent Auditors.............................. F-3
Report of Independent Auditors.............................. F-4
Consolidated Balance Sheets -- December 31, 1998 and 1997... F-5
Consolidated Statements of Operations -- For the Period from
April 1, 1998 (date operations commenced) to December 31,
1998, for the Period from January 1, 1998 to May 31, 1998
and for the Years Ended December 31, 1997 and 1996........ F-6
Consolidated Statement of Shareholders' Equity -- For the
Period from April 1, 1998 (date operations commenced) to
December 31, 1998......................................... F-7
Statement of Parent's Investment (Deficiency) -- For the
Period from January 1, 1998 through May 31, 1998 and for
the Years Ended December 31, 1997 and 1996................ F-8
Consolidated Statements of Cash Flows -- For the Period from
April 1, 1998 (date operations commenced) to December 31,
1998, for the Period from January 1, 1998 to May 31, 1998
and for the Years Ended December 31, 1997 and 1996........ F-9
Notes to Consolidated Financial Statements.................. F-10
Condensed Consolidated Balance Sheet -- June 30, 1999....... F-21
Condensed Consolidated Statements of Operations -- For the
Three and Six Months Ended June 30, 1999, for the period
from April 1, 1998 (date operations commenced) to June 30,
1998 and for the period from January 1, 1998 to May 31,
1998...................................................... F-22
Condensed Consolidated Statement of Shareholders'
Equity -- For the Six Months Ended June 30, 1999.......... F-23
Condensed Consolidated Statements of Cash Flows -- For the
Six Months Ended June 30, 1999, for the period from April
1, 1998 (date operations commenced) to June 30, 1998 and
for the period from January 1, 1998 to May 31, 1998....... F-24
Notes to Condensed Consolidated Financial Statements........ F-25
MEGSINET INC.
Independent Auditors' Report................................ F-30
Consolidated Balance Sheets as of December 31, 1998 and
1997...................................................... F-31
Consolidated Statement of Operations for the year ended
December 31, 1998......................................... F-32
Consolidated Statement of Stockholders' Deficit for the year
ended December 31, 1998................................... F-33
Consolidated Statement of Cash Flows for the year ended
December 31, 1998......................................... F-34
Notes to Consolidated Financial Statements.................. F-35
Consolidated Balance Sheet as of March 31, 1999............. F-41
Consolidated Statement of Operations for the three months
ended March 31, 1999 and 1998............................. F-42
Consolidated Statement of Stockholders' Deficit for the
three months ended March 31, 1999......................... F-43
Consolidated Statement of Cash Flows for the three months
ended March 31, 1999 and 1998............................. F-44
Notes to Consolidated Financial Statements.................. F-45
USN COMMUNICATIONS, INC.
Report of Independent Auditors.............................. F-47
Independent Auditors' Report................................ F-48
Consolidated Balance Sheets as of December 31, 1998 and
1997...................................................... F-49
</TABLE>
F-1
<PAGE> 122
<TABLE>
<S> <C>
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996.......................... F-50
Consolidated Statements of Redeemable Preferred Stock for
the years ended December 31, 1998, 1997 and 1996.......... F-51
Consolidated Statements of Common Stockholders' Deficit for
the years ended December 31, 1998, 1997 and 1996.......... F-52
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996.......................... F-53
Notes to Consolidated Financial Statements.................. F-54
Condensed Consolidated Balance Sheet as of March 31, 1999... F-66
Condensed Consolidated Statements of Operations for the
three months ended March 31, 1998 and 1999................ F-67
Condensed Consolidated Statement of Common Stockholders'
Deficit for the three months ended March 31, 1999......... F-68
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 1999 and 1998................ F-69
Notes to Condensed Consolidated Financial Statements........ F-70
</TABLE>
F-2
<PAGE> 123
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Directors
CoreComm Limited
We have audited the consolidated balance sheet of CoreComm Limited and
Subsidiaries as of December 31, 1998, and the related consolidated statements of
operations, shareholders' equity and cash flows for the period from April 1,
1998 (date operations commenced) to December 31, 1998. Our audit also included
the financial statement schedule listed in the Index at Item 14(a) for the
period from April 1, 1998 (date operations commenced) to December 31, 1998.
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
CoreComm Limited and Subsidiaries at December 31, 1998, and the consolidated
results of their operations and their cash flows for the period from April 1,
1998 (date operations commenced) to December 31, 1998 in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
ERNST & YOUNG LLP
New York, New York
February 26, 1999, except for note 16, as to
which the date is September 2, 1999
F-3
<PAGE> 124
REPORT OF INDEPENDENT AUDITORS
Shareholder
OCOM Corporation Telecoms Division
We have audited the accompanying balance sheet of OCOM Corporation Telecoms
Division ("OCOM") as of December 31, 1997, and the related statements of
operations, parent's investment (deficiency) and cash flows for the period from
January 1, 1998 to May 31, 1998 and the years ended December 31, 1997 and 1996.
Our audit also included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule 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
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of OCOM Corporation Telecoms
Division at December 31, 1997, and the results of its operations and its cash
flows for the period from January 1, 1998 to May 31, 1998 and the years ended
December 31, 1997 and 1996 in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
New York, New York
February 26, 1999
F-4
<PAGE> 125
CORECOMM LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
THE PREDECESSOR
(OCOM)
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ---------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 26,161,000 $ --
Marketable securities..................................... 110,718,000 --
Accounts receivable-trade, less allowance for doubtful
accounts of $742,000 (1998) and $46,000 (1997)......... 1,125,000 332,000
Due from affiliates....................................... 1,954,000 --
Inventory................................................. 150,000 80,000
Other..................................................... 519,000 48,000
------------ ----------
Total current assets.............................. 140,627,000 460,000
Fixed assets, net........................................... 3,582,000 1,269,000
Goodwill, net of accumulated amortization of $230,000....... 4,028,000 --
LMDS license costs.......................................... 25,366,000 --
Other, net of accumulated amortization of $1,000............ 2,923,000 2,000
------------ ----------
$176,526,000 $1,731,000
============ ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 1,937,000 $ 348,000
Accrued expenses.......................................... 4,247,000 1,062,000
Current portion of note payable and capital lease
obligations............................................ 133,000 --
Deferred revenue.......................................... 411,000 --
------------ ----------
Total current liabilities......................... 6,728,000 1,410,000
Note payable................................................ 283,000 --
Capital lease obligations................................... 218,000 --
Commitments and contingent liabilities
Shareholders' equity:
Series preferred stock -- $.01 par value, authorized
1,000,000 shares; issued and outstanding none.......... -- --
Common stock -- $.01 par value; authorized 75,000,000
shares; issued and outstanding 19,799,000 shares....... 198,000 --
Additional paid-in capital.................................. 185,354,000 --
(Deficit)................................................... (16,255,000) --
Parent's investment......................................... -- 321,000
------------ ----------
169,297,000 321,000
------------ ----------
$176,526,000 $1,731,000
============ ==========
</TABLE>
See accompanying notes.
F-5
<PAGE> 126
CORECOMM LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THE PREDECESSOR (OCOM)
-------------------------------------------
FOR THE PERIOD FROM FOR THE
APRIL 1, 1998 PERIOD FROM
(DATE OPERATIONS JANUARY 1,
COMMENCED) TO 1998 YEAR ENDED DECEMBER 31,
DECEMBER 31, TO MAY 31, -------------------------
1998 1998 1997 1996
------------------- --------------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES........................... $ 6,713,000 $ 1,452,000 $ 3,579,000 $ 5,103,000
COSTS AND EXPENSES
Operating.......................... 5,584,000 772,000 1,581,000 3,065,000
Selling, general and
administrative................... 13,989,000 3,205,000 5,934,000 3,119,000
Compensation charge from the
issuance of stock options........ 4,586,000 -- -- --
Depreciation....................... 749,000 255,000 428,000 138,000
Amortization....................... 231,000 2,000 11,000 11,000
------------ ----------- ----------- -----------
25,139,000 4,234,000 7,954,000 6,333,000
------------ ----------- ----------- -----------
Operating (loss)................... (18,426,000) (2,782,000) (4,375,000) (1,230,000)
OTHER INCOME (EXPENSE)
Interest income and other, net..... 2,632,000 -- (4,000) 133,000
Interest expense................... (21,000) -- -- --
------------ ----------- ----------- -----------
(Loss) before income tax
provision........................ (15,815,000) (2,782,000) (4,379,000) (1,097,000)
Income tax provision............... (440,000) -- -- --
------------ ----------- ----------- -----------
Net (loss)......................... $(16,255,000) $(2,782,000) $(4,379,000) $(1,097,000)
============ =========== =========== ===========
Basic and diluted net (loss) per
share............................ $ (.82) $ (.14) $ (.22) $ (.06)
============ =========== =========== ===========
</TABLE>
See accompanying notes.
F-6
<PAGE> 127
CORECOMM LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE PERIOD FROM APRIL 1, 1998 (DATE OPERATIONS COMMENCED)
TO DECEMBER 31, 1998
<TABLE>
<CAPTION>
COMMON STOCK
--------------------- ADDITIONAL
SHARES PAR PAID-IN CAPITAL (DEFICIT)
---------- -------- --------------- ------------
<S> <C> <C> <C> <C>
Initial contribution...................... 1,800,000 $ 18,000 $ 22,167,000
Capital contributions..................... 17,997,000 180,000 158,598,000
Issuance of stock options................. 4,586,000
Exercise of warrants...................... 2,000 3,000
Net (loss) for the period from April 1,
1998 (date operations commenced) to
December 31, 1998....................... $(16,255,000)
---------- -------- ------------ ------------
Balance, December 31, 1998................ 19,799,000 $198,000 $185,354,000 $(16,255,000)
========== ======== ============ ============
</TABLE>
See accompanying notes.
F-7
<PAGE> 128
CORECOMM LIMITED AND SUBSIDIARIES
OCOM CORPORATION TELECOMS DIVISION (THE PREDECESSOR)
STATEMENT OF PARENT'S INVESTMENT (DEFICIENCY)
FOR THE PERIOD FROM JANUARY 1, 1998 THROUGH MAY 31, 1998 AND
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<S> <C>
Balance, December 31, 1995.................................. $ 207,000
Capital contributions....................................... 682,000
Net loss for the year ended December 31, 1996............... (1,097,000)
-----------
Balance, December 31, 1996.................................. (208,000)
Capital contributions....................................... 4,908,000
Net loss for the year ended December 31, 1997............... (4,379,000)
-----------
Balance, December 31, 1997.................................. 321,000
Capital contributions....................................... 4,261,000
Net loss for the period ended May 31, 1998.................. (2,782,000)
-----------
Balance, May 31, 1998....................................... $ 1,800,000
===========
</TABLE>
See accompanying notes.
F-8
<PAGE> 129
CORECOMM LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THE PREDECESSOR (OCOM)
-----------------------------------------
FOR THE
FOR THE PERIOD FROM PERIOD FROM
APRIL 1, 1998 (DATE JANUARY 1,
OPERATIONS 1998 TO YEAR ENDED DECEMBER 31,
COMMENCED) TO MAY 31, --------------------------
DECEMBER 31, 1998 1998 1997 1996
------------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net (loss)................................ $ (16,255,000) $(2,782,000) $(4,379,000) $(1,097,000)
Adjustments to reconcile net (loss) to net
cash used in operating activities:
Depreciation and amortization........... 980,000 257,000 439,000 149,000
Compensation charge from the issuance of
stock options......................... 4,586,000 -- -- --
(Gain) loss on disposal of fixed
assets................................ 2,000 -- 4,000 (1,000)
Inventory reserve....................... -- -- 78,000 --
Provision for losses on accounts
receivable............................ 501,000 92,000 46,000 --
Accretion of interest on marketable
securities............................ (639,000) -- -- --
Other................................... (121,000) -- -- --
Changes in operating assets and
liabilities, net of effect from
business acquisitions:
Accounts receivable................... (480,000) (262,000) 129,000 129,000
Due from affiliates................... (1,954,000) -- -- --
Inventory............................. (82,000) 20,000 (158,000) --
Other current assets.................. (205,000) (199,000) 79,000 7,000
Other assets.......................... (2,824,000) -- -- --
Accounts payable...................... 1,261,000 (311,000) 169,000 82,000
Accrued expenses...................... 2,814,000 (453,000) 116,000 230,000
Deferred revenue...................... 94,000
------------- ----------- ----------- -----------
Net cash (used in) operating activities... (12,322,000) (3,638,000) (3,477,000) (501,000)
INVESTING ACTIVITIES
Purchase of fixed assets.................. (2,344,000) (623,000) (1,435,000) (183,000)
Proceeds from disposal of fixed assets.... 3,000 -- 4,000 2,000
Purchase of marketable securities......... (110,079,000) -- -- --
------------- ----------- ----------- -----------
Net cash (used in) investing activities... (112,420,000) (623,000) (1,431,000) (181,000)
FINANCING ACTIVITIES
Capital contributions..................... 150,904,000 4,261,000 4,908,000 682,000
Exercise of warrants...................... 3,000 -- -- --
Principal payments of capital lease
obligations............................. (4,000) -- -- --
------------- ----------- ----------- -----------
Net cash provided by financing
activities.............................. 150,903,000 4,261,000 4,908,000 682,000
------------- ----------- ----------- -----------
Increase in cash and cash equivalents..... 26,161,000 -- -- --
Cash and cash equivalents at beginning of
period.................................. -- -- -- --
------------- ----------- ----------- -----------
Cash and cash equivalents at end of
period.................................. $ 26,161,000 $ -- $ -- $ --
============= =========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid for interest.................... $ 4,000 $ -- $ -- $ --
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
ACTIVITIES
Capital contributions of noncash net
assets.................................. $ 30,059,000 $ -- $ -- $ --
Liabilities incurred to acquire fixed
assets.................................. 175,000 -- -- --
</TABLE>
See accompanying notes.
F-9
<PAGE> 130
CORECOMM LIMITED AND SUBSIDIARIES
AND ITS PREDECESSOR OCOM CORPORATION TELECOMS DIVISION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS
CoreComm Limited (the "Company"), formerly a wholly-owned subsidiary of
Cellular Communications of Puerto Rico, Inc. ("CCPR"), was formed in March 1998
(operations commenced in April 1998) in order to succeed to the businesses and
assets that were operated by OCOM Corporation and as an appropriate vehicle to
pursue new telecommunications opportunities outside of Puerto Rico and the U.S.
Virgin Islands. In September 1998, CCPR made a cash contribution to the Company
of $150,000,000 and distributed 100% of the outstanding shares of the Company on
a one-for-one basis to CCPR's shareholders.
The Company's competitive local exchange carrier ("CLEC"), cellular long
distance, landline long distance and cellular resale businesses were formerly
owned and operated by OCOM Corporation Telecoms Division ("OCOM"). CCPR acquired
the operating assets and related liabilities of these businesses from OCOM on
June 1, 1998. OCOM is the predecessor business to the Company.
In addition to the businesses acquired from OCOM, the Company also sells
pre-paid cellular service through the sale of pre-paid cards, provides
centralized telecommunications services ("Centrex"), provides a full range of
Internet services for both home and business customers through its Internet
Service Provider ("ISP") subsidiary and provides paging service and pager
repairs. The Company's customers are located throughout the United States,
although much of the Company's business is conducted in Ohio. The Company does
not own any facilities, except for certain ISP facilities. Instead, it purchases
capacity on a wholesale basis pursuant to contracts and sells it at retail rates
to end users. The Company depends upon the facilities-based carriers to maintain
the quality of their service to the Company's customers. Also, except for
pre-paid cellular service, the Company depends upon the facilities-based
carriers for accurate and prompt billing information in order for the Company to
bill its customers. In addition, all of the Company's lines of business are
highly competitive which results in pricing pressure and increasing customer
acquisition costs, and primarily all are dependent upon trends in the use of
communications service.
The following are the revenues from external customers for each of the
Company's communications services:
<TABLE>
<CAPTION>
FOR THE THE PREDECESSOR (OCOM)
PERIOD FROM ---------------------------------------
APRIL 1, FOR THE
1998 (DATE PERIOD FROM
OPERATIONS JANUARY 1,
COMMENCED) TO 1998 YEAR ENDED DECEMBER 31,
DECEMBER 31, TO MAY 31, ------------------------
1998 1998 1997 1996
------------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
CLEC and landline long distance......... $1,976,000 $ 217,000 $ 167,000 $ 104,000
Cellular long distance.................. 1,035,000 1,034,000 3,352,000 4,999,000
Centrex................................. 1,017,000 -- -- --
Wireless (including pre-paid
cellular)............................. 2,530,000 201,000 60,000 --
ISP..................................... 155,000 -- -- --
---------- ---------- ---------- ----------
$6,713,000 $1,452,000 $3,579,000 $5,103,000
========== ========== ========== ==========
</TABLE>
In February 1999, the Company entered into an agreement to acquire MegsINet
Inc., a national Internet network and regional telecommunications provider. The
Company will purchase 100% of MegsINet's stock for a total consideration of
approximately $16.75 million in cash plus approximately 2.1 million shares of
the Company's common stock. This transaction is subject to certain conditions,
including the registration of the Company's stock to be issued.
F-10
<PAGE> 131
CORECOMM LIMITED AND SUBSIDIARIES
AND ITS PREDECESSOR OCOM CORPORATION TELECOMS DIVISION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Also in February 1999, the Company entered into an agreement to acquire
certain assets of USN Communications, Inc., a CLEC reseller. Completion of this
transaction is conditioned upon approval by the Bankruptcy Court presiding over
USN's Chapter 11 case, in which third parties may bid for the same assets.
2. SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company,
its wholly-owned subsidiaries and those entities where the Company's interest is
greater than 50%. Significant intercompany accounts and transactions have been
eliminated in consolidation.
Cash Equivalents
Cash equivalents are short-term highly liquid investments purchased with a
maturity of three months or less. Cash equivalents were $20,995,000 at December
31, 1998 and consisted of corporate commercial paper.
Marketable Securities
Marketable securities are classified as available-for-sale, which are
carried at fair value. Unrealized holding gains and losses on securities, net of
tax, are carried as a separate component of shareholders' equity. The amortized
cost of debt securities is adjusted for amortization of premiums and accretion
of discounts to maturity. Such amortization is included in interest income.
Realized gains and losses and declines in value judged to be other than
temporary will be included in interest income. The cost of securities sold or
matured is based on the specific identification method. Interest on securities
is included in interest income.
Marketable securities at December 31, 1998 consisted of a certificate of
deposit and corporate commercial paper. During the period from April 1, 1998
(date operations commenced) to December 31, 1998, there were no realized gains
or losses on sales of securities. All of the marketable securities as of
December 31, 1998 had a contractual maturity of less than one year.
Inventory
Inventory consists principally of telephones, pagers and accessories and is
stated at the lower of cost or market. Cost is determined by specific
identification or the first-in, first-out method.
Financial Instruments
The carrying value of all financial instruments approximates their fair
value due to the short maturity of the respective instruments.
F-11
<PAGE> 132
CORECOMM LIMITED AND SUBSIDIARIES
AND ITS PREDECESSOR OCOM CORPORATION TELECOMS DIVISION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Fixed Assets
Fixed assets are stated at cost. Depreciation is computed by the
straight-line method over the estimated useful lives of the assets. Estimated
useful lives are as follows: operating equipment--5 or 15 years, computer
hardware and software--3 or 5 years and other equipment--2 to 7 years, except
for leasehold improvements for which the estimated useful lives are the term of
the lease.
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. If the
sum of the expected future undiscounted cash flows is less than the carrying
amount of the asset, a loss is recognized for the difference between the fair
value and carrying value of the asset.
Goodwill
Goodwill is the excess of the purchase price over the fair value of net
assets acquired in business combinations accounted for as purchases. Goodwill is
amortized on a straight-line basis over the 10 year period benefited. The
Company continually reviews the recoverability of the carrying value of goodwill
using the same methodology that it uses for the evaluation of its other
long-lived assets.
LMDS License Costs
The costs incurred to acquire the Local Multipoint Distribution Service
("LMDS") licenses from the Federal Communications Commission (the "FCC") were
deferred and will be amortized on a straight-line basis over the term of the
licenses upon the commencement of operations. The Company continually reviews
the recoverability of the carrying value of LMDS licenses using the same
methodology that it uses for the evaluation of its other long-lived assets.
Noncompetition Agreements
Other assets include noncompetition agreements obtained in connection with
an acquisition which were valued at an aggregate of $100,000. The noncompetition
agreements are being charged to expense on a straight-line basis over the
noncompetition period of 5 years.
Net (Loss) Per Share
The Company reports its net (loss) per share in accordance with the
Financial Accounting Standards Board ("FASB") Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings Per Share." The denominator for the basic
and diluted net loss per common share computations was 19,785,000, 19,776,000,
19,613,000 and 19,794,000 for the period from April 1, 1998 (date operations
commenced) to December 31, 1998, for the period from January 1, 1998 to May 31,
1998 and for the years ended December 31, 1997 and 1996, respectively (as
adjusted for the 3-for-2 stock split by way of stock dividend paid on September
2, 1999). These weighted average shares are equivalent to CCPR's historical
weighted average shares (since CCPR shareholders received one share of the
Company for each CCPR share owned), plus the Company's weighted average shares
in the 1998 period. The shares issuable upon the exercise of stock options and
warrants are excluded from the calculation of net loss per share as their effect
would be antidilutive.
Revenue Recognition
Telecommunications revenue is recognized at the time service is provided to
the customer. Charges for services that are billed in advance are deferred and
recognized when earned.
F-12
<PAGE> 133
CORECOMM LIMITED AND SUBSIDIARIES
AND ITS PREDECESSOR OCOM CORPORATION TELECOMS DIVISION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Advertising Expense
The Company charges the cost of advertising to expense as incurred.
Advertising expense for the period from April 1, 1998 (date operations
commenced) to December 31, 1998, for the period from January 1, 1998 to May 31,
1998 and for the years ended December 31, 1997 and 1996 were $812,000, $79,000,
$127,000 and $350,000, respectively.
Stock-Based Compensation
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." The Company applies APB Opinion No.
25, "Accounting for Stock Issued to Employees" and related interpretations in
accounting for its stock option plans.
3. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 requires that all items that are required to be recognized
under accounting standards as components of comprehensive income be reported in
a financial statement that is displayed with the same prominence as other
financial statements. The Company adopted SFAS No. 130 in 1998, which had no
effect on the consolidated financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information." SFAS No. 131 establishes standards for
the way that public enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. The Company adopted
SFAS No. 131 in 1998, which had no effect on the consolidated financial
statements since the Company operates in one business segment.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is required to be adopted in fiscal
years beginning after June 15, 1999. Management does not anticipate that the
adoption of the new standard will have a significant effect on the results of
operations, financial condition or cash flows of the Company.
4. ACQUISITIONS
In April and June 1998, CCPR acquired the stock of Digicom, Inc. and
certain operating assets and related liabilities of JeffRand Corp. (known as the
Wireless Outlet) and OCOM Corporation. CCPR contributed these businesses to the
Company. These acquisitions were accounted for as purchases by CCPR, and,
accordingly, the net assets and results of operations of the acquired businesses
have been included in the consolidated financial statements from the dates of
acquisition. The contribution of the assets from CCPR to the Company was
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 financial statements include the results of the
contributed companies for all periods owned by CCPR. In November 1998, a
wholly-owned subsidiary of the Company acquired substantially all of the assets
and certain liabilities of Stratos Internet Group, Inc. ("Stratos"), an ISP in
the Cleveland-Akron, Ohio area. This acquisition has been accounted for as a
purchase, and, accordingly, the net assets and results of operations of Stratos
have been included in the consolidated financial statements from the date of
acquisition.
F-13
<PAGE> 134
CORECOMM LIMITED AND SUBSIDIARIES
AND ITS PREDECESSOR OCOM CORPORATION TELECOMS DIVISION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A summary of the allocation of the aggregate purchase price is as follows:
<TABLE>
<S> <C>
Cash.................................................. $ 4,887,000
Note payable.......................................... 362,000
-----------
Aggregate purchase price.............................. 5,249,000
Net assets acquired:
Current assets........................................ 1,600,000
Fixed assets.......................................... 1,817,000
Current liabilities................................... (2,251,000)
Capital lease obligations............................. (275,000)
-----------
891,000
-----------
Excess purchase price................................. 4,358,000
Allocated to:
Noncompetition agreements............................. 100,000
-----------
Goodwill.............................................. $ 4,258,000
===========
</TABLE>
The pro forma unaudited consolidated results of operations for the years
ended December 31, 1998 and 1997 assuming consummation of the acquisitions and
receipt of the capital contributions from CCPR as of January 1, 1997 are as
follows. The pro forma net (loss) and basic and diluted net (loss) per share do
not give effect to interest income that may have been earned had the
$150,000,000 cash capital contribution from CCPR been made on January 1, 1997.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1998 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
Total revenue.................................... $ 11,499,000 $ 9,829,000
Net (loss)....................................... (19,132,000) (7,303,000)
Basic and diluted net (loss) per share........... (.97) (.37)
</TABLE>
5. LMDS LICENSE COSTS
A wholly-owned subsidiary of CCPR, Cortelyou Communications Corp.
("Cortelyou") was the successful bidder, for an aggregate of $25,241,000, for 15
Block A LMDS licenses in Ohio. LMDS frequencies are expected to be used for the
provision of voice, data, video and Internet services to businesses and homes in
competition with incumbent local exchange telephone companies and/or cable
television operators. The FCC has allocated two blocks of frequencies to be
licensed in each of the 493 Basic Trading Areas in the United States and its
territories based on an auction that commenced in February 1998 and ended in
March 1998. In June 1998, CCPR funded Cortelyou's payment of its bid and the FCC
issued the licenses. Costs of $125,000 were incurred in connection with the
auction and the license acquisition. CCPR contributed Cortelyou to the Company.
F-14
<PAGE> 135
CORECOMM LIMITED AND SUBSIDIARIES
AND ITS PREDECESSOR OCOM CORPORATION TELECOMS DIVISION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. FIXED ASSETS
Fixed assets consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1998 1997
---------- ----------
<S> <C> <C>
Operating equipment................................. $ 720,000 $ --
Computer hardware and software...................... 2,450,000 1,640,000
Other equipment..................................... 987,000 566,000
Construction in progress............................ 5,000 --
---------- ----------
4,162,000 2,206,000
Accumulated depreciation............................ (580,000) (937,000)
---------- ----------
$3,582,000 $1,269,000
========== ==========
</TABLE>
7. ACCRUED EXPENSES
Accrued expenses consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1998 1997
---------- ----------
<S> <C> <C>
Payroll and related................................. $1,263,000 $ 433,000
Professional fees................................... 527,000 204,000
Taxes excluding income taxes........................ 1,246,000 108,000
Advertising......................................... 175,000 115,000
Other............................................... 1,036,000 202,000
---------- ----------
$4,247,000 $1,062,000
========== ==========
</TABLE>
8. NOTE PAYABLE
The Company issued a note payable in the amount of $362,000 in connection
with the Stratos acquisition. Interest on the note accrues at 5.542% per annum.
The note is payable in twelve consecutive quarterly payments of principal and
interest of $33,000 commencing in May 1999 and is collateralized by the assets
acquired from Stratos. The Company recorded approximately $1,000 of interest
expense in 1998. As of December 31, 1998, $80,000 of the balance was included in
current liabilities and $283,000 was recorded as note payable.
F-15
<PAGE> 136
CORECOMM LIMITED AND SUBSIDIARIES
AND ITS PREDECESSOR OCOM CORPORATION TELECOMS DIVISION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. LEASES
The Company has capital leases for certain of its operating equipment. At
December 31, 1998, leased property included in operating equipment aggregated
$258,000 with accumulated depreciation of $7,000. Future minimum annual payments
under these leases at December 31, 1998 are as follows:
<TABLE>
<S> <C>
Year Ending December 31,
1999...................................................... $ 81,000
2000...................................................... 81,000
2001...................................................... 81,000
2002...................................................... 81,000
2003...................................................... 21,000
--------
345,000
Interest at 11.5%......................................... (74,000)
--------
Present value of minimum obligations...................... 271,000
Current portion........................................... (53,000)
--------
$218,000
========
</TABLE>
As of December 31, 1998, the Company had leases for office space and
equipment which extend through 2009. Total rent expense for the period from
April 1, 1998 (date operations commenced) to December 31, 1998, the period from
January 1, 1998 to May 31, 1998 and for the years ended December 31, 1997 and
1996 under operating leases was $354,000, $98,000, $131,000 and $60,000,
respectively.
Future minimum annual lease payments under noncancellable operating leases
at December 31, 1998 are: $1,559,000 (1999); $1,764,000 (2000); $1,740,000
(2001); $1,753,000 (2002); $1,467,000 (2003) and $5,909,000 thereafter.
10. COMPENSATION CHARGE
The compensation charge of $4,586,000 in 1998 is a non-cash charge recorded
in accordance with APB Opinion No. 25, "Accounting for Stock Issued to
Employees," as a one time charge related to the issuance of the Company's stock
options to holders of CCPR's stock options in connection with the Company's
distribution to CCPR's shareholders.
11. RELATED PARTY TRANSACTIONS
Certain officers and directors of the Company are also officers or
directors of NTL Incorporated ("NTL"). NTL provides certain corporate
management, financial, legal and technical services to the Company. Amounts
charged to the Company by NTL consist of salaries and direct costs where
identifiable and 30% of NTL's corporate overhead. It is not practicable to
determine the amount of expenses that would have been incurred had the Company
operated as an unaffiliated entity. In the opinion of management, this
allocation method is reasonable. In 1998, NTL charged the Company $313,000 which
is included in general and administrative expenses.
The Company's relationship with CCPR is governed by agreements entered into
in connection with the distribution, including a Tax Disaffiliation Agreement.
The Tax Disaffiliation Agreement details the respective obligations concerning
various tax liabilities and provides for cooperation with respect to certain tax
matters, the exchange of information and the retention of records.
F-16
<PAGE> 137
CORECOMM LIMITED AND SUBSIDIARIES
AND ITS PREDECESSOR OCOM CORPORATION TELECOMS DIVISION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
OCOM provided, and now a subsidiary of the Company provides, billing and
software development services to subsidiaries of CCPR and subsidiaries of NTL.
Certain officers and directors of the Company are officers and directors of
CCPR. Beginning in 1997, the Company charged amounts in excess of its costs to
provide these services. General and administrative expenses were reduced by
$275,000, $138,000, and $217,000 for the period from April 1, 1998 (date
operations commenced) to December 31, 1998, the period from January 1, 1998 to
May 31, 1998 and for the year ended December 31, 1997, respectively, as a result
of these charges.
At December 31, 1998, due from affiliates included $128,000 due from CCPR
and $1,826,000 due from NTL.
12. 401(k) PLAN
A subsidiary of the Company sponsors a 401(k) Plan in which all full-time
employees of that subsidiary who have completed 90 days of employment and are 21
years of age may participate. The Company's matching contribution is determined
annually by the Board of Directors. Participants may make salary deferral
contributions of 1% to 15% of their compensation not to exceed the maximum
allowed by law. The expense for the period from April 1, 1998 (date operations
commenced) to December 31, 1998, the period from January 1, 1998 to May 31, 1998
and for the years ended December 31, 1997 and 1996 was $103,000, $29,000,
$126,000 and $46,000, respectively.
13. SHAREHOLDERS' EQUITY
Shareholder Rights Plan
The Rights Agreement provides that one Right will be issued with each share
of common stock issued on or after the date of distribution. The Rights become
exercisable upon the occurrence of certain potential takeover events and will
expire in December 2010 unless previously redeemed by the Company. When
exercisable, each Right entitles the owner to purchase from the Company of a
share of Series A Junior Participating Preferred Stock ("Series A Preferred
Stock") at a purchase price of $100.
The Series A Preferred Stock will be entitled to a minimum preferential
quarterly dividend payment of $.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 Series A 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 the common stock. Each share of Series A Preferred Stock will have
100 votes and will vote together with the common stock. In the event of any
merger, consolidation or other transaction in which shares of common stock are
changed or exchanged, each share of Series A Preferred Stock will be entitled to
receive 100 times the amount received per share of common stock. The rights are
protected by customary antidilution provisions.
The 1,000,000 authorized shares of Series Preferred Stock are designated
Series A Preferred Stock. No shares of Series A Preferred Stock are issued or
outstanding.
Warrants and Stock Options
In connection with the distribution of the Company to CCPR's shareholders,
the Company issued warrants to purchase shares of common stock to holders of
CCPR stock options who elected to receive warrants as follows: (1) warrants to
purchase an aggregate of 2,870,000 shares of common stock at an exercise price
of $8.79 per share which expire in 2005, (2) warrants to purchase an aggregate
of 6,000 shares of common stock at an exercise price of $8.79 per share which
expire in 2003 and (3) warrants to purchase an aggregate of 1,229,000 shares of
common stock at an exercise price of $10.55 which expire in
F-17
<PAGE> 138
CORECOMM LIMITED AND SUBSIDIARIES
AND ITS PREDECESSOR OCOM CORPORATION TELECOMS DIVISION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2005. As of December 31, 1998, there were 4,103,000 shares of common stock
reserved for issuance upon the exercise of warrants.
There are 9,000,000 shares of common stock reserved for issuance under the
1998 Stock Option Plan (the "Plan"). The Plan provides that incentive stock
options be granted at the fair market value of the Company's common stock on the
date of grant, and nonqualified stock options be granted at a price determined
by the Compensation and Option Committee. Options are exercisable as to 20% of
the shares subject thereto on the date of grant and become exercisable as to an
additional 20% of the shares subject thereto on each January 1 thereafter, while
the optionee remains an employee of the Company. Options will expire ten years
after the date of the grant.
In connection with the distribution of the Company to CCPR's shareholders,
the Company issued approximately 1,251,000 options to purchase shares of the
Company's common stock to holders of CCPR stock options who elected to receive
options.
Pro forma information regarding net loss and net loss per share is required
by SFAS No. 123, and has been determined as if the Company had accounted for its
employee warrants and stock options under the fair value method of that
Statement. The fair value for these warrants and options was estimated at the
date of grant using the Black-Scholes option pricing model with the following
weighted-average assumptions for 1998: risk-free interest rate of 5.02%,
dividend yield of 0%, volatility factor of the expected market price of the
Company's common stock of .810, and a weighted-average expected life of the
warrants and options of 8.1 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's warrants and stock options have
characteristics significantly different from those of traded options and because
changes in the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its warrants and stock
options.
For purposes of pro forma disclosures, the estimated fair value of the
warrants and options is amortized to expense over the warrants and options'
vesting periods. Following is the Company's pro forma information for the period
from April 1, 1998 (date operations commenced) to December 31, 1998:
<TABLE>
<S> <C>
Pro forma net (loss)................................... $(48,015,000)
Pro forma net (loss) per share -- basic and
diluted.............................................. $ (2.43)
</TABLE>
A summary of the Company's warrants and stock option activity and related
information for the period from April 1, 1998 (date operations commenced) to
December 31, 1998 follows:
<TABLE>
<CAPTION>
WEIGHTED-
NUMBER OF AVERAGE
WARRANTS AND EXERCISE
OPTIONS PRICE
------------ ---------
<S> <C> <C>
Granted.............................................. 6,512,000 $ 8.26
Exercised............................................ (2,000) 8.79
Forfeited............................................ -- --
---------
Outstanding -- end of period......................... 6,510,000 $ 8.26
=========
Exercisable at end of period......................... 4,584,000 $ 9.01
=========
</TABLE>
F-18
<PAGE> 139
CORECOMM LIMITED AND SUBSIDIARIES
AND ITS PREDECESSOR OCOM CORPORATION TELECOMS DIVISION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Weighted-average fair value of warrants and options, calculated using the
Black-Scholes option pricing model, granted during 1998 is $6.49.
The following table summarizes the status of the stock options outstanding
and exercisable at December 31, 1998:
<TABLE>
<CAPTION>
STOCK OPTIONS
STOCK OPTIONS OUTSTANDING EXERCISABLE
----------------------------------- ---------------------
WEIGHTED- WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER OF CONTRACTUAL EXERCISE NUMBER OF EXERCISE
EXERCISE PRICE OPTIONS LIFE PRICE OPTIONS PRICE
- -------------- --------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
$0.03 to $0.44 621,000 9.7 Years $ 0.255 125,000 $ 0.255
$4.15 to $4.54 65,000 9.7 Years $ 4.44 12,000 $ 4.44
$7.92 to $8.79 1,722,000 9.7 Years $ 8.77 345,000 $ 8.77
--------- -------
Total 2,408,000 482,000
========= =======
</TABLE>
14. INCOME TAXES
The provision for income taxes for the period from April 1, 1998 (date
operations commenced) to December 31, 1998 consists of the following:
<TABLE>
<S> <C>
Current:
Federal................................................. $ --
State and local......................................... 440,000
--------
Total current............................................. 440,000
--------
Deferred:
Federal................................................. --
State and local......................................... --
--------
Total deferred............................................ --
--------
$440,000
========
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets as of December 31, 1998 are as
follows:
<TABLE>
<S> <C>
Deferred tax liabilities:
Tax over book depreciation and amortization........... $ 58,000
Deferred tax assets:
Net operating losses.................................. 5,419,000
Allowance for doubtful accounts....................... 301,000
Amortization of goodwill.............................. 24,000
-----------
5,744,000
Valuation allowance for deferred tax assets........... (5,686,000)
-----------
Net deferred tax assets................................. 58,000
-----------
Net deferred tax liabilities............................ $ --
===========
</TABLE>
F-19
<PAGE> 140
CORECOMM LIMITED AND SUBSIDIARIES
AND ITS PREDECESSOR OCOM CORPORATION TELECOMS DIVISION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At December 31, 1998, the Company had net operating loss carryforwards of
approximately $13,400,000 for federal income tax purposes that expire in 2018.
Since the Company cannot file a consolidated federal income tax return, the net
operating loss carryforward can only be utilized by the subsidiary that
generated the loss. The net deferred tax assets of $5,686,000 have been fully
offset by a valuation allowance due to the uncertainty of realizing such tax
benefit.
The reconciliation of income taxes computed at U.S. federal statutory rates
to income tax expense for the period from April 1, 1998 (date operations
commenced) to December 31, 1998 is as follows:
<TABLE>
<S> <C>
Benefit at federal statutory rate (35%)................. $ 5,689,000
State and local income taxes............................ 440,000
Expenses not deductible for tax purposes................ (1,623,000)
Foreign income not subject to U.S. tax.................. 846,000
U.S. losses with no benefit............................. (4,912,000)
-----------
$ 440,000
===========
</TABLE>
15. COMMITMENTS AND CONTINGENT LIABILITIES
As of December 31, 1998, the Company has purchase commitments of
approximately $2,200,000 outstanding.
The Company is involved in various disputes, arising in the ordinary course
of its business, which may result in pending or threatened litigation. None of
these matters are expected to have a material adverse effect on the Company's
financial position, results of operations or cash flows.
16. STOCK SPLIT
The Company declared a 3-for-2 stock split by way of a stock dividend,
which was paid on September 2, 1999. All common stock data in the consolidated
financial statements give effect to the stock split.
F-20
<PAGE> 141
CORECOMM LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
JUNE 30,
1999
-------------
(UNAUDITED)
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 30,663,000
Marketable securities..................................... 45,482,000
Accounts receivable-trade, less allowance for doubtful
accounts of $23,683,000................................ 13,870,000
Due from affiliates....................................... 5,472,000
Other..................................................... 3,638,000
------------
Total current assets.............................. 99,125,000
Fixed assets, net........................................... 68,570,000
Goodwill, net of accumulated amortization of $1,379,000..... 75,837,000
LMDS license costs.......................................... 25,366,000
Other, net of accumulated amortization of $94,000........... 2,307,000
------------
$271,205,000
============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 10,569,000
Accrued expenses.......................................... 12,154,000
Due to affiliate.......................................... 106,000
Equipment payable......................................... 25,991,000
Current portion of notes payable and capital lease
obligations............................................ 8,552,000
Deferred revenue.......................................... 1,370,000
------------
Total current liabilities......................... 58,742,000
Notes payable............................................... 6,970,000
Capital lease obligations................................... 4,425,000
Commitments and contingent liabilities
Shareholders' equity:
Series preferred stock, $.01 par value, authorized
1,000,000 shares; issued and outstanding none.......... --
Common stock, $.01 par value; authorized 75,000,000
shares; issued and outstanding 24,221,000.............. 242,000
Additional paid-in capital................................ 239,657,000
(Deficit)................................................. (38,831,000)
------------
201,068,000
------------
$271,205,000
============
</TABLE>
See accompanying notes.
F-21
<PAGE> 142
CORECOMM LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THE PREDECESSOR
PERIOD FROM (OCOM)
APRIL 1, 1998 FOR THE
THREE MONTHS (DATE OPERATIONS SIX MONTHS PERIOD FROM
ENDED COMMENCED) TO ENDED JANUARY 1, 1998
JUNE 30, JUNE 30, JUNE 30, TO MAY 31,
1999 1998 1999 1998
------------ ---------------- ------------ ---------------
<S> <C> <C> <C> <C>
REVENUES................................ $ 12,436,000 $ 1,261,000 $ 16,032,000 $ 1,452,000
COSTS AND EXPENSES
Operating............................... 11,302,000 1,067,000 14,150,000 772,000
Selling, general and administrative..... 13,736,000 1,417,000 19,520,000 3,205,000
Corporate............................... 1,851,000 -- 4,143,000 --
Depreciation............................ 1,282,000 97,000 1,710,000 255,000
Amortization............................ 1,021,000 61,000 1,172,000 2,000
------------ ----------- ------------ -----------
29,192,000 2,642,000 40,695,000 4,234,000
------------ ----------- ------------ -----------
Operating (loss)........................ (16,756,000) (1,381,000) (24,663,000) (2,782,000)
OTHER INCOME (EXPENSE)
Interest income and other, net.......... 1,306,000 -- 2,870,000 --
Interest expense........................ (204,000) -- (218,000) --
------------ ----------- ------------ -----------
(Loss) before income tax provision...... (15,654,000) (1,381,000) (22,011,000) (2,782,000)
Income tax provision.................... (400,000) -- (565,000) --
------------ ----------- ------------ -----------
Net (loss).............................. $(16,054,000) $(1,381,000) $(22,576,000) $(2,782,000)
============ =========== ============ ===========
Basic and diluted net (loss) per
share................................. $ (.76) $ (.07) $ (1.11) $ (.14)
------------ ----------- ------------ -----------
Weighted average shares................. 21,018,000 19,776,000 20,421,000 19,776,000
============ =========== ============ ===========
</TABLE>
See accompanying notes.
F-22
<PAGE> 143
CORECOMM LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
---------------------- PAID-IN
SHARES PAR CAPITAL (DEFICIT)
---------- -------- ------------ ------------
<S> <C> <C> <C> <C>
Balance, December 31, 1998............. 19,799,000 $198,000 $185,354,000 $(16,255,000)
Exercise of stock options.............. 367,000 4,000 2,107,000
Exercise of warrants................... 1,944,000 19,000 9,014,000
Common stock issued for acquisition.... 2,111,000 21,000 30,055,000
Stock options issued for acquisition... 4,027,000
Warrants issued for acquisition........ 9,100,000
Net (loss) for the six months ended
June 30, 1999........................ (22,576,000)
---------- -------- ------------ ------------
Balance, June 30, 1999................. 24,221,000 $242,000 $239,657,000 $(38,831,000)
========== ======== ============ ============
</TABLE>
See accompanying notes.
F-23
<PAGE> 144
CORECOMM LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THE PREDECESSOR
FOR THE PERIOD (OCOM)
FROM APRIL 1, FOR THE PERIOD
1998 (DATE FROM
SIX MONTHS OPERATIONS JANUARY 1,
ENDED COMMENCED) 1998 TO
JUNE 30, TO JUNE 30, MAY 31,
1999 1998 1998
-------------- -------------- ---------------
<S> <C> <C> <C>
Net cash (used in) operating activities.......... $(18,468,000) $ (417,000) $(3,638,000)
INVESTING ACTIVITIES
Purchase of fixed assets......................... (7,255,000) (232,000) (623,000)
Acquisitions, net of cash acquired............... (47,082,000) -- --
Purchase of marketable securities................ (56,856,000) -- --
Proceeds from sale of marketable securities...... 123,713,000 -- --
------------ ----------- -----------
Net cash provided by (used in) investing
activities..................................... 12,520,000 (232,000) (623,000)
FINANCING ACTIVITIES
Capital contributions............................ -- 850,000 4,261,000
Principal payments............................... (443,000) -- --
Principal payments of capital lease
obligations.................................... (251,000) -- --
Proceeds from exercise of stock options and
warrants....................................... 11,144,000 -- --
------------ ----------- -----------
Net cash provided by financing activities........ 10,450,000 850,000 4,261,000
------------ ----------- -----------
Increase in cash and cash equivalents............ 4,502,000 201,000 --
Cash and cash equivalents at beginning of
period......................................... 26,161,000 -- --
------------ ----------- -----------
Cash and cash equivalents at end of period....... $ 30,663,000 $ 201,000 $ --
============ =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest........................... $ 122,000 $ -- $ --
Income taxes paid................................ 919,000 -- --
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
ACTIVITIES
Capital contributions of non-cash net assets..... $ -- $29,059,000 $ --
Liabilities incurred to acquire fixed assets..... 3,089,000 -- --
Common stock, stock options and warrants issued
for acquisitions............................... 43,203,000 -- --
</TABLE>
See accompanying notes.
F-24
<PAGE> 145
CORECOMM LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three and six months
ended June 30, 1999 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1999. For further information, refer
to the consolidated financial statements and footnotes thereto for the year
ended December 31, 1998 included in this Offering Memorandum.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," which is required to be adopted in fiscal years
beginning after June 15, 2000. Management does not anticipate that the adoption
of this standard will have a significant effect on earnings or the financial
position of the Company.
The shares issuable upon the exercise of stock options and warrants are
excluded from the calculation of net (loss) per share as their effect would be
antidilutive.
NOTE 2. ORGANIZATION AND BUSINESS
CoreComm Limited (the "Company"), formerly a wholly-owned subsidiary of
Cellular Communications of Puerto Rico, Inc. ("CCPR"), was formed in March 1998
(operations commenced in April 1998) in order to succeed to the businesses and
assets that were operated by OCOM Corporation and as an appropriate vehicle to
pursue new telecommunications opportunities outside of Puerto Rico and the U.S.
Virgin Islands. On June 1, 1998, CCPR acquired certain operating assets and
related liabilities from OCOM Corporation Telecoms Division ("OCOM"). OCOM is
the predecessor business to the Company. In September 1998, CCPR made a cash
contribution to the Company of $150,000,000 and distributed 100% of the
outstanding shares of the Company on a one-for-one basis to CCPR's shareholders.
NOTE 3. ACQUISITIONS
In May 1999, the Company acquired 100% of the stock of MegsINet Inc., a
national Internet service provider ("ISP") with a national Asynchronous Transfer
Mode network and local telecommunications facilities in Chicago for a total
consideration of $16.8 million in cash and 2.1 million shares of the Company's
common stock. In addition, the Company exchanged MegsINet stock options for
options to purchase 295,500 shares of the Company's common stock, repaid $2.0
million of MegsINet debt and incurred acquisition related costs of $1.2 million.
The Company's common stock was valued at $30.1 million, the fair value on the
date prior to the announcement. The Company's stock options were valued at $4.0
million using the Black-Scholes option pricing model.
Also in May 1999, the Company acquired the wireline assets of USN
Communications, Inc., which was a competitive local exchange carrier ("CLEC")
that operated on a resale basis, for a cash payment of $26.4 million, warrants
to purchase 375,000 shares of the Company's common stock at a price of $20 per
share and 150,000 shares at a price of $33 1/3 per share and a potential
contingent cash payment to be paid in July 2000 which is capped at $58.6
million. The contingent payment is payable only if the USN assets meet or exceed
operating performance thresholds. The warrants were valued at $9.1 million based
on an
F-25
<PAGE> 146
CORECOMM LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
appraisal as of the date of issuance. In addition, the Company incurred
acquisition related costs of $1.0 million.
These acquisitions have been accounted for as purchases, and accordingly,
the net assets and results of operations of the acquired businesses have been
included in the consolidated financial statements from the dates of acquisition.
The aggregate purchase price of $90.6 million exceeded the estimated fair value
of the net tangible assets acquired by $72.9 million, which is included in
goodwill. Under the purchase method of accounting, the purchase price is
allocated to the assets acquired and liabilities assumed based on the estimated
fair values at acquisition. However, changes to the allocation of the purchase
price are expected as valuations or appraisals of assets and liabilities are
completed. Although the Company cannot ascertain what the changes will be at
this time, such changes are not expected to be significant.
In April and June 1998, CCPR acquired the stock of Digicom, Inc. and
certain operating assets and related liabilities of JeffRand Corp. (known as the
Wireless Outlet) and OCOM Corporation. CCPR contributed these businesses to the
Company. These acquisitions were accounted for as purchases by CCPR, and,
accordingly, the net assets and results of operations of the acquired businesses
have been included in the consolidated financial statements from the dates of
acquisition. The contribution of the assets from CCPR to the Company was
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 financial statements include the results of the
contributed companies for all periods owned by CCPR. In November 1998, a
wholly-owned subsidiary of the Company acquired substantially all of the assets
and certain liabilities of Stratos Internet Group, Inc. ("Stratos"), an ISP in
the Cleveland-Akron, Ohio area. This acquisition has been accounted for as a
purchase, and, accordingly, the net assets and results of operations of Stratos
have been included in the consolidated financial statements from the date of
acquisition.
The pro forma unaudited consolidated results of operations for the six
months ended June 30, 1999 and 1998 assuming consummation of the acquisitions
and receipt of the capital contributions from CCPR as of January 1, 1998 are as
follows. The pro forma net (loss) and net (loss) per share do not give effect to
interest income that may have been earned had the $150,000,000 cash capital
contribution from CCPR been made on January 1, 1998.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Total revenue................................... $ 55,736,000 $ 72,272,000
Net (loss)...................................... (54,734,000) (86,117,000)
Basic and diluted net (loss) per share.......... (2.45) (5.90)
</TABLE>
A significant component of the pro forma results is associated with the
acquisition of certain assets of USN. Although USN quickly developed a large
customer list and revenue base in 1997 and 1998, it had difficulties under its
previous management providing services, including billing, customer care and
other operational areas, and filed for bankruptcy in February 1999. Since the
acquisition, we have been focusing on improving the operations of USN. We do not
intend to actively sell additional lines through USN until we are satisfied with
the quality of the USN operations. Consequently, consistent with our due
diligence, transaction structure and purchase price, we expect that revenues
associated with USN assets will decline significantly over the next several
months as customers continue to leave or "churn" off the service.
F-26
<PAGE> 147
CORECOMM LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
NOTE 4. FIXED ASSETS
Fixed assets consist of:
<TABLE>
<CAPTION>
JUNE 30,
1999
-----------
(UNAUDITED)
<S> <C>
Operating equipment......................................... $44,825,000
Computer hardware and software.............................. 10,488,000
Other equipment............................................. 6,402,000
Construction in progress.................................... 9,118,000
-----------
70,833,000
Accumulated depreciation.................................... (2,263,000)
-----------
$68,570,000
===========
</TABLE>
NOTE 5. ACCRUED EXPENSES
Accrued expenses consist of:
<TABLE>
<CAPTION>
JUNE 30,
1999
-----------
(UNAUDITED)
<S> <C>
Payroll and related..................................... $ 3,248,000
Professional fees....................................... 925,000
Taxes, including income taxes........................... 2,826,000
Toll and interconnect................................... 840,000
Accrued equipment purchases............................. 1,733,000
Other................................................... 2,582,000
-----------
$12,154,000
===========
</TABLE>
NOTE 6. 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"). In 1998, MegsINet entered into an agreement
with Ascend to lease up to $16 million in operating equipment under a capital
lease agreement. At June 30, 1999, MegsINet was obligated under capital leases
with Ascend related to this agreement totaling approximately $4.2 million and
had received approximately $26.0 million in equipment for which no formal lease
agreement had been signed. As no lease agreement for this equipment has been
signed, the entire balance has been classified as current.
F-27
<PAGE> 148
CORECOMM LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
NOTE 7. LEASES
The Company has capital leases for certain of its operating equipment.
Future minimum lease payments under these capital leases as of June 30, 1999
are:
<TABLE>
<S> <C>
July 1 to December 31, 1999............................. $ 2,103,000
Year ending December 31:
2000.................................................. 3,938,000
2001.................................................. 2,716,000
2002.................................................. 200,000
2003.................................................. 19,000
-----------
Total minimum lease payments............................ 8,976,000
Less amount representing interest (at rates ranging from
8.5% to 26.44%)....................................... (1,163,000)
-----------
Present value of net minimum capital lease payments..... 7,813,000
Current portion......................................... (3,388,000)
-----------
$ 4,425,000
===========
</TABLE>
NOTE 8. NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
1999
-----------
(UNAUDITED)
<S> <C>
Borrowing under Ascend working capital promissory note,
interest at 8.5%...................................... $ 3,849,000
Note payable to Cisco for equipment, interest at
12.75%................................................ 7,945,000
Other................................................... 340,000
-----------
12,134,000
Less current portion.................................... 5,164,000
-----------
$ 6,970,000
===========
</TABLE>
MegsINet originally borrowed $4 million from Ascend under the working
capital promissory note dated August 1998. MegsINet is required to make monthly
principal and interest payments of $148,000 through January 2002. The Company
has issued a warrant to Ascend to purchase approximately 19,000 shares of the
Company's common stock at $20.63 per share in connection with the promissory
note. The warrant expires in August 2008.
In 1998, MegsINet entered into an agreement with Cisco Systems Capital
Corporation ("Cisco"), whereby MegsINet can purchase up to $16 million in
operating equipment under a promissory note. MegsINet has borrowed $7,945,000 as
of June 30, 1999. MegsINet is required to make monthly principal and interest
payments of $320,000 beginning in July 1999 through September 2001. The Company
has guaranteed the obligations of MegsINet under the promissory note.
NOTE 9. RELATED PARTY TRANSACTIONS
Some of the officers and directors of the Company are also officers or
directors of NTL Incorporated ("NTL"). NTL provides the Company with management,
financial, legal and technical services, access to
F-28
<PAGE> 149
CORECOMM LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
office space and equipment and use of supplies. Amounts charged to the Company
by NTL consist of salaries and direct costs allocated to the Company where
identifiable, and a percentage of the portion of NTL's corporate overhead which
cannot be specifically allocated to NTL (which is agreed upon by the Boards of
Directors of NTL and the Company). NTL's charges to the Company commenced after
the spin-off from CCPR in September 1998. It is not practicable to determine the
amounts of these expenses that would have been incurred had the Company operated
as an unaffiliated entity. In our opinion, this allocation method is reasonable.
For the six months ended June 30, 1999, NTL charged the Company $817,000 which
is included in corporate expenses.
OCOM provided, and now a subsidiary of the Company provides, billing and
software development services to subsidiaries of CCPR and subsidiaries of NTL.
Certain officers and directors of the Company are officers and directors of
CCPR. The Company charges an amount in excess of its costs to provide these
services. General and administrative expenses were reduced by $346,000 and
$29,000 in the six months ended June 30, 1999 and in the period from April 1,
1998 (date operations commenced) to June 30, 1998, respectively, as a result of
these charges.
At June 30, 1999, due from affiliates included $5,472,000 due from NTL. At
June 30, 1999, due to affiliate included $106,000 due to CCPR.
NOTE 10. COMMITMENTS AND CONTINGENT LIABILITIES
As of June 30, 1999, the Company had purchase commitments of $27,000,000
outstanding.
The Company is involved in various disputes, arising in the ordinary course
of its business, which may result in pending or threatened litigation. None of
these matters are expected to have a material adverse effect on the Company's
financial position, results of operations or cash flows.
F-29
<PAGE> 150
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.
KPMG LLP
St. Louis, Missouri
February 15, 1999
F-30
<PAGE> 151
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-31
<PAGE> 152
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-32
<PAGE> 153
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-33
<PAGE> 154
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-34
<PAGE> 155
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.
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.
F-35
<PAGE> 156
MEGSINET INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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>
(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.
F-36
<PAGE> 157
MEGSINET INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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>
(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.
F-37
<PAGE> 158
MEGSINET INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 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.
F-38
<PAGE> 159
MEGSINET INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(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>
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-Scholes 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-39
<PAGE> 160
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.
(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.
(12) SUBSEQUENT EVENT (UNAUDITED)
On May 3, 1999, MegsINet entered into a revised agreement that changes
certain terms of the Merger Transaction (see note 11). The primary change in the
new agreement results in the survival of MegINet as a wholly-owned subsidiary of
the acquiring enterprise.
F-40
<PAGE> 161
MEGSINET INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
MARCH 31, 1999
(UNAUDITED)
<TABLE>
<S> <C>
ASSETS
Cash........................................................ $ 3,381,580
Prepaid expenses and other current assets................... 1,594,341
-----------
Total current assets.............................. 4,975,921
Property and equipment, net................................. 45,518,521
-----------
Total assets...................................... $50,494,442
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Equipment payable........................................... $25,757,434
Current portion of notes payable............................ 6,043,139
Current portion of capital lease obligations................ 2,702,925
Accounts payable............................................ 2,152,894
Accrued liabilities......................................... 997,190
Deferred revenue............................................ 935,378
-----------
Total current liabilities......................... 38,588,960
Notes payable, less current portion......................... 7,885,422
Capital lease obligations, less current portion............. 4,691,112
Commitments and contingencies
Stockholders' deficit:
Preferred stock, no par value, 3,000,000 shares authorized
and 2,001,200 shares issued............................ --
Common stock, no par value, 30,000,000 shares authorized
and 10,200,632 shares issued........................... --
Paid-in capital........................................... 8,955,745
Retained deficit.......................................... (9,626,797)
-----------
Total stockholders' deficit....................... (671,052)
-----------
Total liabilities and stockholders' deficit....... $50,494,442
===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-41
<PAGE> 162
MEGSINET INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
1999 1998
----------- --------
<S> <C> <C>
Revenues.................................................... $ 1,602,729 $996,919
Cost of sales............................................... 2,675,431 476,368
----------- --------
Costs in excess of revenues............................... (1,072,702) 520,551
----------- --------
Operating expenses:
Salaries and compensation................................. 1,001,112 203,753
Other operating expense................................... 899,202 244,761
----------- --------
Total operating expenses.......................... 1,900,314 448,514
----------- --------
Income (loss) from operations.......................... (2,973,016) 72,037
Interest expense............................................ 559,816 85,642
----------- --------
Net (loss)............................................. $(3,532,832) $(13,605)
=========== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-42
<PAGE> 163
MEGSINET INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
THREE MONTHS ENDED MARCH 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
TOTAL
PREFERRED COMMON PAID-IN RETAINED STOCKHOLDERS'
STOCK STOCK CAPITAL DEFICIT DEFICIT
--------- ------ --------- ---------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1998........... $-- -- 4,005,988 (6,093,965) (2,087,977)
Issuance of common stock, 59,160
shares............................... -- -- 66,287 -- 66,287
Issuance of preferred stock, 2,000,000
shares............................... -- -- 5,000,000 -- 5,000,000
Commission paid........................ -- -- (75,000) -- (75,000)
Merger related fees.................... -- -- (41,530) (41,530)
Net loss............................... -- -- -- (3,532,832) (3,532,832)
-- -- --------- ---------- ----------
BALANCE AT MARCH 31, 1999.............. $-- -- 8,955,745 (9,626,797) (671,052)
== == ========= ========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-43
<PAGE> 164
MEGSINET INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------
1999 1998
-------------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $ (3,532,832) $ (13,605)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.......................... 726,917 111,909
Changes in operating working capital:
Prepaid expenses and other current assets............ (1,050,229) (15,895)
Accounts payable..................................... 687,526 (171,482)
Accrued liabilities.................................. 613,814 69,860
Deferred revenue..................................... 293,393 (202,851)
------------ ---------
Net cash used in operating activities............. (2,261,411) (222,064)
------------ ---------
Cash flows from investing activities -- capital
expenditures.............................................. (18,976,005) (130,905)
------------ ---------
Cash flows from financing activities:
Proceeds from notes payable............................... 19,007,783 --
Payments on note payable to stockholder................... (156,158) (4,120)
Payments on capital lease obligations..................... (253,963) (114,903)
Issuance of stock......................................... 4,949,750 362,366
------------ ---------
Net cash provided by financing activities......... 23,547,412 243,343
------------ ---------
Net increase (decrease) in cash................... 2,309,996 (109,626)
Cash, beginning of period................................... 1,071,584 284,041
------------ ---------
Cash, end of period......................................... $ 3,381,580 $ 174,415
============ =========
Supplemental disclosure of cash flow information -- cash
paid for interest......................................... $ 566,747 $ 85,642
============ =========
</TABLE>
Supplemental disclosure of non cash investing and financing activities:
Capital lease obligations of $467,020 and $1,108,213 were incurred in the
three months ended March 31, 1999 and 1998, respectively, when the Company
entered into equipment leases.
Equipment payable of $15,792,553 and zero were incurred in the three months
ended March 31, 1999 and 1998, respectively, when the Company purchased
equipment.
The Company paid $75,000 and zero of commissions through issuance of common
stock in the three months ended March 31, 1999 and 1998, respectively.
See accompanying notes to condensed consolidated financial statements.
F-44
<PAGE> 165
MEGSINET INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three months ended March 31, 1999 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1999. For further information, refer to the consolidated
financial statements and footnotes thereto for the year ended December 31, 1998.
NOTE 2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
MARCH 31, 1999
(UNAUDITED)
--------------
<S> <C>
Telecommunications equipment................................ $42,305,441
Computer equipment.......................................... 643,492
Telephone equipment......................................... 178,096
Furniture and fixtures...................................... 61,245
Leasehold improvements...................................... 179,325
Construction in progress.................................... 4,172,407
-----------
47,540,006
Less accumulated depreciation and amortization.............. 2,021,485
-----------
Net property and equipment........................ $45,518,521
===========
</TABLE>
NOTE 3. NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<CAPTION>
MARCH 31, 1999
(UNAUDITED)
--------------
<S> <C>
Borrowings under Ascend working capital promissory note,
interest at 8.5%.......................................... $ 4,000,000
Borrowings under Cisco working capital promissory note,
interest at 13.5%......................................... 2,021,885
Note payable to Cisco for equipment, interest at 12.75%..... 7,906,676
-----------
Total notes payable............................... 13,928,561
Less current installments................................... 6,043,139
-----------
Notes payable, less current installments.................... $ 7,885,422
===========
</TABLE>
NOTE 4. RELATED-PARTY TRANSACTIONS
At March 31, 1999 and 1998, MegsINet had an unsecured note payable to a
stockholder in the amount of zero and $156,158, respectively. The note had an
interest rate of 8.5% and was due upon demand.
F-45
<PAGE> 166
MEGSINET INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS--(CONTINUED)
NOTE 5. CHANGES IN CAPITAL STRUCTURE
During 1999, the Company issued 2,000,000 shares of 1999A Series
Convertible Preferred Stock. Such stock had a liquidation value of $2.50 per
share and was entitled to dividends of $0.25 per share per year. As of March 31,
1999, the Company had not declared the 1999 dividends; therefore, no amount had
been accrued. Unpaid dividends totaled $125,000 at March 31, 1999.
NOTE 6. 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, results of
operations or cash flows of MegsINet.
NOTE 7. MERGER TRANSACTION
In May 1999, all of the outstanding stock of MegsINet was purchased by
CoreComm Limited for total consideration of approximately $16.8 million in cash
and 1.4 million shares of CoreComm Limited common stock. In addition, CoreComm
Limited repaid $2.5 million of MegsINet debt.
F-46
<PAGE> 167
REPORT OF INDEPENDENT AUDITORS
Board of Directors
USN Communications, Inc.
We have audited the accompanying consolidated balance sheet of USN
Communications, Inc. and subsidiaries (the "Company") as of December 31, 1998,
and the related consolidated statements of operations, redeemable preferred
stock, common stockholders' deficit and cash flows for the year then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
an assessment of the accounting principles used and significant estimates made
by management, as well as an evaluation of the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
report.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of USN
Communications, Inc. and subsidiaries at December 31, 1998, and the consolidated
results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As more fully described in Note 1 of
the Notes to Consolidated Financial Statements, on February 18, 1999, the
Company filed voluntary petitions for reorganization under Chapter 11 of title
11 of the United States Code. This matter raises substantial doubt about the
Company's ability to continue as a going concern. The financial statements do
not include any adjustments to reflect the future effects on the recoverability
and classification of assets or the amounts and classification of liabilities
that may result from the outcome of this uncertainty.
ERNST & YOUNG LLP
Chicago, Illinois
April 13, 1999
F-47
<PAGE> 168
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
USN Communications, Inc.
Chicago, Illinois
We have audited the accompanying consolidated balance sheet of USN
Communications, Inc. and subsidiaries (the "Company") as of December 31, 1997,
and the related consolidated statements of operations, redeemable preferred
stock, common stockholders' deficit and cash flows for each of the two years in
the period ended December 31, 1997. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
as of December 31, 1997, and the results of its operations and its cash flows
for each of the two years in the period ended December 31, 1997 in conformity
with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Chicago, Illinois
March 9, 1998
F-48
<PAGE> 169
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1998 1997
--------- ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 3,767 $ 87,454
Marketable equity securities.............................. -- 8,181
Accounts receivable, net.................................. 24,902 23,917
Net assets of discontinued operations held for sale....... 19,250 --
Other current assets...................................... 2,270 1,444
--------- ---------
Total current assets.............................. 50,189 120,996
Property and equipment, net................................. 14,985 16,802
Other assets................................................ 34,162 33,402
--------- ---------
Total assets...................................... $ 99,336 $ 171,200
========= =========
LIABILITIES, REDEEMABLE PREFERRED STOCK
AND COMMON STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable.......................................... $ 53,145 $ 20,485
Accrued expenses and other current liabilities............ 12,981 7,179
17% Senior Secured Note................................... 10,000 --
Capital lease obligations and notes payable............... 607 559
--------- ---------
Total current liabilities......................... 76,733 28,223
14 5/8% Senior Discount Notes............................... 140,504 100,002
14% Senior Discount Notes................................... 13,877 34,580
9% Convertible Subordinated Discount Notes.................. 32,966 30,188
9% Consent Convertible Notes................................ 10,450 --
Accrued interest............................................ 9,385 7,374
Capital lease obligations and notes payable................. 628 556
--------- ---------
Total liabilities................................. 284,543 200,923
Commitments and contingent liabilities
REDEEMABLE PREFERRED STOCK:
9% Cumulative Convertible Pay-In-Kind Preferred Stock:
$1 par value; 30,000 shares authorized at 1997; 10,920
shares outstanding at December 31, 1997............... -- 11
9% Cumulative Convertible Pay-In-Kind Preferred Stock,
Series A: $1 par value; 150,000 shares authorized at
1997; 45,209 shares outstanding at December 31,
1997.................................................. -- 45
Accumulated unpaid dividends.............................. -- 1,516
Additional paid-in-capital................................ -- 55,705
--------- ---------
Total redeemable preferred stock.................. -- 57,277
COMMON STOCKHOLDERS' DEFICIT:
Common stock, $.01 par value, 100,000,000 and 30,000,000
shares authorized at December 31, 1998 and 1997,
respectively; 23,585,741 and 7,282,511 shares issued at
December 31, 1998 and 1997, respectively............... 235 73
Additional paid-in capital................................ 260,227 74,642
Treasury stock, 10,000 shares............................. (1) (1)
Accumulated other comprehensive income.................... -- 8,181
Accumulated deficit....................................... (445,668) (169,895)
--------- ---------
Total common stockholders' deficit................ (185,207) (87,000)
--------- ---------
Total liabilities, redeemable preferred stock, and common
stockholders' deficit..................................... $ 99,336 $ 171,200
========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
F-49
<PAGE> 170
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------------
1998 1997 1996
----------- ---------- ----------
<S> <C> <C> <C>
Net Service Revenue................................... $ 132,503 $ 47,200 $ 9,814
Cost of Services...................................... 117,957 41,272 9,256
----------- ---------- ----------
Gross profit........................................ 14,546 5,928 558
EXPENSES:
Sales and marketing................................. 82,134 62,375 12,612
General and administrative.......................... 110,635 41,538 20,665
Non-recurring charges............................... 28,987 -- --
----------- ---------- ----------
Operating Loss........................................ (207,210) (97,985) (32,719)
OTHER INCOME (EXPENSE):
Interest income..................................... 3,570 3,420 1,376
Interest expense.................................... (30,099) (15,333) (1,797)
Realized gain on sale of marketable securities...... 11,714 -- 8,079
Other income (expense).............................. (311) 6 14
----------- ---------- ----------
Other income (expense) -- net....................... (15,126) (11,907) 7,672
----------- ---------- ----------
Net Loss from Continuing Operations................... (222,336) (109,892) (25,047)
DISCONTINUED OPERATIONS:
Loss from operations of discontinued division....... (4,919) -- --
Provision for estimated loss on disposal of
discontinued operations (including estimated
operating loss of $6.2 million during phase out
period).......................................... (47,939) -- --
----------- ---------- ----------
Total loss from discontinued operations..... (52,858) -- --
----------- ---------- ----------
Net Loss.............................................. $ (275,194) $ (109,892) $ (25,047)
=========== ========== ==========
Preferred Dividends................................... 579 2,211 3,691
=========== ========== ==========
Net Loss to Common Shareholders -- Basic and
Diluted............................................. $ (275,773) $ (112,103) $ (28,738)
=========== ========== ==========
Loss per Common Share -- Basic and Diluted
Net loss from continuing operations................. $ (10.51) $ (15.55) $ (5.65)
Discontinued operations............................. (2.49) -- --
----------- ---------- ----------
Net loss............................................ $ (13.00) $ (15.55) $ (5.65)
=========== ========== ==========
Weighted Average Common Shares Outstanding -- Basic
and Diluted......................................... 21,203,771 7,206,886 5,082,028
=========== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
F-50
<PAGE> 171
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SERIES A
9% PIK 9% PIK SERIES A-2 SERIES A ACCUMULATED ADDITIONAL
PREFERRED PREFERRED PREFERRED PREFERRED UNPAID PAID-IN
STOCK STOCK STOCK STOCK DIVIDENDS CAPITAL TOTAL
--------- --------- ---------- --------- ----------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996............... $ 26 $ 16 $ 3,810 $ 40,544 $ 44,396
Accumulated dividends on Series A and
A-2 Preferred Stock.................. 3,466 3,466
Conversion of Series A and A-2
Preferred to Class A Common Stock.... (26) (16) (7,276) (40,544) (47,862)
Issuance of 10,000 shares of 9% PIK
Preferred Stock...................... $ 10 9,990 10,000
Costs incurred related to issuance of
9% PIK Preferred Stock............... (180) (180)
Accumulated dividends on Series A 9%
PIK Preferred Stock.................. 225 225
---- ---- ---- ---- ------- -------- --------
BALANCE, DECEMBER 31, 1996............. 10 -- -- -- 225 9,810 10,045
---- ---- ---- ---- ------- -------- --------
Issuance of 920 shares of 9% PIK
Preferred Stock as payment of
dividends............................ 1 (920) 919 --
Issuance of 45,209 shares of Series A
9% PIK Preferred Stock............... $ 45 45,164 45,209
Costs incurred related to issuance of
Series A 9% PIK Preferred Stock...... (188) (188)
Accumulated dividends on 9% PIK
Preferred Stock...................... 941 941
Accumulated dividends on Series A 9%
PIK Preferred Stock.................. 1,270 1,270
---- ---- ---- ---- ------- -------- --------
BALANCE, DECEMBER 31, 1997............. 11 45 -- -- 1,516 55,705 57,277
---- ---- ---- ---- ------- -------- --------
Accumulated dividends on 9% PIK
Preferred Stock...................... 114 114
Accumulated dividends on Series A 9%
PIK Preferred Stock.................. 465 465
Conversion of 9% PIK and Series A 9%
PIK Preferred Stock to Common
Stock................................ (11) (45) (2,095) (55,705) (57,856)
---- ---- ---- ---- ------- -------- --------
BALANCE, DECEMBER 31, 1998............. $ -- $ -- $ -- $ -- $ -- $ -- $ --
==== ==== ==== ==== ======= ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-51
<PAGE> 172
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' DEFICIT
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL COMMON STOCK OTHER
COMMON PAID-IN HELD IN COMPREHENSIVE ACCUMULATED
STOCK CAPITAL TREASURY INCOME DEFICIT TOTAL
------ ---------- ------------ ------------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996.................... $ 31 $ 255 $ (29,054) $ (28,768)
Conversion of Series A and A-2 Preferred
Stock to Class A Common Stock............. 27 47,835 47,862
Issuance of 50,000 shares of common stock... 1 5 6
Compensation grants of 220,000 shares of
common stock.............................. 2 31 33
Repricing of common stock................... 11 (11)
Repurchase of 10,000 shares of common
stock..................................... $(1) (1)
Issuance of stock warrants.................. 6,000 6,000
Accumulated unpaid preferred dividends...... (3,691) (3,691)
Net loss.................................... (25,047) (25,047)
---- -------- --- -------- --------- ---------
BALANCE, DECEMBER 31, 1996.................. 72 54,115 (1) -- (57,791) (3,606)
---- -------- --- -------- --------- ---------
Issuance of 97,251 shares of common stock... 1 531 532
Compensation expense on stock options....... 644 644
Issuance of stock warrants.................. 19,352 19,352
Accumulated dividends on 9% PIK Preferred
Stock..................................... (941) (941)
Accumulated dividends on Series A 9% PIK
Preferred Stock........................... (1,271) (1,271)
Comprehensive income (loss):
Net loss.................................. (109,892) (109,892)
Unrealized gain of available-for-sale
securities.............................. $ 8,181 8,181
Comprehensive loss........................ (101,711)
---- -------- --- -------- --------- ---------
BALANCE, DECEMBER 31, 1997.................. 73 74,642 (1) 8,181 (169,895) (87,000)
---- -------- --- -------- --------- ---------
Issuance of 8,628,861 shares of common
stock..................................... 86 137,984 138,070
Costs incurred related to issuance of
stock..................................... (10,764) (10,764)
Accumulated dividends on 9% PIK Preferred
Stock..................................... (114) (114)
Accumulated dividends on Series A 9% PIK
Preferred Stock........................... (465) (465)
Conversion of 9% PIK and Series A 9% PIK to
6,130,175 shares of common stock.......... 61 57,795 57,856
Issuance of 1,544,194 shares of common stock
upon exercise of warrants and options..... 15 16 31
Compensation expense on stock options....... 554 554
Comprehensive income (loss):
Net loss.................................. (275,194) (275,194)
Unrealized gain on available-for-sale
securities.............................. 3,533 3,533
Realized gain on sale of marketable
securities.............................. (11,714) (11,714)
---------
Comprehensive loss........................ (283,375)
---- -------- --- -------- --------- ---------
BALANCE, DECEMBER 31, 1998.................. $235 $260,227 $(1) $ -- $(445,668) $(185,207)
==== ======== === ======== ========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
F-52
<PAGE> 173
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------
1998 1997 1996
--------- --------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................... $(275,194) $(109,892) $(25,047)
Adjustments to reconcile net loss to net cash flows from
operating activities:
Depreciation.............................................. 9,317 2,834 558
Amortization.............................................. 252 738 1,771
Non-cash interest on debt obligations..................... 29,726 15,179 1,654
Provision for losses on accounts receivable............... 33,964 4,314 30
Stock compensation award expense.......................... 554 645 33
Gain on sale of marketable securities..................... (11,714) -- --
(Gain)loss on disposal of property and equipment.......... 298 -- (8,079)
Non-recurring charges..................................... 25,980 -- --
Loss on discontinued operations........................... 52,858 -- --
Changes in:
Accounts receivable.................................... (34,949) (25,227) (1,850)
Other assets........................................... (492) (1,179) (226)
Accounts payable....................................... 32,597 12,577 4,820
Accrued expenses....................................... 2,643 4,002 2,425
--------- --------- --------
Net cash flows from operating activities.......... (134,160) (96,009) (23,911)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment.......................... (29,910) (15,200) (2,259)
Proceeds from sale of marketable securities................. 11,714 -- --
Purchase of subsidiary, net of cash acquired................ (72,108) -- --
Deposits.................................................... (6,280) (959) (495)
Proceeds from sale of property and equipment................ 441 -- --
Proceeds from the sale of assets............................ -- -- 9,533
Purchase of licensing agreement............................. -- (900) --
--------- --------- --------
Net cash flows from investing activities.......... (96,143) (17,059) 6,779
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock.................................... 138,101 532 6
Issuance of preferred stock................................. -- 45,209 10,000
Costs incurred related to issuance of stock................. (10,764) (485) (180)
Repurchase of common stock.................................. -- -- (1)
Proceeds from Consent Convertible Notes..................... 10,000 -- 27,644
Proceeds from Senior Notes.................................. 10,000 100,002 30,203
Debt acquisition costs...................................... -- (4,715) (2,920)
Repayment of capital lease obligations and notes payable.... (721) (839) (568)
--------- --------- --------
Net cash flows from financing activities.......... 146,616 139,704 64,184
--------- --------- --------
Net (Decrease) Increase in Cash............................. (83,687) 26,636 47,052
Cash and Cash Equivalents -- Beginning of period............ 87,454 60,818 13,766
--------- --------- --------
Cash and Cash Equivalents -- End of period.................. $ 3,767 $ 87,454 $ 60,818
========= ========= ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Conversion of preferred stock to common stock............... $ 57,856 -- --
========= ========= ========
Declared dividends.......................................... $ 579 -- --
========= ========= ========
Capital lease obligations incurred.......................... $ 841 $ 928 $ 592
========= ========= ========
Issuance of stock warrants.................................. -- $ 19,352 $ 6,000
========= ========= ========
Dividends paid in kind...................................... -- $ 920 --
========= ========= ========
Cash paid for interest...................................... $ 173 $ 138 $ 32
========= ========= ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-53
<PAGE> 174
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUBSEQUENT EVENT
On February 18, 1999, (the "Petition Date") USN Communications, Inc. (the
"Company") and certain of its subsidiaries filed voluntary petitions for
reorganization (the "Filing") under Chapter 11 ("Chapter 11") of Title 11 of the
United States Code ("Bankruptcy Code") in the United States Bankruptcy Court for
the District of Delaware (the "Bankruptcy Court"). In Chapter 11, the Company
will continue to manage its affairs and operate its business as a debtor in
possession while it develops a plan of reorganization. As a debtor in possession
in Chapter 11, the Company may not engage in transactions outside of the
ordinary course of business without approval, after notice and hearing, of the
Bankruptcy Court.
As a result of the Filing, the Company is currently in default under all of
its debt agreements in effect prior to the Petition Date. As a result, all
unpaid principal of, and accrued prepetition interest on, such debt became
immediately due and payable. The payment of such debt and accrued but unpaid
prepetition interest is prohibited during the pendency of the Company's Chapter
11 case without the approval of the Bankruptcy Court. The Bankruptcy Court has
authorized the payment, by the Company, of the Company's $15 million aggregate
principal amount of prepetition senior secured notes with a $20 million
debtor-in-possession financing facility.
In accordance with the Bankruptcy Code, the Company can seek court approval
for the rejection of executory contracts, including real property leases. Any
such rejection may give rise to a prepetition unsecured claim for breach of
contract. In connection with the Company's Chapter 11 case, a review is being
undertaken of all the Company's obligations under its executory contracts,
including real property leases.
On April 2, 1999, the Bankruptcy Court authorized the Company to (1) sell
substantially all of the Company's assets, excluding USN Wireless, Inc., to
CoreComm Limited for approximately $27 million in cash, warrants to purchase
350,000 shares of CoreComm Limited common stock and a contingent payment based
on future operating results that caps the total consideration at $85 million,
and (2) sell the capital stock of USN Wireless, Inc. to Unified Signal
Corporation.
The accompanying consolidated financial statements have been prepared on a
going concern basis of accounting and do not reflect any adjustments that might
result should the Company be unable to continue as a going concern. The
Company's recurring losses from operations and the related Chapter 11 filing
raise substantial doubt about its ability to continue as a going concern.
Because the Company has agreed to sell assets and as a result of the
Chapter 11 case, the Company may liquidate or settle liabilities for amounts
other than those reflected in the financial statements. Further, a plan of
reorganization could materially change the amounts currently recorded in the
financial statements. The financial statements do not give effect to any
adjustments to the carrying value of assets, or amounts and classification of
liabilities that might be necessary as a consequence of these matters.
2. ORGANIZATION
USN Communications, Inc. ("USN"), was incorporated under the laws of the
State of Delaware on April 20, 1994 and completed an initial public offering in
February 1998. USN holds controlling investments in several other companies, of
which the active companies include: US Network Corporation, USN Communications
Northeast, Inc. ("USNCN"), USN Communications Midwest, Inc and USN Solutions,
Inc. Its continuing subsidiaries operate in a
F-54
<PAGE> 175
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
single business segment, primarily as a reseller of a broad range of
telecommunication services in various cities in the Midwest and the Northeast
regions of the United States.
3. SUMMARY OF ACCOUNTING POLICIES
A summary of the significant accounting policies applied in the preparation
of the accompanying consolidated financial statements follows:
Use of Estimates--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements, and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from
those estimates.
Principles of Consolidation--The accompanying consolidated financial
statements include the accounts of USN Communications, Inc. and its
subsidiaries. Significant intercompany balances and transactions have been
eliminated in consolidation.
Revenue Recognition--The Company recognizes revenues in the period in which
telephone services are provided. For the services provided in which the
Company has operated as a commission agent only, commission revenues are
recorded at the net commissions earned.
Cash and Cash Equivalents--Cash and cash equivalents are defined as cash in
banks, time deposits and highly liquid short-term investments with initial
maturities from dates of acquisition of three months or less.
Fair Value of Financial Instruments--The carrying values of financial
instruments included in current assets and liabilities approximate fair
values due to the short-term maturities of these instruments. At December
31, 1998 and 1997, the fair value of long-term liabilities was
approximately $77.5 and $186.3 million, respectively.
Marketable Equity Securities--All marketable securities are classified as
available-for-sale and are available to support current operations or to
take advantage of other investment opportunities. These securities are
stated at estimated fair value based upon market quotes. Unrealized gains
and losses are computed on the basis of specific identification and are
included in Common Stockholders' Deficit as a component of Comprehensive
Income.
Concentration of Credit Risk--Financial instruments which potentially
subject the Company to concentration of credit risk consist principally of
trade receivables. The Company's customers are concentrated in two specific
geographic regions, the Midwest and the Northeast. No single customer
accounted for a significant amount of the Company's sales in 1998, 1997, or
1996 and there were no significant accounts receivable from a single
customer at December 31, 1998 or 1997. The Company reviews a customer's
credit history before extending credit. The Company establishes an
allowance for doubtful accounts based upon factors surrounding the credit
risk of specific customers, historical trends and other information.
Property and Equipment--Purchases of property and equipment are carried at
cost. Depreciation is provided on the straight-line basis. Furniture and
equipment are depreciated over five to ten years. Computer hardware and
software are depreciated over three to five years. Leasehold improvements
and assets leased under capital leases are amortized over the shorter of
the related lease term or the estimated useful life of the asset.
Intangible Assets and Deferred Charges--Debt acquisition costs are
amortized over the life of the related debt. The value of the warrants
issued with the Senior Notes is amortized
F-55
<PAGE> 176
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
over the life of those notes. The cost of a licensing agreement for billing
services is being amortized over three years.
Impairment of Long-Lived Assets--Management reviews long-lived assets and
the related intangible assets for impairment of value whenever events or
changes in circumstances indicate the carrying amount of such assets may
not be recoverable. If the Company determines it is unable to recover the
carrying value of the assets, the assets will be written down using an
appropriate method. During 1998, management determined that its property
and equipment was impaired based on undiscounted future cash flows.
Accordingly, the Company adjusted property and equipment to fair value
resulting in an impairment loss of approximately $9.2 million, which has
been included in Non-recurring Charges.
Stock-Based Compensation--During 1996, the Company implemented Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). In accordance with the provisions of SFAS
No. 123, the Company has elected to recognize compensation under the
"intrinsic value" method prescribed by Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees," which requires the
proforma disclosure of net income and earnings per share as if the fair
value method had been applied.
Earnings per Share Calculations--On December 31, 1997, the Company adopted
Statement of Financial Accounting Standards No. 128, "Earnings Per Share",
which requires the disclosure of two earnings per common share
computations; basic and diluted. Earnings per common share ("EPS") is
computed by dividing net income or loss by the weighted average number of
shares of common stock (basic) plus common stock equivalents (diluted)
outstanding during the year. As all of the Company's warrants and options
are antidilutive, they have been excluded from the calculation of diluted
EPS. Accordingly, basic EPS is equal to diluted EPS.
Comprehensive Income--On January 1, 1998, the Company adopted Statement of
Financial Accounting Standards No. 130 "Reporting Comprehensive Income",
which establishes standards for reporting and display of comprehensive
income and its components. Other comprehensive income consists solely of
unrealized gains on available-for-sale securities. The Company has chosen
to disclose comprehensive income in the Statements of Stockholders' Equity
for all periods presented.
Business Segments--On January 1, 1998, the Company adopted SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information",
which requires reporting segment information consistent with the way
management internally utilizes information to assess performance and
allocate resources. The Company's continuing operations consist of one
business segment: competitive local exchange telecommunication services.
Reclassifications--Certain prior year amounts have been reclassified to
conform to the current year presentation.
4. ACQUISITION AND DISCONTINUED OPERATIONS
On February 20, 1998, the Company used a portion of the net proceeds from
its initial public offering to acquire all of the outstanding capital stock of
Hatten Communications Holding Company, Inc., a Connecticut corporation ("Hatten
Communications" now known as USN Wireless, Inc.), pursuant to a Stock Purchase
Agreement dated January 7, 1998, for approximately $69.1 million, net of cash
acquired, including the repayment of approximately
F-56
<PAGE> 177
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$14.0 million of existing indebtedness and the payment of certain fees and
expenses. The Company made additional investments of $3 million in Hatten
Communications during 1998.
In November 1998, the Company's Board of Directors approved the hiring of
an investment banking firm to solicit bids for the sale of USN Wireless, Inc.
The USN Wireless, Inc. business has been classified as discontinued operations
in the accompanying financial statements. On April 2, 1999, the Bankruptcy Court
approved the asset sale of USN Wireless, Inc. for approximately $19.25 million,
net of expected disposition costs.
The net assets and estimated loss on disposal of discontinued operations at
December 31, 1998 are summarized as follows (in thousands):
<TABLE>
<S> <C>
Current assets.............................................. $ 9,558
Fixed assets................................................ 1,634
Goodwill and other intangibles, net of amortization......... 61,484
Current liabilities......................................... (11,682)
Provision for estimated loss on sale of discontinued
operations................................................ (41,744)
--------
Net assets of discontinued operations....................... $ 19,250
========
Estimated loss on sale of discontinued operations........... $ 41,744
Operating losses from measurement date to December 31,
1998...................................................... 2,195
Estimated operating losses from January 1, 1999 to
anticipated disposal date................................. 4,000
--------
Estimated loss on disposal of discontinued operations....... $ 47,939
========
</TABLE>
The loss from discontinued operations through the measurement date is
summarized as follows (in thousands):
<TABLE>
<S> <C>
Revenues.................................................... $33,054
Cost of service............................................. 21,880
Selling, general and administrative......................... 16,077
-------
Operating loss.............................................. (4,903)
Other....................................................... (16)
-------
Net loss.................................................... $(4,919)
=======
</TABLE>
5. RESTRUCTURING
During 1998, the Company completed its restructuring plan to reduce its
headcount by 910 employees. The headcount reduction represented approximately
56% of its workforce. As a result, the Company eliminated its customer
acquisition sales force and consolidated its operations into 11 main facilities
located in cities serving over 80% of the Company's current customers. In
addition, the Company discontinued its telemarketing efforts. In connection with
these headcount reduction programs, a charge of approximately $19.8 million has
been recorded in Non-recurring Charges, comprised of $2.8 million for severance
and $17.0 million for facility closing costs and related fixed asset disposals
and reserves. A restructuring reserve of approximately $3.2 million remains at
December 31, 1998 for costs primarily associated with lease termination.
F-57
<PAGE> 178
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. ACCOUNTS RECEIVABLE
Accounts receivable at December 31 consists of the following (in
thousands):
<TABLE>
<CAPTION>
1998 1997
-------- -------
<S> <C> <C>
Billed................................................ $ 29,369 $10,790
Unbilled.............................................. 13,735 17,664
-------- -------
Gross accounts receivable............................. 43,104 28,454
Allowance for doubtful accounts....................... (18,202) (4,537)
-------- -------
Net accounts receivable............................... $ 24,902 $23,917
======== =======
</TABLE>
Unbilled accounts receivable comprises access charges, features and usage
for revenue earned but not yet billed to customers. A majority of the unbilled
accounts receivable at December 31, 1998 and 1997 were billed within 30 and 90
days after year end, respectively.
7. PROPERTY AND EQUIPMENT
Property and equipment at December 31 consist of the following (in
thousands):
<TABLE>
<CAPTION>
1998 1997
-------- -------
<S> <C> <C>
Furniture and equipment............................... $ 9,365 $ 5,343
Computer hardware..................................... 13,172 6,710
Computer software..................................... 8,848 6,311
Leasehold improvements................................ 5,378 2,098
-------- -------
36,763 20,462
Less accumulated depreciation......................... (12,587) (3,660)
Less impairment reserve............................... (9,191) --
-------- -------
Total....................................... $ 14,985 $16,802
======== =======
</TABLE>
8. OTHER ASSETS
Other assets at December 31 consist of the following (in thousands):
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Debt acquisition costs (net of accumulated
amortization:
1998 -- $7,539; 1997 -- $2,851)...................... $25,448 $30,136
Deposits............................................... 8,283 2,003
Licensing agreement (net of accumulated amortization:
$1998--$178; 1997--$104)............................. 222 796
Other.................................................. 209 467
------- -------
Total........................................ $34,162 $33,402
======= =======
</TABLE>
9. ACCRUED EXPENSES
Accrued expenses at December 31 consist of the following (in thousands):
<TABLE>
<CAPTION>
1998 1997
------- ------
<S> <C> <C>
Excise taxes............................................ $ 3,340 $ 111
Restructuring reserves.................................. 3,159 --
</TABLE>
F-58
<PAGE> 179
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1998 1997
------- ------
<S> <C> <C>
Payroll and benefits.................................... 3,151 5,534
Professional services................................... 1,524 946
Other................................................... 1,807 588
------- ------
Total......................................... $12,981 $7,179
======= ======
</TABLE>
10. OPERATING LEASES
The Company leases certain office space and equipment under operating
leases. Future minimum lease commitments under noncancelable operating leases as
of December 31, 1998 are approximately as follows (amounts in thousands):
<TABLE>
<S> <C>
1999........................................................ $ 9,106
2000........................................................ 8,645
2001........................................................ 7,622
2002........................................................ 6,140
2003........................................................ 5,282
Thereafter.................................................. 6,240
-------
Total............................................. $43,035
=======
</TABLE>
Rent expense for the years ended December 31, 1998, 1997 and 1996 was
approximately $9.5 million, $3.9 million and $1.0 million, respectively.
11. PRIVATE PLACEMENT OFFERINGS
14% Senior Notes and 9% Convertible Notes--In September 1996, the Company
received approximately $55 million in cash, net of commissions paid, in exchange
for 48,500 units consisting of $48.5 million aggregate principal amount at
maturity of 14% Senior Discount Notes ("14% Senior Notes") due 2003 and warrants
to purchase 790,780 shares of Common Stock, and 36,000 units consisting of $36
million aggregate principal amount at maturity of 9% Convertible Subordinated
Notes ("Convertible Notes") due 2004.
The 14% Senior Notes were sold at a unit price, before commissions, of
$622.75 per $1,000 face amount. These notes accrete interest at an annual rate
of 14% from September 30, 1996 to March 31, 2000. Thereafter, the notes bear
interest at an annual rate of 14%, semiannually in arrears in cash.
The Convertible Notes were sold at a unit price, before commissions, of
$767.90 per $1,000 face amount and are convertible into Common Stock at a
conversion price of $10.436 per share. These notes will accrete interest at an
annual rate of 9% from September 30, 1996 to September 30, 1999. Thereafter, the
notes will bear interest at an annual rate of 9%, and will be paid semiannually
in arrears in cash.
14 5/8% Senior Notes--In August 1997, the Company received approximately
$96.5 million in cash, net of commissions paid, in exchange for 152,725 units
consisting of $152.7 million aggregate principal amount at maturity of 14 5/8%
Senior Discount Notes due 2004 ("14 5/8% Senior Notes") and warrants to purchase
2,053,900 shares of Common Stock. In connection with this offering, the Company
paid a consent fee to the holders of the outstanding 14% Senior Notes and
Convertible Notes consisting of warrants to purchase 145,160 shares of Common
Stock at an exercise price of $.01 per share. The Company also granted those
holders
F-59
<PAGE> 180
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
an option, which was exercised in October 1997, to purchase up to $10.0 million
in aggregate proceeds to the Company of convertible notes of the Company
("Consent Convertible Notes") on terms substantially similar to the existing
Convertible Notes. Additionally, the Company granted to holders of the 14%
Senior Notes an option, for a specified period of time, to exchange all of the
14% Senior Notes for 14 5/8% Senior Notes having an accreted value equal to the
accreted value of such 14% Senior Notes at the time of such exchange. A portion
of this option was exercised in March 1998.
The 14 5/8% Senior Notes were sold at a unit price, before commissions, of
$654.78 per $1,000 face amount. These convertible notes accrete interest at an
annual rate of 14 5/8% from August 18, 1997 to August 15, 2000. Thereafter, the
convertible notes bear interest at an annual rate of 14 5/8% payable
semiannually in arrears in cash.
In March 1998, the holders of the 14% Senior Notes exchanged $31.5 million
aggregate principal amount at maturity of the Company's 14% Senior Notes for
$33.6 million aggregate principal amount at maturity of the Company's 14 5/8%
Senior Discount Notes due 2004 (the "14 5/8% Senior Notes").
9% Consent Convertible Notes--In August 1997, in connection with the 1997
private placement offering, the Company issued an option to the holders of the
14% Senior Notes to purchase $13.0 million aggregate principal amount at
maturity of the Company's 9% Consent Convertible Subordinated Discount Notes due
2006 ("Consent Notes") for an aggregate purchase price of $10 million and
convertible into common stock at a conversion price of $10.121 per share based
on accreted value at the time of conversion. Pursuant to the option, which was
exercised by the holders in October 1997, the Consent Notes were sold in January
1998 at a price of $767.90 per $1,000 face amount. These convertible notes
accrete interest at an annual rate of 9%, compounded semiannually, until January
13, 2001. Thereafter interest will bear interest at an annual rate of 9% payable
semiannually in arrears in cash.
17% Senior Secured Note--In November 18, 1998, the Company received
approximately $10 million in cash in exchange for the issuance and sale of a $10
million 17% Senior Secured Note ("17% Note") due January 15, 1999. Interest is
payable upon the maturity of the 17% Note. The 17% Note is secured by a first
priority lien on substantially all assets of the Company, including the
Company's accounts receivable and the stock of the Company's directly owned
subsidiaries.
On January 20, 1999, the 17% Note was cancelled in exchange for a
replacement $10.0 million 17% Senior Secured Note due February 15, 1999, and the
Company received an additional $2.5 million in cash in exchange for a new $2.5
million 17% Senior Secured Note due February 15, 1999 (collectively the "New 17%
Notes"). Interest on the New 17% Notes is payable in cash upon maturity. As was
the case with the 17% Note, the New 17% Notes are secured by a first priority
lien on substantially all assets of the Company, including the Company's
accounts receivable and the stock of the Company's directly owned subsidiaries.
On February 8, 1999, the Company received an additional $2.5 million in
cash under the provisions of the New 17% Notes, bringing the total amount due
under the New 17% Notes to $15 million. Also on February 8, 1999, the maturity
date for the New 17% Notes was changed from February 15, 1999 to February 16,
1999.
On February 23, 1999, the New 17% Notes, including accrued interest, were
exchanged for a replacement $16.3 million 14% Class B Senior Secured Note due
June 30, 1999 (the "Class B Notes"). On February 25, 1999, the Company received
$2.0 million in cash in exchange for the issuance and sale of a $2 million 14%
Class A Senior Secured Notes due
F-60
<PAGE> 181
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
June 30, 1999 (the "Class A Notes"). Interest on the Class A Notes and Class B
Notes is payable upon maturity. The Class A Notes and Class B Notes are secured
by a first priority lien on substantially all assets of the Company, including
the Company's accounts receivable and the stock of the Company's directly owned
subsidiaries.
12. REDEEMABLE PREFERRED STOCK
In August 1997, the Board of Directors authorized the issuance of up to
150,000 shares of $1 par value preferred stock designated as 9% Cumulative
Convertible Pay-In-Kind Preferred Stock, Series A ("Series A 9% Preferred
Stock"). In connection with the private placement offering in August 1997,
described in Note 11, the Company issued 30,209 shares of its Series A 9%
Preferred Stock to certain of its existing stockholders and their affiliates for
an aggregate purchase price of $30.2 million.
In October 1997, the Company issued an additional 15,000 shares of its
Series A 9% Preferred Stock for an aggregate purchase price of $15.0 million.
In February 1998, in conjunction with the initial public offering, all of
the Company's outstanding 9% Preferred Stock and Series A Preferred Stock,
including dividends accrued through the conversion date, were converted to
6,130,175 shares of Common Stock.
13. COMMON STOCK
In February 1998, the Company issued and sold 8,600,000 shares of Common
Stock (of which 600,000 shares were sold pursuant to the exercise of the
underwriters' over-allotment option) in its initial public offering for net
proceeds of approximately $127.0 million. In March 1998, the Company issued and
sold 28,861 additional shares pursuant to the exercise of the underwriters'
over-allotment option for net proceeds of $0.4 million.
In August 1998, the Company adopted a Stockholder Rights Plan pursuant to
which rights were distributed as a dividend at a rate of one Right for each
share of Common Stock held by stockholders of record on August 24, 1998. The
Rights are exercisable 10 days after certain events involving the acquisition of
15% or more of the Company's outstanding common stock or the commencement of a
tender or exchange offer for at least 15% of the common stock, subject to
certain exceptions. Upon the occurrence of such an event, each Right, unless
redeemed by the Company, entitles the holder to receive, upon exercise and
payment of the exercise price, common stock equal to twice the exercise price of
the Right. The initial exercise price of a Right is $50, subject to adjustment.
There are 1,000,000 shares of preferred stock reserved for issuance upon
exercise of the Rights.
14. STOCK WARRANTS
Pursuant to the 14% Senior Notes discussed in Note 11, the Company has
48,450 warrants outstanding at December 31, 1998. Each warrant can be exercised
for 12.69 shares of the Company's Common Stock at an exercise price of $0.01 per
share, expiring September 30, 2003. An additional 14,516 warrants outstanding at
December 31, 1998 can be exercised for 10 shares of the Company's Common Stock
at an exercise price of $0.01 per share, expiring August 15, 2004.
Pursuant to the 14 5/8% Senior Notes discussed in Note 11, the Company has
472,440 warrants outstanding at December 31, 1998. Each warrant can be exercised
for 1.34 shares of the Company's Common Stock at an exercise price of $0.01 per
share. The warrants expire August 15, 2004.
F-61
<PAGE> 182
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. STOCK OPTION PLAN
The Company has granted options to acquire shares of Common Stock to
certain officers and other employees under the 1994 Stock Option Plan. These
options generally become exercisable at a rate of 25% every six months over a
period of two years after the date of grant, although with respect to certain
grants no vesting occurs until twelve months after the grant date.
In connection with the financing described in Note 11 and the issuance of
the 9% Preferred Stock described in Note 12, the Company granted options to
purchase 319,610 shares of Common Stock at an exercise price of $0.15 per share.
These options were not issued under the 1994 Stock Option Plan, but rather, were
issued pursuant to separate stock option agreements between the Company and the
holders. Upon the conversion of the 9% Preferred Stock to Common Stock in 1998,
253,240 options became exercisable.
In 1998 and 1997, the Board of Directors authorized the grant of options to
purchase 1,248,900 and 993,400 shares, respectively, of Common Stock to
substantially all non-executive officer employees of the Company and 807,500 and
1,137,000 shares, respectively, of Common Stock to the Company's executive
officers and directors. These options have an exercise price ranging from $3.56
to $11.56. Options granted to directors vested 100% on the grant date. One third
of all other options vested on February 9, 1998 or a year after the employee's
hire date, whichever is later, with an additional one-third of the options
vesting on each of the two anniversaries following the initial vesting date.
Stock option transactions are summarized as follows:
<TABLE>
<CAPTION>
PRICE PRICE PRICE
PER PER PER
1998 SHARE 1997 SHARE 1996 SHARE
---------- ------------- --------- ------------ --------- ------------
<S> <C> <C> <C> <C> <C> <C>
>Outstanding at January
1.................... 3,245,540 $ 0.11 - 8.80 1,108,990 $0.11 - 8.80 190,500 $ 0.11
Granted................ 1,056,400 3.56 - 11.56 2,355,400 0.15 - 8.80 1,033,240 0.11 - 8.80
Exercised.............. (115,970) 0.15 (37,250) 0.11 (50,000) 0.11
Canceled............... (1,753,650) 0.15 - 8.80 (181,600) 8.80 (64,750) 0.11
---------- ------------- --------- ------------ --------- ------------
Outstanding at December
31................... 2,432,320 0.11 - 11.56 3,245,540 0.11 - 8.80 1,108,990 0.11 - 8.80
---------- ------------- --------- ------------ --------- ------------
Options exercisable at
December 31.......... 1,452,288 0.11 - 11.56 557,190 0.11 - 8.80 106,620 0.11 - 8.80
========== ============= ========= ============ ========= ============
</TABLE>
The following table summarizes information about options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
WTD.
AVG. WTD. WTD.
RANGE OF REMAINING AVG. AVG.
EXERCISE NUMBER LIFE OF EXERCISE NUMBER EXERCISE
PRICE OUTSTANDING CONTRACT PRICE EXERCISABLE PRICE
- -------- ----------- --------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.11 to $4.80 819,520 7.64 yrs $ 0.15 809,520 $ 0.15
$4.81 to $8.80 1,575,300 5.96 yrs 8.78 605,268 8.80
$8.80 to $11.56 37,500 6.41 yrs 11.56 37,500 11.56
--------- ---------
2,432,320 1,452,288
========= =========
</TABLE>
F-62
<PAGE> 183
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
For proforma information regarding net loss and loss per share, the fair
value for the options awarded in 1998 and 1997 was estimated as of the date of
the grant using the minimum value valuation model with the following weighted
average assumptions for 1998 and 1997, respectively: risk-free interest rates of
5.34% and 6.15%; dividend yields of 0%; and an expected life of the option of
ten years. The weighted average fair value per share of options granted in 1998
and 1997 was $2.12 and $3.64, respectively.
For purposes of proforma disclosures, the estimated fair value of the
options is amortized over the options' vesting period. Therefore, in the year of
adoption and subsequently affected years, the effect of applying SFAS No. 123
for providing proforma loss and loss per share are not likely to be
representative of the effects on reported income or loss in future years.
Had compensation cost for these plans been determined based on the fair
value at the grant dates for awards as prescribed by SFAS No. 123, proforma net
loss to common shareholders (in thousands) and loss per common share for the
years ended December 31, 1998 and 1997 would have been:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Proforma net loss to common stockholders........... $(278,572) $(114,609)
Proforma net loss per common share -- basic and
diluted.......................................... $ (13.14) $ (15.90)
</TABLE>
The effect on the Company's reported net loss, on a proforma basis, was not
material for 1996.
16. EMPLOYEE BENEFIT PLAN
On January 1, 1995, the Company adopted a qualified 401(k) plan covering
all eligible employees in which the Company contributions are discretionary.
Employees are permitted to make annual contributions through salary deductions
up to 15% of their annual salary. The plan can be amended or terminated at any
time by the Board of Directors. The Company made contributions to the plan of
approximately $414,000 in 1998 and made no contributions to the plan in 1997 or
1996.
17. INCOME TAXES
The Company incurred net losses of $275.2 million, $109.9 million and $25.0
in 1998, 1997 and 1996, respectively. Accordingly, no provision for current
federal or state income taxes has been made to the financial statements.
The Company's deferred tax asset components at December 31 comprise (in
thousands):
<TABLE>
<CAPTION>
1998 1997
--------- --------
<S> <C> <C>
Net operating loss carry-forwards................... $ 129,947 $ 57,977
Accrued liabilities and asset valuation reserves.... 15,349 1,715
Amortization of intangibles......................... 74 146
Subtotal............................................ 145,370 59,838
Valuation allowance................................. (145,370) (59,838)
--------- --------
Total..................................... $ -- $ --
========= ========
</TABLE>
As of December 31, 1998 and 1997, the Company had not recognized deferred
income tax assets related to deductible temporary differences and cumulative net
operating losses. The ability of the Company to fully realize deferred tax
assets in future years is contingent upon its
F-63
<PAGE> 184
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
success in generating sufficient levels of taxable income before the statutory
expiration periods for utilizing such net operating losses lapse. After an
assessment of all available evidence, including historical and projected
operating trends, the Company was unable to conclude that realization of such
deferred tax assets in the near future was more likely than not. Accordingly, a
valuation allowance was recorded to offset the full amount of such assets.
At December 31, 1998, the Company had net operating loss carry-forwards for
income tax purposes of approximately $351.2 million. The ability of the Company
or the Company's subsidiaries, as the case may be, to utilize their net
operating loss carry-forwards to offset future taxable income may be subject to
certain limitations contained in the Internal Revenue Code of 1986, as amended
(the "Code"). These operating losses begin to expire in 2009 for Federal income
tax purposes. Of the net operating loss carry-forwards remaining at December 31,
1998, $26.3 million can be applied only against future taxable income of the
Company's subsidiary, USNCN.
18. COMMITMENTS
In 1995 and 1996, the Company entered into agreements with two
non-affiliated telecommunications companies ("TelCos") to allow the Company to
resell the TelCos' local telephone service in various regional markets. The
agreements have terms of up to ten years and contain minimum purchase
commitments of local access lines, ranging from zero to 150,000 lines. These
commitments are measured by the number of lines in place on the last day of each
12-month period. The agreements allow for ramp-up periods and carryover pools
for shortfalls or excesses before any commitment levels are required to be met.
So long as the Company maintains cumulative net shortfalls lower than
established caps, no payments will be due to the TelCos other than for normal
usage, access and related charges. Even if no lines were sold by the Company,
the earliest required payment for any shortfall amount is in 2000.
In July 1996, the Company entered into an agreement with a third
telecommunications company to allow the Company to resell long-distance
telephone service. The agreement is for a term of 33 months and contains an
annual purchase commitment of $12 million, with a minimum monthly commitment of
$600,000 to qualify for the contract rates. This agreement was amended in 1998
to extend the term to 35 months, increase the revenue commitment for the last 12
months to $24 million and increase the minimum monthly commitment to $1.2
million to qualify for the contract rates. The agreement allows for a ramp-up
period before commitment levels are required to be met.
In 1994, USNCN executed an exclusive agreement with a non-affiliated
telecommunications company ("TelCo One"), whereby TelCo One allows USNCN to
establish a local private network on its infrastructure in which to provide
service to customers. Under this agreement, TelCo One provides network
maintenance and access to telephone switches. The initial term of the agreement
expires in 2004.
Although no measurement date for the purchase commitments has been reached,
the Company would not have met the minimum purchase levels at December 31, 1998.
No provisions have been made for potential losses which may be incurred due to
the Company's inability to fulfill any purchase commitments.
19. LEGAL MATTERS
The Company is defendant in a class action lawsuit alleging the violation
of state and federal securities laws in connection with the Company's initial
public offering and subsequent
F-64
<PAGE> 185
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
events. In addition, the Company is a defendant in various lawsuits arising out
of the ordinary course of business, as well as various collection lawsuits in
the period preceding the Filing. All of these lawsuits have been stayed as a
result of applicable provisions of the Bankruptcy Code by virtue of the Filing.
20. YEAR 2000 (UNAUDITED)
Although the Company is not aware of any material operational issues or
costs associated with preparing its internal systems for the Year 2000, there
can be no assurance that the Company will not experience serious unanticipated
negative consequences and/or material costs caused by undetected errors or
defects in the technology used in its internal systems, which include third
party software and hardware technology.
F-65
<PAGE> 186
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
DEBTOR-IN-POSSESSION
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31,
1999
---------
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 6,887
Accounts receivable, net.................................. 15,905
Net assets of discontinued operations held for sale....... 19,259
Other current assets...................................... 2,163
---------
Total current assets.............................. 44,214
Property and equipment, net................................. 10,640
Other assets................................................ 8,606
---------
Total assets...................................... $ 63,460
=========
LIABILITIES AND COMMON STOCKHOLDERS' DEFICIT
LIABILITIES NOT SUBJECT TO COMPROMISE
CURRENT LIABILITIES:
Accounts payable.......................................... $ 4,261
Accrued expenses and other current liabilities............ 1,257
Senior Secured Note....................................... 18,330
---------
Total current liabilities......................... 23,848
LIABILITIES SUBJECT TO COMPROMISE
Accounts payable and accrued expenses..................... 62,275
Capital lease obligations and notes payable............... 211,857
---------
Total liabilities subject to compromise........... 274,132
COMMON STOCKHOLDERS' DEFICIT:
Common stock, $.01 par value, 100,000,000 shares
authorized, 23,585,741 shares issued................... 235
Additional paid-in capital................................ 260,253
Treasury stock, 10,000 shares............................. (1)
Accumulated deficit....................................... (495,007)
---------
Total common stockholders' deficit................ (234,520)
---------
Total liabilities and common stockholders' deficit.......... $ 63,460
=========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
F-66
<PAGE> 187
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
DEBTOR-IN-POSSESSION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Net Service Revenue..................................... $ 24,496 $ 32,421
Cost of Services........................................ 22,458 26,637
----------- -----------
Gross profit.......................................... 2,038 5,784
EXPENSES:
Sales and marketing................................... 3,347 24,425
General and administrative............................ 15,822 20,088
----------- -----------
Operating Loss.......................................... (17,131) (38,729)
OTHER INCOME (EXPENSE):
Interest income....................................... -- 1,568
Interest expense...................................... (5,389) (7,062)
Other income (expense)................................ (547) 3
----------- -----------
Other income (expense)-- net.......................... (5,936) (5,491)
----------- -----------
Net Loss Before Reorganization Items.................... $ (23,067) $ (44,220)
=========== ===========
REORGANIZATION ITEMS:
Interest income....................................... $ 141 --
Professional fees..................................... (1,607) --
Write-off of debt acquisition costs................... (24,806) --
----------- -----------
Total reorganization expense.................. (26,272) --
----------- -----------
Net Loss................................................ $ (49,339) $ (44,220)
=========== ===========
Preferred Dividends..................................... -- $ 579
=========== ===========
Net Loss to Common Shareholders -- Basic and Diluted.... $ (49,339) $ (44,799)
=========== ===========
Net Loss Per Common Share -- Basic and Diluted.......... $ (2.09) $ (3.12)
=========== ===========
Weighted Average Common Shares Outstanding -- Basic and
Diluted............................................... 23,585,741 14,366,749
=========== ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
F-67
<PAGE> 188
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
DEBTOR-IN-POSSESSION
CONDENSED CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' DEFICIT
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON
ADDITIONAL STOCK HELD
COMMON PAID-IN IN ACCUMULATED
STOCK CAPITAL TREASURY DEFICIT TOTAL
------ ---------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1998......... $235 $260,227 $(1) $(445,668) $(185,207)
Compensation expense on stock
options.......................... 26 26
Net loss........................... (49,339) (49,339)
---- -------- --- --------- ---------
Balance, March 31, 1999............ $235 $260,253 $(1) $(495,007) $(234,520)
==== ======== === ========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
F-68
<PAGE> 189
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
DEBTOR-IN-POSSESSION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1999 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................... $(49,339) $(44,220)
Adjustments to reconcile net loss to net cash flows from
operating activities:
Depreciation.............................................. 2,880 2,152
Amortization.............................................. 50 63
Non-cash interest on debt obligations..................... 5,352 7,017
Provision for losses on accounts receivable............... 1,330 2,442
Stock compensation award expense.......................... 26 173
Loss on disposal of property and equipment................ 547 --
Changes in operating assets and liabilities:
Accounts receivable.................................... 7,667 (19,559)
Other assets........................................... 214 (269)
Accounts payable....................................... 3,640 2,868
Accrued expenses....................................... (858) 9,089
Changes in reorganization items:
Reorganization expense................................. 26,272 --
Payments of reorganization costs....................... (1,607) --
-------- --------
Net cash flows from operating activities.......... (3,826) (40,244)
CASH FLOWS FROM INVESTING ACTIVITIES:
Deposits.................................................... 92 (1,390)
Purchase of property and equipment.......................... -- (5,763)
Purchase of subsidiary, net of cash acquired................ -- (69,054)
-------- --------
Net cash flows from investing activities.......... 92 (76,207)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Senior Notes.................................. 7,000 --
Issuance of common stock.................................... -- 138,068
Costs incurred related to issuance of stock................. -- (10,764)
Proceeds from Consent Convertible Notes..................... -- 10,000
Repayment of capital lease obligations and notes payable.... (146) (144)
-------- --------
Net cash flows from financing activities.......... 6,854 137,160
-------- --------
Net Increase in Cash........................................ 3,120 20,709
Cash and Cash Equivalents -- Beginning of Period............ 3,767 87,454
-------- --------
Cash and Cash Equivalents -- End of Period.................. $ 6,887 $108,163
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Conversion of preferred stock to common stock............... -- $ 57,856
======== ========
Dividends paid in kind...................................... -- $ 2,095
======== ========
Declared dividends.......................................... -- $ 579
======== ========
Capital lease obligations incurred.......................... -- $ 288
======== ========
Cash paid for interest...................................... $ 33 $ 45
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
F-69
<PAGE> 190
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
DEBTOR-IN-POSSESSION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The unaudited, condensed consolidated financial statements of USN
Communications, Inc. (the "Company") included herein have been prepared in
accordance with generally accepted accounting principles for interim financial
information. The interim financial statements reflect all adjustments,
consisting only of normal recurring adjustments, which are, in the opinion of
management, necessary for a fair presentation of the results for the interim
periods presented. The condensed consolidated financial statements should be
read in conjunction with the audited consolidated financial statements at
December 31, 1998 and the notes thereto. The results of operations for the
interim periods should not be considered indicative of results to be expected
for the full year.
2. CHAPTER 11 PROCEEDINGS
On February 18, 1999, (the "Petition Date") the Company and certain of its
subsidiaries filed voluntary petitions for reorganization (the "Filing") under
Chapter 11 ("Chapter 11") of Title 11 of the United States Code ("Bankruptcy
Code") in the United States Bankruptcy Court for the District of Delaware (the
"Bankruptcy Court"). In Chapter 11, the Company has continued to manage its
affairs and operate its business as a debtor in possession while it develops a
plan of reorganization. As a debtor in possession in Chapter 11, the Company may
not engage in transactions outside of the ordinary course of business without
approval, after notices and hearing, of the Bankruptcy Court.
On April 2, 1999, the Bankruptcy Court authorized the Company to (1) sell
substantially all of the Company's assets, excluding USN Wireless, Inc. to
CoreComm Limited for approximately $27 million in cash, warrants to purchase
350,000 shares of CoreComm Limited common stock and a contingent payment based
on future operating results that caps the total consideration at $85 million,
and (2) sell the capital stock of USN Wireless, Inc. The closing of the sale of
assets to CoreComm Limited occurred on May 26, 1999. The Company continues to
own the capital stock of USN Wireless, Inc.
As a result of the Filing, the Company is currently in default under of all
of its debt agreements in effect prior to the Petition Date. As a result, all
unpaid principal of, and accrued prepetition interest on, such debt became
immediately due and payable. The payment of such debt and accrued but unpaid
prepetition interest is prohibited during the pendency of the Company's Chapter
11 case without the approval of the Bankruptcy Court. The Bankruptcy Court has
authorized the payment, by the Company, of the Company's $15 million aggregate
principal amount of prepetition senior secured notes with a $20 million
debtor-in-possession financing facility. The debtor-in-possession financing
facility was discharged with a portion of the proceeds from the sale of assets
to CoreComm Limited.
The accompanying condensed consolidated financial statements have been
prepared on a going concern basis of accounting and do not reflect any
adjustments that might result should the Company be unable to continue as a
going concern, other than the discontinuation of interest expense subsequent to
the filing date of approximately $3.8 million. The Company's recurring losses
from operations and the related Chapter 11 filing raise substantial doubt about
its ability to continue as a going concern.
Because the Company sold assets and may sell additional assets, and as a
result of the Chapter 11 case, the Company may liquidate or settle liabilities
for amounts other than those
F-70
<PAGE> 191
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
DEBTOR-IN-POSSESSION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
reflected in the financial statements. Further, a plan of reorganization could
materially change the amounts currently recorded in the financial statements.
The financial statements do not give effect to any adjustments to the carrying
value of assets, or amounts and classification of liabilities that might be
necessary as a consequence of these matters.
3. FINANCIAL REPORTING FOR BANKRUPTCY PROCEEDINGS
The American Institute of Certified Public Accountants Statement of
Position 90-7, "Financial Reporting by Entities in Reorganization Under the
Bankruptcy code" ("SOP 90-7"), provides guidance for financial reporting by
entities that have filed petitions with the Bankruptcy Court and expect to
reorganize under Chapter 11 of the Bankruptcy Code.
Under SOP 90-7, the financial statements of an entity in a Chapter 11
reorganization proceeding should distinguish transactions and events that are
directly associated with the reorganization from those of the operations of the
ongoing business as it evolves. Accordingly, SOP 90-7 requires the following
financial reporting/accounting treatments in respect of each of the financial
statements.
Consolidated Balance Sheet
The balance sheet separately classifies pre-petition liabilities subject to
compromise (generally unsecured and undersecured claims) and post-petition
liabilities not subject to compromise (fully secured claims). The Senior Secured
Notes, of which $15.3 million is pre-petition, have been presented as not
subject to compromise (see Note 2). Pre-petition liabilities are reported on the
basis of the expected amount of such allowed claims, as opposed to the amounts
for which those allowed claims may be settled. Under an approved final plan of
reorganization, those claims may be settled at amounts substantially less than
their allowed amounts.
When a liability subject to settlement becomes an allowed claim and that
claim differs from the net carrying amount of the liability, the net carrying
amount is adjusted to the amount of the allowed claim. The resulting gain or
loss is classified as a reorganization item in the Consolidated Statement of
Operations.
Consolidated Statements of Operations
Pursuant to SOP 90-7, revenues and expenses, realized gains and losses, and
provisions for losses resulting from the reorganization of the business are
reported in the Consolidated Statement of Operations separately as
reorganization items. Professional fees are expensed as incurred. Interest
expense is reported only to the extent that it will be paid during the
proceeding or that it is probable that it will be an allowed claim.
Consolidated Statements of Cash Flows
Reorganization items are reported separately within the operating,
investing and financing categories of the Consolidated Statement of Cash Flows.
F-71
<PAGE> 192
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
DEBTOR-IN-POSSESSION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
4. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
1999
(UNAUDITED)
-----------
<S> <C>
Billed...................................................... $25,041
Unbilled.................................................... 8,768
-------
Gross accounts receivable................................... 33,809
Allowance for doubtful accounts............................. (17,904)
-------
Net accounts receivable..................................... $15,905
=======
</TABLE>
Unbilled accounts receivable comprises access charges, features and usage
for revenue earned but not yet billed to customers. A majority of the unbilled
accounts receivable were billed within 30 days after the March 31, 1999.
5. NET ASSETS OF DISCONTINUED OPERATIONS
The USN Wireless, Inc. business has been classified as discontinued
operations in the accompanying financial statements. On April 2, 1999, the
Bankruptcy Court approved the asset sale of USN Wireless, Inc.
The net assets of discontinued operations are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
MARCH 31, 1999
(UNAUDITED)
--------------
<S> <C>
Current assets.............................................. $ 9,223
Fixed assets................................................ 1,521
Goodwill and other intangibles, net of amortization......... 59,681
Current liabilities......................................... (9,422)
Provision for estimated loss on sale of discontinued
operations................................................ (41,744)
--------
Net assets of discontinued operations....................... $ 19,259
========
</TABLE>
6. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31, 1999
(UNAUDITED)
---------------
<S> <C>
Furniture and equipment..................................... $ 9,221
Computer hardware........................................... 11,476
Computer software........................................... 8,504
Leasehold improvements...................................... 5,755
--------
34,956
Less accumulated depreciation............................... (15,125)
Less impairment reserve..................................... (9,191)
--------
Total............................................. $ 10,640
========
</TABLE>
F-72
<PAGE> 193
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
DEBTOR-IN-POSSESSION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
7. OTHER ASSETS
Other assets consist of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31, 1999
(UNAUDITED)
--------------
<S> <C>
Deposits.................................................... $8,191
Licensing agreement, net of accumulated amortization $211... 189
Other....................................................... 226
------
Total............................................. $8,606
======
</TABLE>
8. NOTES PAYABLE
On November 18, 1998, the Company received approximately $10 million in
cash in exchange for the issuance and sale of a $10 million 17% Senior Secured
Note ("17% Note") due January 15, 1999. Interest was payable upon the maturity
of the 17% Note. The 17% Note was secured by a first priority lien on
substantially all assets of the Company, including the Company's accounts
receivable and the stock of the Company's directly owned subsidiaries.
On January 20, 1999, the 17% Note was cancelled in exchange for a
replacement $10.0 million 17% Senior Secured Note due February 15, 1999, and the
Company received an additional $2.5 million in cash in exchange for a new $2.5
million 17% Senior Secured Note due February 15, 1999 (collectively the "New 17%
Notes"). Interest on the New 17% Notes was payable in cash upon maturity. As was
the case with the 17% Note, the New 17% Notes were secured by a first priority
lien on substantially all assets of the Company, including the Company's
accounts receivable and the stock of the Company's directly owned subsidiaries.
On February 8, 1999, the Company received an additional $2.5 million in
cash under the provisions of the New 17% Notes, bringing the total amount due
under the New 17% Notes to $15 million. Also on February 8, 1999, the maturity
date for the New 17% Notes was changed from February 15, 1999 to February 16,
1999.
On February 23, 1999, the New 17% Notes, including accrued interest, were
exchanged for a replacement $16.3 million 14% Class B Senior Secured Note due
June 30, 1999 (the "Class B Notes"). On February 25, 1999, the Company received
$2.0 million in cash in exchange for the issuance and sale of a $2 million 14%
Class A Senior Secured Notes due June 30, 1999 (the "Class A Notes"). Interest
on the Class A Notes and Class B Notes is payable upon maturity. The Class A
Notes and Class B Notes are secured by a first priority lien on substantially
all assets of the Company, including the Company's accounts receivable and the
stock of the Company's directly owned subsidiaries.
9. LEGAL MATTERS
The Company is defendant in a class action lawsuit alleging the violation
of state and federal securities laws in connection with the Company's initial
public offering and subsequent events. In addition, the Company is a defendant
in various lawsuits arising out of the ordinary course of business, as well as
various collection lawsuits in the period preceding the Filing. All of these
lawsuits have been stayed as a result of applicable provisions of the Bankruptcy
Code by virtue of the Filing.
F-73
<PAGE> 194
- ------------------------------------------------------
- ------------------------------------------------------
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 ANY
OTHER INFORMATION. THIS PROSPECTUS MAY BE DELIVERED TO YOU AFTER THE DATE OF
THIS PROSPECTUS. HOWEVER, YOU SHOULD REALIZE THAT THE AFFAIRS OF CORECOMM
LIMITED MAY HAVE CHANGED SINCE THE DATE OF THIS PROSPECTUS. THIS PROSPECTUS WILL
NOT REFLECT SUCH CHANGES. YOU SHOULD NOT CONSIDER THIS PROSPECTUS TO BE AN OFFER
OR SOLICITATION RELATING TO THE NOTES IN ANY JURISDICTION IN WHICH SUCH AN OFFER
OR SOLICITATION IS NOT AUTHORIZED. FURTHERMORE, YOU SHOULD NOT CONSIDER THIS
PROSPECTUS TO BE AN OFFER OR SOLICITATION RELATING TO THE NOTES IF THE PERSON
MAKING THE OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR IF IT IS UNLAWFUL
FOR YOU TO RECEIVE SUCH AN OFFER OR SOLICITATION.
-------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................. 1
Risk Factors........................ 8
Use of Proceeds..................... 21
Price Range of Common Stock......... 21
Dividend Policy..................... 21
Capitalization...................... 22
Unaudited Pro Forma Financial
Information....................... 23
Selected Consolidated Financial
Data.............................. 27
Management's Discussion and Analysis
of Financial Condition and results
of Operations..................... 29
Business............................ 37
Regulation.......................... 61
Management.......................... 69
Security Ownership.................. 75
Selling Securityholders............. 77
Certain Relationships and Related
Transactions...................... 80
Description of Convertible Notes.... 82
Description of Capital Stock........ 100
Description of Our Other
Indebtedness...................... 107
Certain United States Federal Income
Tax Considerations................ 108
Plan of Distribution................ 113
Enforceability of Civil
Liabilities....................... 114
Legal Matters....................... 114
Experts............................. 114
Where You Can Find More
Information....................... 115
Incorporation of Documents by
Reference......................... 116
Disclosure Regarding Forward-looking
Statements........................ 117
Index to Financial Statements....... F-1
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
6% CONVERTIBLE
SUBORDINATED
NOTES DUE 2006
AND SHARES OF
COMMON STOCK
CORECOMM LIMITED
--------------------
PROSPECTUS
--------------------
, 1999
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 195
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following is an itemization of all expenses (subject to future
contingencies), payable by the registrant in connection with the sale of the 6%
Convertible Subordinated Notes due 2006 being registered and the common stock
being registered. All amounts are estimates except the SEC registration fee and
the Nasdaq National Market additional listing fee.
<TABLE>
<S> <C>
SEC registration fee........................................ $ 48,650
Nasdaq National Market listing fee.......................... 17,500
Legal fees and expenses..................................... 150,000
Accounting fees and expenses................................ 175,000
Printing and engraving fees................................. 155,000
Miscellaneous expenses...................................... 78,850
--------
Total............................................. $625,000
========
</TABLE>
ITEM 15. 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
II-1
<PAGE> 196
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 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.
Pursuant to the registration rights agreement entered into in connection
with the issuance of the convertible notes, the selling securityholders have
agreed to indemnify CoreComm's directors and its officers who sign the
registration statement against certain civil liabilities, including certain
liabilities under the Securities Act. Alternatively, such directors and officers
may be entitled to contribution in connection with those liabilities.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<C> <S>
3.1 Memorandum of Association of CoreComm Limited (incorporated
by reference to Exhibit 3.1 to CoreComm Limited's Form
10-12G, File No. 0-24521)
3.2 By-laws of CoreComm Limited (incorporated by reference to
Exhibit 3.2 to CoreComm Limited's Form 10-12G, File No.
0-24521)
4.1 Rights Agreement between CoreComm and Continental Stock
Transfer & Trust Company, as Rights Agent (incorporated by
reference to Exhibit 4.2 to CoreComm Limited's Form 10-12G,
File No. 0-24521)
4.2 Form of Common Stock Certificate (incorporated by reference
to Exhibit 4.1 to CoreComm Limited's Form 10-12G, File No.
0-24521)
4.3 Indenture, dated October 6, 1999, between CoreComm Limited
and The Chase Manhattan Bank, as Trustee
4.4 Registration Rights Agreement, dated October 6, 1999,
between CoreComm Limited and the initial purchasers of the
convertible notes
5.1* Opinion of Appleby, Spurling & Kempe as to the legality of
the shares of CoreComm Limited common stock being registered
hereby
5.2* Opinion of Paul, Weiss, Rifkind, Wharton & Garrision as the
legality of the convertible notes of CoreComm Limited being
registered hereby
8.1 Opinion of Paul, Weiss, Rifkind, Wharton & Garrison as to
tax matters
12.1 Statement regarding computation of ratios
23.1 Consent of Ernst & Young LLP with respect to CoreComm
Limited
23.2 Consent of Ernst & Young LLP with respect to OCOM
Corporation Telecoms Division
23.3 Consent of Ernst & Young LLP with respect to USN
Communications, Inc.
23.4 Consent of KPMG LLP
</TABLE>
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<PAGE> 197
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<C> <S>
23.5 Consent of Deloitte & Touche LLP
23.6* Consent of Paul, Weiss, Rifkind, Wharton & Garrison
(included in Exhibits 5.2 and 8.1 and incorporated herein by
reference)
23.7* Consent of Appleby, Spurling & Kempe (included in Exhibit
5.1 and incorporated herein by reference)
24.1 Power of Attorney (included on the signature page hereto)
25.1 Statement of Eligibility of Trustee on Form T-1
27.1 Financial Data Schedule of CoreComm Limited
</TABLE>
- ---------------
* To be filed by amendment.
ITEM 17. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of a prospectus pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more than a 20
percent change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration
statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if
the registration statement is on Form S-3, Form S-8 or Form F-3, and the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed with or furnished to the
Commission by the Registrant pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in the registration
statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offering therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(b) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of
the registrant's annual report pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
II-3
<PAGE> 198
(c) Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment
by the Registrant of expenses incurred or paid by a director, officer, or
controlling person of the Registrant in the successful defense of any
action, suit, or proceeding) is asserted by such director, officer, or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question as to whether such indemnification by it is
against public policy as expressed in the Act, and will be governed by the
final adjudication of such issue.
II-4
<PAGE> 199
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and 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 1st day of
November, 1999.
CORECOMM LIMITED
By: /s/ RICHARD J. LUBASCH
------------------------------------
Richard J. Lubasch
Senior Vice President --
General Counsel and Secretary
POWER OF ATTORNEY
Each person whose individual signature appears below hereby authorizes
Richard J. Lubasch and J. Barclay Knapp and each of them as attorneys-in-fact,
with full power of substitution, to execute in the name and on behalf of such
person, individually and in each capacity stated below, and to file, any and all
amendments to this Registration Statement, including any and all post-effective
amendments, with the Securities and Exchange Commission or any regulatory
authority.
Pursuant to the requirements of the Securities Act of 1933, 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 November 1, 1999
- ---------------------------------------------------
George S. Blumenthal
/s/ J. BARCLAY KNAPP President, Chief Executive and November 1, 1999
- --------------------------------------------------- Financial Officer and
J. Barclay Knapp Director (principal executive
and financial officer)
/s/ GREGG GORELICK Vice President -- Controller November 1, 1999
- --------------------------------------------------- and Treasurer (principal
Gregg Gorelick accounting officer)
/s/ SIDNEY R. KNAFEL Director November 1, 1999
- ---------------------------------------------------
Sidney R. Knafel
/s/ TED H. MCCOURTNEY Director November 1, 1999
- ---------------------------------------------------
Ted H. McCourtney
/s/ DEL MINTZ Director November 1, 1999
- ---------------------------------------------------
Del Mintz
</TABLE>
II-5
<PAGE> 200
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ WARREN POTASH Director November 1, 1999
- ---------------------------------------------------
Warren Potash
/s/ ALAN J. PATRICOF Director November 1, 1999
- ---------------------------------------------------
Alan J. Patricof
</TABLE>
II-6
<PAGE> 201
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION PAGE
- ------- ----------- ----
<C> <S> <C>
3.1 Memorandum of Association of CoreComm Limited (incorporated
by reference to Exhibit 3.1 to CoreComm Limited's Form
10-12G, File No. 0-24521)
3.2 By-laws of CoreComm Limited (incorporated by reference to
Exhibit 3.2 to CoreComm Limited's Form 10-12G, File No.
0-24521)
4.1 Rights Agreement between CoreComm and Continental Stock
Transfer & Trust Company, as Rights Agent (incorporated by
reference to Exhibit 4.2 to CoreComm Limited's Form 10-12G,
File No. 0-24521)
4.2 Form of Common Stock Certificate (incorporated by reference
to Exhibit 4.1 to CoreComm Limited's Form 10-12G, File No.
0-24521)
4.3 Indenture, dated October 6, 1999, between CoreComm Limited
and The Chase Manhattan Bank, as Trustee
4.4 Registration Rights Agreement, dated October 6, 1999,
between CoreComm Limited and the initial purchasers of the
convertible notes
5.1* Opinion of Appleby, Spurling & Kempe as to the legality of
the shares of CoreComm Limited common stock being registered
hereby
5.2* Opinion of Paul, Weiss, Rifkind, Wharton & Garrison as to
the legality of the convertible notes of CoreComm Limited
being registered hereby
8.1 Opinion of Paul, Weiss, Rifkind, Wharton & Garrison as to
tax matters
12.1 Statement regarding computation of ratios
23.1 Consent of Ernst & Young LLP with respect to CoreComm
Limited
23.2 Consent of Ernst & Young LLP with respect to OCOM
Corporation Telecoms Division
23.3 Consent of Ernst & Young LLP with respect to USN
Communications, Inc.
23.4 Consent of KPMG LLP
23.5 Consent of Deloitte & Touche LLP
23.6* Consent of Paul, Weiss, Rifkind, Wharton & Garrison
(included in Exhibits 5.2 and 8.1 and incorporated herein by
reference)
23.7* Consent of Appleby, Spurling & Kempe (included as part of
its opinion filed as Exhibit 5.1 and incorporated herein by
reference)
24.1 Power of Attorney (included on the signature page hereto)
25.1 Statement of Eligibility of Trustee on Form T-1
27.1 Financial Data Schedule of CoreComm Limited
</TABLE>
- ---------------
* To be filed by amendment.
<PAGE> 1
Exhibit 4.3
CORECOMM LIMITED
$175,000,000
6% CONVERTIBLE SUBORDINATED NOTES DUE 2006
INDENTURE
Dated as of October 6, 1999
The Chase Manhattan Bank
Trustee
<PAGE> 2
TABLE OF CONTENTS
ARTICLE I. ....................................................................1
Section 1.01. Definitions...................................................1
Section 1.02. Other Definitions.............................................5
Section 1.03. Incorporation by Reference of Trust Indenture Act.............5
Section 1.04. Rules of Construction.........................................6
ARTICLE II. THE NOTES..........................................................6
Section 2.01. Form and Dating...............................................6
Section 2.02. Execution and Authentication..................................9
Section 2.03. Registrar and Paying Agent....................................9
Section 2.04. Paying Agent to Hold Money in Trust...........................9
Section 2.05. Holder Lists.................................................10
Section 2.06. Transfer and Exchange........................................10
Section 2.07. Replacement Notes............................................14
Section 2.08. Outstanding Notes............................................14
Section 2.09. Treasury Notes...............................................15
Section 2.10. Temporary Notes; Global Notes................................15
Section 2.11. Cancellation.................................................16
Section 2.12. Defaulted Interest...........................................16
ARTICLE III. REDEMPTION.......................................................16
Section 3.01. Notices to Trustee...........................................16
Section 3.02. Selection of Notes to Be Redeemed............................16
Section 3.03. Notice of Redemption.........................................17
Section 3.04. Effect of Notice of Redemption...............................17
Section 3.05. Deposit of Redemption Price..................................17
Section 3.06. Notes Redeemed in Part.......................................17
Section 3.07. Optional Redemption and Optional Tax Redemption..............18
Section 3.08. Mandatory Redemption.........................................18
Section 3.09. Purchase Offer...............................................18
ARTICLE IV. COVENANTS.........................................................20
Section 4.01. Payment of Notes.............................................20
Section 4.02. Reports......................................................20
Section 4.03. Compliance Certificate.......................................20
Section 4.04. Stay, Extension and Usury Laws...............................21
Section 4.05. Corporate Existence..........................................21
Section 4.06. Taxes........................................................21
Section 4.07. Change of Control............................................21
Section 4.08. Payment of Additional Amounts................................22
Section 4.09. Limitation on Status As Investment Company...................22
ARTICLE V. CONVERSION.........................................................22
Section 5.01. Conversion Privilege.........................................22
Section 5.02. Conversion Procedure.........................................23
Section 5.03. Fractional Shares............................................23
Section 5.04. Taxes on Conversion..........................................23
Section 5.05. Company to Provide Stock.....................................24
Section 5.06. Adjustment of Conversion Price...............................24
Section 5.07. No Adjustment................................................27
Section 5.08. Other Adjustments............................................27
Section 5.09. Adjustments for Tax Purposes.................................27
<PAGE> 3
Section 5.10. Notice of Adjustment.........................................27
Section 5.11. Notice of Certain Transactions...............................27
Section 5.12. Effect of Reclassifications, Consolidations, Mergers or
Sales on Conversion Privilege................................28
Section 5.13. Trustee's Disclaimer.........................................28
ARTICLE VI. SUBORDINATION.....................................................29
Section 6.01. Agreement to Subordinate and Ranking.........................29
Section 6.02. No Payment on Notes if Senior Debt in Default................29
Section 6.03. Distribution on Acceleration of Notes; Dissolution and
Reorganization; Subrogation of Notes.........................30
Section 6.04. Reliance by Senior Debt on Subordination Provisions..........32
Section 6.05. No Waiver of Subordination Provisions........................33
Section 6.06. Trustee's Relation to Senior Debt............................33
Section 6.07. Other Provisions Subject Hereto..............................34
ARTICLE VII. SUCCESSORS.......................................................34
Section 7.01. Sale of Assets...............................................34
Section 7.02. Successor Corporation Substituted............................34
ARTICLE VIII. DEFAULTS AND REMEDIES...........................................35
Section 8.01. Events of Default............................................35
Section 8.02. Acceleration.................................................36
Section 8.03. Other Remedies...............................................37
Section 8.04. Waiver of Past Defaults......................................37
Section 8.05. Control by majority..........................................37
Section 8.06. Limitation on Suits..........................................37
Section 8.07. Rights of Holders to Receive Payment.........................38
Section 8.08. Collection Suit by Trustee...................................38
Section 8.09. Trustee May File Proofs of Claim.............................38
Section 8.10. Priorities...................................................38
Section 8.11. Undertaking for Costs........................................39
ARTICLE IX. TRUSTEE...........................................................39
Section 9.01. Duties of Trustee............................................40
Section 9.02. Rights of Trustee............................................40
Section 9.03. Individual Rights of Trustee.................................40
Section 9.04. Trustee's Disclaimer.........................................40
Section 9.05. Notice of Defaults...........................................40
Section 9.06. Reports by Trustee to Holders................................40
Section 9.07. Compensation and Indemnity...................................41
Section 9.08. Replacement of Trustee.......................................41
Section 9.09. Successor Trustee by Merger, Etc.............................42
Section 9.10. Eligibility; Disqualification................................42
Section 9.11. Preferential Collection of Claims Against Company............42
ARTICLE X. DISCHARGE OF INDENTURE.............................................42
Section 10.01. Termination of Company's Obligations........................42
Section 10.02. Repayment to Company........................................43
ARTICLE XI. AMENDMENTS, SUPPLEMENTS AND WAIVERS...............................43
Section 11.01. Without Consent of Holders..................................43
Section 11.02. With Consent of Holders.....................................43
Section 11.03. Compliance with Trust Indenture Act.........................44
Section 11.04. Revocation and Effect of Consents...........................44
Section 11.05. Notation on or Exchange of Notes............................45
Section 11.06. Trustee Protected...........................................45
ii
<PAGE> 4
ARTICLE XII. MISCELLANEOUS....................................................45
Section 12.01. Trust Indenture Act Controls................................45
Section 12.02. Notices.....................................................45
Section 12.03. Communication by Holders with Other Holders.................46
Section 12.04. Certificate and Opinion as to Conditions Precedent..........46
Section 12.05. Statements Required in Certificate or Opinion...............46
Section 12.06. Rules by Trustee and Agents.................................46
Section 12.07. Legal Holidays..............................................46
Section 12.08. No Recourse Against Others..................................47
Section 12.09. Counterparts and Facsimile Signatures.......................47
Section 12.10. Variable Provisions.........................................47
Section 12.11. Governing Law, submission to jurisdiction...................47
Section 12.12. No Adverse Interpretation of Other Agreements...............48
Section 12.13. Successors..................................................48
Section 12.14. Severability................................................48
Section 12.15. Table of Contents, Headings, Etc............................48
iii
<PAGE> 5
INDENTURE, dated as of October 6, 1999, between CoreComm Limited, a
Bermuda corporation (the "COMPANY"), and The Chase Manhattan Bank, a New York
corporation, as trustee (the "TRUSTEE").
Each party agrees as follows for the benefit of the other party and for
the equal and ratable benefit of the Holders (as defined in Section 1.01 hereof)
of the Company's 6% Convertible Subordinated Notes due 2006 (the "NOTES"):
ARTICLE I.
SECTION 1.01. DEFINITIONS.
"AFFILIATE" of any specified Person means any other Person directly
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; provided, however,
that beneficial ownership of 10% or more of the voting securities of a Person
shall be deemed to be control.
"AGENT" means any Registrar, Paying Agent or Conversion Agent.
"BOARD OF DIRECTORS" means the Board of Directors of the Company or any
authorized committee of the Board of Directors.
"BOARD RESOLUTION" means a duly authorized resolution of the Board of
Directors.
"BUSINESS DAY" means any day that is not a Legal Holiday.
"CAPITAL STOCK" means any and all shares, interests, participations,
rights or other equivalents (however designated) of corporate stock, including,
without limitation, partnership interests.
"CHANGE OF CONTROL" means (i) the sale, lease or transfer of all or
substantially all of the assets of the Company to any "Person" or "group"
(within the meaning of Sections 13(d)(3) and 14(d)(2) of the Exchange Act or any
successor provision to either of the foregoing, including any group acting for
the purpose of acquiring, holding or disposing of securities within the meaning
of Rule 13d-5(b)(1) under the Exchange Act) (other than any Permitted Holder),
(ii) the approval by the requisite stockholders of the Company of a plan of
liquidation or dissolution of the Company, (iii) any "Person" or "group" (within
the meaning of Sections 13(d) and 14(d)(2) of the Exchange Act or any successor
provision to either of the foregoing, including any group acting for the purpose
of acquiring, holding or disposing of securities within the meaning of Rule
13d-5(b)(1) under the Exchange Act), other than any Permitted Holder, becomes
the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) of more
than 50% of the total voting power of all classes of the voting stock of the
Company and/or warrants or options to acquire such voting stock, calculated on a
fully diluted basis, unless, as a result of such transaction, the ultimate
direct or indirect ownership of the Company is substantially the same
immediately after such transaction as it was immediately prior to such
transaction, or (iv) during any period of two consecutive years, individuals who
at the beginning of such period constituted the Company's Board of Directors
(together with any new directors whose election or appointment by such board or
whose nomination for election by the shareholders of the Company was approved by
a vote of a majority of the directors then still in office who were either
directors at the beginning of such period or whose election or nomination
<PAGE> 6
for election was previously so approved) cease for any reason to constitute a
majority of the Company's Board of Directors then in office.
"COMMON STOCK" means the common stock, par value $0.01 per share, of
the Company as the same exists at the date of the execution of this Indenture or
as such stock may be constituted from time to time.
"COMPANY" means the party named as such above until a successor
replaces it in accordance with Article VII and thereafter means the successor.
"DAILY MARKET PRICE" means the price of a share of Common Stock on the
relevant date, determined (a) on the basis of the last reported sale price
regular way of the Common Stock as reported on the Nasdaq Stock Market's
National Market (the "NNM"), or if the Common Stock is not then listed on the
NNM, as reported on such national securities exchange upon which the Common
Stock is listed, or (b) if there is no such reported sale on the day in
question, on the basis of the average of the closing bid and asked quotations
regular way as so reported, or (c) if the Common Stock is not listed on the NNM
or on any national securities exchange, on the basis of the average of the high
bid and low asked quotations regular way on the day in question in the
over-the-counter market as reported by the National Association of Securities
Dealers Automated Quotation System, or if not so quoted, as reported by National
Quotation Bureau, Incorporated, or a similar organization.
"DEFAULT" means any event that is, or with the passage of time or the
giving of notice or both would be, an Event of Default.
"DEPOSITARY" shall mean The Depository Trust Company, its nominees and
their respective successors.
"EQUITY INTERESTS" means Capital Stock and all warrants, options or
other rights to acquire Capital Stock, but excluding any Indebtedness that is
convertible into, or exchangeable for Capital Stock.
"EXCESS PAYMENT" means the excess of (A) the aggregate of the cash and
value of other consideration paid by the Company or any of its Subsidiaries with
respect to shares acquired in a tender offer or other negotiated transaction
over (B) the market value of each such acquired shares after giving effect to
the completion of a tender offer or other negotiated transaction.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"EXCHANGE RATE CONTRACT" means, with respect to any Person, any
currency swap agreements, forward exchange rate agreements, foreign currency
futures or options, exchange rate collar agreements, exchange rate insurance and
other agreements or arrangements, or combination thereof, the principal purpose
of which is to provide protection against fluctuations in currency exchange
rates. An Exchange Rate Contract may also include an Interest Rate Agreement.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as approved by a significant segment of the accounting profession,
which are in effect on the Issuance Date and are applied on a consistent basis.
"GUARANTEE" means a guarantee, other than by endorsement of negotiable
instruments for collection in the ordinary course of business, direct or
indirect, in any manner, including, without
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<PAGE> 7
limitation, letters of credit and reimbursement agreements in respect thereof,
of all or any part of any Indebtedness.
"HOLDER" means a Person in whose name a Note is registered in the
register referred to in Section 2.03.
"INDEBTEDNESS" means, with respect to any Person, any indebtedness of
such Person, whether or not contingent, in respect of borrowed money or
evidenced by bonds, notes, debentures or similar instruments or letters of
credit, or reimbursement agreements in respect thereof, or representing the
balance deferred and unpaid of the purchase price of any property (which
purchase price is due more than six months after the placing into service or
delivery of such property) including pursuant to capital leases and
sale-and-leaseback transactions, or representing any hedging obligations under
an Exchange Rate Contract or an Interest Rate Agreement, except any such balance
that constitutes an accrued expense or trade payable, if and to the extent any
of the foregoing indebtedness, other than obligations under an Exchange Rate
Contract or an Interest Rate Agreement, would appear as a liability upon a
balance sheet of such Person prepared in accordance with GAAP, and also
includes, to the extent not otherwise included, the Guarantee of items which
would be included within this definition. The amount of any Indebtedness
outstanding as of any date shall be the accreted value thereof, in the case of
any Indebtedness issued with original issue discount. Indebtedness shall not
include liabilities for taxes of any kind.
"INDENTURE" means this Indenture, as amended from time to time.
"INITIAL PURCHASERS" means Donaldson, Lufkin & Jenrette Securities
Corporation, Wasserstein Perella Securities, Inc., Chase Securities Inc., Bear,
Stearns & Co. Inc., Goldman, Sachs & Co, Morgan Stanley & Co.
Incorporated and Salomon Smith Barney Inc.
"INTEREST RATE AGREEMENT" means, with respect to any Person, any
interest rate swap agreement, interest rate cap agreement, interest rate collar
agreement or other similar agreement the principal purpose of which is to
protect the party indicated therein against fluctuations in interest rates.
"ISSUANCE DATE" means the date on which the Notes are first
authenticated and issued.
"NOTES" has the meaning set forth in the preamble hereto.
"OBLIGATIONS" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"OFFICERS' CERTIFICATE" means a certificate of the Company signed by
two Officers, one of whom must be the Chairman of the Board, the President, the
Treasurer or a Vice President of the Company.
"OPINION OF COUNSEL" means a written opinion from legal counsel who is
reasonably acceptable to the Trustee. The counsel may be an employee of or
counsel to the Company or the Trustee.
"PERMITTED DESIGNEE" means (i) a spouse or a child of a Permitted
Holder, (ii) trusts for the benefit of a Permitted Holder or a spouse or child
of a Permitted Holder, (iii) in the event of the death or incompetence of a
Permitted Holder, his estate, heirs, executor, administrator, committee or other
personal representative or (iv) any Person so long as a Permitted Holder owns at
least 50% of the voting power of all classes of the voting stock of such Person.
"PERMITTED HOLDERS" means George S. Blumenthal, J. Barclay Knapp and
their Permitted Designees.
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<PAGE> 8
"PERSON" means any individual, corporation, partnership, joint venture,
association, joint stock company, trust, unincorporated organization or
government or any agency or political subdivision thereof.
"PURCHASE AGREEMENT" means the Purchase Agreement, dated as of October
1, 1999, among the Company and the Initial Purchasers.
"REGISTRATION DEFAULT" has the meaning set forth in Section 2 of the
Notes.
"REGISTRATION RIGHTS AGREEMENT" means the Registration Rights Agreement
relating to the Notes and the underlying Common Stock, dated October 6, 1999,
among the Company and the Initial Purchasers party thereto.
"SEC" means the Securities and Exchange Commission.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SENIOR DEBT" means the principal of, interest on and other amounts due
on (i) Indebtedness of the Company, whether outstanding on the date hereof or
thereafter created, incurred, assumed or guaranteed by the Company, for money
borrowed from banks or other financial institutions; (ii) Indebtedness of the
Company, whether outstanding on the date hereof or thereafter created, incurred,
assumed or guaranteed by the Company; and (iii) Indebtedness of the Company
under interest rate swaps, caps or similar hedging agreements and foreign
exchange contracts, currency swaps or similar agreements: unless, in the
instrument creating or evidencing or pursuant to which Indebtedness under (i) or
(ii) is outstanding, it is expressly provided that such Indebtedness is not
senior in right of payment to the Notes. Senior Debt includes, with respect to
the obligations described in clauses (i) and (ii) above, interest accruing,
pursuant to the terms of such Senior Debt, on or after the filing of any
petition in bankruptcy or for reorganization relating to the Company, whether or
not post-filing interest is allowed in such proceeding, at the rate specified in
the instrument governing the relevant obligation. Notwithstanding anything to
the contrary in the foregoing, Senior Debt shall not include: (a) Indebtedness
of or amounts owed by the Company for compensation to employees, or for goods or
materials purchased in the ordinary course of business, or for services; and (b)
Indebtedness of the Company to a Subsidiary of the Company.
"SHELF REGISTRATION STATEMENT" shall have the meaning set forth in the
Registration Rights Agreement.
"SIGNIFICANT SUBSIDIARY" means any Subsidiary of the Company which is a
"significant subsidiary" as defined in Rule 1-02(v) of Regulation S-X under the
Securities Act and the Exchange Act, as such Regulation is in effect on the date
hereof.
"SPECIAL INTEREST" has the meaning set forth in Section 2 of the Notes.
"SUBSIDIARY" means any corporation, association or other business
entity of which more than 50% of the total voting power of shares of Capital
Stock entitled, without regard to the occurrence of any contingency, to vote in
the election of directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by any Person or one or more of the other
Subsidiaries of that Person or a combination thereof.
"TIA" means the Trust Indenture Act of 1939 (15 U.S. Code (Sections)
77aaa-77bbbb) as in effect on the date of execution of this Indenture.
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<PAGE> 9
"TRUSTEE" means the party named as such above until a successor
replaces it in accordance with the applicable provisions of this Indenture and
thereafter means the successor.
"TRUST OFFICER" means the Chairman of the Board, the President or any
other officer or assistant officer of the Trustee assigned by the Trustee to
administer its corporate trust matters.
SECTION 1.02 .OTHER DEFINITIONS.
DEFINED
TERM IN SECTION
- ---- ----------
"ACCREDITED INVESTOR RESTRICTED NOTES"............... 2.01
"ADDITIONAL AMOUNTS"................................. 4.08
"AGENT MEMBER"....................................... 2.01
"BANKRUPTCY LAW"..................................... 8.01
"CEDEL".............................................. 2.01
"CHANGE OF CONTROL PAYMENT".......................... 4.07
"COMMENCEMENT DATE".................................. 3.09
"CONVERSION AGENT"................................... 2.03
"CONVERSION DATE".................................... 5.02
"CONVERSION PRICE"................................... 5.06
"CONVERSION SHARES".................................. 5.06
"CUSTODIAN".......................................... 8.01
"DISTRIBUTION DATE".................................. 5.06
"DISTRIBUTION RECORD DATE"........................... 5.06
"EUROCLEAR".......................................... 2.01
"EVENT OF DEFAULT"................................... 8.01
"GLOBAL NOTE"........................................ 2.01
"LEGAL HOLIDAY"...................................... 12.08
"OFFER AMOUNT"....................................... 3.09
"OFFICER"............................................ 12.11
"PAYING AGENT"....................................... 2.03
"PAYMENT BLOCKAGE NOTICE"............................ 6.02
"PAYMENT BLOCKAGE PERIOD"............................ 6.02
"PAYMENT DEFAULT".................................... 8.01
"PURCHASE DATE"...................................... 3.09
"PURCHASE OFFER"..................................... 3.09
"QIBS"............................................... 2.01
"REGULATION S"....................................... 2.01
"REGULATION S GLOBAL NOTE" .......................... 2.01
"REGISTRAR".......................................... 2.03
"RESTRICTED NOTES"................................... 2.01
"RIGHTS"............................................. 5.06
"RULE 144A".......................................... 2.01
"RULE 144A GLOBAL NOTE".............................. 2.01
"TENDER PERIOD"...................................... 3.09
SECTION 1.03. INCORPORATION BY REFERENCE OF TRUST INDENTURE ACT.
Whenever this Indenture refers to a provision of the TIA, the provision
is incorporated by reference in and made a part of this Indenture.
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<PAGE> 10
The following TIA terms used in this Indenture have the following
meanings:
"INDENTURE SECURITIES" means the Notes;
"INDENTURE SECURITY HOLDER" means a Holder of a Note;
"INDENTURE TO BE QUALIFIED" means this Indenture;
"INDENTURE TRUSTEE" or "institutional trustee" means the Trustee; and
"OBLIGOR" on the Notes means the Company or any other obligor on the
Notes.
All other terms used in this Indenture that are defined by the TIA,
defined by TIA reference to another statute or defined by SEC rule under the TIA
have the meanings so assigned to them.
SECTION 1.04. RULES OF CONSTRUCTION.
Unless the context otherwise requires:
(a) a term has the meaning assigned to it;
(b) an accounting term not otherwise defined has the meaning
assigned to it in accordance with GAAP consistently applied;
(c) "OR" is not exclusive;
(d) words in the singular include the plural, and in the
plural include the singular;
(e) provisions apply to successive events and transactions;
(f) references to sections of or rules under the Securities
Act shall be deemed to include substitute, replacement or successor
sections or rules adopted by the SEC from time to time; and
(g) a reference to "$" or U.S. Dollars is to United States
dollars.
ARTICLE II.
THE NOTES
SECTION 2.01. FORM AND DATING.
(a) General.
The Notes and the Trustee's certificate of authentication shall be
substantially in the form of Exhibit A hereto, which is hereby incorporated by
reference and expressly made a part of this Indenture. The Notes may have
notations, legends or endorsements required by law, stock exchange rule,
agreements to which the Company is subject, if any, or usage (provided that any
such notation, legend or endorsement is in a form acceptable to the Company).
The Company shall furnish any such legend not contained in Exhibit A to the
Trustee in writing. Each Note shall be dated the date of its authentication. The
Notes shall be in denominations of $1,000 and integral multiples thereof. The
terms and provisions of the Notes set forth in Exhibit A are part of this
Indenture and to the extent applicable, the Company
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<PAGE> 11
and the Trustee, by their execution and delivery of this Indenture, expressly
agree to such terms and provisions and to be bound thereby. However, to the
extent any provision of any Note conflicts with the express provisions of this
Indenture, the provisions of this Indenture shall govern and be controlling.
(b) Global Notes.
The Notes are being offered and sold by the Company pursuant to the
Purchase Agreement.
Notes transferred in reliance on Regulation S under the Securities Act
("REGULATION S"), as provided in Section 2.06(a)(ii) hereof, shall be issued in
the form of one or more permanent Global Notes in definitive, fully registered
form without interest coupons with the Global Notes Legend and Restricted Notes
Legend set forth in Exhibit A hereto (the "REGULATION S GLOBAL NOTE"), which
shall be deposited on behalf of the transferee of the Notes represented thereby
with the Trustee, at its New York office, as custodian, for the Depositary, and
registered in the name of the Depositary or the nominee of the Depositary for
the accounts of designated agents holding on behalf of the Euroclear System
("EUROCLEAR") or Cedelbank ("CEDEL"), duly executed by the Company and
authenticated by the Trustee as hereinafter provided. The aggregate principal
amount of the Regulation S Global Note may from time to time be increased or
decreased by adjustments made on the records of the Trustee and the Depositary
or its nominee as hereinafter provided.
Notes offered and sold to Qualified Institutional Buyers ("QIBS") in
reliance on Rule 144A under the Securities Act ("RULE 144A"), as provided in the
Purchase Agreement, shall be issued initially in the form of one or more
permanent Global Notes in definitive, fully registered form without interest
coupons with the Global Notes Legend and Restricted Notes Legend set forth in
Exhibit A hereto ("RULE 144A GLOBAL NOTE"), which shall be deposited on behalf
of the purchasers of the Notes represented thereby with the Trustee, at its New
York office, as custodian for the Depositary, and registered in the name of the
Depositary or a nominee of the Depositary, duly executed by the Company and
authenticated by the Trustee as hereinafter provided. The aggregate principal
amount of the Rule 144A Global Note may from time to time be increased or
decreased by adjustments made on the records of the Trustee and the Depositary
or its nominee as hereinafter provided.
(c) Book-Entry Provisions.
This Section 2.01(c) shall apply only to the Regulation S Global Note
and the Rule 144A Global Note issued in the form of one or more permanent Global
Notes (collectively, the "GLOBAL NOTES") deposited with or on behalf of the
Depositary.
The Company shall execute and the Trustee shall, in accordance with
this Section 2.01(c), authenticate and deliver initially one or more Global
Notes that (a) shall be registered in the name of the Depositary for such Global
Note or Global Notes or the nominee of such Depositary and (b) shall be
delivered by the Trustee to such Depositary or pursuant to such Depositary's
instructions or held by the Trustee as custodian for the Depositary.
Members of, or participants in, the Depositary ("AGENT MEMBERS") shall
have no rights under this Indenture with respect to any Global Note held on
their behalf by the Depositary or by the Trustee as the custodian of the
Depositary or under such Global Note, and the Depositary may be treated by the
Company, the Trustee and any agent of the Company or the Trustee as the absolute
owner of such Global Note for all purposes whatsoever. Notwithstanding the
foregoing, nothing herein shall prevent the Company, the Trustee or any agent of
the Company or the Trustee from giving effect to any written certification,
proxy or other authorization furnished by the Depositary or impair, as between
the
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<PAGE> 12
Depositary and its Agent Members, the operation of customary practices of such
Depositary governing the exercise of the rights of an owner of a beneficial
interest in any Global Note.
(d) Certificated Notes.
Notes offered and sold to "accredited investors" (as defined in Rule
501 (a) (1), (2), (3), (4), (5), (6) and (7) of Regulation D under the
Securities Act), as provided in the Purchase Agreement, shall be issued in the
form of one or more certificated Notes (subject to a minimum initial purchase
amount of $100,000) in definitive, fully registered form without interest
coupons with the Restricted Notes Legend set forth in Exhibit A hereto
("ACCREDITED INVESTOR RESTRICTED NOTES"), which shall be registered in the name
of such Accredited Investor or its nominee, duly executed by the Company and
authenticated by the Trustee as hereinafter provided. Such Accredited Investor
Restricted Notes may only be transferred in reliance on Regulation S or to QIBs
in reliance on Rule 144A.
Notwithstanding the foregoing, Notes offered and sold on the Issuance
Date to "accredited investors" (as defined above) shall be issued initially in
the form of one or more permanent Global Notes in definitive, fully registered
form without interest coupons with the Global Notes Legend and Restrictive Notes
Legend set forth in Exhibit A ("AI Global Note"), which shall be deposited on
behalf of the purchasers of the Notes represented thereby with the Trustee, at
its New York office, as custodian for the Depositary, and registered in the name
of the Depositary or a nominee of the Depositary, duly executed by the Company
and authenticated by the Trustee as hereinafter provided. Such Global Note shall
be deemed to be a Global Note for all purposes of this Indenture. Promptly after
the Issuance Date, the Company shall cause the purchasers of the AI Global Note
to arrange with the Depositary for the exchange of such Global Note for
Accredited Investor Restricted Notes. Upon receipt by the principal Registrar of
instructions from the Depositary directing the principal Registrar to
authenticate and deliver one or more Accredited Investor Restricted Notes of the
same aggregate principal amount as the beneficial interest in the AI Global Note
to be exchanged, such instructions to contain the name or names of the Holder or
Holders of such Accredited Investor Restricted Note or Notes, the authorized
denominations of the Accredited Investor Restricted Note or Notes to be so
issued and appropriate delivery instructions, then the principal Registrar will
instruct the Depositary to reduce the AI Global Note by the aggregate principal
amount of the beneficial interest therein to be exchanged and to debit from the
account of the Person making such exchange the beneficial interest in the AI
Global Note that is being exchanged, and concurrently with such reduction and
debit the Company shall execute, and the Trustee shall authenticate and deliver,
one or more Accredited Investor Restricted Notes of the same aggregate principal
amount in accordance with the instructions referred to above. Certificated Notes
may be issued as aforesaid notwithstanding any other provision of this Indenture
to the contrary restricting the issuance of certificated Notes.
In addition to the provisions of Section 2.10, owners of beneficial
interests in Global Notes may, if the Company, at its option, notifies the
Trustee in writing that it elects to cause the issuance of certificated Notes,
receive a certificated Note, which certificated Note shall bear the Restricted
Notes Legend set forth in Exhibit A hereto (the "RESTRICTED NOTES") unless
otherwise provided in this Section 2.01(d) and Section 2.06(b) hereof.
After a transfer of any Notes during the period of the effectiveness of
a Shelf Registration Statement with respect to the Notes and pursuant thereto,
all requirements for Restricted Notes Legends on such Note will cease to apply,
and a certificated Note without a Restricted Notes Legend will be available to
the Holder of such Notes.
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<PAGE> 13
SECTION 2.02. EXECUTION AND AUTHENTICATION.
One Officer shall sign the Notes for the Company by manual or facsimile
signature.
If an Officer whose signature is on a Note no longer holds that office
at the time the Note is authenticated, the Note shall nevertheless be valid.
A Note shall not be valid until authenticated by the manual signature
of an authorized officer of the Trustee. The signature shall be conclusive
evidence that the Note has been authenticated under this Indenture.
The Trustee shall, upon a written order of the Company signed by an
Officer, authenticate (1) Notes for original issue up to an aggregate principal
amount stated in paragraph 6 of the Notes. The aggregate principal amount of
Notes outstanding at any time may not exceed $175,000,000 except as provided in
Section 2.07.
The Trustee may appoint an authenticating agent acceptable to the
Company to authenticate Notes. An authenticating agent may authenticate Notes
whenever the Trustee may do so. Each reference in this Indenture to
authentication by the Trustee includes authentication by such agent. An
authenticating agent has the same rights as an Agent to deal with Holders, the
Company or an Affiliate.
SECTION 2.03. REGISTRAR AND PAYING AGENT.
The Company shall maintain in the Borough of Manhattan, City of New
York, State of New York, (i) offices or agencies where the Notes may be
presented for registration of transfer or for exchange ("REGISTRAR") (ii)
offices or agencies where the Notes may be presented for payment ("PAYING
AGENT") and (iii) offices or agencies where the Notes may be presented for
conversion ("CONVERSION AGENT"). The Company initially designates the Trustee at
its corporate trust offices in the Borough of Manhattan, City of New York, State
of New York to act as principal Registrar, Paying Agent and Conversion Agent.
The principal Registrar shall keep a register of the Notes and of their transfer
and exchange. The Company may appoint one or more co-registrars, one or more
additional paying agents and one or more additional Conversion Agents in such
other locations as it shall determine. The term "Registrar" includes any
co-registrar, the term "Paying Agent" includes any additional paying agent and
the term "Conversion Agent" includes any additional conversion agent. The
Company may change any Paying Agent, Registrar or Conversion Agent without prior
notice to any Holder. The Company shall notify the Trustee of the name and
address of any Agent not a party to this Indenture. If the Company fails to
appoint or maintain another entity as Registrar, Paying Agent or Conversion
Agent, the Trustee shall act as such. The Company or any of its Affiliates may
act as Paying Agent, Registrar or Conversion Agent.
SECTION 2.04. PAYING AGENT TO HOLD MONEY IN TRUST.
The Company shall require each Paying Agent other than the Trustee to
agree in writing that the Paying Agent will hold in trust for the benefit of
Holders or the Trustee all money held by the Paying Agent for the payment of
principal or interest on the Notes, and will notify the Trustee of any default
by the Company in making any such payment. While any such default continues, the
Trustee may require a Paying Agent to pay all money held by it to the Trustee
and to account for any money disbursed by it. The Company at any time may
require a Paying Agent to pay all money held by it to the Trustee. Upon payment
over to the Trustee, the Paying Agent (if other than the Company or an Affiliate
of the Company) shall have no further liability for the money. If the Company or
an Affiliate of the Company
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<PAGE> 14
acts as Paying Agent, it shall segregate and hold in a separate trust fund for
the benefit of the Holders all money held by it as Paying Agent.
SECTION 2.05. HOLDER LISTS.
The Trustee shall preserve in as current a form as is reasonably
practicable the most recent list available to it of the names and addresses of
Holders. If the Trustee is not the Registrar, the Company shall furnish to the
Trustee on or before each interest payment date and at such other times as the
Trustee may request in writing a list in such form and as of such date as the
Trustee may reasonably require of the names and addresses of Holders.
SECTION 2.06. TRANSFER AND EXCHANGE.
Where Notes are presented to the Registrar or a co-registrar with a
request to register a transfer or to exchange them for an equal principal amount
of Notes of other denominations, the Registrar shall register the transfer or
make the exchange if its requirements for such transactions are met. To permit
registrations of transfers and exchanges, the Company shall issue and the
Trustee shall authenticate Notes at the Registrar's request. No service charge
shall be made for any registration of transfer or exchange (except as otherwise
expressly permitted herein), but the Company may require payment of a sum
sufficient to cover any transfer tax or similar governmental charge payable in
connection therewith (other than any such transfer tax or similar governmental
charge payable upon exchanges pursuant to Sections 2.10, 3.06 or 11.05 hereof).
The Company shall not be required (i) to issue, register the transfer
of or exchange any Note for a period beginning at the opening of business 15
days before the day of any selection of Notes to be redeemed under Section 3.02
hereof and ending at the close of business on the day of selection, or (ii) to
register the transfer, or exchange, of any Note so selected for redemption in
whole or in part, except the unredeemed portion of any Note being redeemed in
part.
(a) Notwithstanding any provision to the contrary herein, so
long as a Global Note remains outstanding and is held by or on behalf
of the Depositary, transfers of a Global Note, in whole or in part, or
of any beneficial interest therein, shall only be made in accordance
with Section 2.01(b) and this Section 2.06(a); provided, however, that
beneficial interests in a Global Note may be transferred to Persons who
take delivery thereof in the form of a beneficial interest in the same
Global Note in accordance with the transfer restrictions set forth in
the Restricted Notes Legend and under the heading "Notice to Investors"
in the Company's Offering Memorandum dated October 1, 1999.
(i) Except for transfers or exchanges made in
accordance with clauses (ii) through (iv) of this Section
2.06(a), transfers of a Global Note shall be limited to
transfers of such Global Note in whole, but not in part, to
nominees of the Depositary or to a successor of the Depositary
or such successor's nominee.
(ii) Rule 144A Global Note to Regulation S Global Note.
If an owner of a beneficial interest in the Rule 144A Global
Note deposited with the Depositary or the Trustee as custodian
for the Depositary wishes at any time to transfer its interest
in such Rule 144A Global Note to a Person who is required to
take delivery thereof in the form of an interest in the
Regulation S Global Note, such owner may, subject to the rules
and procedures of the Depositary, exchange or cause the exchange
of such interest for an equivalent beneficial interest in the
Regulation S Global Note. Upon receipt by the principal
Registrar of (1)
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<PAGE> 15
instructions given in accordance with the Depositary's
procedures from an Agent Member directing the principal
Registrar to credit or cause to be credited a beneficial
interest in the Regulation S Global Note in an amount equal to
the beneficial interest in the Rule 144A Global Note to be
exchanged, (2) a written order given in accordance with the
Depositary's procedures containing information regarding the
participant account of the Depositary and the Euroclear or
Cedel account to be credited with such increase and (3) a
certificate in the form of Exhibit B attached hereto given by
the Holder of such beneficial interest, then the principal
Registrar shall instruct the Depositary to reduce or cause to
be reduced the principal amount of the Rule 144A Global Note
and to increase or cause to be increased the principal amount
of the Regulation S Global Note by the aggregate principal
amount of the beneficial interest in the Rule 144A Global Note
equal to the beneficial interest in the Regulation S Global
Note to be exchanged or transferred, to credit or cause to be
credited to the account of the Person specified in such
instructions a beneficial interest in the Regulation S Global
Note equal to the reduction in the principal amount of the
Rule 144A Global Note and to debit or cause to be debited from
the account of the Person making such exchange or transfer the
beneficial interest in the Rule 144A Global Note that is being
exchanged or transferred.
(iii) Regulation S Global Note to Rule 144A Global
Note. If an owner of a beneficial interest in the Regulation S
Global Note deposited with the Depositary or with the Trustee
as custodian for the Depositary wishes at any time to transfer
its interest in such Regulation S Global Note to a Person who
is required to take delivery thereof in the form of an
interest in the Rule 144A Global Note, such Holder may,
subject to the rules and procedures of Euroclear or Cedel, as
the case may be, and the Depositary, exchange or cause the
exchange of such interest for an equivalent beneficial
interest in the Rule 144A Global Note. Upon receipt by the
principal Registrar of (1) instructions from Euroclear or
Cedel, if applicable, and the Depositary, directing the
principal Registrar to credit or cause to be credited a
beneficial interest in the Rule 144A Global Note equal to the
beneficial interest in the Regulation S Global Note to be
exchanged or transferred, (2) a written order given in
accordance with the Depositary's procedures containing
information regarding the participant account of the
Depositary and (3) a certificate in the form of Exhibit C
attached hereto given by the owner of such beneficial
interest, then Euroclear or Cedel or the principal Registrar,
as the case may be, will instruct the Depositary to reduce or
cause to be reduced the Regulation S Global Note and to
increase or cause to be increased the principal amount of the
Rule 144A Global Note by the aggregate principal amount of the
beneficial interest in the Regulation S Global Note to be
exchanged or transferred, and the principal Registrar shall
instruct the Depositary, concurrently with such reduction, to
credit or cause to be credited to the account of the Person
specified in such instructions a beneficial interest in the
Rule 144A Global Note equal to the reduction in the principal
amount of the Regulation S Global Note and to debit or cause
to be debited from the account of the Person making such
exchange or transfer the beneficial interest in the Regulation
S Global Note that is being exchanged or transferred.
(iv) Global Note to Restricted Note. If an owner of a
beneficial interest in a Global Note deposited with the
Depositary or with the Trustee as custodian for the Depositary
wishes at any time to transfer its interest in such Global
Note to a Person who is required to take delivery thereof in
the form of a Restricted Note,
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such owner may, subject to the rules and procedures of
Euroclear or Cedel, if applicable, and the Depositary, cause
the exchange of such interest for one or more Restricted Notes
of any authorized denomination or denominations and of the
same aggregate principal amount. Upon receipt by the principal
Registrar of (1) instructions from Euroclear or Cedel, if
applicable, and the Depositary directing the principal
Registrar to authenticate and deliver one or more Restricted
Notes of the same aggregate principal amount as the beneficial
interest in the Global Note to be exchanged, such instructions
to contain the name or names of the designated transferee or
transferees, the authorized denomination or denominations of
the Restricted Notes to be so issued and appropriate delivery
instructions, (2) a certificate in the form of Exhibit D
attached hereto given by the owner of such beneficial interest
to the effect set forth therein, (3) a certificate in the form
of Exhibit E attached hereto given by the Person acquiring the
Restricted Notes for which such interest is being exchanged,
to the effect set forth therein, and (4) such other
certifications, legal opinions or other information as the
Company may reasonably require to confirm that such transfer
is being made pursuant to an exemption from, or in a
transaction not subject to, the registration requirements of
the Securities Act, then Euroclear or Cedel, if applicable, or
the principal Registrar, as the case may be, will instruct the
Depositary to reduce or cause to be reduced such Global Note
by the aggregate principal amount of the beneficial interest
therein to be exchanged and to debit or cause to be debited
from the account of the Person making such transfer the
beneficial interest in the Global Note that is being
transferred, and concurrently with such reduction and debit
the Company shall execute, and the Trustee shall authenticate
and deliver, one or more Restricted Notes of the same
aggregate principal amount in accordance with the instructions
referred to above.
(v) Restricted Note to Restricted Note. If a Holder
of a Restricted Note wishes at any time to transfer such
Restricted Note to a Person who is required to take delivery
thereof in the form of a Restricted Note, such Holder may,
subject to the restrictions on transfer set forth herein and
in such Restricted Note, cause the exchange of such Restricted
Note for one or more Restricted Notes of any authorized
denomination or denominations and of the same aggregate
principal amount. Upon receipt by the principal Registrar of
(1) such Restricted Note, duly endorsed as provided herein,
(2) instructions from such Holder directing the principal
Registrar to authenticate and deliver one or more Restricted
Notes of the same aggregate principal amount as the Restricted
Note to be exchanged, such instructions to contain the name or
authorized denomination or denominations of the Restricted
Notes to be so issued and appropriate delivery instructions,
(3) a certificate from the Holder of the Restricted Note to be
exchanged in the form of Exhibit D attached hereto, (4) a
certificate in the form of Exhibit E attached hereto given by
the Person acquiring the Restricted Notes for which such
interest is being exchanged, to the effect set forth therein,
and (5) such other certifications, legal opinions or other
information as the Company may reasonably require to confirm
that such transfer is being made pursuant to an exemption
from, or in a transaction not subject to, the registration
requirements of the Securities Act, then the Registrar shall
cancel or cause to be canceled such Restricted Note and
concurrently therewith, the Company shall execute, and the
Trustee shall authenticate and deliver, one or more Restricted
Notes of the same aggregate principal amount, in accordance
with the instructions referred to above.
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<PAGE> 17
(vi) Restricted Note to Rule 144A Global Note. If an
owner of a Restricted Note registered in the name of such owner
wishes at any time to transfer such Restricted Note to a Person
who is required to take delivery thereof in the form of an
interest in the Rule 144A Global Note, such Holder may, subject
to the rules and procedures of the Depositary, exchange or cause
the exchange of such Restricted Note for an equivalent
beneficial interest in the Rule 144A Global Note. Upon receipt
by the principal Registrar of (1) instructions from the Company,
directing the principal Registrar (A) to credit or cause to be
credited a beneficial interest in the Rule 144A Global Note
equal to the principal amount of the Restricted Note to be
exchanged or transferred and (B) to cancel such Restricted Note
to be exchanged or transferred, (2) a written order given in
accordance with the Depositary's procedures containing
information regarding the participant account of the Depositary
and (3) a certificate in the form of Exhibit C attached hereto
given by the owner of such Restricted Note, then the principal
Registrar will instruct the Trustee to cancel such Restricted
Note and will instruct the Depositary to increase or cause to be
increased the principal amount of the Rule 144A Global Note by
the principal amount of the Restricted Note to be exchanged or
transferred, and the principal Registrar shall instruct the
Depositary, concurrently with such cancellation of the
Restricted Note, to credit or cause to be credited to the
account of the Person specified in such instructions a
beneficial interest in the Rule 144A Global Note equal to the
principal amount of the Restricted Note to be canceled by the
Trustee.
(vii) Restricted Note to Regulation S Global Note. If
an owner of a Restricted Note registered in the name of such
owner wishes at any time to transfer such Restricted Note to a
Person who is required to take delivery thereof in the form of
an interest in the Regulation S Global Note, such owner may,
subject to the rules and procedures of the Euroclear or Cedel,
as the case may be, exchange or cause the exchange of such
Restricted Note for an equivalent beneficial interest in the
Regulation S Global Note. Upon receipt by the principal
Registrar of (1) instructions from the Company, directing the
principal Registrar (A) to credit or cause to be credited a
beneficial interest in the Regulation S Global Note equal to the
principal amount of the Restricted Note to be exchanged or
transferred and (B) to cancel such Restricted Note to be
exchanged or transferred, (2) a written order given in
accordance with the Depositary's procedures containing
information regarding the participant account of the Euroclear
or Cedel account to be credited with such increase and (3) a
certificate in the form of Exhibit B attached hereto given by
the Holder of such Restricted Note, then the principal Registrar
will instruct the Trustee to cancel such Restricted Note and
will instruct the Depositary to increase or cause to be
increased the principal amount of the Regulation S Global Note
by the principal amount of the Restricted Note to be exchanged
or transferred, and the principal Registrar shall instruct the
Depositary, concurrently with such cancellation of the
Restricted Note, to credit or cause to be credited to the
account of the Person specified in such instructions a
beneficial interest in the Regulation S Global Note equal to the
principal amount of the Restricted Note to be canceled by the
Trustee.
(viii) Other Exchanges. In the event that a beneficial
interest in a Global Note is exchanged for a certificated Note
in definitive registered form pursuant to Section 2.10, prior to
the effectiveness of a Shelf Registration Statement with respect
to such Notes, such Notes may be exchanged only in accordance
with such
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<PAGE> 18
procedures as are substantially consistent with the provisions
of clauses (ii) through (v) above (including the certification
requirements intended to ensure that such transfers comply with
Rule 144A, Rule 144, Regulation S or any other available
exemption from registration, as the case may be) and such other
procedures as may from time to time be adopted by the Company.
(b) Except in connection with a Shelf Registration Statement
contemplated by and in accordance with the terms of the Registration
Rights Agreement, if Notes are issued upon the transfer, exchange or
replacement of Notes bearing the Restricted Securities Legend set forth
in Exhibit A hereto, or if a request is made to remove such Restricted
Notes Legend on Notes, the Notes so issued shall bear the Restricted
Notes Legend, or the Restricted Notes Legend shall not be removed, as
the case may be, unless there is delivered to the Company such
satisfactory evidence, which may include an opinion of counsel licensed
to practice law in the State of New York, as may be reasonably required
by the Company, that neither the legend nor the restrictions on
transfer set forth therein are required to ensure that transfers
thereof comply with the provisions of Rule 144A, Rule 144, Regulation S
or any other available exemption from registration under the Securities
Act or, with respect to Restricted Notes, that such Notes are not
"restricted" within the meaning of Rule 144 under the Securities Act.
Upon provision of such satisfactory evidence, the Trustee, at the
direction of the Company, shall authenticate and deliver Notes that do
not bear the legend.
(c) Neither the Company nor the Trustee shall have any
responsibility for any actions taken or not taken by the Depositary and
the Company shall have no responsibility for any actions taken or not
taken by the Trustee as agent or custodian of the Depositary.
SECTION 2.07. REPLACEMENT NOTES.
If the Holder of a Note claims that the Note has been lost, destroyed
or wrongfully taken or if such Note is mutilated and is surrendered to the
Trustee, the Company shall issue and the Trustee shall authenticate a
replacement Note if the Trustee's and the Company's requirements are met. If
required by the Trustee or the Company, an indemnity bond must be sufficient in
the judgment of both to protect the Company, the Trustee, any Agent or any
authenticating agent from any loss which any of them may suffer if a Note is
replaced. The Company may charge for its expenses in replacing a Note.
In case any such mutilated, destroyed, lost or stolen Note has become
or is about to become due and payable, or is about to be purchased by the
Company pursuant to Article III hereof, the Company in its discretion may,
instead of issuing a new Note, pay or purchase such Note, as the case may be.
Every replacement Note is an additional obligation of the Company and
shall be entitled to all of the benefits of this Indenture equally and
proportionately with all other Notes duly issued hereunder.
SECTION 2.08. OUTSTANDING NOTES.
The Notes outstanding at any time are all the Notes authenticated by
the Trustee except for those canceled by it, those delivered to it for
cancellation, and those described in this Section as not outstanding.
If a Note is replaced, paid or purchased pursuant to Section 2.07
hereof, it ceases to be outstanding unless the Trustee receives proof
satisfactory to it that the replaced, paid or purchased Note is held by a bona
fide purchaser.
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<PAGE> 19
If the principal amount of any Note is considered paid under Section
4.01 hereof, it ceases to be outstanding and interest on it ceases to accrue.
Except as set forth in Section 2.09 hereof, a Note does not cease to be
outstanding because the Company or an Affiliate of the Company holds the Note.
SECTION 2.09. TREASURY NOTES.
In determining whether the Holders of the required principal amount of
Notes have concurred in any direction, waiver or consent, Notes owned by the
Company or an Affiliate of the Company shall be considered as though they are
not outstanding, except that for the purposes of determining whether the Trustee
shall be protected in relying on any such direction, waiver or consent, only
Notes that the Trustee knows are so owned shall be so disregarded.
SECTION 2.10. TEMPORARY NOTES; GLOBAL NOTES.
(a) Until definitive Notes are ready for delivery, the Company
may prepare and the Trustee shall authenticate temporary Notes.
Temporary Notes shall be substantially in the form of definitive Notes
but may have variations that the Company considers appropriate for
temporary Notes. Without unreasonable delay, the Company shall prepare
and the Trustee shall authenticate definitive Notes in exchange for
temporary Notes. Holders of temporary Notes shall be entitled to all of
the benefits of this Indenture.
(b) A Global Note deposited with the Depositary or with the
Trustee as custodian for the Depositary pursuant to Section 2.01 shall
be transferred to the beneficial owners thereof in the form of
certificated Notes only in accordance with Section 2.01(d) or if such
transfer complies with Section 2.06 and (i) the Depositary notifies the
Company that it is unwilling or unable to continue as Depositary for
such Global Note or if at any time such Depositary ceases to be a
"clearing agency" registered under the Exchange Act and a successor
Depositary is not appointed by the Company within 90 days after receipt
of such notice or after it becomes aware of such cessation or (ii) an
Event of Default has occurred and is continuing.
(c) Any Global Note that is transferable to the beneficial
owners thereof in the form of certificated Notes pursuant to Section
2.01(d) or to this Section 2.10 shall be surrendered by the Depositary
to the Trustee to be so transferred, in whole or from time to time in
part, without charge, and the Trustee shall authenticate and deliver,
upon such transfer of each portion of such Global Note, an equal
aggregate principal amount of Notes of authorized denominations in the
form of certificated Notes. Any portion of a Global Note transferred
pursuant to this Section 2.10 shall be executed, authenticated and
delivered only in denominations of $1,000 and any integral multiple
thereof and registered in such names as the Depositary shall direct.
Any Note in the form of certificated Notes delivered in exchange for an
interest in the Global Notes shall, except as otherwise provided by
Section 2.06(b) bear the Restricted Notes Legend set forth in Exhibit A
hereto.
(d) The registered Holder of a Global Note may grant proxies
and otherwise authorize any Person, including Agent Members and Persons
that may hold interests through Agent Members, to take any action which
a Holder is entitled to take under this Indenture or the Notes.
(e) In the event of the occurrence of either of the events
specified in Section 2.10(b), the Company will promptly make available
to the Trustee a reasonable supply of certificated Notes in definitive,
fully registered form without interest coupons.
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<PAGE> 20
SECTION 2.11. CANCELLATION.
The Company at any time may deliver Notes to the Trustee for
cancellation. The Registrar, Paying Agent and Conversion Agent shall forward to
the Trustee any Notes surrendered to them for registration of transfer, exchange
or payment. The Trustee shall promptly cancel all Notes surrendered for
registration of transfer, exchange, payment, conversion, replacement or
cancellation and shall dispose of canceled Notes as the Company directs. The
Company may not issue new Notes to replace Notes that it has paid or that have
been delivered to the Trustee for cancellation.
SECTION 2.12. DEFAULTED INTEREST.
If the Company fails to make a payment of interest on the Notes, it
shall pay such defaulted interest plus any interest payable on the defaulted
interest, in any lawful manner. It may pay such defaulted interest, plus any
such interest payable on it, to the Persons who are Holders on a subsequent
special record date. The Company shall fix any such record date and payment
date, provided that no such record date shall be less than 10 days prior to the
related payment date for such defaulted interest. At least 15 days before any
such record date, the Company shall mail to Holders a notice that states the
special record date, the related payment date and amount of such interest to be
paid.
ARTICLE III.
REDEMPTION
SECTION 3.01. NOTICES TO TRUSTEE.
If the Company elects to redeem Notes pursuant to the optional
redemption provisions of the Notes and Section 3.07 hereof or pursuant to the
Optional Tax Redemption provision of the Notes (Section 8 of the Notes), it
shall notify the Trustee of the redemption date and the principal amount of
Notes to be redeemed, and in connection with an Optional Tax Redemption as
provided in the Notes, such notice shall be accompanied by an Officers'
Certificate to the effect that the conditions to such redemption contained
herein have been complied with. The Company shall give each notice provided for
in this Section 3.01 at least 40 days before the redemption date (unless a
shorter notice period shall be reasonably satisfactory to the Trustee).
SECTION 3.02. SELECTION OF NOTES TO BE REDEEMED.
If less than all of the Notes are to be redeemed at any time, selection
of Notes shall be made by the Trustee on a pro rata basis or by lot or by method
that complies with the requirements of any exchange on which the Notes are
listed and that the Trustee considers fair and appropriate, provided that no
Notes of $1,000 or less shall be redeemed in part. The Trustee shall make the
selection not more than 60 days and not less than 30 days before the redemption
date from Notes outstanding not previously called for redemption. Notes and
portions of Notes selected shall be in amounts of $1,000 or integral multiples
of $1,000. Provisions of this Indenture that apply to Notes called for
redemption also apply to portions of Notes called for redemption. The Trustee
shall notify the Company promptly of the Notes or portions of Notes to be called
for redemption.
If any Note selected for partial redemption is converted in part after
such selection, the converted portion of such Note shall be deemed (so far as
may be) to be the portion to be selected for redemption. The Notes (or portions
thereof) so selected shall be deemed duly selected for redemption for all
purposes hereunder, notwithstanding that any such Note is converted in whole or
in part before the mailing of the notice of redemption. Upon any redemption of
less than all the Notes, the Company and the Trustee may treat as outstanding
any Notes surrendered for conversion during the period 15 days next preceding
the
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<PAGE> 21
mailing of a notice of redemption and need not treat as outstanding any Note
authenticated and delivered during such period in exchange for the unconverted
portion of any Note converted in part during such period.
SECTION 3.03. NOTICE OF REDEMPTION.
At least 30 days but not more than 60 days before a redemption date,
the Company shall mail, by first class mail, a notice of redemption to each
Holder whose Notes are to be redeemed at its registered address. The notice
shall identify the Notes to be redeemed and shall state:
(a) the redemption date;
(b) the redemption price;
(c) if any Note is to be redeemed in part only, the portion of
the principal amount thereof redeemed, and that, after the redemption
date, upon surrender of such Note, a new Note in principal amount equal
to the unredeemed portion thereof shall be issued in the name of the
Holder thereof upon cancellation of the original Note;
(d) the name and address of the Paying Agent;
(e) that Notes called for redemption must be surrendered to
the Paying Agent to collect the redemption price plus accrued interest,
if any;
(f) that interest on Notes called for redemption ceases to
accrue on and after the redemption date; and
(g) the paragraph of the Notes pursuant to which the Notes
called for redemption are being redeemed.
Such notice shall also state the current Conversion Price and the date
on which the right to convert such Notes or portions thereof into Common Stock
of the Company will expire.
At the Company's request, the Trustee shall give notice of redemption
in the Company's name and at its expense; provided that the Company shall have
delivered to the Trustee, at least 45 days prior to the redemption date, an
Officers' Certificate requesting that the Trustee give such notice and setting
forth the information to be stated in such notice, as provided in the preceding
paragraph.
SECTION 3.04. EFFECT OF NOTICE OF REDEMPTION.
Once notice of redemption is mailed in accordance with Section 3.03
hereof, Notes called for redemption become due and payable on the redemption
date at the price set forth in the Note. A notice of redemption may not be
conditional.
SECTION 3.05. DEPOSIT OF REDEMPTION PRICE.
On or before the redemption date, the Company shall deposit with the
Trustee or with the Paying Agent money sufficient to pay the redemption price of
and accrued interest on all Notes to be redeemed on that date unless theretofore
converted into Common Stock pursuant to the provisions hereof. The Trustee or
the Paying Agent shall return to the Company any money not required for that
purpose.
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<PAGE> 22
SECTION 3.06. NOTES REDEEMED IN PART.
Upon surrender of a Note that is redeemed in part, the Company shall
issue and the Trustee shall authenticate for the Holder at the expense of the
Company a new Note equal in principal amount to the unredeemed portion of the
Note surrendered.
SECTION 3.07. OPTIONAL REDEMPTION AND OPTIONAL TAX REDEMPTION.
The Company may redeem all or any portion of the Notes, upon the terms
and at the redemption prices set forth in the Notes. The Company may also redeem
all of the Notes in accordance with the Optional Tax Redemption provision of the
Notes (Section 8 of the Notes). Any redemption pursuant to this Section 3.07
shall be made pursuant to the provisions of Section 3.01 through 3.06 hereof.
SECTION 3.08. MANDATORY REDEMPTION
The Company shall not be required to make mandatory redemption payments
or sinking fund payments with respect to the Notes.
SECTION 3.09. PURCHASE OFFER.
(a) In the event that, pursuant to 4.07 hereof, the Company
shall commence an offer to all Holders of the Notes to purchase Notes
(the "PURCHASE OFFER"), the Company shall follow the procedures in this
Section 3.09.
(b) The Purchase Offer shall remain open for a period
specified by the Company which shall be no less than 30 calendar days
and no more than 40 calendar days following its commencement (the
"COMMENCEMENT DATE") (as determined in accordance with Section 4.07
hereof), except to the extent that a longer period is required by
applicable law (the "TENDER PERIOD"). Upon the expiration of the Tender
Period (the "PURCHASE DATE"), the Company shall purchase the principal
amount of all of the Notes required to be purchased pursuant to Section
4.07 hereof (the "OFFER AMOUNT").
(c) If the Purchase Date is on or after an interest payment
record date and on or before the related interest payment date, any
accrued interest shall be paid to the Person in whose name a Note is
registered at the close of business on such record date, and no
additional interest will be payable to Holders who tender Notes
pursuant to the Purchase Offer.
(d) The Company shall provide the Trustee with notice of the
Purchase Offer at least 10 days before the Commencement Date.
(e) On or before the Commencement Date, the Company or the
Trustee (at the expense of the Company) shall send, by first class
mail, a notice to each of the Holders, which shall govern the terms of
the Purchase Offer and shall state:
(i) that the Purchase Offer is being made pursuant to
this Section 3.09 and Section 4.07 hereof, that all Notes
validly tendered will be accepted for payment and the length of
time the Purchase Offer will remain open;
(ii) the purchase price (as determined in accordance
with Section 4.07 hereof) and the Purchase Date, and that all
Notes tendered will be accepted for payment;
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<PAGE> 23
(iii) that any Note or portion thereof not tendered or
accepted for payment will continue to accrue interest;
(iv) that, unless the Company defaults in the payment
of the purchase price, any Note or portion thereof accepted for
payment pursuant to the Purchase Offer will cease to accrue
interest after the Purchase Date;
(v) that Holders electing to have a Note or portion
thereof purchased pursuant to any Purchase Offer will be
required to surrender the Note, with the form entitled "Option
of Holder to Elect Purchase" on the reverse of the Note
completed, to the Company, a depositary, if appointed by the
Company, or a Paying Agent at the address specified in the
notice prior to the close of business on the third Business Day
preceding the Purchase Date;
(vi) that Holders will be entitled to withdraw their
election if the Company, depositary or Paying Agent, as the case
may be, receives, not later than the close of business on the
second Business Day preceding the Purchase Date, or such longer
period as may be required by law, a letter or a telegram, telex
or facsimile transmission (receipt of which is confirmed and
promptly followed by a letter) setting forth the name of the
Holder, the principal amount of the Note or portion thereof the
Holder delivered for purchase and a statement that such Holder
is withdrawing his election to have the Note or portion thereof
purchased;
(vii) that Holders whose Notes were purchased only in
part will be issued new Notes equal in principal amount to the
unpurchased portion of the Notes surrendered.
(f) On or prior to the Purchase Date, the Company shall
irrevocably deposit with the Trustee or a Paying Agent in immediately
available funds an amount equal to the Offer Amount to be held for
payment in accordance with the terms of this Section 3.09. On the
Purchase Date, the Company shall, to the extent lawful, (i) accept for
payment the Notes or portions thereof properly tendered pursuant to the
Purchase Offer, (ii) deliver or cause the depositary or Paying Agent to
deliver to the Trustee Notes so accepted and (iii) deliver to the
Trustee an Officers' Certificate stating such Notes or portions thereof
have been accepted for payment by the Company in accordance with the
terms of this Section 3.09. The Depositary, the Paying Agent or the
Company, as the case may be, shall promptly (but in any case not later
than ten (10) calendar days after the Purchase Date) mail or deliver to
each tendering Holder an amount equal to the purchase price of the
Notes tendered by such Holder and accepted by the Company for purchase,
and the Trustee shall promptly authenticate and mail or deliver to such
Holders a new Note equal in principal amount to any unpurchased portion
of the Note surrendered. Any Notes not so accepted shall be promptly
mailed or delivered by or on behalf of the Company to the Holder
thereof. The Company will publicly announce in a newspaper of general
circulation the results of the Purchase Offer on the Purchase Date.
(g) The Purchase Offer shall be made by the Company in
compliance with all applicable provisions of the Exchange Act, and all
applicable tender offer rules promulgated thereunder, and shall include
all instructions and materials necessary to enable such Holders to
tender their Notes.
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<PAGE> 24
ARTICLE IV.
COVENANTS
SECTION 4.01. PAYMENT OF NOTES.
The Company shall pay the principal of, premium, if any and interest
on, the Notes on the dates and in the manner provided in the Notes. Principal,
premium, if any, and interest shall be considered paid on the date due if the
Paying Agent (other than the Company or an Affiliate of the Company) holds on
that date money designated for and sufficient to pay all principal, premium, if
any, and interest then due. To the extent lawful, the Company shall pay interest
(including post-petition interest in any proceeding under any Bankruptcy Law) on
(i) overdue principal and premium, if any, at the rate borne by the Notes,
compounded semiannually; and (ii) overdue installments of interest or (without
regard to any applicable grace period) at the same rate, compounded
semiannually.
Whenever in this Indenture or the Notes there is mentioned, in any
context, the payment of principal (and premium, if any), Offer Amount, interest
or any other amount payable under or with respect to any Note such mention shall
be deemed to include mention of the payment of Special Interest provided for in
Section 2 of the Notes to the extent that, in such context, Special Interest is,
was or would be payable in respect thereof pursuant to the provisions of Section
2 of the Notes and express mention of the payment of Special Interest (if
applicable) in any provisions hereof shall not be construed as excluding Special
Interest in those provisions hereof where such express mention is not made (if
applicable).
SECTION 4.02. REPORTS.
Whether or not required by the rules and regulations of the SEC, so
long as any Notes are outstanding, the Company shall file with the SEC and
furnish to the Trustee and to the Holders of Notes, all quarterly and annual
financial information required to be contained in a filing with the SEC on Forms
10-Q and 10-K, including a "Management's Discussion and Analysis of Results of
Operations and Financial Condition" and, with respect to the annual information
only, a report thereon by the Company's certified independent accountants, in
each case, as required by the rules and regulations of the SEC as in effect on
the Issuance Date.
SECTION 4.03. COMPLIANCE CERTIFICATE.
The Company shall deliver to the Trustee, within 90 days after the end
of each fiscal year of the Company, an Officers' Certificate stating that a
review of the activities of the Company and its subsidiaries during the
preceding fiscal year has been made under the supervision of the signing
Officers with a view to determining whether the Company has kept, observed,
performed and fulfilled its obligations under, and complied with the covenants
and conditions contained in, this Indenture, and further stating, as to each
such Officer signing such certificate, that to the best of his knowledge the
Company has kept, observed, performed and fulfilled each and every covenant, and
complied with the covenants and conditions contained in this Indenture and is
not in default in the performance or observance of any of the terms, provisions
and conditions hereof (or, if a Default or Event of Default shall have occurred,
describing all such Defaults or Events of Default of which he may have
knowledge) and that to the best of his knowledge no event has occurred and
remains in existence by reason of which payments on account of the principal or
of interest, if any, on the Notes are prohibited.
One of the Officers signing such Officers' Certificate shall be either
the Company's principal executive officer, principal financial officer or
principal accounting officer.
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The Company will so long as any of the Notes are outstanding, deliver
to the Trustee, forthwith upon becoming aware of any Default or Event of Default
an Officers' Certificate specifying such Default or Event of Default.
Immediately upon the occurrence of any Registration Default giving rise
to Special Interest or the cure of any such Registration Default, the Company
shall give the Trustee notice thereof and of the event giving rise to such
Registration Default or the cure of any such Registration Default (such notice
to be contained in an Officers' Certificate) and prior to receipt of such
Officers' Certificate the Trustee shall be entitled to assume that no such
Registration Default has occurred or been cured, as the case may be.
SECTION 4.04. STAY, EXTENSION AND USURY LAWS.
The Company covenants (to the extent that it may lawfully do so) that
it will not at any time insist upon, plead, or in any manner whatsoever claim or
take the benefit or advantage of, any stay, extension or usury law wherever
enacted, now or at any time hereafter in force, which may affect the covenants
or the performance of this Indenture; and the Company (to the extent it may
lawfully do so) hereby expressly waives all benefit or advantage of any such
law, and covenants that it will not, by resort to any such law, hinder, delay or
impede the execution of any power herein granted to the Trustee, but will suffer
and permit the execution of every such power as though no such law had been
enacted.
SECTION 4.05. CORPORATE EXISTENCE.
Subject to Article VII hereof, to the extent permitted by law the
Company will do or cause to be done all things necessary to preserve and keep in
full force and effect its corporate existence and the corporate, partnership or
other existence of each subsidiary of the Company in accordance with the
respective organizational documents of each subsidiary and the rights (charter
and statutory), licenses and franchises of the Company; provided, however, that
the Company shall not be required to preserve any such right, license or
franchise, or the corporate, partnership or other existence of any subsidiary,
if the preservation thereof is no longer desirable in the conduct of the
business of the Company and its subsidiaries taken as a whole.
SECTION 4.06. TAXES.
The Company shall, and shall cause each of its subsidiaries to, pay
prior to delinquency all material taxes, assessments and governmental levies,
except as contested in good faith and by appropriate proceedings.
SECTION 4.07. CHANGE OF CONTROL.
(a) Upon the occurrence of a Change of Control, each Holder of
Notes shall have the right to require the Company to repurchase all or
any part (equal to $1,000 or an integral multiple thereof) of such
Holder's Notes pursuant to the Purchase Offer at a purchase price equal
to 101% of the principal amount thereof plus accrued and unpaid
interest to the date of purchase (the "CHANGE OF CONTROL Payment").
(b) Within 40 days following any Change of Control, the
Company shall mail to each Holder the notice provided by Section
3.09(e).
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SECTION 4.08. PAYMENT OF ADDITIONAL AMOUNTS.
At least 10 days prior to the first date on which payment of principal
and any premium or interest on the Notes is to be made, and at least 10 days
prior to any subsequent such date if there has been any change with respect to
the matters set forth in the Officers' Certificate described in this Section
4.08, the Company shall furnish the Trustee and the Paying Agent, if other than
the Trustee, with an Officers' Certificate instructing the Trustee and the
Paying Agent whether the Company is obligated to pay Additional Amounts (as
defined in Section 3 of the Notes) with respect to such payment of principal, or
of any premium or interest on the Notes. If the Company will be obligated to pay
Additional Amounts with respect to such payment then such Officers' Certificate
shall specify by country the amount, if any, required to be withheld on such
payments to such Holders and the Company will pay to the Trustee or the Paying
Agent such Additional Amounts. The Company shall indemnify the Trustee and the
Paying Agent for, and hold them harmless against, any loss, liability or expense
reasonably incurred without negligence or bad faith on their part arising out of
or in connection with actions taken or omitted by any of them in reliance on any
Officers' Certificate furnished to them pursuant to this Section 4.08.
Whenever in this Indenture or the Notes there is mentioned, in any
context, the payment of principal (and premium, if any), Offer Amount, interest
or any other amount payable under or with respect to any Note such mention shall
be deemed to include mention of the payment of Additional Amounts provided for
in this Section 4.08 and Section 3 of the Notes to the extent that, in such
context, Additional Amounts, are, were or would be payable in respect thereof
pursuant to the provisions of this Section 4.08 and Section 3 of the Notes and
express mention of the payment of Additional Amounts (if applicable) in any
provisions hereof shall not be construed as excluding Additional Amounts in
those provisions hereof where such express mention is not made (if applicable).
SECTION 4.09. LIMITATION ON STATUS AS INVESTMENT COMPANY.
The Company shall not, and shall not permit any Subsidiary to, conduct
its business in a fashion that would cause the Company to be required to be
registered as an "investment company" (as that term is defined in the Investment
Company Act of 1940, as amended.
ARTICLE V.
CONVERSION
SECTION 5.01. CONVERSION PRIVILEGE.
A Holder of a Note may convert it into fully paid and nonassessable
shares of Common Stock at any time after 90 days following the Issuance Date and
prior to maturity at the Conversion Price then in effect, except that, with
respect to any Note called for redemption, such conversion right shall terminate
at the close of business on the Business Day immediately preceding the
redemption date (unless the Company shall default in making the redemption
payment when it becomes due, in which case the conversion right shall terminate
on the date such default is cured). The number of shares of Common Stock
issuable upon conversion of a Note is determined by dividing the principal
amount of such Note by the conversion price in effect on the Conversion Date
(the "CONVERSION PRICE").
The initial Conversion Price is stated in paragraph 13 of the Notes and
is subject to adjustment as provided in this Article V.
A holder may convert a portion of a Note equal to any integral multiple
of $1,000. Provisions of this Indenture that apply to conversion of all of a
Note also apply to conversion of a portion of it.
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<PAGE> 27
SECTION 5.02. CONVERSION PROCEDURE.
To convert a Note, a holder must satisfy the requirements in paragraph
13 of the Notes. The date on which the holder satisfies all of those
requirements is the conversion date (the "CONVERSION DATE"). As soon as
practicable after the Conversion Date, the Company shall deliver to the Holder
through the Conversion Agent a certificate for the number of whole shares of
Common Stock issuable upon the conversion and a check for any fractional share
determined pursuant to Section 5.03 hereof. The Person in whose name the
certificate is registered shall become the stockholder of record on the
Conversion Date and, as of such date, such Person's rights as a Holder shall
cease; provided, however, that no surrender of a Note on any date when the stock
transfer books of the Company shall be closed shall be effective to constitute
the Person entitled to receive the shares of Common Stock upon such conversion
as the stockholder of record of such shares of Common Stock on such date, but
such surrender shall be effective to constitute the Person entitled to receive
such shares of Common Stock as the stockholder of record thereof for all
purposes at the close of business on the next succeeding day on which such stock
transfer books are open; provided further, however, that such conversion shall
be at the Conversion Price in effect on the date that such Note shall have been
surrendered for conversion, as if the stock transfer books of the Company had
not been closed.
No payment or adjustment will be made for accrued and unpaid interest
on a converted Note, but if any holder surrenders a Note for conversion after
the close of business on the record date for the payment of an installment of
interest and prior to the opening of business on the next interest payment date,
then, notwithstanding such conversion, the interest payable on such interest
payment date shall be paid to the holder of such Note on such record date. In
such event, such Note, when surrendered for conversion, need not be accompanied
by payment of an amount equal to the interest payable on such interest payment
date on the portion so converted.
If a holder converts more than one Note at the same time, the number of
whole shares of Common Stock issuable upon the conversion shall be based on the
total principal amount of Notes converted.
Upon surrender of a Note that is converted in part, the Trustee shall
authenticate for the holder a new Note equal in principal amount to the
unconverted portion of the Note surrendered.
SECTION 5.03. FRACTIONAL SHARES.
The Company will not issue fractional shares of Common Stock upon
conversion of a Note. In lieu thereof, the Company will pay an amount in cash
based upon the Daily Market Price of the Common Stock on the trading day prior
to the date of conversion.
SECTION 5.04. TAXES ON CONVERSION.
The issuance of certificates for shares of Common Stock upon the
conversion of any Note shall be made without charge to the converting Holder for
such certificates or for any tax in respect of the issuance of such
certificates, and such certificates shall be issued in the respective names of,
or in such names as may be directed by, the Holder or Holders of the converted
Note; provided, however, that in the event that certificates for shares of
Common Stock are to be issued in a name other than the name of the holder of the
Note converted, such Note, when surrendered for conversion, shall be accompanied
by an instrument of transfer, in form satisfactory to the Company, duly executed
by the registered holder thereof or his duly authorized attorney; and provided
further, however, that the Company shall not be required to pay any tax which
may be payable in respect of any transfer involved in the issuance and delivery
of any such certificates in a name other than that of the holder of the
converted Note, and the
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<PAGE> 28
Company shall not be required to issue or deliver such certificates unless or
until the Person or Persons requesting the issuance thereof shall have paid to
the Company the amount of such tax or shall have established to the satisfaction
of the Company that such tax has been paid or is not applicable.
SECTION 5.05. COMPANY TO PROVIDE STOCK.
The Company shall at all times reserve and keep available, free from
preemptive rights, out of its authorized but unissued Common Stock, solely for
the purpose of issuance upon conversion of Notes as herein provided, a
sufficient number of shares of Common Stock to permit the conversion of all
outstanding Notes for shares of Common Stock. All shares of Common Stock which
may be issued upon conversion of the Notes shall be duly authorized, validly
issued, fully paid and nonassessable when so issued. Shares of Common Stock
issuable upon conversion of a Restricted Note shall bear such restrictive
legends as the Company shall provide in accordance with applicable law. If
shares of Common Stock are to be issued upon conversion of a Restricted Note and
they are to be registered in a name other than that of the holder of such
Restricted Note, then the Person in whose name such shares of Common Stock are
to be registered must deliver to the Trustee a certificate satisfactory to the
Company and signed by such Person as to compliance with the restrictions on
transfer contained in such restrictive legends.
SECTION 5.06. ADJUSTMENT OF CONVERSION PRICE.
The Conversion Price shall be subject to adjustment from time to time
as follows:
(a) In case the Company shall (1) pay a dividend in shares of
Common Stock to holders of Common Stock, (2) make a distribution in
shares of Common Stock to holders of Common Stock, (3) subdivide its
outstanding shares of Common Stock into a greater number of shares of
Common Stock or (4) combine its outstanding shares of Common Stock into
a smaller number of shares of Common Stock, the Conversion Price in
effect immediately prior to such action shall be adjusted so that the
holder of any Note thereafter surrendered for conversion shall be
entitled to receive the number of shares of Common Stock which he would
have owned immediately following such action had such Notes been
converted immediately prior thereto. Any adjustment made pursuant to
this subsection (a) shall become effective immediately after the record
date in the case of a dividend or distribution and shall become
effective immediately after the effective date in the case of a
subdivision or combination.
(b) In case the Company shall issue rights or warrants to
substantially all holders of Common Stock entitling them (for a period
commencing no earlier than the record date for the determination of
holders of Common Stock entitled to receive such rights or warrants and
expiring not more than 45 days after such record date) to subscribe for
or purchase shares of Common Stock (or securities convertible into
Common Stock) at a price per share less than the current market price
(as determined pursuant to subsection (f) below) of the Common Stock on
such record date, the Conversion Price shall be adjusted so that the
same shall equal the price determined by multiplying the Conversion
Price in effect immediately prior to such record date by a fraction of
which the numerator shall be the number of shares of Common Stock
outstanding on such record date, plus the number of shares of Common
Stock which the aggregate offering price of the offered shares of
Common Stock (or the aggregate conversion price of the convertible
securities so offered) would purchase at such current market price, and
of which the denominator shall be the number of shares of Common Stock
outstanding on such record date plus the number of additional shares of
Common Stock offered (or into which the convertible securities so
offered are convertible). Such adjustments shall become effective
immediately after such record date.
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<PAGE> 29
(c) In case the Company shall distribute to all holders of
Common Stock shares of capital stock of the Company other than Common
Stock, evidences of indebtedness or other assets (other than cash
dividends out of current or retained earnings), or shall distribute to
substantially all holders of Common Stock rights or warrants to
subscribe for securities (other than those referred to in subsection
(b) above), then in each such case the Conversion Price shall be
adjusted so that the same shall equal the price determined by
multiplying the Conversion Price in effect immediately prior to the
date of such distribution by a fraction of which the numerator shall be
the current market price (determined as provided in subsection (f)
below) of the Common Stock on the record date mentioned below less the
then fair market value (as determined by the Board of Directors, whose
determination shall be conclusive evidence of such fair market value
and described in a Board Resolution) of the portion of the assets so
distributed or of such subscription rights or warrants applicable to
one share of Common Stock, and of which the denominator shall be such
current market price of the Common Stock. Such adjustment shall become
effective immediately after the record date for the determination of
the holders of Common Stock entitled to receive such distribution.
Notwithstanding the foregoing, in the event that the Company shall
distribute rights or warrants (other than those referred to in
subsection (b) above) ("RIGHTS") pro rata to holders of Common Stock,
the Company may, in lieu of making any adjustment pursuant to this
Section 5.06, make proper provision so that each holder of a Note who
converts such Note (or any portion thereof) after the record date for
such distribution and prior to the expiration or redemption of the
Rights shall be entitled to receive upon such conversion, in addition
to the shares of Common Stock issuable upon such conversion (the
"CONVERSION SHARES"), a number of Rights to be determined as follows:
(i) if such conversion occurs on or prior to the date for the
distribution to the holders of Rights of separate certificates
evidencing such Rights (the "DISTRIBUTION DATE"), the same number of
Rights to which a holder of a number of shares of Common Stock equal to
the number of Conversion Shares is entitled at the time of such
conversion in accordance with the terms and provisions of and
applicable to the Rights; and (ii) if such conversion occurs after the
Distribution Date, the same number of Rights to which a holder of the
number of shares of Common Stock into which the principal amount of the
Note so converted was convertible immediately prior to the Distribution
Date would have been entitled on the Distribution Date in accordance
with the terms and provisions of and applicable to the Rights.
(d) In case the Company shall, by dividend or otherwise, at
any time distribute to all holders of its Common Stock cash (including
any distributions of cash out of current or retained earnings of the
Company but excluding any cash that is distributed as part of a
distribution requiring a Conversion Price adjustment pursuant to
paragraph (c) of this Section 5.06) in an aggregate amount that,
together with the sum of (x) the aggregate amount of any other
distributions to all holders of its Common Stock made in cash plus (y)
all Excess Payments, in each case made within the 12 months preceding
the date fixed for determining the stockholders entitled to such
distribution (the "DISTRIBUTION RECORD DATE") and in respect of which
no Conversion Price adjustment pursuant to paragraphs (c) or (e) of
this Section 5.06 or this paragraph (d) has been made, exceeds 15% of
the product of the current market price per share (determined as
provided in paragraph (f) of this Section 5.06) of the Common Stock on
the Distribution Record Date times the number of shares of Common Stock
outstanding on the Distribution Record Date (excluding shares held in
the treasury of the Company), the Conversion Price shall be reduced so
that the same shall equal the price determined by multiplying such
Conversion Price in effect immediately prior to the effectiveness of
the Conversion Price reduction contemplated by this paragraph (d) by a
fraction of which the numerator shall be the current market price per
share (determined as provided in paragraph (f) of this Section 5.06) of
the Common Stock on the Distribution Record Date less the amount of
such cash and other consideration (including any Excess Payments) so
distributed applicable to one share (based on
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<PAGE> 30
the pro rata portion of the aggregate amount of such cash and other
consideration (including any Excess Payments), divided by the shares of
Common Stock outstanding on the Distribution Record Date) of Common
Stock and the denominator shall be such current market price per share
(determined as provided in paragraph (f) of this Section 5.06) of the
Common Stock on the Distribution Record Date, such reduction to become
effective immediately prior to the opening of business on the day
following the Distribution Record Date.
(e) In case a tender offer or other negotiated transaction
made by the Company or any Subsidiary for all or any portion of the
Common Stock shall be consummated, if an Excess Payment is made in
respect of such tender offer or other negotiated transaction and the
amount of such Excess Payment, together with the sum of (x) the
aggregate amount of all Excess Payments plus (y) the aggregate amount
of all distributions to all holders of the Common Stock made in cash
(specifically including distributions of cash out of retained
earnings), in each case made within the 12 months preceding the date of
payment of such current negotiated transaction consideration or
expiration of such current tender offer, as the case may be (the
"PURCHASE DATE"), and as to which no adjustment pursuant to paragraph
(c) or paragraph (d) of this Section 5.06 or this paragraph (e) has
been made, exceeds 15% of the product of the current market price per
share (determined as provided in paragraph (f) of this Section 5.06) of
the Common Stock on the Purchase Date times the number of shares of
Common Stock outstanding (including any tendered shares but excluding
any shares held in the treasury of the Company) on the Purchase Date,
the Conversion Price shall be reduced so that the same shall equal the
price determined by multiplying such Conversion Price in effect
immediately prior to the effectiveness of the Conversion Price
reduction contemplated by this paragraph (e) by a fraction of which the
numerator shall be the current market price per share (determined as
provided in paragraph (f) of this Section 5.06) of the Common Stock on
the Purchase Date less the amount of such Excess Payments and such cash
distributions, if any, applicable to one share (based on the pro rata
portion of the aggregate amount of such Excess Payments and such cash
distributions, divided by the shares of Common Stock outstanding on the
Purchase Date) of Common Stock and the denominator shall be such
current market price per share (determined as provided in paragraph (f)
of this Section 5.06) of the Common Stock on the Purchase Date, such
reduction to become effective immediately prior to the opening of
business on the day following the Purchase Date.
(f) The current market price per share of Common Stock on any
date shall be deemed to be the average of the Daily Market Prices for
the shorter of (i) ten consecutive business days ending on the last
full trading day on the exchange or market referred to in determining
such Daily Market Prices prior to the time of determination or (ii) the
period commencing on the date next succeeding the first public
announcement of the issuance of such rights or such warrants or such
other distribution or such negotiated transaction through such last
full trading day on the exchange or market referred to in determining
such Daily Market Prices prior to the time of determination.
(g) In any case in which this Section 5.06 shall require that
an adjustment be made immediately following a record date, the Company
may elect to defer (but only until five Business Days following the
filing by the Company with the Trustee of the certificate described in
Section 5.10 hereof) issuing to the holder of any Note converted after
such record date the shares of Common Stock and other Capital Stock of
the Company issuable upon such conversion over and above the shares of
Common Stock and other Capital Stock of the Company issuable upon such
conversion only on the basis of the Conversion Price prior to
adjustment; and, in lieu of the shares the issuance of which is so
deferred, the Company shall issue or cause its transfer agents to issue
due bills or other appropriate evidence of the right to receive such
shares.
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SECTION 5.07. NO ADJUSTMENT.
No adjustment in the Conversion Price shall be required until
cumulative adjustments amount to 1% or more of the Conversion Price as last
adjusted; provided, however, that any adjustments which by reason of this
Section 5.07 are not required to be made shall be carried forward and taken into
account in any subsequent adjustment. All calculations under this Article V
shall be made to the nearest cent or to the nearest one-hundredth of a share, as
the case may be. No adjustment need be made for rights to purchase Common Stock
pursuant to a Company plan for reinvestment of dividends or interest. No
adjustment need be made for a change in the par value or no par value of the
Common Stock.
SECTION 5.08. OTHER ADJUSTMENTS.
(a) In the event that, as a result of an adjustment made pursuant to
Section 5.06 hereof, the holder of any Note thereafter surrendered for
conversion shall become entitled to receive any shares of Capital Stock of the
Company other than shares of its Common Stock, thereafter the Conversion Price
of such other shares so receivable upon conversion of any Note shall be subject
to adjustment from time to time in a manner and on terms as nearly equivalent as
practicable to the provisions with respect to Common Stock contained in this
Article V.
(b) In the event that shares of Common Stock are not delivered after
the expiration of any of the rights or warrants referred to in Section 5.06(b)
and Section 5.06(c) hereof, the Conversion Price shall be readjusted to the
Conversion Price which would otherwise be in effect had the adjustment made upon
the issuance of such rights or warrants been made on the basis of delivery of
only the number of shares of Common Stock actually delivered.
SECTION 5.09. ADJUSTMENTS FOR TAX PURPOSES.
The Company may make such reductions in the Conversion Price, in
addition to those required by Section 5.06 hereof, as it determines to be
advisable in order that any stock dividend, subdivision of shares, distribution
or rights to purchase stock or securities or distribution of securities
convertible into or exchangeable for stock made by the Company to its
stockholders will not be taxable to the recipients thereof.
SECTION 5.10. NOTICE OF ADJUSTMENT.
Whenever the Conversion Price is adjusted, the Company shall promptly
mail to Holders at the addresses appearing on the Registrar's books a notice of
the adjustment and file with the Trustee an Officers' Certificate briefly
stating the facts requiring the adjustment and the manner of computing it. The
certificate shall be conclusive evidence of the correctness of such adjustment.
SECTION 5.11. NOTICE OF CERTAIN TRANSACTIONS.
In the event that:
(1) the Company takes any action which would require an adjustment in
the Conversion Price;
(2) the Company takes any action that would require a supplemental
indenture pursuant to Section 5.12; or
(3) there is a dissolution or liquidation of the Company;
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<PAGE> 32
a Holder of a Note may wish to convert such Note into shares of Common Stock
prior to the record date for or the effective date of the transaction so that he
may receive the rights, warrants, securities or assets which a holder of shares
of Common Stock on that date may receive. Therefore, the Company shall mail to
Holders at the addresses appearing on the Registrar's books and the Trustee a
notice stating the proposed record or effective date, as the case may be. The
Company shall mail the notice at least 15 days before such date; however,
failure to mail such notice or any defect therein shall not affect the validity
of any transaction referred to in clause (1), (2) or (3) of this Section 5.11.
SECTION 5.12. EFFECT OF RECLASSIFICATIONS, CONSOLIDATIONS, MERGERS OR SALES ON
CONVERSION PRIVILEGE.
If any of the following shall occur, namely: (i) any reclassification
or change of outstanding shares of Common Stock issuable upon conversion of
Notes (other than a change in par value, or from par value to no par value, or
from no par value to par value, or as a result of a subdivision or combination),
(ii) any consolidation or merger to which the Company is a party other than a
merger in which the Company is the continuing corporation and which does not
result in any reclassification of, or change (other than a change in name, or
par value, or from par value to no par value, or from no par value to par value
or as a result of a subdivision or combination) in, outstanding shares of Common
Stock or (iii) any sale or conveyance of all or substantially all of the
property or business of the Company as an entirety, then the Company, or such
successor or purchasing corporation, as the case may be, shall, as a condition
precedent to such reclassification, change, consolidation, merger, sale or
conveyance, execute and deliver to the Trustee a supplemental indenture in form
reasonably satisfactory to the Trustee providing that the holder of each Note
then outstanding shall have the right to convert such Note into the kind and
amount of shares of stock and other securities and property (including cash)
receivable upon such reclassification, change, consolidation, merger, sale or
conveyance by a holder of the number of shares of Common Stock deliverable upon
conversion of such Note immediately prior to such reclassification, change,
consolidation, merger, sale or conveyance. Such supplemental indenture shall
provide for adjustments of the Conversion Price which shall be as nearly
equivalent as may be practicable to the adjustments of the Conversion Price
provided for in this Article V. The foregoing, however, shall not in any way
affect the right a holder of a Note may otherwise have, pursuant to clause (ii)
of the last sentence of subsection (c) of Section 5.06 hereof, to receive Rights
upon conversion of a Note. If, in the case of any such consolidation, merger,
sale or conveyance, the stock or other securities and property (including cash)
receivable thereupon by a holder of Common Stock includes shares of stock or
other securities and property of a corporation other than the successor or
purchasing corporation, as the case may be, in such consolidation, merger, sale
or conveyance, then such supplemental indenture shall also be executed by such
other corporation and shall contain such additional provisions to protect the
interests of the holders of the Notes as the Board of Directors of the Company
shall reasonably consider necessary by reason of the foregoing. The provision of
this Section 5.12 shall similarly apply to successive consolidations, mergers,
sales or conveyances.
In the event the Company shall execute a supplemental indenture
pursuant to this Section 5.12, the Company shall promptly file with the Trustee
an Officers' Certificate briefly stating the reasons therefor, the kind or
amount of shares of stock or securities or property (including cash) receivable
by holders of the Notes upon the conversion of their Notes after any such
reclassification, change, consolidation, merger, sale or conveyance and any
adjustment to be made with respect thereto.
SECTION 5.13. TRUSTEE'S DISCLAIMER.
The Trustee has no duty to determine when an adjustment under this
Article V should be made, how it should be made or what such adjustment should
be, but may accept as conclusive evidence of the correctness of any such
adjustment, and shall be protected in relying upon the Officers' Certificate
with
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respect thereto which the Company is obligated to file with the Trustee pursuant
to Section 5.10 hereof. The Trustee makes no representation as to the validity
or value of any securities or assets issued upon conversion of Notes, and the
Trustee shall not be responsible for the Company's failure to comply with any
provisions of this Article V.
The Trustee shall not be under any responsibility to determine the
correctness of any provisions contained in any supplemental indenture executed
pursuant to Section 5.12, but may accept as conclusive evidence of the
correctness thereof, and shall be protected in relying upon, the Officers'
Certificate with respect thereto which the Company is obligated to file with the
Trustee pursuant to Section 5.12 hereof.
ARTICLE VI.
SUBORDINATION
SECTION 6.01. AGREEMENT TO SUBORDINATE AND RANKING.
The Company, for itself and its successors, and each holder, by his
acceptance of Notes, agree that the payment of the principal of or interest on
or any other amounts due on the Notes is subordinated in right of payment, to
the extent and in the manner stated in this Article VI, to the prior payment in
full of all existing and future Senior Debt. The Notes shall rank pari passu
with, and shall not be senior in right of payment to such other Indebtedness of
the Company whether outstanding on the date of this Indenture or hereafter
created, incurred, issued or guaranteed by the Company, where the instrument
creating or evidencing such Indebtedness expressly provides that such
Indebtedness ranks pari passu with the Notes.
SECTION 6.02. NO PAYMENT ON NOTES IF SENIOR DEBT IN DEFAULT.
Anything in this Indenture to the contrary notwithstanding, no payment
on account of principal of or redemption of, interest on or other amounts due on
the Notes, and no redemption, purchase, or other acquisition of the Notes, shall
be made by or on behalf of the Company (i) unless full payment of amounts then
due for principal and interest and of all other amounts then due on all Senior
Debt has been made or duly provided for pursuant to the terms of the instrument
governing such Senior Debt, (ii) if, at the time of such payment, redemption,
purchase or other acquisition, or immediately after giving effect thereto, there
shall exist under any Senior Debt, or any agreement pursuant to which any Senior
Debt is issued, any default, which default shall not have been cured or waived
and which default shall have resulted in the full amount of such Senior Debt
being declared due and payable or (iii) if, at the time of such payment,
redemption, purchase or other acquisition, the Trustee shall have received
written notice from any of the holders of Senior Debt or such holder's
representative (a "PAYMENT BLOCKAGE NOTICE") that there exists under such Senior
Debt, or any agreement pursuant to which such Senior Debt is issued, any
default, which default shall not have been cured or waived, permitting the
holders thereof to declare any amounts of such Senior Debt due and payable, but
only for the period (the "PAYMENT BLOCKAGE PERIOD") commencing on the date of
receipt of the Payment Blockage Notice and ending (unless earlier terminated by
notice given to the Trustee by the holders of such Senior Debt) on the earlier
of (a) the date on which such event of default shall have been cured or waived
or (b)180 days from the receipt of the Payment Blockage Notice. Upon termination
of the Payment Blockage Period, payments on account of principal of or interest
on the Notes (other than, subject to Section 6.03 hereof, amounts due and
payable by reason of the acceleration of the maturity of the Notes) and
redemptions, purchases or other acquisitions may be made by or on behalf of the
Company. Notwithstanding anything herein to the contrary, (a) only one Payment
Blockage Notice may be given during any period of 360 consecutive days with
respect to the same event of default or any other events of default on the same
issue of Senior Debt existing and known to the Person giving such notice at the
time of such notice unless such event of default or such other events of default
have been cured or waived for a period of not less than 90
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consecutive days and (b) no new Payment Blockage Period may be commenced by the
holder or holders of the same issue of Senior Debt or their representative or
representatives during any period of 360 consecutive days unless all events of
default which were the object of the immediately preceding Payment Blockage
Notice, and any other event of default on the same issue of Senior Debt existing
and known to the Person giving such notice at the time of such notice, have been
cured or waived.
In the event that, notwithstanding the provisions of this Section 6.02,
payments are made by or on behalf of the Company in contravention of the
provisions of this Section 6.02, such payments shall be held by the Trustee, any
Paying Agent or the holders, as applicable, in trust for the benefit of, and
shall be paid over to and delivered to, the holders of Senior Debt or their
representative or the trustee under the indenture or other agreement (if any),
pursuant to which any instruments evidencing any Senior Debt may have been
issued for application to the payment of all Senior Debt ratably according to
the aggregate amounts remaining unpaid to the extent necessary to pay all Senior
Debt in full in accordance with the terms of such Senior Debt, after giving
effect to any concurrent payment or distribution to or for the holders of Senior
Debt.
The Company shall give prompt written notice to the Trustee and any
Paying Agent of any default or event of default under any Senior Debt or under
any agreement pursuant to which any Senior Debt may have been issued.
SECTION 6.03. DISTRIBUTION ON ACCELERATION OF NOTES; DISSOLUTION AND
REORGANIZATION; SUBROGATION OF NOTES.
(a) If the Notes are declared due and payable because of the
occurrence of an Event of Default, the Company or the Trustee shall give prompt
written notice to the holders of all Senior Debt or to the trustee(s) for such
Senior Debt of such acceleration. The Company may not pay the principal of or
interest on or any other amounts due on the Notes until five days after such
holders or trustee(s) of Senior Debt receive such notice and, thereafter, the
Company may pay the principal of or interest on or any other amounts due on the
Notes only if the provisions of this Article VI permit such payment.
(b) Upon (i) any acceleration of the principal amount due on the Notes
because of an Event of Default or (ii) any distribution of assets of the Company
upon any dissolution, winding up, liquidation or reorganization of the Company
(whether in bankruptcy, insolvency or receivership proceedings or upon an
assignment for the benefit of creditors or any other dissolution, winding up,
liquidation or reorganization of the Company):
(1) the holders of all Senior Debt shall first be entitled to
receive payment in full of the principal thereof, the interest thereon
and any other amounts due thereon before the holders are entitled to
receive payment on account of the principal of or interest on or any
other amounts due on the Notes;
(2) any payment or distribution of assets of the Company of
any kind or character, whether in cash, property or securities (other
than securities of the Company as reorganized or readjusted or
securities of the Company or any other corporation provided for by a
plan of reorganization or readjustment the payment of which is
subordinate, at least to the extent provided in this Article VI with
respect to the Notes, to the payment in full without diminution or
modification by such plan of all Senior Debt), to which the holders or
the Trustee would be entitled except for the provisions of this Article
VI, shall be paid by the liquidating trustee or agent or other Person
making such a payment or distribution, directly to the holders of
Senior Debt (or their representatives(s) or trustee(s) acting on their
behalf), ratably according to the aggregate amounts remaining unpaid on
account of the principal of or interest on and other
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amounts due on the Senior Debt held or represented by each, to the
extent necessary to make payment in full of all Senior Debt remaining
unpaid, after giving effect to any concurrent payment or distribution
to the holders of such Senior Debt; and
(3) in the event that, notwithstanding the foregoing, any
payment or distribution of assets of the Company of any kind or
character, whether in cash, property or securities (other than
securities of the Company as reorganized or readjusted, or securities
of the Company or any other corporation provided for by a plan of
reorganization or readjustment the payment of which is subordinate, at
least to the extent provided in this Article VI with respect to the
Notes, to the payment in full without diminution or modification by
such plan of Senior Debt), shall be received by the Trustee or the
holders before all Senior Debt is paid in full, such payment or
distribution shall be held in trust for the benefit of, and be paid
over to upon request by a holder of the Senior Debt, the holders of the
Senior Debt remaining unpaid (or their representatives) or trustee(s)
acting on their behalf, ratably as aforesaid, for application to the
payment of such Senior Debt until all such Senior Debt shall have been
paid in full, after giving effect to any concurrent payment or
distribution to the holders of such Senior Debt.
Subject to the payment in full of all Senior Debt, the holders shall be
subrogated to the rights of the holders of Senior Debt to receive payments or
distributions of cash, property or securities of the Company applicable to the
Senior Debt until the principal of and interest on the Notes shall be paid in
full and, for purposes of such subrogation, no such payments or distributions to
the holders of Senior Debt of cash, property or securities which otherwise would
have been payable or distributable to holders shall, as between the Company, its
creditors other than the holders of Senior Debt, and the holders, be deemed to
be a payment by the Company to or on account of the Senior Debt, it being
understood that the provisions of this Article VI are and are intended solely
for the purpose of defining the relative rights of the Holders, on the one hand,
and the holders of Senior Debt, on the other hand.
Nothing contained in this Article VI or elsewhere in this Indenture or
in the Notes is intended to or shall (i) impair, as between the Company and its
creditors other than the holders of Senior Debt, the obligation of the Company,
which is absolute and unconditional, to pay to the holders the principal of and
interest on the Notes as and when the same shall become due and payable in
accordance with the terms of the Notes or is intended to or (ii) affect the
relative rights of the holders and creditors of the Company other than holders
of Senior Debt or, as between the Company and the Trustee, the obligations of
the Company to the Trustee, or (iii) prevent the Trustee or the holders from
exercising all remedies otherwise permitted by applicable law upon default under
this Indenture, subject to the rights, if any, under this Article VI of the
holders of Senior Debt in respect of cash, property and securities of the
Company received upon the exercise of any such remedy.
Upon distribution of assets of the Company referred to in this Article
VI, the Trustee, subject to the provisions of Section 9.01 hereof, and the
holders shall be entitled to rely upon a certificate of the liquidating trustee
or agent or other Person making any distribution to the Trustee or to the
holders for the purpose of ascertaining the Persons entitled to participate in
such distribution, the holders of the Senior Debt and other indebtedness of the
Company, the amount thereof or payable thereon, the amount or amounts paid or
distributed thereon and all other facts pertinent thereto or to this Article VI.
The Trustee, however, shall not be deemed to owe any fiduciary duty to the
holders of Senior Debt. Nothing contained in this Article VI or elsewhere in
this Indenture, or in any of the Notes, shall prevent the good faith application
by the Trustee of any moneys which were deposited with it hereunder, prior to
its receipt of written notice of facts which would prohibit such application,
for the purpose of the payment of or on account of the principal of or interest
on, the Notes unless, prior to the date on which such application is made by the
Trustee, the Trustee shall be charged with notice under Section 6.03(d) hereof
of the facts which would prohibit the making of such application.
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(c) The provisions of this Article VI shall not be applicable to any
cash, properties or securities received by the Trustee or by any holder when
received as a holder of Senior Debt and nothing in Section 9.11 hereof or
elsewhere in this Indenture shall deprive the Trustee or such holder of any of
its rights as such holder.
(d) The Company shall give prompt written notice to the Trustee of any
fact known to the Company which would prohibit the making of any payment of
money to or by the Trustee in respect of the Notes pursuant to the provisions of
this Article VI. The Trustee, subject to the provisions of Section 9.01 hereof,
shall be entitled to assume that no such fact exists unless the Company or any
holder of Senior Debt or any trustee therefor has given such notice to the
Trustee. Notwithstanding the provisions of this Article VI or any other
provisions of this Indenture, the Trustee shall not be charged with knowledge of
the existence of any fact which would prohibit the making of any payment of
monies to or by the Trustee in respect of the Notes pursuant to the provisions
in this Article VI, unless, and until three Business Days after, the Trustee
shall have received written notice thereof from the Company or any holder or
holders of Senior Debt or from any trustee therefor; and, prior to the receipt
of any such written notice, the Trustee, subject to the provisions of Section
9.01 hereof, shall be entitled in all respects conclusively to assume that no
such facts exist; provided that if on a date not less than three Business Days
immediately preceding the date upon which by the terms hereof any such monies
may become payable for any purpose (including, without limitation, the principal
of or interest on any Note), the Trustee shall not have received with respect to
such monies the notice provided for in this Section 6.03(d), than anything
herein contained to the contrary notwithstanding, the Trustee shall have full
power and authority to receive such monies and to apply the same to the purpose
for which they were received, and shall not be affected by any notice to the
contrary which may be received by it on or after such prior date.
The Trustee shall be entitled to rely on the delivery to it of a
written notice by a Person representing himself to be a holder of Senior Debt
(or a trustee on behalf of such holder) to establish that such notice has been
given by a holder of Senior Debt (or a trustee on behalf of any such holder or
holders). In the event that the Trustee determines in good faith that further
evidence is required with respect to the right of any Person as a holder of
Senior Debt to participate in any payment or distribution pursuant to this
Article VI, the Trustee may request such Person to furnish evidence to the
reasonable satisfaction of the Trustee as to the amount of Senior Debt held by
such Person, the extent to which such Person is entitled to participate in such
payment or distribution and any other facts pertinent to the rights of such
Person under this Article VI, and, if such evidence is not furnished, the
Trustee may defer any payment to such Person pending judicial determination as
to the right of such Person to receive such payment; nor shall the Trustee be
charged with knowledge of the curing or waiving of any default of the character
specified in Section 6.02 hereof or that any event or any condition preventing
any payment in respect of the Notes shall have ceased to exist, unless and until
the Trustee shall have received an Officers' Certificate to such effect.
(e) The provisions of this Section 6.03 applicable to the Trustee
shall also apply to any Paying Agent for the Company.
SECTION 6.04. RELIANCE BY SENIOR DEBT ON SUBORDINATION PROVISIONS.
Each holder of any Note by his acceptance thereof acknowledges and
agrees that the foregoing subordination provisions are, and are intended to be,
an inducement and a consideration for each holder of any Senior Debt, whether
such Senior Debt was created or acquired before or after the issuance of the
Notes, to acquire and continue to hold, or to continue to hold, such Senior
Debt, and such holder of Senior Debt shall be deemed conclusively to have relied
on such subordination provisions in acquiring and continuing to hold, or in
continuing to hold, such Senior Debt. Notice of any default in the payment
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of any Senior Debt, except as expressly stated in this Article VI, and notice of
acceptance of the provisions hereof are hereby expressly waived. Except as
otherwise expressly provided herein, no waiver, forbearance or release by any
holder of Senior Debt under such Senior Debt or under this Article VI shall
constitute a release of any of the obligations or liabilities of the Trustee or
holders of the Notes provided in this Article VI.
SECTION 6.05. NO WAIVER OF SUBORDINATION PROVISIONS.
Except as otherwise expressly provided herein, no right of any present
or future holder of any Senior Debt to enforce subordination as herein provided
shall at any time in any way be prejudiced or impaired by any act or failure to
act on the part of the Company or by any act or failure to act, in good faith,
by any such holder, or by any noncompliance by the Company with the terms,
provisions and covenants of this Indenture, regardless of any knowledge thereof
any such holder may have or be otherwise charged with.
Without in any way limiting the generality of the foregoing paragraph,
the holders of Senior Debt may, at any time and from time to time, without the
consent of, or notice to, the Trustee or the holders of the Notes, without
incurring responsibility to the holders of the Notes and without impairing or
releasing the subordination provided in this Article VI or the obligations
hereunder of the holders of the Notes to the holders of Senior Debt, do any one
or more of the following: (i) change the manner, place or terms of payment of,
or renew or alter, Senior Debt, or otherwise amend or supplement in any manner
Senior Debt or any instrument evidencing the same or any agreement under which
Senior Debt is outstanding; (ii) sell, exchange, release or otherwise dispose of
any property pledged, mortgaged or otherwise securing Senior Debt; (iii) release
any Person liable in any manner for the collection of Senior Debt; and (iv)
exercise or refrain from exercising any rights against the Company or any other
Person.
SECTION 6.06. TRUSTEE'S RELATION TO SENIOR DEBT.
The Trustee in its individual capacity shall be entitled to all the
rights set forth in this Article VI in respect of any Senior Debt at any time
held by it, to the same extent as any holder of Senior Debt, and nothing in
Section 9.11 hereof or elsewhere in this Indenture shall deprive the Trustee of
any of its rights as such holder.
With respect to the holders of Senior Debt, the Trustee undertakes to
perform or to observe only such of its covenants and obligation, as are
specifically set forth in this Article VI, and no implied covenants or
obligations with respect to the holders of Senior Debt shall be read into this
Indenture against the Trustee. The Trustee shall not owe any fiduciary duty to
the holders of Senior Debt but shall have only such obligations to such holders
as are expressly set forth in this Article VI.
Each holder of a Note by his acceptance thereof authorizes and directs
the Trustee on his behalf to take such action as may be necessary or appropriate
to effectuate the subordination provided in this Article VI and appoints the
Trustee his attorney-in-fact for any and all such purposes, including, in the
event of any dissolution, winding up or liquidation or reorganization under any
applicable bankruptcy law of the Company (whether in bankruptcy, insolvency or
receivership proceedings or otherwise), the timely filing of a claim for the
unpaid balance of such holder's Notes in the form required in such proceedings
and the causing of such claim to be approved. If the Trustee does not file a
claim or proof of debt in the form required in such proceedings prior to 30 days
before the expiration of the time to file such claims or proofs, then any holder
or holders of Senior Debt or their representative or representatives shall have
the right to demand, sue for, collect, receive and receipt for the payments and
distributions in respect of the Notes which are required to be paid or delivered
to the holders of Senior Debt as provided in this Article VI and to file and
prove all claims therefore and to take all such other action in the name
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of the holders or otherwise, as such holders of Senior Debt or representative
thereof may determine to be necessary or appropriate for the enforcement of the
provisions of this Article VI.
SECTION 6.07. OTHER PROVISIONS SUBJECT HERETO.
Expect as expressly stated in this Article VI, notwithstanding anything
contained in this Indenture to the contrary, all the provisions of this
Indenture and the Notes are subject to the provisions of this Article VI.
However, nothing in this Article VI shall apply to or adversely affect the
claims of, or payment, to, the Trustee pursuant to Section 9.07 hereof.
Notwithstanding the foregoing, the failure to make a payment on account of
principal of or interest on the Notes by reason of any provision of this Article
VI shall not be construed as preventing the occurrence of an Event of Default
under Section 8.01 hereof.
ARTICLE VII.
SUCCESSORS
SECTION 7.01. SALE OF ASSETS.
The Company may not sell, assign, transfer, lease, convey or otherwise
dispose of all or substantially all of its properties or assets in one or more
related transactions to, another corporation, Person or entity unless:
(a) the entity or Person to which such sale, assignment,
transfer, lease, conveyance or other disposition shall have been made
is a corporation organized or existing under the laws of the United
Kingdom, the Netherlands, the Netherlands Antilles, Bermuda or the
Cayman Islands or of the United States, any state thereof or the
District of Columbia;
(b) the entity or Person to which such sale, assignment,
transfer, lease, conveyance or other disposition will have been made
assumes all the Obligations of the Company, pursuant to a supplemental
indenture in a form reasonably satisfactory to the Trustee, under the
Notes and this Indenture;
(c) immediately after such transaction no Default or Event of
Default exists.
SECTION 7.02. SUCCESSOR CORPORATION SUBSTITUTED.
Upon any consolidation or merger, or any sale, assignment, transfer,
lease, conveyance or other disposition of all or substantially all of the assets
of the Company in accordance with Section 7.01 or Section 8.01(i) hereof, the
successor corporation formed by such consolidation or into or with which the
Company is merged or to which such sale, assignment, transfer, lease, conveyance
or other disposition is made shall succeed to, and be substituted for and may
exercise every right and power of, the Company under this Indenture with the
same effect as if such successor Person has been named as the Company herein;
provided, however, that the predecessor Company in the case of a sale,
assignment, transfer, lease, conveyance or other disposition shall not be
released from the obligation to pay the principal of and interest on the Notes.
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ARTICLE VIII.
DEFAULTS AND REMEDIES
SECTION 8.01. EVENTS OF DEFAULT.
An "EVENT OF DEFAULT" occurs if:
(a) the Company defaults in the payment of interest on any
Note when the same becomes due and payable and the Default continues
for a period of 30 days after the date due and payable;
(b) the Company defaults in the payment of the principal of
any Note when the same becomes due and payable at maturity, upon
optional redemption, in connection with a Purchase Offer, upon
declaration or otherwise;
(c) the Company fails to observe or perform for a period of 30
days after notice any covenant or agreement contained in Sections 4.07
and 7.01 hereof (other than, in the case of Section 4.07 a failure to
purchase Notes in connection with a Purchase Offer) hereof;
(d) the Company fails to observe or perform any other covenant
or agreement contained in this Indenture or the Notes, required by it
to be performed and the Default continues for a period of 60 days after
notice from the Trustee to the Company or from the Holders of 25% in
aggregate principal amount of the then outstanding Notes to the Company
and the Trustee stating that such notice is a "Notice of Default";
(e) default under any mortgage, indenture or instrument under
which there may be issued or by which there may be secured or evidenced
any Indebtedness for money borrowed by the Company or any of its
Subsidiaries that is a Significant Subsidiary or any group of two or
more Subsidiaries that, taken as a whole, would constitute a
Significant Subsidiary, or the payment of which is guaranteed by the
Company or any of its Subsidiaries that is a Significant Subsidiary or
any group of two or more Subsidiaries that, taken as a whole, would
constitute a Significant Subsidiary, whether such Indebtedness or
guarantee now exists or is created after the Issuance Date, which
default:
(i) is caused by a failure to pay when due principal of
or interest on such Indebtedness within the grace period
provided for in such Indebtedness (which failure continues
beyond any applicable grace period) (a "PAYMENT DEFAULT"); or
(ii) results in the acceleration of such Indebtedness
prior to its express maturity and, in each case, the principal
amount of any such Indebtedness, together with the principal
amount of any other such Indebtedness under which there is a
Payment Default or the maturity of which has been so
accelerated, aggregates $20 million or more;
(f) failure by the Company or any of its Subsidiaries that is
a Significant Subsidiary or any group of two or more Subsidiaries that,
taken as a whole, would constitute a Significant Subsidiary to pay
final judgments for the payment of money (other than any judgment as to
which a reputable insurance company has accepted liability subject to
customary terms) aggregating in excess of $10 million, which judgments
are not paid, discharged or stayed within 60 days after their entry;
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(g) the Company or any of its Subsidiaries that is a
Significant Subsidiary or any group of two or more Subsidiaries that,
taken as a whole, would constitute a Significant Subsidiary pursuant to
or within the meaning of any Bankruptcy Law:
(i) commences a voluntary case;
(ii) consents to the entry of an order for relief
against it in an involuntary case in which it is the debtor;
(iii) consents to the appointment of a Custodian of
it or for all or substantially all of its property;
(iv) makes a general assignment for the benefit of
its creditors; or
(v) generally is unable to pay its debts as the same
become due; and
(h) a court of competent jurisdiction enters an order or
decree under any Bankruptcy Law that:
(i) is for relief against the Company or any of its
Subsidiaries that is a Significant Subsidiary or any group of
two or more Subsidiaries that, taken as a whole, would
constitute a Significant Subsidiary in an involuntary case;
(ii) appoints a Custodian of the Company or any of
its Subsidiaries that is a Significant Subsidiary or any group
of two or more Subsidiaries that, taken as a whole, would
constitute a Significant Subsidiary or for all or
substantially all of its property;
(iii) orders the liquidation of the Company or any of
its Subsidiaries that is a Significant Subsidiary or any group
of two or more Subsidiaries that, taken as a whole, would
constitute a Significant Subsidiary, and the order or decree
remains unstayed and in effect for 60 days; or
(i) The approval by the shareholders of the Company of any
merger, amalgamation or consolidation by the Company (whether or not
the Company is the surviving corporation) and whether or not such
merger, amalgamation or consolidation is in one or more related
transactions if, (x) the successor corporation, Person or entity (A)
does not assume all the Obligations of the Company, pursuant to a
supplemental indenture in a form reasonably satisfactory to the
Trustee, under the Notes and this Indenture and (B) is not a
corporation, Person or entity organized or existing under the laws of
the United States, any state thereof, the District of Columbia or the
laws of the United Kingdom, the Netherlands, the Netherlands Antilles,
Bermuda or the Cayman Islands or (y) immediately after such
transaction, any Default or Event of Default exists.
The term "BANKRUPTCY LAW" means Title 11, U.S. Code or any similar Federal,
state or foreign law for the relief of debtors or the protection of creditors.
The term "CUSTODIAN" means any receiver, trustee, assignee, liquidator or
similar official under any Bankruptcy Law.
SECTION 8.02. ACCELERATION.
If an Event of Default (other than an Event of Default specified in
clauses (g), (h), and (i) of Section 8.01 hereof) occurs and is continuing, the
Trustee by notice to the Company, or the Holders of at least 25% in principal
amount of the then outstanding Notes by notice to the Company and the Trustee,
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may declare all the Notes to be due and payable. Upon such declaration, the
principal of, premium, if any, and interest on the Notes shall be due and
payable immediately. If an Event of Default specified in clause (g), (h) or (i)
of Section 8.01 hereof occurs, such an amount shall ipso facto become and be
immediately due and payable without any declaration or other act on the part of
the Trustee or any Holder.
If the Notes have been declared due and payable as a result of the
acceleration of Indebtedness prior to its express maturity pursuant to Section
8.01(e)(ii), such declaration shall be automatically rescinded if the
acceleration of such indebtedness has been rescinded or annulled within 30 days
after such acceleration in accordance with the mortgage, indenture or instrument
under which it was issued and the conditions set forth in clauses (i) and (ii)
in the next paragraph are satisfied.
Except as otherwise provided in the immediately preceding paragraph,
the Holders of a majority in principal amount of the then outstanding Notes by
notice to the Trustee may rescind an acceleration and its consequences (i) if
the recission would not conflict with any judgment or decree of a court of
competent jurisdiction and (ii) if all existing Events of Default have been
cured or waived except nonpayment of principal or interest on the Notes that has
become due solely because of the acceleration of the Notes.
SECTION 8.03. OTHER REMEDIES.
If an Event of Default occurs and is continuing, the Trustee may pursue
any available remedy to collect the payment of principal or interest on the
Notes or to enforce the performance of any provision of the Notes or this
Indenture.
The Trustee may maintain a proceeding even if it does not possess any
of the Notes or does not produce any of them in the proceeding. A delay or
omission by the Trustee or any Holder in exercising any right or remedy accruing
upon an Event of Default shall not impair the right or remedy or constitute a
waiver of or acquiescence in the Event of Default. All remedies are cumulative
to the extent permitted by law.
SECTION 8.04. WAIVER OF PAST DEFAULTS.
The Holders of a majority in principal amount of the then outstanding
Notes by notice to the Trustee may on behalf of all of the Holders of the Notes
waive an existing Default or Event of Default and its consequences except a
continuing Default or Event of Default in the payment of the principal of or
interest on any Note. When a Default or Event of Default is waived, it is cured
and ceases; but no such waiver shall extend to any subsequent or other Default
or impair any right consequent thereon.
SECTION 8.05. CONTROL BY MAJORITY.
The Holders of a majority in principal amount of the then outstanding
Notes may direct the time, method and place of conducting any proceeding for any
remedy available to the Trustee or exercising any trust or power conferred on
it. However, the Trustee may refuse to follow any direction that conflicts with
law or this Indenture, is unduly prejudicial to the rights of other Holders, or
would involve the Trustee in personal liability.
SECTION 8.06. LIMITATION ON SUITS.
A Holder may pursue a remedy with respect to this Indenture or the
Notes only if:
(a) the Holder gives to the Trustee notice of a continuing
Event of Default;
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(b) the Holders of at least 25% in principal amount of the
then outstanding Notes make a request to the Trustee to pursue the
remedy;
(c) such Holder or Holders offer to the Trustee indemnity
satisfactory to the Trustee against any loss, liability or expense;
(d) the Trustee does not comply with the request within 60
days after receipt of the request and the offer of indemnity; and
(e) during such 60-day period the Holders of a majority in
principal amount of the then outstanding Notes do not give the Trustee
a direction inconsistent with the request.
A Holder may not use this Indenture to prejudice the rights of another
Holder or to obtain a preference or priority over another Holder.
SECTION 8.07. RIGHTS OF HOLDERS TO RECEIVE PAYMENT.
Notwithstanding any other provision of this Indenture, the right of any
Holder of a Note to receive payment of principal, and interest on the Note, on
or after the respective due dates expressed in the Note, or to bring suit for
the enforcement of any such payment on or after such respective dates, shall not
be impaired or affected without the consent of the Holder made pursuant to this
Section 8.07.
SECTION 8.08. COLLECTION SUIT BY TRUSTEE.
If an Event of Default specified in Section 8.01(a) or (b), hereof
occurs and is continuing, the Trustee may recover judgment in its own name and
as trustee of an express trust against the Company for the whole amount of
principal and interest remaining unpaid on the Notes and interest on overdue
principal and interest and such further amount as shall be sufficient to cover
the costs and, to the extent lawful, expenses of collection, including the
reasonable compensation, expenses, disbursements and advances of the Trustee,
its agents and counsel.
SECTION 8.09. TRUSTEE MAY FILE PROOFS OF CLAIM.
The Trustee may file such proofs of claim and other papers or documents
as may be necessary or advisable in order to have the claims of the Trustee and
the Holders allowed in any judicial proceedings relative to the Company, its
creditors or its property. Nothing contained herein shall be deemed to authorize
the Trustee to authorize or consent to or accept or adopt on behalf of any
Holder any plan of reorganization, arrangement, adjustment or composition
affecting the Notes or the rights of any Holder thereof, or to authorize the
Trustee to vote in respect of the claim of any Holder in any such proceeding.
SECTION 8.10. PRIORITIES.
If the Trustee collects any money pursuant to this Article, it shall
pay out the money in the following order:
First: to the Trustee for amounts due under Section 9.07 hereof;
Second: to the holders of Senior Debt to the extent required by Article
VI;
Third: to Holders for amounts due and unpaid on the Notes for principal
and interest (and Additional Amounts, if applicable), ratably, without
preference or priority of any kind, according to the amounts due and payable on
the Notes for principal and interest, respectively; and
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Fourth: to the Company.
The Trustee may fix a record date and payment date for any payment to
Holders made pursuant to this Section 8.10.
SECTION 8.11. UNDERTAKING FOR COSTS.
In any suit for the enforcement of any right or remedy under this
Indenture or in any suit against the Trustee for any action taken or omitted by
it as a Trustee, a court in its discretion may require the filing by any party
litigant in the suit of an undertaking to pay the costs of the suit, and the
court in its discretion may assess reasonable costs, including reasonable
attorneys' fees, against any party litigant in the suit, having due regard to
the merits and good faith of the claims or defenses made by the party litigant.
This Section 8.11 does not apply to a suit by the Trustee, a suit by a Holder
pursuant to Section 8.07 hereof, or a suit by Holders of more than 10% in
principal amount of the then outstanding Notes.
ARTICLE IX.
TRUSTEE
SECTION 9.01. DUTIES OF TRUSTEE.
(a) If an Event of Default has occurred and is continuing, the Trustee
shall exercise such of the rights and powers vested in it by this Indenture, and
use the same degree of care and skill in their exercise, as a prudent man would
exercise or use under the circumstances in the conduct of his own affairs.
(b) Except during the continuance of an Event of Default: (i) the
Trustee need perform only those duties that are specifically set forth in this
Indenture and no others and (ii) in the absence of bad faith on its part, the
Trustee may conclusively rely, as to the truth of the statements and the
correctness of the opinions expressed therein, upon certificates or opinions
furnished to the Trustee and conforming to the requirements of this Indenture.
However, the Trustee shall examine the certificates and opinions to determine
whether or not they conform to the requirements of this Indenture and to confirm
the correctness of all mathematical computations.
(c) The Trustee may not be relieved from liability for its own
negligent action, its own negligent failure to act, or its own willful
misconduct, except that: (i) this paragraph does not limit the effect of
paragraph (b) of this Section 9.01; (ii) the Trustee shall not be liable for any
error of judgment made in good faith by a Trust Officer, unless it is proved
that the Trustee was negligent in ascertaining the pertinent facts and (iii) the
Trustee shall not be liable with respect to any action it takes or omits to take
in good faith in accordance with a direction received by it pursuant to Section
8.05 hereof.
(d) Every provision of this Indenture that in any way relates to the
Trustee is subject to paragraphs (a), (b) and (c) of this Section 9.01.
(e) The Trustee may refuse to perform any duty or exercise any right or
power unless it receives indemnity satisfactory to it against any loss,
liability or expense.
(f) The Trustee shall not be liable for interest on any money received
by it except as the Trustee may agree in writing with the Company. Money held in
trust by the Trustee need not be segregated from other funds except to the
extent required by law.
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SECTION 9.02. RIGHTS OF TRUSTEE.
(a) The Trustee may rely on any document believed by it to be genuine
and to have been signed or presented by the proper Person. The Trustee need not
investigate any fact or matter stated in the document.
(b) Before the Trustee acts or refrains from acting, it may require an
Officers' Certificate or an Opinion of Counsel, or both. The Trustee shall not
be liable for any action it takes or omits to take in good faith in reliance on
such Officers' Certificate or Opinion of Counsel.
(c) The Trustee may act through agents and shall not be responsible for
the misconduct or negligence of any agent appointed with due care.
(d) The Trustee shall not be liable for any action it takes or omits to
take in good faith which it believes to be authorized or within its rights or
powers.
(e) The Trustee shall not be charged with knowledge of any Event of
Default under subsection (c), (d), (e), (f) or (i) (and subsection (a) or (b) if
the Trustee does not act as Paying Agent) of Section 8.01 or of the identity of
any Significant Subsidiary or of any group of two or more Subsidiaries that,
taken as a whole, would constitute a Significant Subsidiary unless either (1) a
Trust Officer of the Trustee assigned to its corporate trust department shall
have actual knowledge thereof, or (2) the Trustee shall have received notice
thereof in accordance with Section 12.02 hereof from the Company or any Holder.
SECTION 9.03. INDIVIDUAL RIGHTS OF TRUSTEE.
The Trustee in its individual or any other capacity may become the
owner or pledgee of Notes and may otherwise deal with the Company or an
Affiliate with the same rights it would have if it were not Trustee. Any Agent
may do the same with like rights. However, the Trustee is subject to Sections
9.10 and 9.11 hereof.
SECTION 9.04. TRUSTEE'S DISCLAIMER.
The Trustee makes no representation as to the validity or adequacy of
this Indenture or the Notes, it shall not be accountable for the Company's use
of the proceeds from the Notes, and it shall not be responsible for any
statement of the Company in the Indenture or any statement in the Notes other
than its authentication or for compliance by the Company with the Registration
Rights Agreement.
SECTION 9.05. NOTICE OF DEFAULTS.
If a Default or Event of Default occurs and is continuing and if it is
known to the Trustee, the Trustee shall mail to Holders a notice of the Default
or Event of Default within 90 days after it occurs. Except in the case of a
Default or Event of Default in payment on any Note, the Trustee may withhold the
notice if and so long as a committee of its Trust Officers in good faith
determines that withholding the notice is in the interests of Holders.
SECTION 9.06. REPORTS BY TRUSTEE TO HOLDERS.
Within 60 days after the reporting date stated in Section 12.10, the
Trustee shall mail to Holders a brief report dated as of such reporting date
that complies with TIA (Section) 313(a) if and to the extent required by such
(Section) 313(a). The Trustee also shall comply with TIA (Section) 313(b)(2).
The Trustee shall also transmit by mail all reports as required by TIA (Section)
313(c).
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A copy of each report at the time of its mailing to Holders shall be
filed with the SEC and each stock exchange on which the Notes are listed. The
Company shall notify the Trustee when the Notes are listed on any stock
exchange.
SECTION 9.07. COMPENSATION AND INDEMNITY.
The Company shall pay to the Trustee from time to time reasonable
compensation for its services hereunder. The Trustee's compensation shall not be
limited by any law on compensation of a trustee of an express trust. The Company
shall reimburse the Trustee upon request for all reasonable disbursements,
expenses and advances incurred or made by it. Such disbursements and expenses
may include the reasonable disbursements, compensation and expenses of the
Trustee's agents and counsel.
The Company shall indemnify the Trustee against any loss or liability
incurred by it except as set forth in the next paragraph. The Trustee shall
notify the Company promptly of any claim for which it may seek indemnity. The
Company shall defend the claim and the Trustee shall cooperate in the defense.
The Trustee may have separate counsel and the Company shall pay the reasonable
fees, disbursements and expenses of such counsel. The Company need not pay for
any settlement made without its consent, which consent shall not be unreasonably
withheld.
The Company need not reimburse any expense or indemnify against any
loss or liability incurred by the Trustee through negligence or bad faith.
To secure the Company's payment obligations in this Section 9.07, the
Trustee shall have a lien prior to the Notes on all money or property held or
collected by the Trustee, except money or property held in trust to pay
principal and interest on particular Notes.
Without prejudice to any other rights available to the Trustee under
applicable law, when the Trustee incurs expenses or renders services after an
Event of Default specified in Section 8.01(g) or (h) hereof occurs, the expenses
and the compensation for the services are intended to constitute expenses of
administration under any Bankruptcy Law.
All amounts owing to the Trustee under this Section 9.07 shall be
payable by the Company in United States dollars.
SECTION 9.08. REPLACEMENT OF TRUSTEE.
A resignation or removal of the Trustee and appointment of a successor
Trustee shall become effective only upon the successor Trustee's acceptance of
appointment as provided in this Section 9.08.
The Trustee may resign by so notifying the Company. The Holders of a
majority in principal amount of the then outstanding Notes may remove the
Trustee by so notifying the Trustee and the Company. The Company may remove the
Trustee if:
(a) the Trustee fails to comply with Section 9.10 hereof,
unless the Trustee's duty to resign is stayed as provided in TIA
(Section) 310(b);
(b) the Trustee is adjudged a bankrupt or an insolvent or an
order for relief is entered with respect to the Trustee under any
Bankruptcy Law;
(c) a Custodian or public officer takes charge of the Trustee
or its property; or
(d) the Trustee becomes incapable of acting.
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If the Trustee resigns or is removed or if a vacancy exists in the
office of Trustee for any reason, the Company shall promptly appoint a successor
Trustee. Within one year after the successor Trustee takes office, the Holders
of a majority in principal amount of the then outstanding Notes may appoint a
successor Trustee to replace the successor Trustee appointed by the Company.
If a successor Trustee does not take office within 60 days after the
retiring Trustee resigns or is removed, the retiring Trustee, the Company or the
Holders of at least 10% in principal amount of the then outstanding Notes may
petition any court of competent jurisdiction for the appointment of a successor
Trustee.
If the Trustee fails to comply with Section 9.10 hereof, unless the
Trustee's duty to resign is stayed as provided in TIA (Section) 310(b), any
Holder who has been a bona fide Holder of a Note for at least six months may
petition any court of competent jurisdiction for the removal of the Trustee and
the appointment of a successor Trustee.
A successor Trustee shall deliver a written acceptance of its
appointment to the retiring Trustee and to the Company. Thereupon the
resignation or removal of the retiring Trustee shall become effective, and the
successor Trustee shall have all the rights, powers and duties of the Trustee
under this Indenture. The successor Trustee shall mail a notice of its
succession to Holders. The retiring Trustee shall promptly transfer all property
held by it as Trustee to the successor Trustee, subject to the lien provided for
in Section 9.07 hereof. Notwithstanding replacement of the Trustee pursuant to
this Section 9.08 hereof, the Company's obligations under Section 9.07 hereof
shall continue for the benefit of the retiring trustee with respect to expenses
and liabilities incurred by it prior to such replacement.
SECTION 9.09. SUCCESSOR TRUSTEE BY MERGER, ETC.
If the Trustee consolidates, merges or converts into, or transfers all
or substantially all of its corporate trust business to, another corporation,
the successor corporation without any further act shall be the successor
Trustee.
SECTION 9.10. ELIGIBILITY; DISQUALIFICATION.
This Indenture shall always have a Trustee who satisfies the
requirements of TIA (Section) 310(a)(1) and (5). The Trustee shall always have a
combined capital and surplus as stated in Section 12.10 hereof. The Trustee is
subject to TIA (Section) 310(b).
SECTION 9.11. PREFERENTIAL COLLECTION OF CLAIMS AGAINST COMPANY.
The Trustee is subject to TIA (Section) 311(a), excluding any creditor
relationship listed in TIA (Section) 311(b). A Trustee who has resigned or been
removed shall be subject to TIA (Section) 311(a) to the extent indicated
therein.
ARTICLE X.
DISCHARGE OF INDENTURE
SECTION 10.01. TERMINATION OF COMPANY'S OBLIGATIONS.
This Indenture shall cease to be of further effect (except that the
Company's obligations under Sections 9.07 and 10.02 hereof shall survive) when
all outstanding Notes theretofore authenticated and issued have been delivered
to the Trustee for cancellation and the Company has paid all sums payable
hereunder.
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SECTION 10.02. REPAYMENT TO COMPANY.
The Trustee and the Paying Agent shall promptly pay to the Company upon
request any excess money or securities held by them at any time.
The Trustee and the Paying Agent shall pay to the Company upon request
any money held by them for the payment of principal or interest that remains
unclaimed for two years after the date upon which such payment shall have become
due; provided, however, that the Company shall have first caused notice of such
payment to the Company to be mailed to each Holder entitled thereto no less than
30 days prior to such payment. After payment to the Company, the Trustee and the
Paying Agent shall have no further liability with respect to such money and
Holders entitled to the money must look to the Company for payment as general
creditors unless any applicable abandoned property law designates another
Person.
ARTICLE XI.
AMENDMENTS, SUPPLEMENTS AND WAIVERS
SECTION 11.01. WITHOUT CONSENT OF HOLDERS.
The Company and the Trustee may amend or supplement this Indenture or
the Notes without the consent of any Holder:
(a) to cure any ambiguity, defect or inconsistency;
(b) to comply with Sections 5.12 and 7.01 hereof;
(c) to provide for uncertificated Notes in addition to or in
place of certificated Notes;
(d) to make any change that provides additional rights or
benefits to the Holders of the Notes;
(e) to make any change that does not adversely affect the
interests hereunder of any Holder; or
(f) to qualify the Indenture under the TIA or to comply with
the requirements of the SEC in order to maintain the qualification of
the Indenture under the TIA.
SECTION 11.02. WITH CONSENT OF HOLDERS.
Subject to Section 8.07 hereof, the Company and the Trustee may amend
or supplement this Indenture or the Notes with the written consent of the
Holders of at least a majority in principal amount of the then outstanding
Notes. Subject to Sections 8.04 and 8.07 hereof, the Holders of a majority in
principal amount of the Notes then outstanding may also waive compliance in a
particular instance by the Company with any provision of this Indenture or the
Notes. However, without the consent of each Holder affected, an amendment,
supplement or waiver under this Section 11.02 may not:
(a) reduce the principal amount of Notes whose Holders must
consent to an amendment, supplement or waiver;
(b) reduce the principal of or change the fixed maturity of
any Note or alter the provisions of Sections 7 and 8 of the Notes;
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(c) reduce the rate of or change the time for payment of
interest on any Note;
(d) waive a default in the payment of the principal of or
interest on any Note, except a rescission of acceleration of the Notes
by the Holders of at least a majority in aggregate principal amount of
the Notes and a waiver of the payment default that resulted from such
acceleration;
(e) make any Note payable in money other than that stated in
the Note;
(f) make any change in Section 8.04 or 8.07 hereof;
(g) waive a redemption payment with respect to any Note;
(h) impair the right to convert the Notes into Common Stock;
(i) modify Article V or VI in a manner adverse to the Holders
of Notes; and
(j) make any change in the foregoing amendment and waiver
provisions of this Article XI.
To secure a consent of the Holders under this Section 11.02, it shall
not be necessary for the Holders to approve the particular form of any proposed
amendment, supplement or waiver, but it shall be sufficient if such consent
approves the substance thereof.
After an amendment, supplement or waiver under this Section 11.02
becomes effective, the Company shall mail to Holders a notice briefly describing
the amendment or waiver.
SECTION 11.03. COMPLIANCE WITH TRUST INDENTURE ACT.
Every amendment to this Indenture or the Notes shall be set forth in a
supplemental indenture that complies with the TIA as then in effect.
SECTION 11.04. REVOCATION AND EFFECT OF CONSENTS.
Until an amendment, supplement or waiver becomes effective, a consent
to it by a Holder of a Note is a continuing consent by the Holder and every
subsequent Holder of a Note or portion of a Note that evidences the same debt as
the consenting Holder's Note, even if notation of the consent is not made on any
Note. However, any such Holder or subsequent Holder may revoke the consent as to
his Note or portion of a Note if the Trustee receives the notice of revocation
before the date on which the Trustee receives an Officers' Certificate
certifying that the Holders of the requisite principal amount of Notes have
consented to the amendment, supplement or waiver.
The Company may, but shall not be obligated to, fix a record date for
the purpose of determining the Holders entitled to consent to any amendment,
supplement or waiver. If a record date is fixed, then notwithstanding the
provisions of the immediately preceding paragraph, those Persons who were
Holders at such record date (or their duly designated proxies), and only those
Persons, shall be entitled to consent to such amendment, supplement or waiver or
to revoke any consent previously given, whether or not such Persons continue to
be Holders after such record date. No consent shall be valid or effective for
more than 90 days after such record date unless consents from Holders of the
principal amount of Notes required hereunder for such amendment or waiver to be
effective shall have also been given and not revoked within such 90-day period.
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After an amendment, supplement or waiver becomes effective it shall
bind every Holder, unless it is of the type described in any of clauses (a)
through (j) of Section 11.02 hereof. In such case, the amendment or waiver shall
bind each Holder who has consented to it and every subsequent Holder that
evidences the same debt as the consenting Holder's Note.
SECTION 11.05. NOTATION ON OR EXCHANGE OF NOTES.
The Trustee may place an appropriate notation about an amendment or
waiver on any Note thereafter authenticated. The Company in exchange for all
Notes may issue and the Trustee shall authenticate new Notes that reflect the
amendment or waiver.
Failure to make such notation on a Note or to issue a new Note as
aforesaid shall not affect the validity and effect of such amendment or waiver.
SECTION 11.06. TRUSTEE PROTECTED.
The Trustee shall sign all supplemental indentures, except that the
Trustee may, but need not, sign any supplemental indenture that adversely
affects its rights.
ARTICLE XII.
MISCELLANEOUS
SECTION 12.01. TRUST INDENTURE ACT CONTROLS.
This Indenture is subject to the provisions of the TIA that are
required to be incorporated into this Indenture (or, prior to the registration
of the Notes pursuant to the Registration Rights Agreement, would be required to
be incorporated into this Indenture if it were qualified under the TIA), and
shall, to the extent applicable, be governed by such provisions. If any
provision of this Indenture limits, qualifies, or conflicts with another
provision which is required (or would be so required) to be incorporated in this
Indenture by the TIA, the incorporated provision shall control.
SECTION 12.02. NOTICES.
Any notice or communication by the Company or the Trustee to the other
is duly given if in writing and delivered in Person or mailed by first class
mail to the other's address stated in Section 12.10 hereof. The Company or the
Trustee by notice to the other may designate additional or different addresses
for subsequent notices or communications.
Any notice or communication to a Holder shall be mailed by first class
mail to his address shown on the register kept by the Registrar. Failure to mail
a notice or communication to a Holder or any defect in it shall not affect its
sufficiency with respect to other Holders.
If a notice or communication is mailed in the manner provided above
within the time prescribed, it is duly given, whether or not the addressee
receives it.
If the Company mails a notice or communication to Holders, it shall
mail a copy to the Trustee and each Agent at the same time.
All other notices or communications shall be in writing.
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In case by reason of the suspension of regular mail service, or by
reason of any other cause, it shall be impossible to mail any notice as required
by the Indenture, then such method of notification as shall be made with the
approval of the Trustee shall constitute a sufficient mailing of such notice.
SECTION 12.03. COMMUNICATION BY HOLDERS WITH OTHER HOLDERS.
Holders may communicate pursuant to TIA (Section) 312(b) with other
Holders with respect to their rights under this Indenture or the Notes. The
Company, the Trustee, the Registrar and anyone else shall have the protection of
TIA (Section) 312(c).
SECTION 12.04. CERTIFICATE AND OPINION AS TO CONDITIONS PRECEDENT.
Upon any request or application by the Company to the Trustee to take
any action under this Indenture, the Company shall furnish to the Trustee:
(a) an Officers' Certificate stating that, in the opinion of
the signers, all conditions precedent, if any, provided for in this
Indenture relating to the proposed action have been complied with; and
(b) an Opinion of Counsel stating that, in the opinion of such
counsel, all such conditions precedent have been complied with.
SECTION 12.05. STATEMENTS REQUIRED IN CERTIFICATE OR OPINION.
Each certificate or opinion with respect to compliance with a condition
or covenant provided for in this Indenture (other than pursuant to Section 4.03)
shall include:
(a) a statement that the Person signing such certificate or
rendering such opinion has read such covenant or condition;
(b) a brief statement as to the nature and scope of the
examination or investigation upon which the statements or opinions
contained in such certificate or opinion are based;
(c) a statement that, in the opinion of such Person, such
Person has made such examination or investigation as is necessary to
enable such Person to express an informed opinion as to whether or not
such covenant or condition has been complied with; and
(d) a statement as to whether or not, in the opinion of such
Person, such condition or covenant has been complied with.
SECTION 12.06. RULES BY TRUSTEE AND AGENTS.
The Trustee may make reasonable rules for action by, or a meeting of,
Holders. The Registrar or Paying Agent may make reasonable rules and set
reasonable requirements for its functions.
SECTION 12.07. LEGAL HOLIDAYS.
A "LEGAL HOLIDAY" is a Saturday, a Sunday or a day on which banking
institutions in the State of New York are not required to be open. If a payment
date is a Legal Holiday at a place of payment, payment may be made at that place
on the next succeeding day that is not a Legal Holiday, and no interest shall
accrue for the intervening period. If any other operative date for purposes of
this Indenture
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shall occur on a Legal Holiday then for all purposes the next succeeding day
that is not a Legal Holiday shall be such operative date.
SECTION 12.08. NO RECOURSE AGAINST OTHERS.
A director, officer, employee, incorporator or shareholder of the
Company, as such, shall not have any liability for any Obligations of the
Company under the Notes or this Indenture or for any claim based on, in respect
of or by reason of such Obligations or their creation. Each Holder by accepting
a Note waives and releases all such liability. The waiver and release are part
of the consideration for the issue of the Notes.
SECTION 12.09. COUNTERPARTS AND FACSIMILE SIGNATURES.
This Indenture may be executed by manual or facsimile signature in any
number of counterparts and by the parties hereto in separate counterparts, each
of which when so executed shall be deemed to be an original and all of which
taken together shall constitute one and the same agreement.
SECTION 12.10. VARIABLE PROVISIONS.
"OFFICER" means the Chairman of the Board, the President, any Vice
President, the Treasurer, the Secretary, any Assistant Treasurer or any
Assistant Secretary of the Company.
The first certificate pursuant to Section 4.03 hereof shall be for the
fiscal year ended on December 31, 1999.
The reporting date for Section 9.06 hereof is March 15, of each year.
The first reporting date is March 15, 2000.
The Trustee shall always have a combined capital and surplus of at
least $100,000,000 as set forth in its most recent published annual report of
condition.
The Company's address is:
CoreComm Limited
110 East 59th Street, 26th Floor
New York, New York 10022
Attention: Richard J. Lubasch, Esq.
Senior Vice President, General Counsel and Secretary
The Trustee's address is:
The Chase Manhattan Bank
450 West 33rd Street
New York, New York 10001
Attention: Capital Markets Fiduciary Services
SECTION 12.11. GOVERNING LAW, SUBMISSION TO JURISDICTION.
THE INTERNAL LAWS OF THE STATE OF NEW YORK SHALL GOVERN THIS INDENTURE
AND THE NOTES, WITHOUT REGARD TO THE CONFLICT OF LAWS PROVISIONS THEREOF.
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To the extent permitted by applicable law, the Company irrevocably
submits to the nonexclusive jurisdiction of any federal or state court in the
Borough of Manhattan, City and State of New York, United States of America, in
any suit or proceeding based on or arising under this Indenture and the Notes
and irrevocably agrees that all claims in respect of such suit or proceeding may
be determined in any such court. The Company irrevocably and fully waives the
defense of an inconvenient forum to the maintenance of such suit or proceeding.
The Company hereby irrevocably designates and appoints CoreComm Services, Inc.,
c/o National Registered Agents, Inc., 440 Ninth Avenue, 5th Floor, New York, New
York 10001 (the "Process Agent"), as the authorized agent of the Company upon
whom process may be served in any such suit or proceeding, it being understood
that the designation and appointment of the Process Agent as such authorized
agent shall become effective immediately without any further action on the part
of the Company. The Company represents to the Trustee that it has notified the
Process Agent of such designation and appointment and that the Process Agent has
accepted the same. The Company hereby irrevocably authorizes and directs the
Process Agent to accept such service. The Company further agrees that service of
process upon the Process Agent shall be deemed in every respect effective
service of process upon the Company in any such suit or proceeding. Nothing
herein shall affect the right of the Trustee or any Holder to serve process in
any other manner permitted by law. In the event that CoreComm Services, Inc.
ceases to be a subsidiary of the Company that is qualified to do business in New
York, the Company agrees that it will take any and all action, including the
execution and filing of any and all such documents and instruments as may be
necessary to validly designate and appoint an alternate agent for service of
process, and to maintain such designation and appointment in full force and
effect so long as the Company has any outstanding obligations under this
Indenture or the Notes, on terms that are reasonably acceptable to the Trustee.
To the extent that the Company has or hereafter may acquire any immunity from
jurisdiction of any court or from any legal process (whether through service of
notice, attachment prior to judgment, attachment in aid of execution, execution
or otherwise) with respect to itself or its property, the Company hereby
irrevocably waives such immunity in respect of its obligations hereunder and
thereunder, to the extent permitted by law.
SECTION 12.12. NO ADVERSE INTERPRETATION OF OTHER AGREEMENTS.
This Indenture may not be used to interpret another indenture, loan or
debt agreement of the Company or an Affiliate. Any such indenture, loan or debt
agreement may not be used to interpret this Indenture.
SECTION 12.13. SUCCESSORS.
All agreements of the Company in this Indenture and the Notes shall
bind its successor. All agreements of the Trustee in this Indenture shall bind
its successor.
SECTION 12.14. SEVERABILITY.
In case any provision in this Indenture or in the Notes shall be
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.
SECTION 12.15. TABLE OF CONTENTS, HEADINGS, ETC.
The Table of Contents, Cross-Reference Table, and headings of the
Articles and Sections of this Indenture have been inserted for convenience of
reference only, are not to be considered a part hereof, and shall in no way
modify or restrict any of the terms or provisions hereof.
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SIGNATURES
IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be
duly executed, all as of the date first written above.
CORECOMM LIMITED, as Company
By: /s/ Richard J. Lubasch
---------------------------------
Name: Richard J. Lubasch
Title: Senior Vice President,
General Counsel and Secretary
THE CHASE MANHATTAN BANK, as Trustee
By: /s/ Andrew M. Deck
---------------------------------
Name:
Title:
<PAGE> 54
EXHIBIT A
[FORM OF FACE OF NOTE]
[Global Notes Legend]
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF
THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), NEW YORK, NEW
YORK, TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR
PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR
SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY
PAYMENT IS MADE TO CEDE & CO., OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN
AUTHORIZED REPRESENTATIVE OF DTC) ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR
VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED
OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
TRANSFERS OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS IN WHOLE,
BUT NOT IN PART, TO NOMINEES OF DTC OR TO A SUCCESSOR THEREOF OR SUCH
SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL NOTE SHALL BE
LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN THE
INDENTURE REFERRED TO ON THE REVERSE HEREOF.
[Restricted Notes Legend]
THE SECURITY (OR ITS PREDECESSOR) EVIDENCED HEREBY WAS ORIGINALLY
ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER SECTION 5 OF THE UNITED
STATES SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND THE
SECURITY EVIDENCED HEREBY AND ANY SHARES OF COMMON STOCK ISSUED UPON CONVERSION
HEREOF MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH
REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. EACH PURCHASER OF THE
SECURITY EVIDENCED HEREBY IS HEREBY NOTIFIED THAT THE SELLER MAY BE RELYING ON
THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE SECURITIES ACT PROVIDED BY
RULE 144A THEREUNDER. THE HOLDER OF THE SECURITY EVIDENCED HEREBY AGREES FOR THE
BENEFIT OF THE COMPANY THAT (A) SUCH SECURITY AND ANY SHARES OF COMMON STOCK
ISSUED UPON CONVERSION HEREOF MAY BE RESOLD, PLEDGED OR OTHERWISE TRANSFERRED,
ONLY (1) (a) TO A PERSON WHO THE SELLER REASONABLY BELIEVES IS A QUALIFIED
INSTITUTIONAL BUYER (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) IN A
TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (b) IN A TRANSACTION MEETING
THE REQUIREMENTS OF RULE 144 UNDER THE SECURITIES ACT, IF AVAILABLE, (c) OUTSIDE
THE UNITED STATES TO A NON-U.S. PERSON IN A TRANSACTION MEETING THE REQUIREMENTS
OF RULE 904 UNDER THE SECURITIES ACT OR (d) IN ACCORDANCE WITH ANOTHER EXEMPTION
FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT (AND BASED UPON AN
OPINION OF COUNSEL IF THE COMPANY SO REQUESTS), (2) TO THE COMPANY OR (3)
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT AND, IN EACH CASE, IN ACCORDANCE
WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR ANY
OTHER APPLICABLE JURISDICTION AND (B) THE PURCHASER WILL, AND EACH SUBSEQUENT
PURCHASER IS REQUIRED TO, NOTIFY ANY SUBSEQUENT PURCHASER FROM IT OF THE
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<PAGE> 55
SECURITY EVIDENCED HEREBY OR ANY COMMON STOCK ISSUABLE UPON CONVERSION HEREOF OF
THE RESALE RESTRICTIONS SET FORTH IN (A) ABOVE.
A-2
<PAGE> 56
No. ________
$________
CUSIP No. [ ]/CINS No. [ ]
6% CONVERTIBLE SUBORDINATED NOTE DUE 2006
CoreComm Limited, a Bermuda corporation (the "COMPANY"), promises to
pay to __________________________ or registered assigns, the principal sum of
____________________ $[____________] [, or such other amount as is indicated on
Schedule A hereof* ,] on October 1, 2006, subject to the further provisions of
this Note set forth on the reverse hereof which further provisions shall for all
purposes have the same effect as if set forth at this place.
Interest Payment Dates: April 1 and October 1, commencing April 1, 2000
Record Dates: March 15 and September 15
IN WITNESS WHEREOF, CoreComm Limited has caused this Note to be signed
manually or by facsimile by one of its duly authorized officers.
Dated:_____________________________
CORECOMM LIMITED
by:________________________________
TRUSTEE'S CERTIFICATE OF AUTHENTICATION
This is one of the 6% Convertible Subordinated
Notes due 2006 described in the
within-mentioned Indenture.
THE CHASE MANHATTAN BANK, as Trustee
By:_________________________________
Authorized Officer
- --------
* Applicable to Global Notes Only
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<PAGE> 57
[FORM OF REVERSE OF NOTE]
CORECOMM LIMITED
6% Convertible Subordinated Note due 2006
1. Interest. CORECOMM LIMITED, a Bermuda corporation (the "COMPANY"),
is the issuer of 6% Convertible Subordinated Notes due 2006 (the "NOTES"). The
Notes will accrue interest at a rate of 6% per annum. The Company promises to
pay interest on the Notes in cash semiannually on each April 1 and October 1,
commencing on April 1, 2000, to Holders of record on the immediately preceding
March 15 and September 15, respectively. Interest on the Notes will accrue from
the most recent date to which interest has been paid, or if no interest has been
paid, from October 6, 1999. Interest will be computed on the basis of a 360-day
year of twelve 30-day months. The Company will pay interest on overdue principal
at the interest rate borne by the Notes, compounded semiannually, and it shall
pay interest on overdue installments of interest (without regard to any
applicable grace period) at the same interest rate compounded semiannually. Any
interest paid on this Note shall be increased to the extent necessary to pay
Additional Amounts as set forth in this Note.
2. Registration Rights. The holder of this Note is entitled to the
benefits of a Registration Rights Agreement, dated as of October 6, 1999, among
the Company and the Initial Purchasers (the "Registration Rights Agreement").
Pursuant to the Registration Rights Agreement the Company has agreed for the
benefit of the Holders of the Notes, that (i) it will, at its cost, within 90
days after the closing of the sale of the Notes (the "Closing"), file a shelf
registration statement (the "Shelf Registration Statement") with the Securities
and Exchange Commission (the "Commission") with respect to resales of the Notes
and the Common Stock issuable upon conversion thereof, (ii) it will use its best
efforts to cause such Shelf Registration Statement to be declared effective
within 180 days after the Closing, and (iii) it will use its best efforts to
keep such Shelf Registration Statement continuously effective under the
Securities Act, subject to certain exceptions specified in the Registration
Rights Agreement until the second anniversary of the date of the Closing. The
Company will be permitted to suspend use of the prospectus that is part of the
Shelf Registration Statement during certain periods of time and in certain
circumstances relating to pending corporate developments and public filings with
the SEC and similar events. If (a) the Company fails to file the Shelf
Registration Statement required by the Registration Rights Agreement on or
before the date specified above for such filing, (b) such Shelf Registration
Statement is not declared effective by the Commission on or prior to the date
specified above for such effectiveness, or (c) the Shelf Registration Statement
is declared effective but thereafter ceases to be effective or useable in
connection with resales of Transfer Restricted Securities (as defined in the
Registration Rights Agreement) during the periods specified in the Registration
Rights Agreement (each such event referred to in clauses (a) through (c) above a
"Registration Default"), then the Company will pay special interest to each
Holder of Transfer Restricted Securities, with respect to the first 90-day
period immediately following the occurrence of such Registration Default in an
amount equal to an increase in the annual interest rate on the Notes of 0.25%
("SPECIAL INTEREST") and with respect to each subsequent 90-day period, an
amount equal to an increase in the annual interest rate on the Notes of 0.25%
until all Registration Defaults have been cured, up to a maximum increase in the
annual interest rate on the Notes equal to 1.0%. All accrued Special Interest
shall be paid by the Company on each Interest Payment Date for which Special
Interest is owed to the holders of Global Notes by wire transfer of immediately
available funds or by federal funds check and to holders of certificated Notes
registered as such as of the preceding Record Date by mailing checks to their
registered addresses. Following the cure of all Registration Defaults, the
application of Special Interest will cease.
3. Additional Amounts. All payments made by the Company on this Note
shall be made without deduction or withholding for or on account of, any and all
present or future taxes, duties,
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<PAGE> 58
assessments, or governmental charges of whatever nature unless the deduction or
withholding of such taxes, duties, assessments or governmental charges is then
required by law. If any deduction or withholding for or on account of any
present or future taxes, assessments or other governmental charges of Bermuda or
any other jurisdiction (other than the United States) in which the Company or a
successor corporation is organized (or any political subdivision or taxing
authority thereof or therein) ("Other Relevant Jurisdiction") shall at any time
be required in respect of any amounts to be paid by the Company under this Note,
the Company shall pay or cause to be paid such additional amounts ("ADDITIONAL
AMOUNTS") as may be necessary in order that the net amounts received by a Holder
of this Note after such deduction or withholding shall be not less than the
amounts specified in this Note to which the Holder of this Note is entitled;
provided, however, that the Company shall not be required to make any payment of
Additional Amounts for or on account of:
(a) any tax, assessment or other governmental charge to
the extent such tax, assessment or other governmental charge would not
have been imposed but for (i) the existence of any present or former
connection between such Holder (or between a fiduciary, settlor,
beneficiary, member or shareholder of, or possessor of a power over,
such Holder, if such Holder is an estate, nominee, trust, partnership
or corporation), other than the holding of this Note or the receipt of
amounts payable in respect of this Note, and Bermuda or any Other
Relevant Jurisdiction (or any political subdivision or taxing authority
thereof or therein) including, without limitation, such Holder (or such
fiduciary, settlor, beneficiary, member, shareholder or possessor)
being or having been a citizen or resident thereof or being or having
been present or engaged in trade or business therein or having or
having had a permanent establishment therein or (ii) the presentation
of this Note (where presentation is required) for payment on a date
more than 30 days after the date on which such payment became due and
payable or the date on which payment thereof is duly provided for,
whichever occurs later, except to the extent that the Holder would have
been entitled to Additional Amounts had this Note been presented on the
last day of such period of 30 days;
(b) any tax, assessment or other governmental charge
that is imposed or withheld by reason of the failure to comply by the
Holder of this Note or, if different, the beneficial owner of the
interest payable on this Note, with a timely request of the Company
addressed to such Holder or beneficial owner to provide information,
documents or other evidence concerning the nationality, residence,
identity or connection with the taxing jurisdiction of such Holder or
beneficial owner which is required or imposed by a statute, regulation
or administrative practice of the taxing jurisdiction as a precondition
to exemption from all or part of such tax, assessment or governmental
charge;
(c) any estate, inheritance, gift, sales, transfer,
personal property or similar tax, assessment or other governmental
charge;
(d) any tax, assessment or other governmental charge
which is collectible otherwise than by withholding from payments of
principal amount, redemption amount, Change of Control Payment or
interest with respect to a Note or withholding from the proceeds of a
sale or exchange of a Note;
(e) any tax, assessment or other governmental charge
required to be withheld by any Paying Agent from any payment of
principal amount, redemption amount, Change of Control Payment or
interest with respect to a Note, if such payment can be made, and is in
fact made, without such withholding by any other Paying Agent located
inside the United States;
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<PAGE> 59
(f) any tax, assessment or other governmental charge
imposed on a Holder that is not the beneficial owner of a Note to the
extent that the beneficial owner would not have been entitled to the
payment of any such Additional Amounts had the beneficial owner
directly held the Note; and
(g) any combination of items (a), (b), (c), (d), (e)
and (f) above;
nor shall Additional Amounts be paid with respect to any payment of the
principal of, or any interest on, this Note to any Holder who is a fiduciary or
partnership or other than the sole beneficial owner of such payment to the
extent that a beneficiary or settlor would not have been entitled to any
Additional Amounts had such beneficiary or settlor been the Holder of this Note.
All references to principal amount or interest on the Notes in the Indenture or
the Notes shall include any Additional Amounts payable to the Company pursuant
to this Section 3.
If any deduction or withholding for or on account of any present or
future taxes, assessments or other governmental charges are imposed by any
taxing jurisdiction but such deduction or withholding could be reduced or
eliminated pursuant to a statute, regulation or administrative practice of the
taxing jurisdiction if certain information, document or other evidence is
provided by Holders or beneficial owners of the Notes, the Company shall provide
a timely request addressed to the Holders or beneficial owners to provide such
information, document or other evidence.
4. Method of Payment. The Company will pay interest on the Notes
(except defaulted interest) to the Persons who are registered Holders of Notes
at the close of business on the record date for the next interest payment date
even though Notes are canceled after the record date and on or before the
interest payment date. Holders must surrender Notes to a Paying Agent to collect
principal and premium payments. The Company will pay principal, premium, if any,
interest and Special Interest, if any, in money of the United States that at the
time of payment is legal tender for payment of public and private debts.
However, the Company may pay principal, premium, if any, interest and Special
Interest, if any, by check payable in such money. It may mail an interest or
Special Interest check to a Holder's registered address. If a Holder so
requests, principal, premium, if any, interest and Special Interest, if any, may
be paid by wire transfer of immediately available funds to an account previously
specified in writing by such Holder to the Company and the Trustee.
5. Paying Agent, Conversion Agent and Registrar. The Trustee will act
as Paying Agent, Conversion Agent and Registrar in the City of New York, New
York. The Company may change any Paying Agent, Conversion Agent or Registrar
without prior notice. The Company or any of its Affiliates may act in any such
capacity.
6. Indenture. The Company issued the Notes under an Indenture, dated as
of October 6, 1999 (the "INDENTURE"), between the Company and The Chase
Manhattan Bank, as Trustee. The terms of the Notes include those stated in the
Indenture and those made part of the Indenture by the Trust Indenture Act of
1939 (15 U.S. Code (Sections) 77aaa-77bbbb) as in effect on the date of
the Indenture. The Notes are subject to, and qualified by, all such terms,
certain of which are summarized hereon, and Holders are referred to the
Indenture and such Act for a statement of such terms. The Notes are unsecured
general obligations of the Company limited to $175,000,000 in aggregate
principal amount and subordinated in right of payment to all existing and future
Senior Debt of the Company.
7. Optional Redemption. Except as provided in Section 8 hereof, the
Notes are not redeemable at the Company's option prior to October 1, 2002.
Thereafter, the Notes will be subject to redemption at the option of the
Company, in whole or in part, upon not less than 30 nor more than 60 days'
notice, at the redemption prices (expressed as percentages of principal amount
thereof) set forth
A-6
<PAGE> 60
below plus accrued and unpaid interest thereon to the applicable redemption
date, if redeemed during the twelve-month period beginning on October 1 of the
years indicated below:
<TABLE>
<CAPTION>
Year Percentage
---- ----------
<S> <C>
2002..................................... 103.429%
2003..................................... 102.571%
2004..................................... 101.714%
2005..................................... 100.857%
2006..................................... 100.000%
</TABLE>
8. Optional Tax Redemption. (a) The Notes may be redeemed at the option
of the Company, in whole but not in part, upon not less than 30 nor more than 60
days notice, at any time at a redemption price equal to the principal amount
thereof plus accrued and unpaid interest to the date fixed for redemption if
after the Issuance Date there has occurred any change in or amendment to the
laws (or any regulations or official rulings promulgated thereunder) of Bermuda
or any Other Relevant Jurisdiction or any change in or amendment to the official
application or interpretation of such laws, regulations or rulings (a "CHANGE IN
TAX LAW") which becomes effective after the Issuance Date, as a result of which
the Company is or would be so required on the next succeeding Interest Payment
Date to pay Additional Amounts with respect to the Notes as described under
Section 3 hereof with respect to withholding taxes imposed by Bermuda or such
Other Relevant Jurisdiction (or any political subdivision or taxing authority
thereof or therein) (a "WITHHOLDING TAX") and such Withholding Tax is imposed at
a rate that exceeds the rate (if any) at which Withholding Tax was imposed on
the Issuance Date; provided, however, that (i) this paragraph shall not apply to
the extent that, at the Issuance Date it was known or would have been known had
professional advice of a nationally recognized accounting firm in Bermuda or
such Other Relevant Jurisdiction, as the case may be, been sought, that a Change
in Tax Law in Bermuda or such Other Relevant Jurisdiction was to occur after the
Issuance Date, (ii) no such notice of redemption may be given earlier than 90
days prior to the earliest date on which the Company would be obliged to pay
such Additional Amounts were a payment in respect of the Notes then due, (iii)
at the time such notice of redemption is given, such obligation to pay such
Additional Amount remains in effect and (iv) the payment of such Additional
Amounts cannot be avoided by the use of any reasonable measures available to the
Company.
The Notes may also be redeemed, in whole but not in part, at any time
at a redemption price equal to the principal amount thereof plus accrued and
unpaid interest to the date fixed for redemption if the Person formed after the
Issuance Date by a consolidation, amalgamation, reorganization or reconstruction
(or other similar arrangement) of the Company or the Person into which the
Company is merged after the Issuance Date or to which the Company conveys,
transfers or leases its properties and assets after the Issuance Date
substantially as an entirety (collectively, a "SUBSEQUENT CONSOLIDATION") is
required, as a consequence of such Subsequent Consolidation and as a consequence
of a Change in Tax Law in Bermuda or any Other Relevant Jurisdiction occurring
after the date of such Subsequent Consolidation to pay Additional Amounts with
respect to Withholding Tax on the Notes and such Withholding Tax is imposed at a
rate that exceeds the rate (if any) at which Withholding Tax was or would have
been imposed on the date of such Subsequent Consolidation; provided, however,
that this paragraph shall not apply to the extent that, at the date of such
Subsequent Consolidation it was known or would have been known had professional
advice of a nationally recognized accounting firm in Bermuda or such Other
Relevant Jurisdiction, as the case may be, been sought, that a Change in Tax Law
in Bermuda or such Other Relevant Jurisdiction was to occur after such date.
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<PAGE> 61
The Company will also pay, or make available for payment, to Holders on
the Redemption Date any Additional Amounts (as described, but subject to the
exceptions referred to, in Section 3 hereof) resulting from the payment of such
Redemption Price.
9. Notice of Redemption. Notice of redemption will be mailed at least
30 days but not more than 60 days before the redemption date to each Holder of
the Notes to be redeemed at his address of record. The Notes in denominations
larger than $1,000 may be redeemed in part but only in integral multiples of
$1,000. In the event of a redemption of less than all of the Notes, the Notes
will be chosen for redemption by the Trustee in accordance with the Indenture.
On and after the redemption date, interest ceases to accrue on the Notes or
portions of them called for redemption.
If this Note is redeemed subsequent to a record date with respect to
any interest payment date specified above and on or prior to such interest
payment date, then any accrued interest will be paid to the Person in whose name
this Note is registered at the close of business on such record date.
10. Mandatory Redemption. The Company will not be required to make
mandatory redemption or repurchase payments with respect to the Notes. There are
no sinking fund payments with respect to the Notes.
11. Repurchase at Option of Holder. If there is a Change of Control,
the Company shall be required to offer to purchase on the Purchase Date all
outstanding Notes at a purchase price equal to 101% of the aggregate principal
amount thereof, plus accrued and unpaid interest, if any, to the Purchase Date.
Holders of Notes that are subject to an offer to purchase will receive a Change
of Control offer from the Company prior to any related Purchase Date and may
elect to have such Notes or portions thereof in authorized denominations
purchased by completing the form entitled "Option of Holder to Elect Purchase"
appearing below.
12. Subordination. The payment of the principal of, interest on or any
other amounts due on the Notes is subordinated in right of payment to all
existing and future Senior Debt of the Company, as described in the Indenture.
Each Holder, by accepting a Note, agrees to such subordination and authorizes
and directs the Trustee on its behalf to take such action as may be necessary or
appropriate to effectuate the subordination so provided and appoints the Trustee
as its attorney-in-fact for such purpose.
13. Conversion. The holder of any Note has the right, exerciseable at
any time after 90 days following the Issuance Date and prior to the close of
business (New York time) on the date of the Note's maturity, to convert the
principal amount thereof (or any portion thereof that is an integral multiple of
$1,000) into shares of Common Stock at the initial Conversion Price of $41.09
per share, subject to adjustment under certain circumstances as set forth in the
Indenture, except that if a Note is called for redemption, the conversion right
will terminate at the close of business on the Business Day immediately
preceding the date fixed for redemption.
To convert a Note, a holder must (1) complete and sign a conversion
notice substantially in the form set forth below, (2) surrender the Note to a
Conversion Agent, (3) furnish appropriate endorsements or transfer documents if
required by the Registrar or Conversion Agent and (4) pay any transfer or
similar tax, if required. Upon conversion, no adjustment or payment will be made
for interest or dividends, but if any holder surrenders a Note for conversion
after the close of business on the record date for the payment of an installment
of interest and prior to the opening of business on the next interest payment
date, then, notwithstanding such conversion, the interest payable on such
interest payment date will be paid to the registered holder of such Note on such
record date. In such event, such Note, when surrendered for conversion, need not
be accompanied by payment of an amount equal to the interest payable on such
interest payment date on the portion so converted. The number of shares issuable
upon
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<PAGE> 62
conversion of a Note is determined by dividing the principal amount of the Note
converted by the Conversion Price in effect on the Conversion Date. No
fractional shares will be issued upon conversion but a cash adjustment will be
made for any fractional interest.
A Note in respect of which a holder has delivered an "Option of Holder
to Elect Purchase" form appearing below exercising the option of such holder to
require the Company to purchase such Note may be converted only if the notice of
exercise is withdrawn as provided above and in accordance with the terms of the
Indenture. The above description of conversion of the Notes is qualified by
reference to, and is subject in its entirety by, the more complete description
thereof contained in the Indenture.
14. Denominations, Transfer, Exchange. The Notes are in registered
form, without coupons, in denominations of $1,000 and integral multiples of
$1,000. The transfer of Notes may be registered, and Notes may be exchanged, as
provided in the Indenture. The Registrar may require a Holder, among other
things, to furnish appropriate endorsements and transfer documents and to pay
any taxes and fees required by law or permitted by the Indenture. The Registrar
need not exchange or register the transfer of any Note or portion of a Note
selected for redemption (except the unredeemed portion of any Note being
redeemed in part). Also, it need not exchange or register the transfer of any
Note for a period of 15 days before a selection of Notes to be redeemed.
15. Persons Deemed Owners. Except as provided in paragraph 4 of this
Note, the registered Holder of a Note may be treated as its owner for all
purposes.
16. Unclaimed Money. If money for the payment of principal or interest
remains unclaimed for two years, the Trustee and the Paying Agent shall pay the
money back to the Company at its written request. After that, Holders of Notes
entitled to the money must look to the Company for payment unless an abandoned
property law designates another Person and all liability of the Trustee and such
Paying Agent with respect to such money shall cease.
17. Defaults and Remedies. The Notes shall have the Events of Default
set forth in Section 8.01 of the Indenture. Subject to certain limitations in
the Indenture, if an Event of Default occurs and is continuing, the Trustee by
notice to the Company or the Holders of at least 25% in aggregate principal
amount of the then outstanding Notes by notice to the Company and the Trustee
may declare all the Notes to be due and payable immediately, except that in the
case of an Event of Default arising from certain events of bankruptcy or
insolvency, all unpaid principal and interest accrued on the Notes shall become
due and payable immediately without further action or notice. The Holders of a
majority in principal amount of the Notes then outstanding by written notice to
the Trustee may rescind an acceleration and its consequences if the rescission
would not conflict with any judgment or decree and if all existing Events of
Default have been cured or waived except nonpayment of principal or interest
that has become due solely because of the acceleration. Holders may not enforce
the Indenture or the Notes except as provided in the Indenture. Subject to
certain limitations, Holders of a majority in principal amount of the then
outstanding Notes issued under the Indenture may direct the Trustee in its
exercise of any trust or power. The Company must furnish annually compliance
certificates to the Trustee. The above description of Events of Default and
remedies is qualified by reference, and subject in its entirety, to the more
complete description thereof contained in the Indenture.
18. Amendments, Supplements and Waivers. Subject to certain exceptions,
the Indenture or the Notes may be amended or supplemented with the consent of
the Holders of at least a majority in principal amount of the then outstanding
Notes (including consents obtained in connection with a tender offer or exchange
offer for Notes), and any existing default may be waived with the consent of the
Holders of a majority in principal amount of the then outstanding Notes. Without
the consent of any
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<PAGE> 63
Holder, the Indenture or the Notes may be amended among other things, to cure
any ambiguity, defect or inconsistency, to provide for uncertificated Notes in
addition to or in place of certificated Notes, to provide for assumption of the
Company's obligations to Holders, to make any change that does not adversely
affect the rights of any Holder or to qualify the Indenture under the TIA or to
comply with the requirements of the SEC in order to maintain the qualification
of the Indenture under the TIA.
19. Trustee Dealings with the Company. The Trustee, in its individual
or any other capacity may become the owner or pledgee of the Notes and may
otherwise deal with the Company or an Affiliate with the same rights it would
have, as if it were not Trustee, subject to certain limitations provided for in
the Indenture and in the TIA. Any Agent may do the same with like rights.
20. No Recourse Against Others. A director, officer, employee,
incorporator or shareholder of the Company, as such, shall not have any
liability for any obligations of the Company under the Notes or the Indenture or
for any claim based on, in respect of or by reason of such obligations or their
creation. Each Holder of the Notes by accepting a Note waives and releases all
such liability. The waiver and release are part of the consideration for the
issue of the Notes.
21. Governing Law. THE INTERNAL LAWS OF THE STATE OF NEW YORK SHALL
GOVERN THE INDENTURE AND THE NOTES WITHOUT REGARD TO CONFLICT OF LAW PROVISIONS
THEREOF.
22. Authentication. The Notes shall not be valid until authenticated by
the manual signature of an authorized officer of the Trustee or an
authenticating agent.
23. Abbreviations. Customary abbreviations may be used in the name of a
Holder or an assignee, such as: TEN COM (= tenants in common), TEN ENT (=
tenants by the entireties), JT TEN (= joint tenants with right of survivorship
and not as tenants in common), CUST (= Custodian), and UGMA (= Uniform Gifts to
Minors Act).
The Company will furnish to any Holder of the Notes upon written
request and without charge a copy of the Indenture. Request may be made to:
CoreComm Limited
110 East 59th Street, 26th Floor
New York, New York 10022
Attention of: Richard J. Lubasch, Esq.
Senior Vice President, General Counsel and Secretary
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<PAGE> 64
ASSIGNMENT FORM
To assign this Note, fill in the form below:
(I) or (we) assign and transfer this Note to
____________________________________________
(Insert assignee's social security or tax I.D. no.)
____________________________________________
____________________________________________
(Print or type assignee's name, address and zip code)
and irrevocably appoint _________________________________ agent to transfer this
Note on the books of the Company. The agent may substitute another to act for
him.
Your Signature: ____________________________________________
(Sign exactly as your name appears on the other side of this Note)
Date: __________________
Signature Guarantee: * ____________________________________________
In connection with any transfer of any of the Notes evidenced by this
certificate occurring prior to the date that is two years after the
later of the date of original issuance of such Notes and the last date,
if any, on which such Notes were owned by the Company or any Affiliate
of the Company, the undersigned confirms that such Notes are being
transferred:
CHECK ONE BOX BELOW
(1) / / to the Company or any subsidiary thereof,
(2) / / to a qualified institutional buyer in compliance with Rule
144A,
(3) / / outside the United States in compliance with Rule 904 under the
Securities Act,
(4) / / pursuant to the exemption from registration provided by Rule
144 under the Securities Act (if available) or
(5) / / pursuant to an effective registration statement under the
Securities Act.
- ----------
* Signature must be guaranteed by a commercial bank, trust company or
member firm of the New York Stock Exchange
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<PAGE> 65
__________________________
Signature
Signature Guarantee*
____________________________
Signature must be guaranteed
____________________________________________________
TO BE COMPLETED BY PURCHASER IF (2) ABOVE IS CHECKED.
The undersigned represents and warrants that it is purchasing this
Note for its own account or an account with respect to which it exercises sole
investment discretion and that it and any such account is a "qualified
institutional buyer" within the meaning of Rule 144A under the Securities Act of
1933, and is aware that the sale to it is being made in reliance on Rule 144A
and acknowledges that it has received such information regarding the Company as
the undersigned has requested pursuant to Rule 144A or has determined not to
request such information and that it is aware that the transferor is relying
upon the undersigned's foregoing representations in order to claim the exemption
from registration provided by Rule 144A.
Date: _____________________
___________________________
* Signature must be guaranteed by a commercial bank, trust company or
member firm of the New York Stock Exchange.
NOTICE: To be executed by an executive officer
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<PAGE> 66
OPTION OF HOLDER TO ELECT PURCHASE
If you want to elect to have this Note or a portion thereof
repurchased by the Company pursuant to Section 3.09 or 4.07 of the Indenture,
check the box: [ ]
If the purchase is in part, indicate the portion (in
denominations of $1,000 or any integral multiple thereof) to be purchased:
______________________
Your Signature:____________________________________________________
(Sign exactly as your name appears on the other side of this Note)
Date: ________________________
Signature Guarantee:**/
- ----------
**/ Signature must be guaranteed by a commercial bank, trust company or
member firm of the New York Stock Exchange.
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<PAGE> 67
ELECTION TO CONVERT
To CoreComm Limited
The undersigned owner of this Note hereby irrevocably
exercises the option to convert this Note, or the portion below designated, into
Common Stock of CoreComm Limited in accordance with the terms of the Indenture
referred to in this Note, and directs that the shares issuable and deliverable
upon conversion, together with any check in payment for fractional shares, be
issued in the name of and delivered to the undersigned, unless a different name
has been indicated in the assignment below. If the shares are to be issued in
the name of a person other than the undersigned, the undersigned will pay all
transfer taxes payable with respect thereto.
Any holder of Notes, upon the exercise of its conversion
rights in accordance with the terms of the Indenture and the Note, agrees to be
bound by the terms of the Registration Rights Agreement relating to the Common
Stock issuable upon conversion of the Notes.
Date:
in whole ___
Portions of Note to be converted ($1,000 or
integral multiples thereof): $______________
_____________________________________________
Signature
Please Print or Typewrite Name and Address,
Including Zip Code, and Social Security or
Other Identifying Number
_____________________________________________
_____________________________________________
_____________________________________________
Signature Guarantee: *_______________________
- ----------
* Signature must be guaranteed by a commercial bank, trust company or
member firm of the New York Stock Exchange.
A-14
<PAGE> 68
[TO BE ATTACHED TO GLOBAL NOTES]
SCHEDULE A
SCHEDULE OF PRINCIPAL AMOUNT
The initial principal amount of this Global Note shall be
$__________________. The following increases or decreases in the principal
amount of this Global Note have been made:
<TABLE>
<CAPTION>
====================================================================================================================
Amount of decrease in Amount of increase Principal amount of Signature of Date of exchange
principal amount of in principal amount this Global Note authorized officer following such
this Global Note of this Global Note of Trustee or Notes decrease or increase
Custodian
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
====================================================================================================================
</TABLE>
A-15
<PAGE> 69
EXHIBIT B
FORM OF TRANSFER CERTIFICATE FOR TRANSFER
FROM RULE 144A GLOBAL NOTE OR RESTRICTED NOTE
TO REGULATION S GLOBAL NOTE
(Transfers pursuant to (Section) 2.06(a)(ii) or 2.06(a)(vii)
of the Indenture)
The Chase Manhattan Bank, as Trustee
450 West 33rd Street
New York, New York 10001
Attn: Capital Markets Fiduciary Services
Re: CoreComm Limited 6% Convertible Subordinated Notes due
2006 (the "NOTES")
Reference is hereby made to the Indenture, dated as October 6,
1999 (the "INDENTURE"), between CoreComm Limited, as Issuer, and The Chase
Manhattan Bank, as Trustee.
This letter relates to $[ ] [check one] (i) / /
aggregate principal amount of Notes which are held in the form of the Rule 144A
Global Note (CUSIP No. ) with the Depositary or (ii) / /
principal amount of Restricted Note (CUSIP No. ) registered,
in either case, in the name of [name of transferor] (the "TRANSFEROR") to effect
the transfer of the Notes in exchange for an equivalent beneficial interest in
the Regulation S Global Notes.
In connection with such request, the Transferor does hereby
certify that such transfer has been effected in accordance with (i) the transfer
restrictions set forth in the Notes and (ii) that:
(1) the offer of the Notes was not made to a Person in the
United States;
(2) the transaction was executed in, on or through the
facilities of a designated offshore securities market and neither the
Transferor nor any Person acting on its behalf knows that the
transaction was pre-arranged with a buyer in the United States;
(3) no directed selling efforts have been made in
contravention of the requirements of Rule 903(b) or 904(b) of
Regulation S, as applicable; and
(4) the transaction is not part of a plan or scheme to evade
the registration requirements of the United States Securities Act of
1933, as amended (the "SECURITIES ACT").
In addition, if the sale is made during a distribution
compliance period and the provisions of Rule 903(c)(2) or (3) or Rule 904(c)(1)
of Regulation S are applicable thereto, we confirm that such sale has been made
in accordance with the applicable provisions of Rule 903(c)(2) or (3) or Rule
904(c)(1), as the case may be.
You and the Company are entitled to rely upon this letter and
are irrevocably authorized to produce this letter or a copy hereof to any
interested party in any administrative or legal proceedings or official inquiry
with respect to the matters covered hereby. Capitalized terms used in this
certificate and not otherwise defined in the Indenture have the meanings set
forth in Regulation S.
B-1
<PAGE> 70
[Name of Transferor]
By:___________________________
Name:
Title:
Dated:
cc: CoreComm Limited
110 East 59th Street
New York, New York 10022
Attn: Richard J. Lubasch, Esq.
Senior Vice President, General Counsel and Secretary
B-2
<PAGE> 71
EXHIBIT C
FORM OF TRANSFER CERTIFICATE FOR TRANSFER
FROM REGULATION S GLOBAL NOTE OR RESTRICTED NOTE
TO RULE 144A GLOBAL NOTE
(Transfers pursuant to (Section) 2.06(a)(iii) or 2.06(a)(vi)
of the Indenture)
The Chase Manhattan Bank, as Trustee
450 West 33rd Street
New York, New York 10001
Attn: Capital Markets Fiduciary Services
Re: CoreComm Limited 6% Convertible Subordinated Notes due
2006 (the "NOTES")
Reference is hereby made to the Indenture, dated as of October
6, 1999 (the "INDENTURE"), between CoreComm Limited, as Issuer, and The Chase
Manhattan Bank, as Trustee. Capitalized terms used but not defined herein shall
have the respective meanings given them in the Indenture.
This letter relates to $[ ] [check one] (i) / / aggregate
principal amount of Notes which are held in the form of the Regulation S Global
Note (CUSIP No. ____) with the Depositary or (ii) / / principal amount of
Restricted Note (CUSIP No. 629407AM9) registered, in each case, in the name of
[name of transferor] (the "TRANSFEROR") to effect the transfer of the Notes in
exchange for an equivalent beneficial interest in the Rule 144A Global Note.
In connection with such request, and in respect of such Notes
the Transferor does hereby certify that such Notes are being transferred in
accordance with (i) the transfer restrictions set forth in the Notes and (ii)
Rule 144A under the United States Securities Act of 1933, as amended, to a
transferee that the Transferor reasonably believes is purchasing the Notes for
its own account or an account with respect to which the transferee exercises
sole investment discretion and the transferee and any such account is a
"qualified institutional buyer" within the meaning of Rule 144A, in a
transaction meeting the requirements of Rule 144A and in accordance with
applicable securities laws of any state of the United States or any other
jurisdiction.
[Name of Transferor],
By:___________________________
Name:
Title:
Dated:
cc: CoreComm Limited
110 East 59th Street
New York, New York 10022
Attn: Richard J. Lubasch, Esq.
Senior Vice President, General Counsel and Secretary
C-1
<PAGE> 72
EXHIBIT D
FORM OF TRANSFER CERTIFICATE FOR TRANSFER
FROM GLOBAL NOTE OR RESTRICTED
NOTE TO RESTRICTED NOTE
(Transfers pursuant to (Section) 2.06(a)(iv)
or (Section) 2.06(a)(v) of the Indenture)
The Chase Manhattan Bank, as Trustee
450 West 33rd Street
New York, New York 10001
Attn: Capital Markets Fiduciary Services
Re: CoreComm Limited 6% Convertible Subordinated Notes due
2006 (the "NOTES")
Reference is hereby made to the Indenture, dated as of October
6, 1999 (the "INDENTURE"), between CoreComm Limited, as Issuer, and The Chase
Manhattan Bank, as Trustee. Capitalized terms used but not defined herein shall
have the respective meanings given them in the Indenture.
This letter relates to $[ ] aggregate principal
amount of Notes which are held [in the form of the [Rule 144A/Regulation S]
[Global] [Restricted] Note (CUSIP No. [ ] CINS No. [ ])
[with the Depositary] in the name of [name of transferor] (the "TRANSFEROR") to
effect the transfer of the Notes.
In connection with such request, and in respect of such Notes,
the Transferor does hereby certify that such Notes are being transferred (i) in
accordance with the transfer restrictions set forth in the Notes and (ii) in
accordance with applicable securities laws of any state of the United States or
any other jurisdiction.
*Insert, if appropriate.
[Name of Transferor],
By:___________________________
Name:
Title:
Dated:
cc: CoreComm Limited
110 East 59th Street
New York, New York 10022
Attn: Richard J. Lubasch, Esq.
Senior Vice President, General Counsel and Secretary
D-1
<PAGE> 73
APPENDIX E
FORM OF LETTER TO BE DELIVERED BY ACCREDITED INSTITUTIONAL INVESTORS
CoreComm Limited
110 East 59th Street
New York, NY 10022
Ladies and Gentlemen:
We are delivering this letter in connection with our acquisition of 6%
Convertible Subordinated Notes due October 1, 2006 (the "Notes") of CoreComm
Limited, a Bermuda corporation (the "Company"), as more fully described in the
Confidential Offering Memorandum (the "Offering Memorandum") relating to the
initial offering of the Notes.
We hereby confirm that:
(i) we are an "accredited investor" within the meaning of Rule
501 (a) (1), (2), (3) or (7) under the Securities Act of 1933, as
amended (the "Securities Act"), or an entity in which all of the equity
owners are accredited investors within the meaning of Rule 501 (a) (1),
(2), (3) or (7) under the Securities Act (an "Institutional Accredited
Investor");
(ii) (A) any purchase of the Notes by us will be for our own
account or for the account of one or more other Institutional
Accredited Investors or as fiduciary for the account of one or more
trusts, each of which is an "accredited investor" within the meaning of
Rule 501 (a) (7) under the Securities Act and for each of which we
exercise sole investment discretion or (B) we are a "bank", within the
meaning of Section 3 (a) (2) of the Securities Act, or a "savings and
loan association" or other institution described in Section 3 (a) (5)
(A) of the Securities Act that is acquiring the Notes as fiduciary for
the account of one or more institutions for which we exercise sole
investment discretion;
(iii) in the event that we purchase any of the Notes, we will
acquire Notes having a minimum purchase price of not less than $100,000
for our own account or for any separate account for which we are
acting;
(iv) we have such knowledge and experience in financial and
business matters that we are capable of evaluating the merits and risks
of purchasing the Notes;
(v) we are not acquiring the Notes with a view to distribution
thereof or with any present intention of offering or selling any of the
Notes, except inside the United States in accordance with Rule 144A
under the Securities Act or outside the United States in accordance
with Regulation S under the Securities Act, as provided below, provided
that the disposition of our property and the property of any accounts
for which we are acting as fiduciary shall remain at all times within
our control; and
(vi) we have received a copy of the Offering Memorandum
relating to the offering of the Notes and acknowledge that we have had
access to such financial and other information, and have been afforded
the opportunity to ask such questions of representatives of the Company
and receive answers thereto, as we deem necessary in connection with
our decision to acquire the Notes.
E-1
<PAGE> 74
We understand that the Notes are being offered in a transaction not involving
any public offering within the United States within the meaning of the
Securities Act and that the Notes have not been registered under the Securities
Act, and we agree, on our own behalf and on behalf of each account for which we
acquire any Notes, that if in the future we decide to resell, pledge or
otherwise transfer such Notes, such Notes may be offered, resold, pledged or
otherwise transferred only: (a) to the Company or any of its subsidiaries, (b)
to a person whom the seller reasonably believes is a Qualified Institutional
Buyer or "QIB" (as defined in Rule 144A under the Securities Act) purchasing for
its own account or for the account of a QIB in a transaction meeting the
requirements of Rule 144A, (c) in an offshore transaction meeting the
requirements of Rule 904 of the Securities Act, (d) in a transaction meeting the
requirements of Rule 144 under the Securities Act, (e) to an Institutional
Accredited Investor that, prior to such transfer, furnishes the trustee a signed
letter containing certain representations and agreements relating to the
transfer of the Notes (in substantially this form) and, if such transfer is in
respect of an aggregate principal amount of Notes less than $100,000, an opinion
of counsel acceptable to the Company that such transfer is in compliance with
the Securities Act, (f) in accordance with another exemption from the
registration requirements of the Securities Act (and based upon an opinion of
counsel acceptable to the Company) or (g) pursuant to an effective registration
statement and, in each case, in accordance with the applicable securities laws
of any state of the United States, or any other applicable jurisdiction. We
understand that the registrar and transfer agent for the Notes will not be
required to accept for registration of transfer any Notes acquired by us, except
upon presentation of evidence satisfactory to the Company and the transfer agent
that the foregoing restrictions on transfer have been complied with. We further
understand that any Notes acquired by us will be in the form of definitive
physical certificates and will bear a legend reflecting the substance of this
paragraph.
We acknowledge that the Company and others will rely upon our
confirmations, acknowledgments and agreements set forth herein, and we agree to
notify you promptly in writing if any of our representations or warranties
herein ceases to be accurate and complete.
THIS LETTER SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE
LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF
LAWS.
Dated:_____________________________ _____________________________
(Name of Purchaser)
By:__________________________
Name:
Title:
Address:
E-2
<PAGE> 1
EXECUTION COPY
================================================================================
Exhibit 4.4
$175,000,000
6% CONVERTIBLE SUBORDINATED NOTES DUE 2006
REGISTRATION RIGHTS AGREEMENT
Dated as of October 6, 1999
by and among
CORECOMM LIMITED
and
DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION
WASSERSTEIN PERELLA SECURITIES, INC.
CHASE SECURITIES INC.
BEAR, STEARNS & CO. INC.
GOLDMAN, SACHS & CO.
MORGAN STANLEY & CO. INCORPORATED
SALOMON SMITH BARNEY INC.
================================================================================
<PAGE> 2
This Registration Rights Agreement (this "AGREEMENT") is made and
entered into as of October 6, 1999 by and among CoreComm Limited, a Bermuda
corporation (the "COMPANY"), and Donaldson, Lufkin & Jenrette Securities
Corporation, Wasserstein Perella Securities, Inc., Chase Securities Inc., Bear,
Stearns & Co. Inc., Goldman, Sachs & Co., Morgan Stanley & Co. Incorporated and
Salomon Smith Barney Inc. (each an "INITIAL PURCHASER" and collectively, the
"INITIAL PURCHASERS"). The Company proposes to issue and sell to the Initial
Purchasers (the "INITIAL PLACEMENT") $150,000,000 in aggregate principal amount
of its 6% Convertible Notes due 2006 (the "FIRM CONVERTIBLE NOTES"). The Company
also proposes to issue and sell to the Initial Purchasers not more than
$25,000,000 principal amount of its 6% Convertible Subordinated Notes due 2006
(the "ADDITIONAL CONVERTIBLE NOTES" and, together with the Firm Convertible
Notes, the "Notes"). As an inducement to the Initial Purchasers to enter into
the purchase agreement, dated as of October 1, 1999 (the "PURCHASE AGREEMENT"),
and in satisfaction of a condition to the Initial Purchasers' obligations
thereunder, the Company agrees with the Initial Purchasers, (i) for the benefit
of the Initial Purchasers and (ii) for the benefit of the holders from time to
time of the Notes whose names appear in the register maintained by the Registrar
in accordance with the provisions of the Indenture (as defined in Section 1
hereof) (including the Initial Purchasers), as follows:
SECTION 1. DEFINITIONS
Capitalized terms used herein without definition shall have their
respective meanings set forth in the Purchase Agreement. As used in this
Agreement, the following capitalized defined terms shall have the following
meanings:
"ACT" means the Securities Act of 1933, as amended, and the rules and
regulations of the Commission promulgated thereunder.
"AFFILIATE" of any specified person means any other person which,
directly or indirectly, is in control of, is controlled by, or is under common
control with, such specified person. For purposes of this definition, control of
a person means the power, direct or indirect, to direct or cause the direction
of the management and policies of such person whether by contract or otherwise;
and the terms "controlling" and "controlled" have meanings correlative to the
foregoing.
"AGREEMENT" means this Registration Rights Agreement.
"CLOSING DATE" has the meaning set forth in the Purchase Agreement.
"COMMISSION" means the Securities and Exchange Commission.
"COMMON STOCK" means the common stock of the Company, par value $0.01
per share, issuable upon the conversion of the Notes.
"COMPANY" means CoreComm Limited.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended,
and the rules and regulations of the Commission promulgated thereunder.
"HOLDER" has the meaning set forth in Section 2 hereof.
"INDENTURE" means the Indenture, dated as of October 6, 1999, between
the Company and the Trustee, relating to the Notes, as the same may be amended
from time to time in accordance with the terms thereof.
<PAGE> 3
"INITIAL PLACEMENT" has the meaning set forth in the preamble hereto.
"INITIAL PURCHASERS" means, collectively, Donaldson, Lufkin & Jenrette
Securities Corporation, Wasserstein Perella Securities, Inc., Chase Securities
Inc., Bear, Stearns & Co. Inc., Goldman, Sachs & Co., Morgan Stanley & Co.
Incorporated and Salomon Smith Barney Inc.
"LOSSES" has the meaning set forth in Section 7(d) hereof.
"MAJORITY HOLDERS" means the Holders of a majority of the aggregate
principal amount of securities registered under a Shelf Registration Statement.
"NOTES" has the meaning set forth in the preamble hereto.
"PROSPECTUS" means the prospectus included in any Shelf Registration
Statement (including, without limitation, a prospectus that discloses
information previously omitted from a prospectus filed as part of an effective
registration statement in reliance upon Rule 430A under the Act), as amended or
supplemented by any prospectus supplement, with respect to the terms of the
offering of any portion of Transfer Restricted Securities covered by such Shelf
Registration Statement, and all amendments and supplements to the Prospectus,
including post-effective amendments.
"SHELF REGISTRATION" means a registration effected pursuant to Section
3 hereof.
"SHELF REGISTRATION PERIOD" has the meaning set forth in Section 3
hereof.
"SHELF REGISTRATION STATEMENT" means a "shelf" registration statement
of the Company pursuant to the provisions of Section 3 hereof that covers some
or all of the Transfer Restricted Securities as applicable, on an appropriate
form under Rule 415 under the Act, or any similar rule that may be adopted by
the Commission, amendments and supplements to such registration statement,
including post-effective amendments, and in each case, including the Prospectus
contained therein, all exhibits thereto and all material incorporated by
reference therein.
"SUPPLEMENT DELAY PERIOD" means any period commencing on the date of
receipt by a Holder of Transfer Restricted Securities of any notice from the
Company of the existence of any fact or event of the kind described in Section
4(b)(2) hereof and ending on the date of receipt by such Holder of an amended or
supplemented Shelf Registration Statement or Prospectus, as contemplated by
Section 4(h) hereof, or the receipt by such Holder of written notice from the
Company (the "ADVICE") that the use of the Prospectus may be resumed, and the
receipt of copies of any additional or supplemental filings that are
incorporated by reference in the Prospectus.
"TRANSFER RESTRICTED SECURITIES" means each Note and the Common Stock
issuable upon conversion thereof until (i) the date on which such Note or the
Common Stock issuable upon conversion thereof has been effectively registered
under the Act and disposed of in accordance with the Shelf Registration
Statement, (ii) the date on which such Note or Common Stock issuable upon
conversion thereof is distributed to the public pursuant to Rule 144 under the
Act (or any similar provision then in effect) or is saleable pursuant to Rule
144(k) under the Act or (iii) the date on which such Note (A) is converted into
Common Stock in accordance with the terms and provisions of the Indenture or (B)
otherwise ceases to be outstanding.
"TRUSTEE" means the trustee with respect to the Notes under the
Indenture.
"UNDERWRITER" means any underwriter of Notes in connection with an
offering thereof under a Shelf Registration Statement.
2
<PAGE> 4
SECTION 2. HOLDERS
A person is deemed to be a holder of Transfer Restricted Securities
(each, a "HOLDER") whenever such person becomes the registered holder of such
Transfer Restricted Securities under the Indenture and includes broker-dealers
that hold Transfer Restricted Securities (i) as a result of market making
activities and other trading activities and (ii) which were acquired directly
from the Company or an Affiliate.
SECTION 3. SHELF REGISTRATION
The Company shall within 90 days of the date of original issuance of
the Notes, file with the Commission and thereafter shall use its reasonable best
efforts to cause to be declared effective under the Act on or prior to 180 days
(plus any additional days allowed as a result of a Supplemental Delay Period)
after the date of original issuance of the Notes, a Shelf Registration Statement
relating to the offer and sale of the Transfer Restricted Securities by the
Holders from time to time in accordance with the methods of distribution elected
by such Holders and set forth in such Shelf Registration Statement.
The Company shall use its best efforts to keep the Shelf Registration
Statement continuously effective in order to permit the Prospectus forming part
thereof to be usable by Holders for a period of two years from the date the
Shelf Registration statement is declared effective by the Commission or such
shorter period that will terminate when (i) all the Transfer Restricted
Securities covered by the Shelf Registration Statement have been sold pursuant
to the Shelf Registration Statement, (ii) the date on which, in the opinion of
counsel to the Company, all of the Transfer Restricted Securities then held by
the Holders may be sold by such Holders in the public United States securities
markets in the absence of a registration statement covering such sales or (iii)
the date on which there ceases to be outstanding any Transfer Restricted
Securities (in any such case, such period being called the "SHELF REGISTRATION
PERIOD"). The Company shall be deemed not to have used its reasonable best
efforts to keep the Shelf Registration Statement effective during the requisite
period if it voluntarily takes any action that would result in Holders of
Transfer Restricted Securities covered thereby not being able to offer and sell
such securities during that period, unless (i) such action is required by
applicable law, (ii) such action is taken by the Company in good faith and for
valid business reasons (not including avoidance of the Company's obligations
hereunder), including the acquisition or divestiture of assets, so long as the
Company promptly thereafter complies with the requirements of Section 4(h)
hereof, if applicable or (iii) such action is taken because of any fact or
circumstance giving rise to a Supplement Delay Period.
SECTION 4. REGISTRATION PROCEDURES
In connection with any Shelf Registration Statement, the following
provisions shall apply:
(a) The Company shall ensure that (i) any Shelf Registration Statement
and any amendment thereto and any Prospectus forming part thereof and any
amendment or supplement thereto complies in all material respects with the Act
and the rules and regulations thereunder, (ii) any Shelf Registration Statement
and any amendment thereto does not, when it becomes effective, contain an untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not misleading and
(iii) any Prospectus forming part of any Shelf Registration Statement, and any
amendment or supplement to such Prospectus, does not include an untrue statement
of a material fact or omit to state a material fact necessary in order to make
the statements, in the light of the circumstances under which they were made,
not misleading.
(b) (1) The Company shall advise the Initial Purchasers and the Holders
of Transfer Restricted Securities named in any Shelf Registration Statement,
and, if requested by the Initial Purchasers or any such Holder, confirm such
advice in writing when a Shelf Registration Statement and
3
<PAGE> 5
any amendment thereto has been filed with the Commission and when the Shelf
Registration Statement or any post-effective amendment thereto has become
effective.
(2) The Company shall advise the Initial Purchasers and the
Holders of Transfer Restricted Securities named in any Shelf Registration
Statement, which have provided in writing to the Company a telephone or
facsimile number and address for notices, and, if requested by the Initial
Purchasers or any such Holder, confirm such advice in writing:
(i) of any request by the Commission for amendments or
supplements to the Shelf Registration Statement or the Prospectus
included therein or for additional information;
(ii) of the initiation by the Commission of proceedings
relating to a stop order suspending the effectiveness of the Shelf
Registration Statement;
(iii) of the issuance by the Commission of any stop order
suspending the effectiveness of the Shelf Registration Statement;
(iv) of the receipt by the Company of any notification with
respect to the suspension of the qualification of the securities
included therein for sale in any jurisdiction or the initiation or
threatening of any proceeding for such purpose; and
(v) of the existence of any fact and the happening of any
event (including, without limitation, pending negotiations relating to,
or the consummation of, a transaction or the occurrence of any event
which would require additional disclosure of material non-public
information by the Company in the Shelf Registration Statement as to
which the Company has a bona fide business purpose for preserving
confidential or which renders the Company unable to comply with
Commission requirements) that, in the opinion of the Company, makes
untrue any statement of a material fact made in its Shelf Registration
Statement, the Prospectus or any amendment or supplement thereto or any
document incorporated by reference therein or requires the making of
any changes in the Shelf Registration Statement or the Prospectus so
that, as of such date, the statements therein are not misleading and do
not omit to state a material fact required to be stated therein or
necessary to make the statements therein (in the case of the
Prospectus, in light of the circumstances under which they were made)
not misleading.
Such advice may be accompanied by an instruction to suspend the use of
the Prospectus until the requisite changes have been made.
(c) The Company shall use its best efforts to obtain the withdrawal of
any order suspending the effectiveness of any Shelf Registration Statement at
the earliest possible time.
(d) The Company shall use its best efforts to furnish to each selling
Holder named in any Shelf Registration Statement who so requests in writing and
who has provided to the Company an address for notices, without charge, at least
one conformed copy of such Shelf Registration Statement and any post-effective
amendment thereto, including financial statements and, if the Holder so requests
in writing, all exhibits and schedules (including those incorporated by
reference).
(e) The Company shall, during the Shelf Registration Period, deliver to
each Holder of Transfer Restricted Securities named in any Shelf Registration
Statement and who has provided to the Company an address for notices, without
charge, as many copies of the Prospectus (including each preliminary Prospectus)
contained in such Shelf Registration Statement and any amendment or supplement
thereto as such Holder may reasonably request; subject to any notice by the
Company in
4
<PAGE> 6
accordance with Section 5(b) hereof, the Company consents to the use of the
Prospectus or any amendment or supplement thereto by each of the selling Holders
for the purposes of offering and resale of the Transfer Restricted Securities
covered by the Prospectus in accordance with the applicable regulations
promulgated under the Act.
(f) Prior to any offering of Transfer Restricted Securities pursuant to
any Shelf Registration Statement, the Company shall register or qualify or
cooperate with the Holders of Transfer Restricted Securities named therein and
their respective counsel in connection with the registration or qualification of
such Transfer Restricted Securities for offer and sale under the securities or
blue sky laws of such jurisdictions of the United States as any such Holders
reasonably request in writing not later than the date that is five business days
prior to the date upon which this Agreement specifies that the Shelf
Registration Statement shall become effective; provided, however, that the
Company will not be required to qualify generally to do business in any
jurisdiction where it is not then so qualified or to take any action which would
subject it to general or unlimited service of process or to taxation in any such
jurisdiction where it is not then so subject.
(g) The Company shall endeavor to cooperate with the Holders of
Transfer Restricted Securities to facilitate the timely preparation and delivery
of certificates representing Transfer Restricted Securities to be sold pursuant
to any Shelf Registration Statement free of any restrictive legends and in such
denominations and registered in such names as Holders may request in writing at
least two business days prior to sales of securities pursuant to such Shelf
Registration Statement.
(h) Upon the occurrence of any event contemplated by paragraph
(b)(2)(v) hereof, the Company shall promptly prepare a post-effective amendment
to any Shelf Registration Statement or an amendment or supplement to the related
Prospectus or file any other required document so that as thereafter delivered
to purchasers of the Transfer Restricted Securities covered thereby, the
Prospectus will not include an untrue statement of a material fact or omit to
state any material fact necessary to make the statements therein, in the light
of the circumstances under which they were made, not misleading; provided that
in the event of a material business transaction (including, without limitation,
pending negotiations relating to such a transaction) which would, in the opinion
of counsel to the Company, require disclosure by the Company in the Shelf
Registration Statement of material non-public information for which the Company
has a bona fide business purpose for not disclosing, then for so long as such
circumstances exist, the Company shall not be required to prepare and file a
supplement or post-effective amendment hereunder.
(i) Not later than the effective date of any such Shelf Registration
Statement hereunder, the Company shall cause to be provided a CUSIP number for
the Notes registered under such Shelf Registration Statement, and provide the
applicable trustee with certificates for such Notes in a form eligible for
deposit with The Depository Trust Company.
(j) The Company shall make generally available to its security holders
in a regular filing on Form 10-Q or 10-K an earnings statement satisfying the
provisions of Rule 158 (which need not be audited) for the twelve-month period
commencing after effectiveness of the Shelf Registration Statement.
(k) The Company shall cause the Indenture to be qualified under the
Trust Indenture Act in a timely manner.
(l) The Company may require each Holder of Transfer Restricted
Securities, which are to be sold pursuant to any Shelf Registration Statement,
to furnish to the Company within 20 business days after written request for such
information has been made by the Company, such information regarding
5
<PAGE> 7
the Holder and the distribution of such securities as the Company may from time
to time reasonably require for inclusion in such Shelf Registration Statement
and such other information as may be necessary or advisable in the reasonable
opinion of the Company and its counsel, in connection with such Shelf
Registration Statement. No Holder of Transfer Restricted Securities shall be
entitled to the benefit of any Special Interest (as set forth in the Notes)
under the Indenture and the Notes or be entitled to use the Prospectus unless
and until such Holder shall have furnished the information required by this
Section 4(l) and all such information required to be disclosed in order to make
the information previously furnished to the Company by such Holder not
materially misleading.
(m) The Company shall, if requested, promptly incorporate in a
Prospectus supplement or post-effective amendment to a Shelf Registration
Statement, such information as the Majority Holders reasonably agree should be
included therein in order to effect their distribution of the Notes and shall
make all required filings of such Prospectus supplement or post-effective
amendment as soon as notified of the matters to be incorporated in such
Prospectus supplement or post-effective amendment; provided, however, that the
Company shall not be required to take any action pursuant to this Section 4(m)
that would, in the opinion of counsel for the Company, violate applicable law or
to include information the disclosure of which at the time would have an adverse
effect on the business or operations of the Company and/or its subsidiaries, as
determined in good faith by the Company.
(n) The Company shall enter into such agreements and take all other
reasonably appropriate actions in order to expedite or facilitate the
registration or the disposition of the Transfer Restricted Securities, and in
connection therewith, if an underwriting agreement is entered into, cause the
same to contain indemnification and contribution provisions and procedures no
less favorable than those set forth in Section 7 (or such other provisions and
procedures acceptable to the Majority Holders), with respect to all parties to
be indemnified pursuant to Section 7 from Holders of Notes to the Company.
(o) The Company shall upon receipt of a reasonable request in writing
therefor:
(i) make reasonably available at reasonable times prior to the
effectiveness of the related Shelf Registration Statement for
inspection by representatives of the Holders of Transfer Restricted
Securities to be registered thereunder and any attorney, accountant or
other agent retained by the Holders, at the office where normally kept
during normal business hours, all financial and other records,
pertinent corporate documents and properties of the Company and its
subsidiaries, and cause the Company's officers, directors and employees
to supply all relevant information reasonably requested by the Holders'
attorneys, accountants or other agents in connection with any such
Shelf Registration Statement as is customary for similar due diligence
examinations; provided, however, that the foregoing inspection and
information gathering shall be coordinated by one counsel designated by
the Holders and that such persons shall first agree in writing with the
Company that any information that is designated in writing by the
Company, in good faith, as confidential at the time of delivery of such
information shall be kept confidential by such person, unless such
disclosure is made in connection with a court proceeding or required by
law, or such information becomes available to the public generally or
through a third party without an accompanying obligation of
confidentiality;
(ii) obtain opinions of counsel to the Company and updates
thereof (which counsel and opinions (in form, scope and substance)
shall be reasonably satisfactory to the Majority Holders), addressed to
each selling Holder covering such matters (in form, scope and
substance) as those matters set forth in Section 6(a), (b), (c) and (d)
of the Purchase Agreement;
(iii) obtain "cold comfort" letters (or, in the case of any
person that does not satisfy the conditions for receipt of a "cold
comfort" letter specified in Statement on Auditing Standards
6
<PAGE> 8
No. 72, an "agreed-upon procedures letter") and updates thereof from
the independent certified public accountants of the Company (and, if
necessary, any other independent certified public accountants of any
subsidiary of the Company or of any business acquired by the Company
for which financial statements and financial data are, or are required
to be, included in the Shelf Registration Statement), addressed where
reasonably practicable to each selling Holder of Transfer Restricted
Securities registered thereunder and the underwriters, if any, in
customary form and covering matters of the type customarily covered in
"cold comfort" letters in connection with primary underwritten
offerings; and
(iv) deliver such documents and certificates as may be
reasonably requested by the Majority Holders, including those to
evidence compliance with Section 4(h).
The foregoing actions set forth in clauses (ii), (iii) and
(iv) of this Section 4(o) shall, if reasonably requested by the
Majority Holder, be performed upon the effectiveness of such Shelf
Registration Statement and the effectiveness of each post-effective
amendment thereto.
(v) The Company may offer securities of the Company other than
the Notes under the Shelf Registration Statement, except where such
offer would conflict with the terms of the Purchase Agreement.
SECTION 5. HOLDERS' AGREEMENTS
Each Holder of Transfer Restricted Securities severally but not
jointly, by the acquisition of such Transfer Restricted Securities, agrees:
(a) To furnish the information required to be furnished pursuant to
Section 4(l) hereof within the time period set forth therein.
(b) That upon receipt of a notice of the commencement of a Supplement
Delay Period, it will keep the fact of such notice confidential, forthwith
discontinue disposition of its Transfer Restricted Securities pursuant to the
Shelf Registration Statement, and will not deliver any Prospectus forming a part
thereof until receipt of the amended or supplemented Shelf Registration
Statement or Prospectus, as applicable, as contemplated by Section 4(h) hereof,
or until receipt of the Advice. If a Supplement Delay Period should occur, the
Shelf Registration Period shall be extended by the number of days of which the
Supplement Delay Period is comprised; provided that the Shelf Registration
Period shall not be extended if the Company has received an opinion of counsel
(which counsel, if different from counsel to the Company referred to in Section
6(b) of the Purchase Agreement, shall be reasonably satisfactory to the Majority
Holders of the Transfer Restricted Securities named in the Shelf Registration
Period and which opinion shall be in writing if the Majority of the Holders so
request) to the effect that the Transfer Restricted Securities can be freely
tradeable without the continued effectiveness of the Shelf Registration
Statement.
(c) If so directed by the Company in a notice of the commencement of a
Supplement Delay Period, each Holder of Transfer Restricted Securities will
deliver to the Company (at the Company's expense) all copies, other than
permanent file copies then in such Holder's possession, of the Prospectus
covering the Transfer Restricted Securities.
(d) Sales of such Transfer Restricted Securities pursuant to a Shelf
Registration Statement shall only be made in the manner set forth in such
currently effective Shelf Registration Statement.
SECTION 6. REGISTRATION EXPENSES
7
<PAGE> 9
The Company shall bear all expenses incurred in connection with the
performance of its obligations under Sections 3 and 4 hereof and will reimburse
the Holders for the reasonable fees and disbursements of one firm or counsel
designated by the Majority Holders to act as counsel for the Holders in
connection with any Shelf Registration Statement. Notwithstanding the foregoing
or anything in this Agreement to the contrary, each Holder shall pay all
underwriting discounts and commission of any underwriters with respect to any
Transfer Restricted Securities sold by it.
SECTION 7. INDEMNIFICATION AND CONTRIBUTION
(a) In connection with Shelf Registration Statement and to the extent
permitted by law, the Company agrees to indemnify and hold harmless each Holder
of Transfer Restricted Securities covered thereby (including each Initial
Purchaser), the directors, officers, employees, partners, representatives and
agents of each such Holder and each person who controls any such Holder within
the meaning of either Section 15 of the Act or Section 20 of the Exchange Act
against any and all losses, claims, damages or liabilities, joint or several, to
which they or any of them may become subject under the Act, the Exchange Act or
other Federal or state statutory law or regulation, at common law or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of, or are based upon, any untrue statement or alleged untrue
statement of a material fact contained in the Shelf Registration Statement as
originally filed or in any amendment thereof, or in any preliminary Prospectus
or Prospectus, or in any amendment thereof or supplement thereto, or arise out
of, or are based upon, the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, and to reimburse each such indemnified party, as
incurred, for any legal or other expenses reasonably incurred by them in
connection with investigating or defending any such loss, claim, damage,
liability or action; provided, however, that (i) the Company will not be liable
in any case to the extent that any such loss, claim, damage or liability arises
out of, or is based upon, any such untrue statement or alleged untrue statement
or omission or alleged omission made therein in reliance upon and in conformity
with written information furnished to the Company by or on behalf of any such
Holder specifically for inclusion therein and (ii) the Company will not be
liable to any indemnified party under this indemnity agreement with respect to
the Shelf Registration Statement or Prospectus to the extent that any such loss,
claim, damage or liability of such indemnified party results solely from an
untrue statement of a material fact contained in, or the omission of a material
fact from, the Shelf Registration Statement or Prospectus, which untrue
statement or omission was corrected in an amended or supplemented Shelf
Registration Statement or Prospectus, if the person alleging such loss, claim,
damage or liability was not sent or given, at or prior to the written
confirmation of such sale, a copy of the amended or supplemented Shelf
Registration Statement or Prospectus if the Company had previously furnished
copies thereof to such indemnified party and if delivery of a prospectus is
required by the Act and was not so made. This indemnity agreement will be in
addition to any liability which the Company may otherwise have.
(b) Each Holder of Transfer Restricted Securities covered by a Shelf
Registration Statement (including each Initial Purchaser) severally agrees to
indemnify and hold harmless (i) the Company, (ii) each of its directors, (iii)
each of its officers who signs such Shelf Registration Statement and (iv) each
person who controls the Company within the meaning of either the Act or the
Exchange Act to the same extent as the foregoing indemnity from the Company to
each such Holder, but only with reference to written information relating to
such Holder furnished to the Company by or on behalf of such Holder specifically
for inclusion in the documents referred to in the foregoing indemnity. This
indemnity agreement will be in addition to any liability which any such Holder
may otherwise have. In no event shall any Holder, its directors, officers or any
person who controls such Holder be liable or responsible for any amount in
excess of the amount by which the total amount received by such Holder with
respect to its sale of Transfer Restricted Securities pursuant to a Shelf
Registration Statement exceeds (i) the amount paid by such Holder for such
Transfer Restricted Securities and (ii) the amount of any damages
8
<PAGE> 10
that such Holder, its directors, officers or any person who controls such Holder
has otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission.
(c) Promptly after receipt by an indemnified party under this Section 7
or notice of the commencement of any action, the indemnified party will, if a
claim in respect thereof is to be made against the indemnifying party under this
Section 7, notify the indemnifying party in writing of the commencement thereof;
but the failure to so notify the indemnifying party (i) will not relieve it from
liability under paragraph (a) or (b) above unless and to the extent it did not
otherwise learn of such action and such failure results in the forfeiture by the
indemnifying party of substantial rights and defenses and (ii) will not, in any
event, relieve the indemnifying party from any obligations to any indemnified
party other than the indemnification obligation provided in paragraph (a) or (b)
above. The indemnifying party shall be entitled to assume the defense of any
such claim and to appoint counsel of the indemnifying party's choice at the
indemnifying party's expense to represent the indemnified party in any action
for which indemnification is sought (in which case the indemnifying party shall
not thereafter be responsible for the fees and expenses of any separate counsel
retained by the indemnified party or parties except as set forth below);
provided, however, that such counsel shall be reasonably satisfactory to the
indemnified party. Notwithstanding the indemnifying party's election to appoint
counsel to represent the indemnified party in an action, the indemnified party
shall have the right to employ separate counsel (including local counsel), and
the indemnifying party shall bear the reasonable fees, costs and expenses of
such separate counsel (and local counsel) if (i) the use of counsel chosen by
the indemnifying party to represent the indemnified party would present such
counsel with a conflict of interest, (ii) the actual or potential defendants in,
or targets of, any such action include both the indemnified party and the
indemnifying party, and the indemnified party reasonably concluded that there
may be legal defenses available to it and/or other indemnified parties that are
different from or additional to those available to the indemnifying party, (iii)
the indemnifying party did not employ counsel satisfactory to the indemnified
party to represent the indemnified party within a reasonable time after notice
of the institution of such action or (iv) the indemnifying party authorized the
indemnified party to employ separate counsel at the expense of the indemnifying
party. The indemnifying party shall indemnify and hold harmless the indemnified
party from and against all losses, claims, damages and liabilities by reason of
any settlement of any action (i) effected with its written consent or (ii)
effected without its written consent if the settlement is entered into more than
twenty business days after the indemnifying party shall have received a request
from the indemnified party for reimbursement for the fees and expenses of
counsel (in any case where such fees and expenses are at the expense of the
indemnifying party) and, prior to the date of such settlement, the indemnifying
party shall have failed to comply with such reimbursement request.
Notwithstanding the immediately preceding sentence, if at any time an
indemnified party shall have requested an indemnifying party to reimburse the
indemnified party for fees and expenses of counsel, an indemnifying party shall
not be liable for any settlement of the nature contemplated by the immediately
preceding sentence effected without its consent if such indemnifying party (i)
reimburses such indemnified party in accordance with such request to the extent
that it considers such request to be reasonable and (ii) provides written notice
to the indemnified party substantiating the unpaid balance as unreasonable, in
each case, prior to the date of settlement. An indemnifying party shall not,
without the prior written consent of the indemnified parties, settle or
compromise or consent to the entry of any judgment with respect to any pending
or threatened claim, action, suit or proceeding for which indemnification or
contribution may be sought hereunder (whether or not the indemnified parties are
actual or potential parties to such claim or action), unless such settlement,
compromise or consent includes an unconditional release of each indemnified
party from all liability arising out of such claim, action, suit or proceeding
and does not include a statement as to or an admission of fault, culpability or
a failure to act, by or on behalf of the indemnified party.
9
<PAGE> 11
(d) In the event that the indemnity provided in paragraph (a) or (b) of
this Section 7 is unavailable or insufficient to hold harmless an indemnified
party for any reason, then each applicable indemnifying party, in lieu of
indemnifying such indemnified party, shall to the extent permitted by law have a
joint and several obligation to contribute to the aggregate losses, claims,
damages and liabilities (including legal or other expenses reasonably incurred
in connection with investigating or defending same) (collectively "LOSSES") to
which such indemnified party may be subject in such proportion as is appropriate
to reflect the relative benefits received by such indemnifying party, on the one
hand, and such indemnified party, on the other hand, from the Initial Placement
and the Shelf Registration Statement that resulted in such Losses; provided,
however, that in no case shall any Initial Purchaser be responsible, in the
aggregate, for any amount in excess of the purchase discount or commission
applicable to such Note, as set forth in Section 2 of the Purchase Agreement. If
the allocation provided by the immediately preceding sentence is unavailable for
any reason, the indemnifying party and the indemnified party shall contribute in
such proportion as is appropriate to reflect not only such relative benefits,
but also the relative fault of such indemnifying party, on the one hand, and
such indemnified party, on the other hand, in connection with the statements or
omissions which resulted in such Losses, as well as any other relevant equitable
considerations. Benefits received by the Company shall be deemed to be equal to
the sum of (x) the total net proceeds from the Initial Placement (in each case,
before deducting expenses) as set forth in Section 2 of the Purchase Agreement
and (y) the total amount of additional interest that the Company was not
required to pay as a result of registering the securities covered by the Shelf
Registration Statement that resulted in such Losses. Benefits received by the
Initial Purchasers shall be deemed to be equal to the total purchase discounts
and commissions as set forth in Section 2 of the Purchase Agreement, and
benefits received by any other Holders shall be deemed to be equal to the value
of the Transfer Restricted Securities sold by such Holders under the Shelf
Registration Statement. Relative fault shall be determined by reference to
whether any alleged untrue statement or omission relates to information provided
by the indemnifying party, on the one hand, or by the indemnified party, on the
other hand. The parties agree that it would not be just and equitable if
contribution were determined by pro rata allocation or any other method of
allocation that does not take account of the equitable considerations referred
to above. Notwithstanding the provisions of this paragraph (d), no person guilty
of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was guilty of such
fraudulent misrepresentation. For purposes of this Section 7, each person who
controls a Holder within the meaning of either the Act or the Exchange Act and
each director, officer, employee and agent of such Holder shall have the same
rights to contribution as such Holder, and each person who controls the Company
within the meaning of either the Act or the Exchange Act, each officer of the
Company who shall have signed the Shelf Registration Statement and each director
of the Company shall have the same rights to contribution as the Company,
subject in each case to the applicable terms and conditions of this paragraph
(d).
(e) The provisions of this Section 7 shall remain in full force and
effect, regardless of any investigation made by or on behalf of any Holder or
the Company or any of the officers, directors or controlling persons referred to
in Section 7 hereof, and will survive the sale by a Holder of Transfer
Restricted Securities or Exchange Notes.
SECTION 8. RULE 144A AND RULE 144
The Company agrees with each Holder, for so long as any Transfer
Restricted Securities remain outstanding and during any period in which the
Company (i) is not subject to Section 13 or 15(d) of the Exchange Act, to make
available, upon request of any Holder, to such Holder or beneficial owner of
Transfer Restricted Securities in connection with any sale thereof and any
prospective purchaser of such Transfer Restricted Securities designated by such
Holder or beneficial owner, the information required by Rule 144A(d)(4) under
the Act in order to permit resales of such Transfer Restricted Securities
10
<PAGE> 12
pursuant to Rule 144A, and (ii) is subject to Section 13 or 15 (d) of the
Exchange Act, to make all filings required thereby in a timely manner in order
to permit resales of such Transfer Restricted Securities pursuant to Rule 144.
SECTION 9. MISCELLANEOUS
(a) No Inconsistent Agreements. The Company has not, as of the date
hereof, entered into, nor shall it, on or after the date hereof, enter into, any
agreement with respect to its securities that is inconsistent with the rights
granted to the Holders herein or otherwise conflicts with the provisions hereof.
(b) Amendments and Waivers. The provisions of this Agreement, including
the provisions of this sentence, may not be amended, qualified, modified or
supplemented, and waivers or consents to departures from the provisions hereof
may not be given, unless the Company has obtained the written consent of the
Holders of at least a majority of the then outstanding aggregate principal
amount of Notes; provided, however, that with respect to any matter that
directly or indirectly affects the rights of any Initial Purchaser hereunder,
the Company shall obtain the written consent of each such Initial Purchaser
against which such amendment, qualification, supplement, waiver or consent is to
be effective. Notwithstanding the foregoing (except the foregoing proviso), a
waiver or consent to depart from the provisions hereof, with respect to a
matter, which relates exclusively to the rights of Holders whose securities are
being sold pursuant to a Shelf Registration Statement and does not directly or
indirectly affect the rights of other Holders, may be given by the Majority
Holders, determined on the basis of Notes being sold rather than registered
under such Shelf Registration Statement.
(c) Notices. All notices and other communications provided for or
permitted hereunder shall be made in writing by hand-delivery, first-class mail,
telex, telecopier, or air courier guaranteeing overnight delivery:
(i) if to a Holder, at the most current address given by such
holder to the Company in accordance with the provisions of this Section
9(c), which address initially is, with respect to each Holder, the
address of such Holder maintained by the registrar under the Indenture
(ii) with a copy in like manner to Donaldson, Lufkin &
Jenrette Securities Corporation;
(iii) if to the Initial Purchasers, initially at the
respective addresses set forth in the Purchase Agreement; and
(iv) if to the Company, initially at its address set forth in
the Purchase Agreement.
All such notices and communications shall be deemed to have been duly
given when received.
Upon the date of filing of a Shelf Registration Statement notice shall
be delivered to Donaldson, Lufkin & Jenrette Securities Corporation, on behalf
of the Initial Purchasers (in the form attached hereto as Exhibit A) and shall
be addressed to: Attention: Louise Guarneri (Compliance Department), 277 Park
Avenue, New York, New York 10172.
The Initial Purchasers or the Company by notice to the other may
designate additional or different addresses for subsequent notices or
communications.
11
<PAGE> 13
(d) Successors and Assigns. This Agreement shall inure to the benefit
of, and be binding upon, the successors and assigns of each of the parties
hereto, including, without the need for an express assignment or any consent by
the Company thereto, subsequent Holders of Notes. The Company hereby agrees to
extend the benefits of this Agreement to any Holder of Notes and any such Holder
may specifically enforce the provisions of this Agreement as if an original
party hereto.
(e) Counterparts. This agreement may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original, and all of which taken
together shall constitute one and the same agreement.
(f) Headings. The headings in this agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
(g) Governing Law. This agreement shall be governed by and construed in
accordance with the internal laws of the State of New York applicable to
agreements made and to be performed in said State (without reference to the
conflict of law rules thereof).
(h) Severability. In the event that any one or more of the provisions
contained herein, or the application thereof in any circumstances, is held
invalid, illegal or unenforceable in any respect for any reason, the validity,
legality and enforceability of any such provision in every other respect and the
remaining provisions hereof shall not be in any way impaired or affected
thereby, it being intended that all of the rights and privileges of the parties
shall be enforceable to the fullest extent permitted by law.
(i) Notes Held by the Company, etc. Whenever the consent or approval of
Holders of a specified percentage of principal amount of Notes is required
hereunder, Notes held by the Company or its Affiliates (other than subsequent
Holders of Notes if such subsequent Holders are deemed to be Affiliates solely
by reason of their holdings of such Notes) shall not be counted in determining
whether such consent or approval was given by the Holders of such required
percentage.
(j) Entire Agreement. This Agreement is intended by the parties as a
final expression of their agreement and intended to be a complete and exclusive
statement of the agreement and understanding of the parties hereto with respect
to the subject matter contained herein. There are no restrictions, promises,
warranties or undertakings, other than those set forth or referred to herein
with respect to the registration rights granted with respect to the Transfer
Restricted Securities. This Agreement supersedes all prior agreements and
understandings between the parties with respect to such subject matter.
12
<PAGE> 14
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
CORECOMM LIMITED
By: /s/ Richard J. Lubasch
----------------------
Name: Richard J. Lubasch
Title: Senior Vice President, General
Counsel and Secretary
<PAGE> 15
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
WASSERSTEIN PERELLA SECURITIES, INC.
CHASE SECURITIES INC.
BEAR, STEARNS & CO. INC.
GOLDMAN, SACHS & CO.
MORGAN STANLEY & CO. INCORPORATED
SALOMON SMITH BARNEY INC
By: DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION
By: /s/ Tony Belinkoff
-----------------------------
Name: Tony Belinkoff
Title: Managing Director
<PAGE> 16
EXHIBIT A
NOTICE OF FILING OF
SHELF REGISTRATION STATEMENT
To: Donaldson, Lufkin & Jenrette Securities Corporation
277 Park Avenue
New York, New York 10172
Attention: Louise Guarneri (Compliance Department)
Fax: (212) 892-7272
From: CoreComm Limited
6% Convertible Subordinated Notes due 2006
Date: ___, 199_
For your information only (NO ACTION REQUIRED):
Today, ______, 199_, we filed a Shelf Registration Statement with the Securities
and Exchange Commission.
<PAGE> 1
Exhibit 8.1
[Letterhead of Paul, Weiss, Rifkind, Wharton & Garrison]
(212) 373-3000
November 1, 1999
CoreComm Limited
110 East 59th Street
New York, New York 10022
Re: CoreComm Limited
6% Convertible Subordinated Notes due 2006
and Shares of Common Stock
Dear Sir or Madam:
In connection with the offer and sale of 6% Convertible
Subordinated Notes due 2006 of CoreComm Limited (the "Company") and the offer
and sale of shares of common stock of the Company, as described in the Form S-3
to be filed with the Securities and Exchange Commission on November 1, 1999 (the
"Registration Statement"), you have requested our opinion, as special United
States tax counsel, concerning the federal income tax matters set forth below.
<PAGE> 2
CoreComm Limited 2
In rendering our opinion, we have examined originals or
copies, certified or otherwise identified to our satisfaction, of such
agreements and other documents as we have deemed relevant and necessary and we
have made such investigations of law as we have deemed appropriate as a basis
for the opinion expressed below. In our examination, we have assumed the
authenticity of original documents, the accuracy of copies and the genuineness
of signatures. We understand and assume that (i) each such agreement represents
the valid and binding obligation of the respective parties thereto, enforceable
in accordance with its respective terms and the entire agreement between the
parties with respect to the subject matter thereof, (ii) the parties to each
agreement have complied, and will comply, with all of their respective
covenants, agreements and undertakings contained therein and (iii) the
transactions provided for by each agreement were and will be carried out in
accordance with their terms.
Our opinion is based upon existing United States federal
income tax laws, regulations, administrative pronouncements and judicial
decisions. All such authorities are subject to change, either prospectively or
retroactively, and any such change could affect our opinion.
The opinion set forth herein has no binding effect on the
United States Internal Revenue Service or the courts of the United States. No
assurance can be given that, if the matter were contested, a court would agree
with the opinion set
forth herein.
We hereby confirm the opinion set forth under the caption
"Certain United States Federal Income Tax Considerations" in the Registration
Statement. While such description discusses the material anticipated United
States federal income tax consequences applicable to certain holders of
convertible notes and common stock of the Company, it does not purport to
discuss all United States federal income tax considerations and our opinion is
limited to those United States federal income tax considerations specifically
discussed therein.
In giving the foregoing opinion, we express no opinion other
than as to the federal income tax laws of the United States of America.
We are furnishing this letter in our capacity as special
United States tax counsel to the Company. This letter is not to be used,
circulated, quoted or otherwise referred to for any other purpose, except as set
forth below.
<PAGE> 3
CoreComm Limited 3
We hereby consent to the filing of this opinion as Exhibit 8.1
to the Registration Statement and we further consent to the use of our name
under the caption "Certain United States Federal Income Tax Considerations" in
the Registration Statement. The issuance of such a consent does not concede that
we are an "expert" for purposes of the Securities Act.
Very truly yours,
/s/ Paul, Weiss, Rifkind, Wharton & Garrison
PAUL, WEISS, RIFKIND, WHARTON &
GARRISON
<PAGE> 1
CoreComm Limited
Exhibit 12.1
<TABLE>
<CAPTION>
For the period
from April 1, 1998
(Date Operations For the period
Commenced) to from January 1, 1998
June 30 December 31, 1998 to May 31, 1998
----------- -----------------------------------------
1999
----------- -----------------------------------------
<S> <C> <C> <C>
Fixed charges:
Interest $ 218,000 $ 21,000 $ 0
Amortization of debt expense 0 0
Interest portion of rental expense 202,000 354,000 98,000
----------- ----------- ----------
$ 420,000 $ 375,000 $ 98,000
Earnings:
Income (loss) from operations ($22,011,000) ($15,815,000) ($2,782,000)
Fixed charges per above 420,000 375,000 98,000
Less: Capitalized interest 0 0 0
----------- ----------- ----------
($21,591,000) ($15,440,000) ($2,684,000)
=========== =========== ==========
Ratio of Earnings to Fixed Charges (1) -- -- --
</TABLE>
<TABLE>
<CAPTION>
The Predecessor OCOM
December 31
-----------------------------------------------------------------
1997 1996 1995 1994
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed charges:
Interest $ 0 $ 0 $ 0 $ 0
Amortization of debt expense 0 0 0 0
Interest portion of rental expense 131,000 60,000 60,000 60,000
---------- ---------- ---------- ----------
$ 131,000 $ 60,000 $ 60,000 $ 60,000
Earnings:
Income (loss) from operations ($4,379,000) ($1,097,000) ($4,154,000) ($1,048,000)
Fixed charges per above 131,000 60,000 60,000 60,000
Less: Capitalized interest 0 0 0 0
---------- ---------- ---------- ----------
($4,248,000) ($1,037,000) ($4,094,000) ($ 988,000)
========== ========== ========== ==========
Ratio of Earnings to Fixed Charges (1) -- -- -- --
</TABLE>
The ratio of earnings to fixed charges is not meaningful for the periods that
result in a deficit
(1) For the six months ended June 30, 1999 and for the period from April 1,
1998 to December 31, 1998 and for the period from January 1, 1998 to
May 31, 1998, and the years ended December 31, 1997, 1996, 1995 and
1994, the deficit of earnings to fixed charges was $22,011,000,
$15,815,000, $2,728,000, $4,379,000, $1,097,000 $4,154,000 and
$1,048,000.
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and
"Selected Consolidated Financial Data" and to the use of our report dated
February 26, 1999 (except for Note 16 as to which the date is September 2,
1999) in the Registration Statement (Form S-3) of CoreComm Limited for the
registration of $175,000,000 in principal amount of 6% Convertible Subordinated
Notes due 2006.
/s/ Ernst & Young LLP
New York, New York
November 1, 1999
<PAGE> 1
Exhibit 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and
"Selected Consolidated Financial Data" and to the use of our report dated
February 26, 1999 in the Registration Statement (Form S-3) of OCOM Corporation
Telecoms Division for the registration of $175,000,000 in principal amount of
6% Convertible Subordinated Notes due 2006.
/s/ Ernst & Young LLP
New York, New York
November 1, 1999
<PAGE> 1
Exhibit 23.3
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated April 13, 1999, in the Registration Statement
(Form S-3) of USN Communications Inc. for the registration of $175,000,000 in
principal amount of 6% Convertible Subordinated Notes due 2006.
/s/ Ernst & Young LLP
New York, New York
November 1, 1999
<PAGE> 1
EXHIBIT 23.4
Independent Auditors' Consent
The Board of Directors
CoreComm Limited:
We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts" in the prospectus.
/s/ KPMG LLP
St. Louis, Missouri
October 29, 1999
<PAGE> 1
Exhibit 23.5
INDEPENDENT AUDITORS' CONSENT
To the Board of Directors and Stockholders of USN Communications, INC.:
We consent to the use in this Registration Statement No. 333-00000 of CoreComm
Limited on Form S-3 of our report dated March 9, 1998 relating to the
consolidated financial statements of USN Communications, Inc. and subsidiaries
for the years ended December 31, 1997 and 1996 appearing elsewhere in the
Prospectus, which is a part of this Registration Statement. We also consent to
the reference to us under the heading "Experts" in such prospectus.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Chicago, Illinois
October 29, 1999
<PAGE> 1
EXHIBIT 25.1
-------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------
FORM T-1
STATEMENT OF ELIGIBILITY
UNDER THE TRUST INDENTURE ACT OF 1939 OF
A CORPORATION DESIGNATED TO ACT AS TRUSTEE
-------------------------------------------
CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF
A TRUSTEE PURSUANT TO SECTION 305(b)(2)
--------
----------------------------------------
THE CHASE MANHATTAN BANK
(Exact name of trustee as specified in its charter)
NEW YORK 13-4994650
(State of incorporation (I.R.S. employer
if not a national bank) identification No.)
270 PARK AVENUE
NEW YORK, NEW YORK 10017
(Address of principal executive offices) (Zip Code)
William H. McDavid
General Counsel
270 Park Avenue
New York, New York 10017
Tel: (212) 270-2611
(Name, address and telephone number of agent for service)
---------------------------------------------
CORECOMM LIMITED
(Exact name of obligor as specified in its charter)
BERMUDA N/A
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification No.)
CEDAR HOUSE
41 CEDAR AVENUE, HM 12 BERMUDA N/A
(Address of principal executive offices) (Zip Code)
---------------------------------------------
6% CONVERTIBLE SUBORDINATED NOTES DUE 2006
(Title of the indenture securities)
-------------------------------------------------------------------
<PAGE> 2
GENERAL
Item 1. General Information.
Furnish the following information as to the trustee:
(a) Name and address of each examining or supervising authority to
which it is subject.
New York State Banking Department, State House, Albany, New York
12110.
Board of Governors of the Federal Reserve System, Washington,
D.C., 20551
Federal Reserve Bank of New York, District No. 2, 33 Liberty
Street, New York, N.Y.
Federal Deposit Insurance Corporation, Washington, D.C., 20429.
(b) Whether it is authorized to exercise corporate trust powers.
Yes.
Item 2. Affiliations with the Obligor.
If the obligor is an affiliate of the trustee, describe each such
affiliation.
None.
-2-
<PAGE> 3
Item 16. List of Exhibits
List below all exhibits filed as a part of this Statement of
Eligibility.
1. A copy of the Articles of Association of the Trustee as now in
effect, including the Organization Certificate and the Certificates of Amendment
dated February 17, 1969, August 31, 1977, December 31, 1980, September 9, 1982,
February 28, 1985, December 2, 1991 and July 10, 1996 (see Exhibit 1 to Form T-1
filed in connection with Registration Statement No. 333-06249, which is
incorporated by reference).
2. A copy of the Certificate of Authority of the Trustee to
Commence Business (see Exhibit 2 to Form T-1 filed in connection with
Registration Statement No. 33-50010, which is incorporated by reference. On July
14, 1996, in connection with the merger of Chemical Bank and The Chase Manhattan
Bank (National Association), Chemical Bank, the surviving corporation, was
renamed The Chase Manhattan Bank).
3. None, authorization to exercise corporate trust powers being
contained in the documents identified above as Exhibits 1 and 2.
4. A copy of the existing By-Laws of the Trustee (see Exhibit 4
to Form T-1 filed in connection with Registration Statement No. 333-76439, which
is incorporated by reference).
5. Not applicable.
6. The consent of the Trustee required by Section 321(b) of the
Act (see Exhibit 6 to Form T-1 filed in connection with Registration Statement
No. 33-50010, which is incorporated by reference. On July 14, 1996, in
connection with the merger of Chemical Bank and The Chase Manhattan Bank
(National Association), Chemical Bank, the surviving corporation, was renamed
The Chase Manhattan Bank).
7. A copy of the latest report of condition of the Trustee,
published pursuant to law or the requirements of its supervising or examining
authority.
8. Not applicable.
9. Not applicable.
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939 the
Trustee, The Chase Manhattan Bank, a corporation organized and existing under
the laws of the State of New York, has duly caused this statement of eligibility
to be signed on its behalf by the undersigned, thereunto duly authorized, all in
the City of New York and State of New York, on the 27th day of October, 1999.
THE CHASE MANHATTAN BANK
By /s/ ROBERT S. PESCHLER
-----------------------------------------------
Robert S. Peschler, Assistant Vice President
-3-
<PAGE> 4
Exhibit 7 to Form T-1
Bank Call Notice
RESERVE DISTRICT NO. 2
CONSOLIDATED REPORT OF CONDITION OF
The Chase Manhattan Bank
of 270 Park Avenue, New York, New York 10017
and Foreign and Domestic Subsidiaries,
a member of the Federal Reserve System,
at the close of business June 30, 1999, in
accordance with a call made by the Federal Reserve Bank of this
District pursuant to the provisions of the Federal Reserve Act.
<TABLE>
<CAPTION>
DOLLAR AMOUNTS
ASSETS IN MILLIONS
<S> <C>
Cash and balances due from depository institutions:
Noninterest-bearing balances and
currency and coin ...................................... $ 13,119
Interest-bearing balances .............................. 6,761
Securities:
Held to maturity securities .................................. 892
Available for sale securities ................................ 42,965
Federal funds sold and securities purchased under
agreements to resell ................................... 32,277
Loans and lease financing receivables:
Loans and leases, net of unearned income .... $130,602
Less: Allowance for loan and lease losses ... 2,551
Less: Allocated transfer risk reserve ....... 0
--------
Loans and leases, net of unearned income,
allowance, and reserve ................................. 128,051
Trading Assets ............................................... 41,426
Premises and fixed assets (including capitalized
leases) ................................................ 3,190
Other real estate owned ...................................... 28
Investments in unconsolidated subsidiaries and
associated companies ................................... 182
Customers' liability to this bank on acceptances
outstanding ............................................ 901
Intangible assets ............................................ 2,010
Other assets ................................................. 14,567
--------
TOTAL ASSETS ................................................. $286,369
========
</TABLE>
-4-
<PAGE> 5
LIABILITIES
<TABLE>
<S> <C> <C>
Deposits
In domestic offices ......................................... $ 101,979
Noninterest-bearing ..................................$42,241
Interest-bearing ......................................59,738
In foreign offices, Edge and Agreement
subsidiaries and IBF's ...................................... 76,395
Noninterest-bearing ...................................$4,645
Interest-bearing ......................................71,750
Federal funds purchased and securities sold under agree-
ments to repurchase ............................................... 36,604
Demand notes issued to the U.S. Treasury .......................... 1,001
Trading liabilities ............................................... 30,287
Other borrowed money (includes mortgage indebtedness
and obligations under capitalized leases):
With a remaining maturity of one year or less ............... 3,606
With a remaining maturity of more than one year
through three years .................................. 14
With a remaining maturity of more than three years .......... 91
Bank's liability on acceptances executed and outstanding .......... 901
Subordinated notes and debentures ................................. 5,427
Other liabilities ................................................. 11,247
TOTAL LIABILITIES ................................................. 267,552
---------
EQUITY CAPITAL
Perpetual preferred stock and related surplus ..................... 0
Common stock ...................................................... 1,211
Surplus (exclude all surplus related to preferred stock) ......... 11,016
Undivided profits and capital reserves ............................ 7,317
Net unrealized holding gains (losses)
on available-for-sale securities .................................. (743)
Accumulated net gains (losses) on cash flow hedges ................ 0
Cumulative foreign currency translation adjustments ............... 16
TOTAL EQUITY CAPITAL .............................................. 18,817
---------
TOTAL LIABILITIES AND EQUITY CAPITAL .............................. $ 286,369
=========
</TABLE>
I, Joseph L. Sclafani, E.V.P. & Controller of the above-named bank, do hereby
declare that this Report of Condition has been prepared in conformance with the
instructions issued by the appropriate Federal regulatory authority and is true
to the best of my knowledge and belief.
JOSEPH L. SCLAFANI
We, the undersigned directors, attest to the correctness of this Report of
Condition and declare that it has been examined by us, and to the best of our
knowledge and belief has been prepared in conformance with the instructions
issued by the appropriate Federal regulatory authority and is true and correct.
WALTER V. SHIPLEY )
WILLIAM B. HARRISON, JR. ) DIRECTORS
FRANK A. BENNACK, JR. )
-5-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 APR-01-1998
<PERIOD-END> JUN-30-1999 DEC-31-1998
<CASH> 30,663,000 26,161,000
<SECURITIES> 45,482,000 110,718,000
<RECEIVABLES> 37,553,000 1,867,000
<ALLOWANCES> (23,683,000) (742,000)
<INVENTORY> 0 150,000
<CURRENT-ASSETS> 3,638,000 519,000,000
<PP&E> 70,833,000 4,162,000
<DEPRECIATION> (2,263,000) (580,000)
<TOTAL-ASSETS> 271,205,000 176,526,000
<CURRENT-LIABILITIES> 58,742,000 6,728,000
<BONDS> 0 0
0 0
0 0
<COMMON> 161,000 132,000
<OTHER-SE> 200,907,000 169,165,000
<TOTAL-LIABILITY-AND-EQUITY> 271,205,000 176,526,000
<SALES> 0 0
<TOTAL-REVENUES> 16,032,000 6,173,000
<CGS> 0 0
<TOTAL-COSTS> 14,150,000 5,584,000
<OTHER-EXPENSES> 19,520,000 18,575,000
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 218,000 21,000
<INCOME-PRETAX> (22,011,000) (15,815,000)
<INCOME-TAX> 565,000 (440,000)
<INCOME-CONTINUING> (22,576,00) (16,255,000)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (22,576,00) (16,255,000)
<EPS-BASIC> (1.66) (1.23)
<EPS-DILUTED> (1.66) (1.23)
</TABLE>
