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October 14, 1998


By CBR Staff Writer

The stop-go acquisition of Internet Communications Corp (INCC) by Rocky Mountain Internet Inc (RMI) has now stopped permanently, and things have got very nasty between the once would-be partners, with RMI accusing INCC of failing to satisfy certain conditions of the original merger agreement, and INCC suing RMI for at least $30m in damages. The merger between the two publicly-traded Colorado-based ISPs, which valued INCC at $38m, was announced in early June and RMI then set about raising $175m in a high yield debt offering to help pay for the acquisition, among other things. But RMI now says that looking over the company this week it has found material changes and therefore it has exercised the right both companies had in the merger agreement to pull out of the deal. Doug Hanson, RMI’s president and chief executive says the material changes affect INCC’s revenues, payables, receivables and cash flow and were beyond the normal course of business. In July it was announced that the shareholders of ICC had taken longer than anticipated to make up their minds and also that the Securities & Exchange Commission (SEC) wanted to investigate the merger. Those events caused RMI to delay the debt offering as it didn’t want to raise the money if there was nothing for it to buy with it. However, things then took a strange twist. On September 18, RMI announced that both the majority shareholder in ICC and the SEC had approved the acquisition, so there were no shareholder or regulatory barriers to the purchase going ahead. But RMI said it still had some financial issues to iron out, so both sides agreed to hold the agreement open until October 2. That day INCC’s stock fell by almost 50%. It now transpires that RMI did not manage to raise the debt offering due to poor market conditions and instead had secured a bridging loan just to cover this acquisition, says RMI’s Hanson. October 2 duly arrived and RMI asked to extend the period once again, but ICC refused and declared RMI in default of the agreement. However, ICC says it chose not to take any action at that time and instead tried to work with RMI and its lenders. On Monday, October 12, ICC was informed that RMI had raised the money, but RMI refused to close the merger. The next day RMI accused ICC of failing to meet certain conditions of the agreement having looked over INCC’s finances, at which point ICC decided to sue RMI for damages. John Couzens, president and chief executive of INCC said RMI has not given his company any reason for defaulting on the merger agreement by mid-afternoon yesterday, but Couzens could not get back to us by press time to respond to Hanson’s specific allegations. He says the damages are for a variety of things, including the effect it as had on the INCC share price and productivity losses. Having signed the deal at a value of $6.50 per share, INCC yesterday closed at $2.50, down 48.7% on the day. Also, one of RMI’s senior technical people spent the last few months at INCC, being paid by the company as its chief technology officer to integrate the two companies’ networks. That work is going to cost quite a lot for INCC to reverse. RMI’s Hanson says INCC promised to deliver the same company it was back in June when the deal was signed. But said that when he looked at the numbers on Monday, it was the first time he had noticed the material changes. Hanson says the lawsuit has no merit whatsoever and this doesn’t change RMI’s strategy of acquiring ISPs. The purchase was to have been via a reverse triangular merger, whereby RMI established a company to acquire INCC as a subsidiary, took the INCC name and ticker symbol and then subsumed the ‘real’ INCC into it. Couzens, not surprisingly says a merger between the two companies is never going to happen. And that’s about the only thing the two companies can agree upon. RMI’s stock closed down $1.125, or 13.0% at $7.50.

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