UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File No. 19869-99
------------------------------------------------------------
CORECOMM INCORPORATED
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3927257
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
110 East 59th Street, New York, New York 10022
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(212) 906-8485
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
The number of shares outstanding of the issuer's common stock as of June 30,
1998 was 13,184,336.
<PAGE>
CoreComm Incorporated and Subsidiaries
Index
PART I. FINANCIAL INFORMATION Page
- ------------------------------ ----
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
June 30, 1998 and December 31, 1997 ............................. 2
Condensed Consolidated Statements of Operations -
Three and six months ended June 30, 1998 and 1997 ............... 3
Condensed Consolidated Statement of Shareholders' Equity -
Six months ended June 30, 1998 .................................. 4
Condensed Consolidated Statements of Cash Flows -
Six months ended June 30, 1998 and 1997 ......................... 5
Notes to Condensed Consolidated Financial Statements ............ 6
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition .............................. 12
PART II. OTHER INFORMATION
- --------------------------
Item 4. Submission of Matters to a Vote of Security Holders ............. 18
Item 6. Exhibits and Reports on Form 8-K ................................ 18
SIGNATURES ............................................................... 19
- ----------
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CoreComm Incorporated and Subsidiaries
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
---------------------------------
(Unaudited) (See Note)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 19,250,000 $ 11,783,000
Marketable securities 24,374,000 62,666,000
Accounts receivable--trade, less allowance for doubtful
accounts of $2,114,000 (1998) and $2,106,000 (1997) 19,021,000 19,043,000
Equipment inventory 4,438,000 2,882,000
Prepaid expenses and other current assets 9,647,000 7,147,000
---------------------------------
Total current assets 76,730,000 103,521,000
Property, plant and equipment, net 129,046,000 128,451,000
Unamortized license acquisition costs 197,514,000 157,467,000
Goodwill, less accumulated amortization of $60,000 2,349,000 -
Deferred financing costs, less accumulated amortization
of $926,000 (1998) and $584,000 (1997) 5,864,000 6,206,000
Other assets, less accumulated amortization of
$639,000 (1998) and $1,088,000 (1997) 1,734,000 1,631,000
---------------------------------
$ 413,237,000 $ 397,276,000
=================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 9,491,000 $ 6,873,000
Accrued expenses 12,260,000 11,730,000
Due to NTL Incorporated 779,000 71,000
Interest payable 8,687,000 8,333,000
Deferred revenue 4,914,000 3,952,000
---------------------------------
Total current liabilities 36,131,000 30,959,000
Long-term debt 208,900,000 200,000,000
Obligation under capital lease 9,310,000 9,456,000
Commitments and contingent liabilities
Shareholders' equity:
Series preferred stock--$.01 par value; authorized
2,500,000 shares; issued and outstanding none - -
Common stock--$.01 par value; authorized 30,000,000 shares;
issued 13,567,000 (1998) and 13,565,000 (1997) shares 136,000 136,000
Additional paid-in capital 226,520,000 226,490,000
(Deficit) (58,698,000) (60,703,000)
---------------------------------
167,958,000 165,923,000
Treasury stock--at cost, 383,000 shares (9,062,000) (9,062,000)
---------------------------------
158,896,000 156,861,000
---------------------------------
$ 413,237,000 $ 397,276,000
=================================
</TABLE>
Note: The balance sheet at December 31, 1997 has been derived from the audited
financial statements at that date.
See accompanying notes.
2
<PAGE>
CoreComm Incorporated and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------------------- --------------------------------
1998 1997 1998 1997
------------------------------- --------------------------------
<S> <C> <C> <C> <C>
REVENUES:
Service revenue $ 38,308,000 $ 34,694,000 $ 72,767,000 $ 68,046,000
Equipment revenue 5,559,000 3,744,000 10,513,000 7,663,000
------------------------------- --------------------------------
43,867,000 38,438,000 83,280,000 75,709,000
COSTS AND EXPENSES:
Cost of equipment sold 4,894,000 4,294,000 9,469,000 9,073,000
Operating expenses 5,303,000 4,338,000 9,418,000 8,228,000
Selling, general and administrative expenses 19,058,000 18,429,000 35,687,000 36,478,000
Depreciation of rental equipment 275,000 198,000 516,000 375,000
Depreciation expense 6,423,000 4,186,000 12,369,000 7,992,000
Amortization expense 1,710,000 1,654,000 3,400,000 3,211,000
------------------------------- --------------------------------
37,663,000 33,099,000 70,859,000 65,357,000
------------------------------- --------------------------------
Operating income 6,204,000 5,339,000 12,421,000 10,352,000
OTHER INCOME (EXPENSE):
Interest income and other, net 494,000 1,282,000 1,180,000 1,985,000
Interest expense (5,395,000) (5,077,000) (10,760,000) (9,061,000)
------------------------------- --------------------------------
Income before income taxes and
extraordinary item 1,303,000 1,544,000 2,841,000 3,276,000
Income tax provision (370,000) (17,000) (836,000) (1,345,000)
------------------------------- --------------------------------
Income before extraordinary item 933,000 1,527,000 2,005,000 1,931,000
Loss from early extinguishment of debt,
net of income tax benefit of $225,000 - (12,000) - (3,842,000)
------------------------------- --------------------------------
Net income (loss) $ 933,000 $ 1,515,000 $ 2,005,000 $ (1,911,000)
=============================== ================================
Earnings per common share:
Income before extraordinary item $ .07 $ .12 $ .15 $ .15
Extraordinary item - - - (.29)
------------------------------- --------------------------------
Net income (loss) $ .07 $ .12 $ .15 $ (.14)
=============================== ================================
Earnings per common share-Assuming Dilution:
Income before extraordinary item $ .06 $ .12 $ .14 $ .15
Extraordinary item - - - (.29)
------------------------------- --------------------------------
Net income (loss) $ .06 $ .12 $ .14 $ (.14)
=============================== ================================
</TABLE>
See accompanying notes.
3
<PAGE>
CoreComm Incorporated and Subsidiaries
Condensed Consolidated Statement of Shareholders' Equity
(Unaudited)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TREASURY STOCK
------------------------- PAID-IN ---------------------------
SHARES AMOUNT CAPITAL (DEFICIT) SHARES AMOUNT
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 13,565,000 $ 136,000 $ 226,490,000 $ (60,703,000) (383,000) $ (9,062,000)
Exercise of stock options 2,000 30,000
Net income for the six months
ended June 30, 1998 2,005,000
---------------------------------------------------------------------------------------------
Balance, June 30, 1998 13,567,000 $ 136,000 $ 226,520,000 $ (58,698,000) (383,000) $ (9,062,000)
=============================================================================================
</TABLE>
See accompanying notes.
4
<PAGE>
CoreComm Incorporated and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
--------------------------------------
1998 1997
--------------------------------------
<S> <C> <C>
Net cash provided by operating activities $ 20,219,000 $ 14,428,000
--------------------------------------
INVESTING ACTIVITIES
Payment of the LMDS license fee (25,356,000) -
Cost of cellular license interest (8,686,000) (146,000)
Acquisition of subsidiaries, net of cash acquired (3,715,000) -
Purchase of property, plant and equipment (13,307,000) (16,747,000)
Purchase of marketable securities (38,496,000) (35,886,000)
Proceeds from maturities of marketable securities 76,911,000 31,548,000
--------------------------------------
Net cash (used in) investing activities (12,649,000) (21,231,000)
--------------------------------------
FINANCING ACTIVITIES
Repayment of bank loan - (115,000,000)
Proceeds from issuance of Notes, net of financing costs - 193,695,000
Purchase of treasury stock - (688,000)
Principal payments of capital lease obligation (133,000) (68,000)
Proceeds from exercise of stock options 30,000 287,000
--------------------------------------
Net cash provided by (used in) financing activities (103,000) 78,226,000
--------------------------------------
Increase in cash and cash equivalents 7,467,000 71,423,000
Cash and cash equivalents at beginning of period 11,783,000 2,307,000
--------------------------------------
Cash and cash equivalents at end of period $ 19,250,000 $ 73,730,000
======================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest exclusive
of amounts capitalized $ 10,406,000 $ 2,406,000
Income taxes paid 355,000 2,897,000
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES:
Liabilities incurred to acquire property, plant and equipment $ 1,754,000 $ 6,263,000
Long-term debt issued to acquire cellular license interest 8,900,000 -
Capital lease obligation to acquire office building - 9,922,000
</TABLE>
See accompanying notes.
5
<PAGE>
CoreComm Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. 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,
1998 are not necessarily indicative of the results that may be expected for the
year ending December 31, 1998. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's annual report on Form 10-K for the year ended December 31, 1997.
NOTE B - ACQUISITIONS
In April and June 1998, a wholly-owned subsidiary of the Company, CoreComm
Limited, acquired the stock of Digicom, Inc. and certain operating assets and
related liabilities of the Wireless Outlet and OCOM Corporation. Digicom, Inc.
is a reseller of Centrex services based in Cleveland, Ohio. The Wireless Outlet
is a reseller of primarily prepaid cellular and paging service in Ohio and other
locations in the United States. OCOM Corporation is competitive local exchange
carrier ("CLEC") on a resale basis as well as a reseller of long distance and
cellular service. The OCOM CLEC business is based in Ohio and the long distance
and cellular businesses operate in Ohio and other locations in the United
States. Aside from the cellular long distance resale business, which has been
operating for approximately seven years, these businesses are in early stages of
development. 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 for these acquisitions was cash of
$3,787,000 which exceeded the fair value of the net tangible assets acquired by
$2,409,000, which is classified as goodwill. The goodwill is being amortized on
a straight-line basis over 10 years.
The Company intends to spin-off CoreComm Limited and its subsidiaries to the
Company's shareholders. The Company intends to make a capital contribution of
$150,000,000 to CoreComm Limited in cash or in-kind prior to the spin-off (see
Note 1).
6
<PAGE>
CoreComm Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited) (continued)
NOTE B - ACQUISITIONS (CONTINUED)
The pro forma unaudited consolidated results of operations for the six months
ended June 30, 1998 and 1997 assuming consummation of the acquisitions described
above as of the beginning of the periods are as follows:
SIX MONTHS ENDED
JUNE 30
-------------------------------
1998 1997
-------------------------------
Total revenue $ 86,588,000 $ 80,707,000
Income (loss) before extraordinary item (1,101,000) 416,000
Net (loss) (1,101,000) (3,426,000)
Basic net (loss) per common share:
Income (loss) before extraordinary item (.08) .03
Net (loss) (.08) (.26)
Diluted net (loss) per common share:
Income (loss) before extraordinary item (.08) .03
Net (loss) (.08) (.26)
NOTE C - UNAMORTIZED LICENSE ACQUISITION COSTS
Unamortized license acquisition costs consist of:
JUNE 30, DECEMBER 31,
1998 1997
-------------------------------
(Unaudited)
Deferred cellular and LMDS license costs $ 31,291,000 $ 5,935,000
Excess of purchase price paid over the fair
market value of tangible assets acquired 207,052,000 189,466,000
-------------------------------
238,343,000 195,401,000
Accumulated amortization 40,829,000 37,934,000
-------------------------------
$ 197,514,000 $ 157,467,000
===============================
In January 1998, the San Juan Cellular Telephone Company ("SJCTC"), a
wholly-owned indirect subsidiary of the Company purchased the FCC license to own
and operate the non-wireline cellular system in Puerto Rico RSA-4 (Aibonito) and
all of the assets of the system in exchange for $8,400,000 in cash and a
promissory note in the amount of $8,900,000. Costs of $286,000 were incurred in
connection with this acquisition.
7
<PAGE>
CoreComm Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited) (continued)
NOTE C - UNAMORTIZED LICENSE ACQUISITION COSTS (CONTINUED)
An indirect subsidiary of CoreComm Limited, Cortelyou Communications Corp.
("Cortelyou"), was the successful bidder, for an aggregate of $25,241,000, for
15 Block A Local Multipoint Distribution Service ("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 Basis
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, Cortelyou paid
its bid and the FCC issued the licenses. Cortelyou incurred costs of $115,000 in
connection with the auction and its license application.
NOTE D - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of:
JUNE 30, DECEMBER 31,
1998 1997
--------------------------------
(Unaudited)
Land $ 1,951,000 $ 1,951,000
Office building 9,922,000 9,922,000
Operating equipment 136,462,000 127,534,000
Office furniture and other equipment 31,804,000 24,546,000
Rental equipment 2,596,000 1,745,000
Construction in progress 8,770,000 12,533,000
--------------------------------
191,505,000 178,231,000
Accumulated depreciation 62,459,000 49,780,000
--------------------------------
$ 129,046,000 $ 128,451,000
================================
8
<PAGE>
CoreComm Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited) (continued)
NOTE E - ACCRUED EXPENSES
Accrued expenses consists of:
JUNE 30, DECEMBER 31,
1998 1997
-----------------------------
(Unaudited)
Accrued compensation $ 1,783,000 $ 765,000
Accrued equipment purchases 246,000 1,427,000
Accrued franchise, property and income taxes 4,091,000 3,489,000
Commissions payable 1,092,000 1,143,000
Subscriber deposits 1,425,000 1,544,000
Other 3,623,000 3,362,000
-----------------------------
$ 12,260,000 $ 11,730,000
=============================
NOTE F - LONG-TERM DEBT
JUNE 30, DECEMBER 31,
1998 1997
------------------------------
(Unaudited)
Senior Subordinated Notes $ 200,000,000 $ 200,000,000
Subsidiary Note Payable 8,900,000 -
------------------------------
$ 208,900,000 $ 200,000,000
==============================
In connection with the acquisition of Puerto Rico RSA-4, SJCTC issued a
promissory note in January 1998. The promissory note was repaid in August 1998
using proceeds from the new bank loan. Interest on the note was payable at 7.95%
per annum beginning in July 1998.
9
<PAGE>
CoreComm Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited) (continued)
NOTE G - NET INCOME (LOSS) PER COMMON SHARE
The following table sets forth the computation of basic and diluted net income
(loss) per common share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------------------------------------------------------------
1998 1997 1998 1997
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Numerator:
Income before extraordinary item $ 933,000 $ 1,527,000 $ 2,005,000 $ 1,931,000
Extraordinary item - (12,000) - (3,842,000)
------------------------------------------------------------------------
Net income (loss) 933,000 1,515,000 2,005,000 (1,911,000)
------------------------------------------------------------------------
Denominator for basic net income (loss) per
common share 13,184,000 13,074,000 13,183,000 13,072,000
Effect of dilutive securities:
Stock options 1,305,000 120,000 772,000 225,000
------------------------------------------------------------------------
Denominator for diluted net income (loss) per
common share 14,489,000 13,194,000 13,955,000 13,297,000
------------------------------------------------------------------------
Basic net income (loss) per common share:
Income before extraordinary item $ .07 $ .12 $ .15 $ .15
Extraordinary item - - - (.29)
------------------------------------------------------------------------
Net income (loss) $ .07 $ .12 $ .15 $ (.14)
========================================================================
Diluted net income (loss) per common share:
Income before extraordinary item $ .06 $ .12 $ .14 $ .15
Extraordinary item - - - (.29)
------------------------------------------------------------------------
Net income (loss) $ .06 $ .12 $ .14 $ (.14)
========================================================================
</TABLE>
NOTE H - COMMITMENTS AND CONTINGENT LIABILITIES
As of June 30, 1998, the Company was committed to purchase approximately
$4,300,000 for cellular network and other equipment and for construction
services. In addition, as of June 30, 1998, the Company had commitments to
purchase telephones, pagers and accessories of approximately $700,000.
In 1992, the Company entered into an agreement which in effect provides for a
twenty year license to use its service mark in Puerto Rico and U.S. Virgin
Islands which is also licensed to many of the non-wireline cellular systems in
the United States. The Company is required to pay licensing and advertising
fees, and to maintain certain service quality standards. The total fees paid for
1998 were $289,000, which were determined by the size of the Company's markets.
10
<PAGE>
CoreComm Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited) (continued)
NOTE I - NEW BANK LOAN AND SPIN-OFF OF CORECOMM LIMITED
In August 1998, a wholly-owned indirect subsidiary of the Company, CCPR
Services, Inc. ("Services") entered into a $170,000,000 credit agreement with
various banks. Services has borrowed $155,000,000 which, along with cash on hand
of $7,000,000, was used to repay amounts due to Cellular Communications of
Puerto Rico, Inc. ("CCPR") (a wholly-owned subsidiary of the Company and the
parent of Services) of $30,000,000, to purchase a 23.5% interest in SJCTC from
CCPR for cash of $120,000,000, to pay fees incurred in connection with the new
bank loan of approximately $3,000,000 and to make a term loan to SJCTC of
$8,900,000 in order for SJCTC to repay its note payable to a third party, which
repayment was a condition of the bank loan. CCPR used $30,000,000 to repay most
of its loan payable to the Company, and CCPR made a cash distribution of
$120,000,000 to the Company. The Company is planning to make a capital
contribution to CoreComm Limited of $150,000,000 in cash or in-kind and spinning
out 100% of CoreComm Limited and its subsidiaries to the Company's shareholders.
Services has $15,000,000 available under the bank loan until September 2001. The
terms include the payment of interest at least quarterly at a floating rate,
which is, at Services' option, either (a) the greater of the bank's prime rate
or the Federal Funds Rate plus 0.5% or (b) LIBOR, plus, based on the ratio of
CCPR and subsidiaries' debt to cash flow and the floating rate in effect, either
0% to 1.25% or 1.25% to 2.5%. The effective rate on Services' borrowings as of
August 12, 1998 was 8%. The terms also include an unused commitment fee of 0.5%
per annum which is payable quarterly. Principal payments commence on September
30, 2001 based on two amortization schedules. One schedule is for the first
$95,000,000 borrowed which includes quarterly payments until June 2006. The
other schedule is for the remainder of the amount borrowed which includes
quarterly payments until June 2005.
In connection with the bank loan, CCPR has pledged to the banks the stock of its
subsidiaries and CCPR and its subsidiaries have given the banks a security
interest in their assets. CCPR and its other subsidiaries have guaranteed the
payment in full when due of the principal, interest and fees owing under the
bank loan. The bank loan also includes, among other things, restrictions on CCPR
and its subsidiaries (i) dividend payments, (ii) acquisitions, (iii)
investments, (iv) sales and dispositions of assets, (v) additional indebtedness
and (vi) liens. The bank loan requires that CCPR and subsidiaries maintain
certain ratios of indebtedness to cash flow, fixed charges to cash flow and debt
service to cash flow.
Services incurred costs of approximately $3,000,000 in connection with the bank
loan which will be included in deferred financing costs.
11
<PAGE>
CoreComm Incorporated and Subsidiaries
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
CoreComm Incorporated (the "Company") was formed in January 1997 to own and
operate Cellular Communications of Puerto Rico, Inc. ("CCPR") and to pursue
communications related opportunities outside of Puerto Rico and the U.S. Virgin
Islands. CCPR, through its wholly-owned subsidiaries, owns and operates cellular
and paging systems in Puerto Rico and the U.S. Virgin Islands. The Company,
through its wholly-owned subsidiary, CoreComm Limited, has recently acquired
three communications related businesses in the United States and was the high
bidder for 15 LMDS licenses in Ohio. As a result of acquisitions in April and
June 1998, the Company consolidated the results of operations of the acquired
businesses from the dates of acquisition. The results of the acquired businesses
are not included in the 1997 consolidated results.
RESULTS OF OPERATIONS
Three Months Ended June 30, 1998 and 1997
- -----------------------------------------
Service revenue increased to $38,308,000 from $34,694,000. Service revenue
includes $1,200,000 in 1998 from acquired businesses. For CCPR's cellular and
paging business in Puerto Rico and the U.S. Virgin Islands, lower average
revenue and minutes of use of new prepaid subscribers and the selection by
existing subscribers of alternate rate plans resulted in average monthly revenue
per cellular subscriber for the second quarter decreasing to $55 in 1998 from
$68 in 1997. Ending subscribers were 234,400 and 175,500 as of June 30, 1998 and
1997, respectively. Ending pagers in use were 53,400 and 39,400 as of June 30,
1998 and 1997, respectively.
The income (loss) from equipment, before depreciation of rental equipment,
increased to income of $665,000 from a loss of $550,000 primarily because CCPR
is not selling telephones below their cost to prepaid subscribers. Reductions in
the cost of cellular telephones also contributed to this change. The income from
equipment in 1998 includes $45,000 from acquired businesses.
Operating expenses increased to $5,303,000 from $4,338,000. Operating expenses
include $1,052,000 in 1998 from acquired businesses. For CCPR's cellular and
paging business in Puerto Rico and the U.S. Virgin Islands, operating expenses
decreased to $4,251,000 from $4,338,000 primarily due to a reduction in
interconnection charges, offset by additional costs associated with the expanded
network (including paging operations). CCPR's operating expenses as a percentage
of service revenue decreased to 11.4% in 1998 from 12.5% in 1997.
Selling, general and administrative expenses increased to $19,058,000 from
$18,429,000. Selling, general and administrative expenses include $1,417,000 in
1998 from acquired businesses and general and administrative expenses of the
Company of $832,000 in 1998 and $347,000 in 1997. For CCPR's cellular and paging
business in Puerto Rico and the U.S. Virgin Islands, selling, general and
administrative expenses decreased to $16,809,000 from $18,082,000 as a result of
all of the following: a decrease in selling and marketing costs, bad debt
expense and subscriber billing expense. The decreases in selling and marketing
costs, bad debt expense
12
<PAGE>
CoreComm Incorporated and Subsidiaries
and subscriber billing expense were 70%, 22% and 8%, respectively, of the
$1,273,000 decrease. These decreases were partially offset by an increase in
property taxes due to an increase in taxable property which was (28)% of the
decrease.
Depreciation of rental equipment increased to $275,000 from $198,000 due to an
increase in the number of rental telephones and pagers.
Depreciation expense increased to $6,423,000 from $4,186,000 primarily because
of an increase in property, plant and equipment.
Amortization expense increased to $1,710,000 from $1,654,000 due to the
amortization of goodwill as a result of the acquisitions in 1998.
Interest income and other, net, decreased to $494,000 from $1,282,000 primarily
due to a decrease in interest income on short term investments.
Interest expense increased to $5,395,000 from $5,077,000 as a result of the
office building capital lease obligation beginning in April 1997 and the
issuance of the subsidiary note payable in January 1998.
The provision for income taxes increased to $370,000 from $17,000 primarily as a
result of an increase in Puerto Rico or U.S. Virgin Islands taxable income of
certain of the Company's consolidated subsidiaries.
The loss from early extinguishment of debt of $12,000 in 1997 is due to an
adjustment to the estimated Puerto Rico income tax benefit from the loss.
Six Months Ended June 30, 1998 and 1997
- ---------------------------------------
Service revenue increased to $72,767,000 from $68,046,000. Service revenue
includes $1,200,000 in 1998 from acquired businesses. For CCPR's cellular and
paging business in Puerto Rico and the U.S. Virgin Islands, lower average
revenue and minutes of use of new prepaid subscribers and the selection by
existing subscribers of alternate rate plans resulted in average monthly revenue
per cellular subscriber for the six months ended June 30 decreasing to $55 in
1998 from $68 in 1997. Ending subscribers were 234,400 and 175,500 as of June
30, 1998 and 1997, respectively. Ending pagers in use were 53,400 and 39,400 as
of June 30, 1998 and 1997, respectively.
The income (loss) from equipment, before depreciation of rental equipment,
increased to income of $1,044,000 from a loss of $1,410,000 primarily because
CCPR is not selling telephones below their cost to prepaid subscribers.
Reductions in the cost of cellular telephones also contributed to this change.
The income from equipment in 1998 includes $45,000 from acquired businesses.
Operating expenses increased to $9,418,000 from $8,228,000. Operating expenses
include $1,052,000 in 1998 from acquired businesses. For CCPR's cellular and
paging businesses in Puerto Rico and the U.S. Virgin Islands, operating expenses
increased to $8,366,000 from
13
<PAGE>
CoreComm Incorporated and Subsidiaries
$8,228,000 primarily due to increased usage of the network and additional costs
associated with the expanded network (including paging operations). CCPR's
operating expenses as a percentage of service revenue decreased to 11.7% in 1998
from 12.1% in 1997.
Selling, general and administrative expenses decreased to $35,687,000 from
$36,478,000. Selling, general and administrative expenses include $1,417,000 in
1998 from acquired businesses and general and administrative expenses of the
Company of $1,328,000 in 1998 and $497,000 in 1997. For CCPR's cellular and
paging businesses in Puerto Rico and the U.S. Virgin Islands, selling, general
and administrative expenses decreased to $32,942,000 from $35,981,000 as a
result of all of the following: a decrease in selling and marketing costs, bad
debt expense and subscriber billing expense. The decreases in selling and
marketing costs, bad debt expense and subscriber billing expense were 38%, 38%
and 11%, respectively, of the total $3,039,000 decrease. These decreases were
partially offset by an increase in property taxes due to an increase in taxable
property which was (23)% of the decrease.
Depreciation of rental equipment increased to $516,000 from $375,000 due to an
increase in the number of rental telephones and pagers.
Depreciation expense increased to $12,369,000 from $7,992,000 primarily because
of an increase in property, plant and equipment.
Amortization expense increased to $3,400,000 from $3,211,000 primarily due to
the amortization of goodwill as a result of the acquisitions in 1998 and to an
increase in license acquisition costs.
Interest income and other, net, decreased to $1,180,000 from $1,985,000
primarily due to a decrease in interest income on short term investments.
Interest expense increased to $10,760,000 from $9,061,000 as a result of the
issuance of the Senior Subordinated Notes on January 28, 1997, the office
building capital lease obligation beginning in April 1997 and the issuance of
the subsidiary note payable in January 1998.
The provision for income taxes decreased to $836,000 from $1,345,000 primarily
as a result of a decrease in Puerto Rico or U.S. Virgin Islands taxable income
of certain of the Company's consolidated subsidiaries.
In connection with the termination of the bank loan, CCPR recorded an
extraordinary loss of $4,067,000 in 1997 ($3,842,000 net of income tax benefit)
from the write-off of unamortized deferred financing costs.
LIQUIDITY AND CAPITAL RESOURCES
CCPR requires capital to expand its cellular and paging network and for debt
service. Subsidiaries of CCPR are currently adding cell sites and increasing
capacity throughout their Puerto Rico and U.S. Virgin Islands markets. CCPR
expects to use approximately $16,700,000 in the remainder of 1998 for
contemplated additions to the cellular network, the paging network and for other
non-cell site related capital expenditures. CCPR's commitments at June 30, 1998
of $2,600,000 for cellular
14
<PAGE>
CoreComm Incorporated and Subsidiaries
network and other equipment and for construction services are included in the
total anticipated expenditures. In addition, CoreComm Limited has purchased
commitments of approximately $1,700,000 as of June 30, 1998.
CoreComm Limited requires capital for the development of its new businesses and
potentially for additional acquisitions. In order to facilitate the funding of
these opportunities, the Company is presently planning to contribute
$150,000,000 in cash or in-kind to CoreComm Limited and spinning out 100% of
CoreComm Limited to the Company's shareholders. In August 1998, a wholly-owned
indirect subsidiary of the Company, CCPR Services, Inc. ("Services") entered
into a $170,000,000 credit agreement with various banks. Services has borrowed
$155,000,000 which, along with cash on hand of $7,000,000, was used to repay
amounts due to CCPR (the parent of Services) of $30,000,000, to purchase a 23.5%
interest in SJCTC from CCPR for cash of $120,000,000, to pay fees incurred in
connection with the new bank loan of approximately $3,000,000 and to make a term
loan to SJCTC of $8,900,000 in order for SJCTC to repay its note payable to a
third party, which repayment was a condition of the bank loan. CCPR used
$30,000,000 to repay most of its loan payable to the Company, and CCPR made a
cash distribution of $120,000,000 to the Company. The Company is planning to
make a capital contribution to CoreComm Limited of $150,000,000 in cash or
in-kind prior to the spin-off.
Services has $15,000,000 available under the bank loan until September 2001. The
terms include the payment of interest at least quarterly at a floating rate,
which is, at Services' option, either (a) the greater of the bank's prime rate
or the Federal Funds Rate plus 0.5% or (b) LIBOR, plus, based on the ratio of
CCPR and subsidiaries' debt to cash flow and the floating rate in effect, either
0% to 1.25% or 1.25% to 2.5%. The effective rate on Services' borrowings as of
August 12, 1998 was 8%. The terms also include an unused commitment fee of 0.5%
per annum which is payable quarterly. Principal payments commence on September
30, 2001 based on two amortization schedules. One schedule is for the first
$95,000,000 borrowed which includes quarterly payments until June 2006. The
other schedule is for the remainder of the amount borrowed which includes
quarterly payments until June 2005.
In connection with the bank loan, CCPR has pledged to the banks the stock of its
subsidiaries and CCPR and its subsidiaries have given the banks a security
interest in their assets. CCPR and its other subsidiaries have guaranteed the
payment in full when due of the principal, interest and fees owing under the
bank loan. The bank loan also includes, among other things, restrictions on CCPR
and its subsidiaries (i) dividend payments, (ii) acquisitions, (iii)
investments, (iv) sales and dispositions of assets, (v) additional indebtedness
and (vi) liens. The bank loan requires that CCPR and subsidiaries maintain
certain ratios of indebtedness to cash flow, fixed charges to cash flow and debt
service to cash flow.
In January 1997, Services issued $200,000,000 principal amount 10% Senior
Subordinated Notes due 2007 (the "Notes") and received proceeds of $193,233,000
after discounts, commissions and other related costs. Approximately $116,000,000
of the proceeds were used to repay the $115,000,000 principal outstanding plus
accrued interest and fees under the bank loan. The Notes are due on February 1,
2007. Interest on the Notes is payable semiannually as of August 1, 1997. The
Notes are redeemable, in whole or in part, at the option of Services at any time
on or after February 1, 2002, at a redemption price of 105% that declines
annually to 100% in 2005, in each
15
<PAGE>
CoreComm Incorporated and Subsidiaries
case together with accrued and unpaid interest to the redemption date. The
Indenture contains certain convenants with respect to Services, CCPR and certain
subsidiaries that limit their ability to, among other things: (i) incur
additional indebtedness, (ii) pay dividends or make other distributions or
restricted payments, (iii) create liens, (iv) sell assets, (v) enter into
mergers or consolidations or (vi) sell or issue stock of subsidiaries.
The Company will be highly leveraged after the spin-off of CoreComm Limited and
as a result of the new bank loan. Such leverage could limit the Company's
ability to obtain additional financing for working capital, capital
expenditures, acquisitions or general corporate purposes, increases its
vulnerability to adverse changes in general economic conditions or increases in
interest rates, and requires that a substantial portion of cash flow from
operations be dedicated to debt service requirements. The leveraged nature of
the Company and the Company's continued compliance with the restrictions in its
debt agreements could limit its ability to respond to market conditions, meet
extraordinary capital needs or restrict other business activities such as
acquisitions. In addition, the Company is a holding company with no significant
assets other than its investments in and advances to its subsidiaries. The
Company is therefore dependent upon receipt of funds from its subsidiaries to
meet its own obligations, however the debt agreements effectively prevent the
payment of dividends, loans or other distributions to the Company. The Company
expects to be able to meet its consolidated capital requirements at least
through the next twelve months with cash and cash equivalents on hand, cash from
operations and borrowings under the new bank loan.
In April 1996, the Board of Directors authorized the repurchase of up to an
additional 750,000 shares of the Company's common stock through open market
purchases as market conditions warrant. This repurchase plan is in addition to a
previously announced repurchase plan for up to 250,000 shares. As of June 30,
1998, the Company has repurchased 590,000 shares for an aggregate of
$15,207,000, of which 207,000 shares that cost an aggregate of $6,145,000 were
retired.
Cash provided by operating activities was $20,219,000 and $14,428,000 for the
six months ended June 30, 1998 and 1997, respectively. The increase is primarily
a result of an increase in operating income and changes in operating assets and
liabilities. Purchases of property, plant and equipment of $13,307,000 in 1998
were primarily for additional cell sites and increased capacity in CCPR's
cellular and paging networks, including $232,000 for CoreComm Limited property,
plant and equipment purchases. In 1998, an indirect subsidiary of CoreComm
Limited, Cortelyou Communications Corp., acquired 15 Block A LMDS licenses in
Ohio for cash of $25,241,0000 plus $115,000 in auction and license application
related costs (an aggregate of $25,356,000). In January 1998, SJCTC purchased
the FCC license to own and operate the non-wireline cellular system in Puerto
Rico RSA-4 (Aibonito) and all of the assets of the system in exchange for
$8,400,000 in cash and a promissory note in the amount of $8,900,000. Including
costs incurred in connection with the acquisition of $286,000, total cash paid
was $8,686,000. CoreComm Limited acquired three communications related
businesses in the United States for cash of $3,715,000 (net of cash acquired).
16
<PAGE>
CoreComm Incorporated and Subsidiaries
CCPR's write-offs of accounts receivable, net of recoveries as a percentage of
service revenue was 4.1% for the six months ended June 30, 1998 compared to 6.7%
for the year ended December 31, 1997. This percentage decreased because CCPR and
its subsidiaries have increased prepaid subscribers and improved credit
procedures.
YEAR 2000
Many computer systems experience problems handling dates beyond the year 1999.
Therefore, some computer hardware and software will need to be modified prior to
the year 2000 in order to remain functional. The Company is assessing both the
internal readiness of its computer systems and the compliance of the computer
systems of certain significant customers and vendors for handling the year 2000.
The Company expects to implement successfully the systems and programming
changes necessary to address year 2000 issues, and does not believe that the
cost of such actions will have a material adverse effect on the Company. There
can be no assurance, however, that there will not be a delay in, or increased
costs associated with, the implementation of such changes, and the Company's
inability to implement such changes could have an adverse effect on the Company.
In addition, the failure of certain of the Company's significant customers and
vendors to address the year 2000 issue could have a material adverse effect on
the Company.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements contained herein constitute "forward-looking statements" as
that term is defined under the Private Securities Litigation Reform Act of 1995.
When used herein, the words, "believe," "anticipate," "should," "intend,"
"plan," "will," "expects," "estimates," "projects," "positioned," "strategy,"
and similar expressions identify such forward-looking statements. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
the Company, or industry results, to be materially different from those
contemplated, projected, forecasted, estimated or budgeted, whether expressed or
implied, by such forward-looking statements. Such factors include the following:
general economic and business conditions in Puerto Rico and the U.S. Virgin
Islands for CCPR's business and in Ohio and certain other portions of the United
States for CoreComm Limited's business, industry trends, the Company's ability
to continue to design and build its network, 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, as well as assumptions about customer acceptance, churn
rates, overall market penetration and competition from providers of alternative
services, the impact of new business opportunities requiring significant
up-front investment, and availability, terms and deployment of capital.
17
<PAGE>
CoreComm Incorporated and Subsidiaries
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 3, 1998, the Company held its annual meeting of stockholders.
The following management proposals were adopted: (i) the reelection of
Alan J. Patricof and Warren Potash to the Board of Directors and (ii)
the ratification of the selection of Ernst & Young LLP as the
Company's independent auditors for 1998.
The stockholders approved the election of Alan J. Patricof by a vote
of 13,128,097 shares in favor and 9,203 shares withheld from voting.
The stockholders approved the election of Warren Potash by a vote of
13,128,097 shares in favor and 9,203 shares withheld from voting. The
stockholders approved the second proposal by a vote of 13,129,796
shares in favor, 2,371 shares against and 5,133 shares abstaining from
voting.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
27. Financial Data Schedule
(b) Reports on Form 8-K.
During the quarter ended June 30, 1998, the Company filed the
following current reports on Form 8-K:
(i) Report dated April 21, 1998, reporting under Item 5, Other
Events, that the Company acquired all of the assets of the
Wireless Outlet.
(ii) Report dated June 10, 1998, reporting under Item 5, Other Events,
that the Company filed a Form 10 Registration Statement with the
Securities and Exchange Commission.
No financial statements were filed with these reports.
18
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CORECOMM INCORPORATED
Date: August 12, 1998 By: /s/ J. Barclay Knapp
------------------------------
J. Barclay Knapp
President
Date: August 12, 1998 By: /s/ Gregg Gorelick
------------------------------
Gregg Gorelick
Vice President-Controller
(Principal Accounting Officer)
19
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<PERIOD-START> JAN-01-1998
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<SECURITIES> 24,374,000
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