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 September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-24521
-------
CORECOMM LIMITED
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Bermuda 13-4068932
- --------------------------------- ------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
Cedar House Assistant Secretary CoreComm Limited
41 Cedar Avenue 110 East 59th Street
Hamilton, HM 12, Bermuda New York, NY 10022
(441) 295-2244 (212) 906-8485
- --------------------------------------------------------------------------------
(Address, including zip code, and (Name, address, including zip code,
telephone number, including area and telephone number, including
code of Registrant's principal area code of agent for service)
executive offices)
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 September
30, 1999 was 25,443,187.
<PAGE>
CoreComm Limited and Subsidiaries
Index
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
September 30, 1999 and December 31, 1998......................... 2
Condensed Consolidated Statements of Operations -
Three and nine months ended September 30, 1999,
three months ended September 30, 1998, for the
period from April 1, 1998 (date operations
commenced) to September 30, 1998 and for the
period from January 1, 1998 to May 31, 1998...................... 3
Condensed Consolidated Statement of Shareholders' Equity -
Nine months ended September 30, 1999............................. 4
Condensed Consolidated Statements of Cash Flows -
Nine months ended September 30, 1999, for the
period from April 1, 1998 (date operations
commenced) to September 30, 1998 and for the period
from January 1, 1998 to May 31, 1998............................. 5
Notes to Condensed Consolidated Financial Statements............. 6
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition............................... 12
Item 3. Quantitative and Qualitative Disclosure About Market Risk........ 19
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ................................ 20
SIGNATURES................................................................ 21
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CoreComm Limited and Subsidiaries
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
---------------------------------------
(Unaudited) (See Note)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 14,824,000 $ 26,161,000
Marketable securities 23,582,000 110,718,000
Accounts receivable-trade, less allowance for doubtful
accounts of $6,797,000 (1999) and $742,000 (1998) 10,623,000 1,125,000
Due from affiliates 6,331,000 1,954,000
Other 3,652,000 669,000
---------------------------------------
Total current assets 59,012,000 140,627,000
Fixed assets, net 78,100,000 3,582,000
Goodwill, net of accumulated amortization of $3,933,000 (1999) and
$230,000 (1998) 56,297,000 4,028,000
Customer lists, net of accumulated amortization of $1,028,000 (1999)
and none (1998) 12,312,000 -
LMDS license costs 25,366,000 25,366,000
Other, net of accumulated amortization of $385,000 (1999) and $1,000 (1998) 7,762,000 2,923,000
---------------------------------------
$ 238,849,000 $ 176,526,000
=======================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 11,106,000 $ 1,937,000
Accrued expenses 17,561,000 4,247,000
Equipment payable 4,702,000 -
Current portion of notes payable and capital lease obligations 16,604,000 133,000
Deferred revenue 1,516,000 411,000
---------------------------------------
Total current liabilities 51,489,000 6,728,000
Notes payable 5,384,000 283,000
Capital lease obligations 17,645,000 218,000
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 25,443,000 (1999) and 19,798,000 (1998) shares 254,000 198,000
Additional paid-in capital 242,658,000 185,354,000
(Deficit) (78,581,000) (16,255,000)
---------------------------------------
164,331,000 169,297,000
---------------------------------------
$ 238,849,000 $ 176,526,000
=======================================
</TABLE>
Note: The balance sheet at December 31, 1998 has been derived from the audited
balance sheet at that date.
See accompanying notes.
2
<PAGE>
CoreComm Limited and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
For the Period
from April 1, The Predecessor
1998 (date (OCOM)
Nine Months operations For the Period
Three Months Ended Ended commenced) to from January 1,
September 30, September 30, September 30, 1998 to May 31,
1999 1998 1999 1998 1998
------------------------------ -----------------------------------------------------
<S> <C> <C> <C> <C> <C>
REVENUES $ 21,107,000 $ 2,551,000 $ 37,139,000 $ 3,812,000 $1,452,000
COSTS AND EXPENSES
Operating 23,374,000 2,106,000 37,524,000 3,173,000 772,000
Selling, general and administrative 24,205,000 4,360,000 43,725,000 5,777,000 3,205,000
Corporate 2,346,000 514,000 6,489,000 514,000 -
Stock option based compensation 1,056,000 4,586,000 1,056,000 4,586,000 -
Depreciation 4,964,000 300,000 6,674,000 397,000 255,000
Amortization 3,833,000 59,000 5,005,000 120,000 2,000
------------------------------ --------------------------------------------------
59,778,000 11,925,000 100,473,000 14,567,000 4,234,000
------------------------------ --------------------------------------------------
Operating (loss) (38,671,000) (9,374,000) (63,334,000) (10,755,000) (2,782,000)
OTHER INCOME (EXPENSE)
Interest income and other, net 546,000 749,000 3,416,000 749,000 -
Interest expense (1,351,000) (1,000) (1,569,000) (1,000) -
------------------------------ --------------------------------------------------
(Loss) before income tax provision (39,476,000) (8,626,000) (61,487,000) (10,007,000) (2,782,000)
Income tax provision (274,000) - (839,000) - -
------------------------------ --------------------------------------------------
Net (loss) $ (39,750,000) $ (8,626,000) $ (62,326,000) $ (10,007,000) $ (2,782,000)
============================== ==================================================
Basic and diluted net (loss) per share $ (1.61) $ (.44) $ (2.85) $ (.51) $ (.14)
============================== ==================================================
Weighted average shares 24,635,000 19,793,000 21,873,000 19,781,000 19,776,000
============================== ==================================================
</TABLE>
See accompanying notes.
3
<PAGE>
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 19,798,000 $ 198,000 $ 185,354,000 $ (16,255,000)
Exercise of stock options 380,000 4,000 2,193,000
Exercise of warrants 3,154,000 31,000 10,873,000
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
Stock option based compensation 1,056,000
Net (loss) for the nine months ended
September 30, 1999 (62,326,000)
-------------------------------------------------------------
Balance, September 30, 1999 25,443,000 $ 254,000 $ 242,658,000 $ (78,581,000)
=============================================================
</TABLE>
See accompanying notes.
4
<PAGE>
CoreComm Limited and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the period The Predecessor
from April 1, (OCOM)
1998 (date For the Period
Nine Months operations from
Ended commenced) to January 1, 1998
September 30, September 30, to May 31,
1999 1998 1998
---------------------------------------------------
<S> <C> <C> <C>
Net cash provided by (used in) operating activities $ (47,973,000) $ 3,340,000 $ (3,638,000)
INVESTING ACTIVITIES
Purchase of fixed assets (14,906,000) (1,821,000) (623,000)
Acquisitions, net of cash acquired (47,056,000) - -
Purchase of marketable securities (65,299,000) - -
Proceeds from sale of marketable securities 154,544,000 - -
---------------------------------------------------
Net cash provided by (used in) investing activities 27,283,000 (1,821,000) (623,000)
FINANCING ACTIVITIES
Capital contributions - 150,904,000 4,261,000
Principal payments (2,214,000) - -
Principal payments of capital lease obligations (1,534,000) - -
Proceeds from exercise of stock options and warrants 13,101,000 - -
---------------------------------------------------
Net cash provided by financing activities 9,353,000 150,904,000 4,261,000
---------------------------------------------------
-
Increase (decrease) in cash and cash equivalents (11,337,000) 152,423,000 -
Cash and cash equivalents at beginning of period 26,161,000 - -
---------------------------------------------------
Cash and cash equivalents at end of period $ 14,824,000 $ 152,423,000 $ -
===================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest $ 735,000 $ - $ -
Income taxes paid 1,209,000 - -
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES
Capital contributions of non-cash net assets $ - $ 30,059,000 $ -
Liabilities incurred to acquire fixed assets 6,335,000 - -
Common stock, stock options and warrants issued
for acquisitions 43,203,000 - -
</TABLE>
See accompanying notes.
5
<PAGE>
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 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 nine months ended September
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 included in the
Company's annual report on Form 10-K for the year ended December 31, 1998.
The financial statements of the Company's foreign subsidiaries have been
translated into U.S. dollars in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 52, "Foreign Currency Translation." All
balance sheet accounts have been translated using the current exchange rates at
the respective balance sheet dates. Statement of operations amounts have been
translated using the average exchange rates for the respective periods. The
gains or losses resulting from the change in exchange rates were not
significant.
In June 1998, the Financial Accounting Standards Board issued SFAS 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.
In August 1999, the Company declared a 3-for-2 stock split by way of stock
dividend, which was paid on September 2, 1999. All common stock and per share
amounts have been adjusted to reflect the stock split.
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.
6
<PAGE>
CoreComm Limited and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
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 296,000 shares of the Company's common stock, repaid $2.0
million of MegsINet debt and incurred acquisition related costs of $1.2 million.
The common stock portion of the consideration was valued at $30.1 million, the
fair value on the date prior to the announcement. The 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 $33.33 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 appraisal as of the date of issuance. In addition, the Company incurred
acquisition related costs of $1.0 million.
In August 1999, the Company acquired a 53% interest in Q-east Holding Limited, a
Taiwan-based startup reseller of telephone services. To date, CoreComm has
invested approximately $2.4 million into Q-east Holding Limited.
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 $93.0 million exceeded the fair value of the net
tangible assets acquired by $70.7 million, which was allocated as follows: $13.3
million to customer lists, $1.5 million to other intangibles and $55.9 million
to goodwill.
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.
7
<PAGE>
CoreComm Limited and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
NOTE 3. ACQUISITIONS - CONTINUED
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 nine months
ended September 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.
Nine Months Ended September 30,
1999 1998
Total revenue $ 76,843,000 $ 116,377,000
Net (loss) (97,166,000) (152,424,000)
Basic and diluted net (loss) per share (4.09) (6.96)
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 these operations, and have been
successful in many areas. However, we do not intend to actively sell additional
lines in these markets until we are fully satisfied with the quality of the
operations. Consequently, and consistent with our due diligence, transaction
structure and purchase price, revenues associated with the USN assets have
declined significantly since our acquisition, and additional declines may
continue over the next several months as customers leave or "churn" off the
service.
NOTE 4. FIXED ASSETS
Fixed assets consist of:
September 30, December 31,
1999 1998
------------------------------------
(unaudited)
Operating equipment $ 50,142,000 $ 720,000
Computer hardware and software 15,414,000 2,450,000
Other equipment 8,986,000 987,000
Construction in progress 10,786,000 5,000
------------------------------------
85,328,000 4,162,000
Accumulated depreciation (7,228,000) (580,000)
------------------------------------
$ 78,100,000 $ 3,582,000
====================================
8
<PAGE>
CoreComm Limited and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
NOTE 5. ACCRUED EXPENSES
Accrued expenses consist of:
September 30, December 31,
1999 1998
------------------------------------
(unaudited)
Payroll and related $ 3,069,000 $ 1,263,000
Professional fees 1,484,000 527,000
Taxes, including income taxes 5,631,000 1,246,000
Toll and interconnect 1,411,000 -
Accrued equipment purchases 2,218,000 -
Advertising 1,163,000 175,000
Other 2,585,000 1,036,000
------------------------------------
$ 17,561,000 $ 4,247,000
====================================
NOTE 6. LEASES
The Company has capital leases for certain of its operating equipment. Future
minimum lease payments under these capital leases as of September 30, 1999 are:
October 1 to December 31, 1999 $ 3,409,000
Year ending December 31:
2000 14,300,000
2001 13,053,000
2002 2,480,000
2003 19,000
------------
Total minimum lease payments 33,261,000
Less amount representing interest (at
rates ranging from 8.5% to 26.44%) (3,990,000)
------------
Present value of net minimum
capital lease payments 29,271,000
Current portion (11,626,000)
------------
$ 17,645,000
============
9
<PAGE>
CoreComm Limited and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
NOTE 7. NOTES PAYABLE
Notes payable consist of the following:
September 30, December 31,
1999 1998
-----------------------------
(unaudited)
Borrowing under Ascend working capital
promissory note, interest at 8.5% $ 3,451,000 $ -
Note payable to Cisco for equipment,
interest at 12.75% 6,605,000 -
Other 306,000 363,000
----------------------------
10,362,000 363,000
Less current portion 4,978,000 80,000
----------------------------
$ 5,384,000 $ 283,000
============================
MegsINet originally borrowed $4 million from Ascend Communications, Inc.
("Ascend") under a 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 19,500 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 operating equipment under a
promissory note. MegsINet is required to make monthly principal and interest
payments that decline each month from $348,000 beginning in July 1999 through
September 2001. The Company has guaranteed the obligations of MegsINet under the
promissory note.
In October 1999, the Company issued $175,000,000 principal amount of 6%
Convertible Subordinated Notes due 2006 (the "Convertible Notes"). Interest on
the Convertible Notes is payable semiannually on April 1 and October 1 of each
year, commencing April 1, 2000. The Convertible Notes are unsecured obligations
convertible into common stock prior to maturity at a conversion price of $41.09
per share, subject to adjustment. There are approximately 4.26 million shares of
common stock reserved for issuance upon conversion of the Convertible Notes. The
Convertible Notes are redeemable, in whole or in part, at the option of the
Company, at any time on or after October 1, 2002, at a redemption price of
103.429% that declines annually to 100% in 2006, in each case together with
accrued and unpaid interest to the redemption date.
10
<PAGE>
CoreComm Limited and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
NOTE 8. 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 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 in October 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 nine months ended September 30,
1999, NTL charged the Company $1,418,000, which is included in corporate
expenses.
A subsidiary of the Company provides billing and software development services
to subsidiaries of NTL. The Company charges an amount in excess of its costs to
provide these services. General and administrative expenses were reduced by
$619,000 and $142,000 in the nine months ended September 30, 1999 and in the
period from April 1, 1998 (date operations commenced) to September 30, 1998,
respectively, as a result of these charges.
At September 30, 1999, due from affiliates was comprised of $6,331,000 due from
NTL. At December 31, 1998, due from affiliates included $128,000 due from CCPR
and $1,826,000 due from NTL.
NOTE 9. COMMITMENTS AND CONTINGENT LIABILITIES
As of September 30, 1999, the Company had purchase commitments of $36,400,000
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.
11
<PAGE>
CoreComm Limited and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
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,
and 53% of the equity of Q-east Holding Limited in August 1999, the Company
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.
A significant component of the 1999 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 these operations and have been
successful in many areas. However, we do not intend to actively sell additional
lines in these markets until we are fully satisfied with the quality of the
operations. Consequently, and consistent with our due diligence, transaction
structure and purchase price, revenues associated with the USN assets have
declined significantly since our acquisition, and additional declines may
continue over the next several months as customers, leave or "churn" off the
service.
Three Months Ended September 30, 1999 and 1998
- ----------------------------------------------
The increase in revenues to $21,107,000 from $2,551,000 is primarily due to
acquisitions in 1999, which accounted for $16,817,000 of the increase. The
remainder of the increase is primarily due to an increase in CLEC and ISP
revenues from an increase in customers, offset by the decline in cellular long
distance revenue as a result of customers switching to other long distance
providers. In the third quarter of 1999, the Company sold most of its prepaid
cellular debit card business and the Company terminated its cellular long
distance business in certain markets. The Company had revenues in the third
quarter of 1999 of $486,000 from the prepaid cellular debit card business and
$106,000 from the cellular long distance business in these markets.
Operating costs increased to $23,374,000 from $2,106,000 primarily due to
acquisitions in 1999, which accounted for $18,986,000 of the increase. The
remainder of the increase is primarily due to the increase in revenues.
Operating costs as a percentage of revenues increased to 111% from 83%. The
increase in percentage terms is the result of an increase in the fixed component
of operating expenses due to the migration toward a facilities-based
infrastructure through new leases in 1999 and the MegsINet acquisition in May
1999. Operating costs as a percentage of revenues is expected to remain higher
than 1998 levels until customer and revenue growth exceeds the increases in
facilities-based infrastructure costs. In the third quarter of 1999, operating
costs included $939,000 from the prepaid cellular debit card business and
$71,000 from the cellular long distance business in the terminated markets.
Selling, general and administrative expenses increased to $24,205,000 from
$4,360,000 primarily due to acquisitions in 1999, which accounted for
$13,821,000 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 as we grow our
operations and customer base.
12
<PAGE>
CoreComm Limited and Subsidiaries
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. Corporate expenses increased
to $2,346,000 from $514,000 because the 1998 expenses did not represent a full
period of results due to the fact that the spin-off from CCPR occurred on
September 2, 1998, at which time corporate expenses commenced, and because
allocated charges from NTL have increased due to the sales in 1999 of other
affiliated companies.
The compensation charge of $1,056,000 in 1999 is a non-cash charge recorded in
accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees,"
related to a change in employee stock option agreements. The compensation charge
of $4,586,000 in 1998 is a non-cash charge recorded in accordance with APB
Opinion No. 25, 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.
Depreciation expense increased to $4,964,000 from $300,000 as a result of
acquisitions in 1999 which accounted for $3,917,000 of the increase and an
increase in fixed assets.
Amortization expense increased to $3,833,000 from $59,000 due to the
amortization of goodwill and other intangibles from the acquisitions in 1999.
Interest income and other, net, decreased to income of $546,000 from $749,000
primarily due to a decrease in interest income resulting from a decrease in the
Company's cash, cash equivalents and marketable securities. In addition, the
Company sold its prepaid cellular debit card business and incurred a loss of
$150,000.
Interest expense increased to $1,351,000 from $1,000 due to interest on the
notes payable and capital leases.
The income tax provision of $274,000 in 1999 is for state and local income tax.
Nine Months Ended September 30, 1999 and the Period from April 1, 1998 (date
operations commenced) to September 30, 1998
- --------------------------------------------------------------------------------
The increase in revenues to $37,139,000 from $3,812,000 is primarily due to
acquisitions in 1999, which accounted for $24,804,000 of the increase. The
remainder of the increase is primarily due to an increase in CLEC and ISP
revenues from an increase in customers, offset by the decline in cellular long
distance revenue as a result of customers switching to other long distance
providers. In the third quarter of 1999, the Company sold most of its prepaid
cellular debit card business and the Company terminated its cellular long
distance business in certain markets. The Company had revenues in the nine
months ended September 30, 1999 of $2,202,000 from the prepaid cellular debit
card business and $484,000 from the cellular long distance business in these
markets.
13
<PAGE>
CoreComm Limited and Subsidiaries
Operating costs increased to $37,524,000 from $3,173,000 primarily due to
acquisitions in 1999, which accounted for $26,747,000 of the increase. The
remainder of the increase is primarily due to the increase in revenues.
Operating costs as a percentage of revenues increased to 101% from 83%. The
increase in percentage terms is the result of an increase in the fixed component
of operating expenses due to the migration toward a facilities-based
infrastructure through new leases in 1999 and the MegsINet acquisition in May
1999. Operating costs as a percentage of revenues is expected to remain higher
than 1998 levels until customer and revenue growth exceeds the increases in
facilities-based infrastructure costs. In the nine months ended September 30,
1999, operating costs were $2,400,000 from the prepaid cellular debit card
business and $343,000 from the cellular long distance business in the terminated
markets.
Selling, general and administrative expenses increased to $43,725,000 from
$5,777,000 primarily due to acquisitions in 1999, which accounted for
$19,102,000 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 as we grow our
operations and customer base.
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. Corporate expenses increased
to $6,489,000 from $514,000 because the 1998 expenses did not represent a full
period of results due to the fact that the spin-off from CCPR occurred on
September 2, 1998, at which time corporate expenses commenced, and because
allocated charges from NTL have increased due to the sales in 1999 of other
affiliated companies.
The compensation charge of $1,056,000 in 1999 is a non-cash charge recorded in
accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees,"
related to a change in employee stock option agreements. The compensation charge
of $4,586,000 in 1998 is a non-cash charge recorded in accordance with APB
Opinion No. 25, 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.
Depreciation expense increased to $6,674,000 from $397,000 as a result of
acquisitions in 1999, which accounted for $4,475,000 of the increase and an
increase in fixed assets.
Amortization expense increased to $5,005,000 from $120,000 due to the
amortization of goodwill and other intangibles from the acquisitions in 1999.
Interest income and other, net, increased to income of $3,416,000 from $749,000
primarily due to interest income on the Company's cash, cash equivalents and
marketable securities. In addition, the Company sold its prepaid cellular debit
card business and incurred a loss of $150,000.
Interest expense increased to $1,569,000 from $1,000 due to interest on the
notes payable and capital leases.
The income tax provision of $839,000 in 1999 is for state and local income tax.
14
<PAGE>
CoreComm Limited and Subsidiaries
LIQUIDITY AND CAPITAL RESOURCES
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 and debt service. We intend to use cash and
securities on hand of $38.4 million at September 30, 1999 and the proceeds from
the convertible notes issued in October 1999 of $169 million to meet our
operating and capital requirements through 2000. However, we will require
additional financing in order to meet our requirements after 2000, and
potentially to fund capital expenditures in 2000. We are currently negotiating
with equipment manufacturers to provide us with vendor financing, and we
currently anticipate obtaining additional financing at the subsidiary level in
the future. However, there can be no assurance that the proposed financings will
occur.
Historical Uses of Cash. For the nine months ended September 30, 1999, cash used
in operating activities increased to $47,973,000 from cash provided by operating
activities of $3,340,000 in the period from April 1, 1998 (date operations
commenced) to September 30, 1998, primarily due to the increase in the net loss
to $62,326,000 from $10,007,000. The net loss increased as a result of
acquisitions and an increase in selling and marketing costs and customer service
expenses as we have grown the business.
For the nine months ended September 30, 1999, cash used to purchase fixed assets
increased to $14,906,000 from $1,821,000 in the period from April 1, 1998 (date
operations commenced) to September 30, 1998. The increase was due to
acquisitions and as a result of an increase in fixed asset purchases. The cash
used for acquisitions of $47,056,000 in the nine months ended September 30, 1999
is primarily for payments in connection with the MegsINet and USN acquisitions.
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 has yet to be determined, and will be related to the speed and
location of equipment deployment, as well as the mix of resold vs.
facilities-based services.
We are in the final stages of constructing Smart Local Exchange Carrier ("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 in the remainder of 1999 and the first
quarter of 2000. 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 129 Incumbent Local Exchange Carriers'
("ILEC") central offices. We have also identified approximately 30 additional
markets where we currently 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.
15
<PAGE>
CoreComm Limited and Subsidiaries
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 capital costs developing and expanding our
networks in the market. A lower or higher penetration would decrease or
increase, respectively, our additional capital costs.
The foregoing 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
performance could differ materially from our current expectations.
Operations. 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.
LMDS. Local Multipoint Distribution Service ("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. The spectrum is
useable for communications services from a fixed antenna, but is not suitable
for mobile or portable communications. LMDS can be used to provide a wireless
high-capacity broadband service for the "last mile" to a home or office.
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 $25 million
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 defacto 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
Communications. The USN acquisition includes a contingent payment in July 2000
which is payable only if the USN assets meet or exceed 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.
16
<PAGE>
CoreComm Limited and Subsidiaries
Sources of Liquidity. Our operations were initially funded by the $150 million
cash capital contribution from CCPR in connection with the spin-off. In October
1999, the Company issued $175 million principal amount of 6% Convertible
Subordinated Notes due 2006, and received net proceeds of $169 million. 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;
- acquisition opportunities;
- operating results; and
- technological developments.
Longer term, it is likely that we will be required to raise additional financing
to fully build out our planned networks. We are currently negotiating with
equipment manufacturers, including Cisco Systems, Inc., Lucent Technologies,
Inc. and Nortel Networks Corporation, to provide us with vendor financing. In
the aggregate, such financings 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 be dependent on 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.
We are a holding company with no significant assets other than cash and
securities and investments in and advances to our subsidiaries. We are therefore
likely to be dependent upon receipt of funds from our subsidiaries to meet our
own obligations. However, our subsidiaries' proposed 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.
17
<PAGE>
CoreComm Limited and Subsidiaries
- - 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 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 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 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 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 from suppliers that 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.
18
<PAGE>
CoreComm Limited and Subsidiaries
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, 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, Year 2000 readiness and availability, terms and deployment
of capital.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
There have been no material changes in the reported market risks since the end
of the most recent fiscal year, except as follows. As a result of the MegsINet
and USN acquisitions, the amount of our liabilities (notes payable and capital
leases) at fixed interest rates has increased. However, we do not currently
believe it is necessary to manage this exposure to interest rate changes. In
addition, we do not currently believe it is necessary to manage our exposure to
foreign currency exchange rate changes. We do not use derivative instruments to
manage our exposure to interest rate or foreign currency exchange rate changes.
19
<PAGE>
CoreComm Limited and Subsidiaries
PART II. OTHER INFORMATION
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 September 30, 1999 the Company filed the
following:
(i) Current Report on Form 8-K/A dated July 9, 1999, reporting under
Item 2, Acquisition or Disposition of Assets, amending its
Current Report on Form 8-K dated May 26, 1999 by filing financial
statements of the acquired businesses and certain pro forma
information for the Company,
(ii) Current Report on Form 8-K dated August 18, 1999, reporting under
Item 5, Other Events, that CoreComm Limited paid a 3-for-2 stock
split by way of a stock dividend to shareholders of record as of
August 30, 1999, and
(iii) Current Report on Form 8-K dated September 15, 1999, reporting
under Item 5, Other Events, that on September 17, 1999, CoreComm
Limited changed its Nasdaq National Market System ticker symbol
and that on September 23, 1999, CoreComm Limited announced that
it intended to commence a private placement of Convertible
Subordinated Notes.
There were no financial statements filed with the second and third reports.
20
<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 LIMITED
Date: November 9, 1999
By: /s/ J. Barclay Knapp
----------------------------------
J. Barclay Knapp
President, Chief Executive Officer
and Chief Financial Officer
Date: November 9, 1999
By: /s/ Gregg Gorelick
----------------------------------
Gregg Gorelick
Vice President-Controller
and Treasurer
(Principal Accounting Officer)
21
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 14,824,000
<SECURITIES> 23,582,000
<RECEIVABLES> 17,420,000
<ALLOWANCES> (6,797,000)
<INVENTORY> 0
<CURRENT-ASSETS> 9,983,000
<PP&E> 85,328,000
<DEPRECIATION> (7,228,000)
<TOTAL-ASSETS> 238,849,000
<CURRENT-LIABILITIES> 51,489,000
<BONDS> 0
0
0
<COMMON> 254,000
<OTHER-SE> 164,077,000
<TOTAL-LIABILITY-AND-EQUITY> 238,849,000
<SALES> 0
<TOTAL-REVENUES> 37,139,000
<CGS> 0
<TOTAL-COSTS> 37,524,000
<OTHER-EXPENSES> 51,270,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,569,000
<INCOME-PRETAX> (61,487,000)
<INCOME-TAX> 839,000
<INCOME-CONTINUING> (62,326,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (62,326,000)
<EPS-BASIC> (2.85)
<EPS-DILUTED> (2.85)
</TABLE>
