<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): July 9, 1999 (May 26, 1999)
CORECOMM LIMITED
(Exact name of Registrant as Specified in Charter)
Bermuda 0-24521 Not Applicable
(State or Other Jurisdiction (Commission (IRS Employer
of Incorporation) File Number) Identification No.)
Cedar House, 41 Cedar Ave., Hamilton, Bermuda HM 12
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (441) 295-2244
(Former Name or Former Address, if Changed Since Last Report)
<PAGE> 2
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
The registrant hereby amends its Current Report on Form 8-K dated May
26, 1999 by filing financial statements of the acquired businesses, MegsINet
Inc.("MegsINet") and USN Communications, Inc. ("USN") and certain pro forma
financial information for CoreComm Limited ("CoreComm").
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(a) Financial Statements of Businesses Acquired.
<TABLE>
<CAPTION>
PAGE
MEGSINET, INC. NUMBER
- -------------- ------
<S> <C>
December 31, 1998
Independent Auditors' Report........................................... F-1
Consolidated Balance Sheets as of December 31, 1998 and 1997........... F-2
Consolidated Statement of Operations for the year ended December
31, 1998............................................................. F-3
Consolidated Statement of Stockholders' Deficit for the year
ended December 31, 1998.............................................. F-4
Consolidated Statement of Cash Flows for the year ended December
31, 1998............................................................. F-5
Notes to Consolidated Financial Statements............................. F-6
March 31, 1999 (unaudited)
Consolidated Balance Sheet as of March 31, 1999........................ F-13
Consolidated Statement of Operations for the three months ended
March 31, 1999 and 1998.............................................. F-14
Consolidated Statement of Stockholders' Deficit for the three
months ended March 31, 1999.......................................... F-15
Consolidated Statement of Cash Flows for the three months ended
March 31, 1999 and 1998.............................................. F-16
Notes to Consolidated Financial Statements............................. F-17
USN COMMUNICATIONS, INC.
- ------------------------
December 31, 1998
Report of Independent Auditors......................................... F-19
Independent Auditors' Report........................................... F-20
Consolidated Balance Sheets as of December 31, 1998 and 1997........... F-21
Consolidated Statements of Operations for the years ended December 31,
1998, 1997 and 1996.................................................. F-23
Consolidated Statements of Redeemable Preferred Stock for the
years ended December 31, 1998, 1997 and 1996......................... F-24
Consolidated Statements of Common Stockholders' Deficit for the years
ended December 31, 1998, 1997 and 1996............................... F-25
Consolidated Statements of Cash Flows for the years ended December 31,
1998, 1997 and 1996.................................................. F-27
Notes to Consolidated Financial Statements............................. F-29
March 31, 1999(unaudited)
Condensed Consolidated Balance Sheet as of March 31, 1999.............. F-40
Condensed Consolidated Statements of Operations for the three months
ended March 31, 1999 and 1998........................................ F-41
</TABLE>
2
<PAGE> 3
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
Condensed Consolidated Statement of Common Stockholders' Deficit for
the three months ended March 31, 1999................................ F-42
Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 1999 and 1998........................................ F-43
Notes to Condensed Consolidated Financial Statements................... F-44
</TABLE>
(b) Pro Forma Financial Information.
<TABLE>
<CAPTION>
CORECOMM LIMITED
- ----------------
<S> <C>
Introduction to Unaudited Pro Form Financial Information............... F-48
Pro Forma Condensed Consolidated Statement of Operations (Unaudited),
Three Months Ended March 31, 1999 ................................... F-49
Pro Forma Condensed Consolidated Statement of Operations (Unaudited),
Year Ended December 31, 1998 ........................................ F-50
Pro Form Condensed Consolidated Balance Sheet (Unaudited),
March 31, 1999....................................................... F-51
Pro Forma Adjustments (Unaudited)...................................... F-52
</TABLE>
<TABLE>
<CAPTION>
Exhibits
- --------
Index to Exhibits
<S> <C>
23.1 Consent of Ernst & Young LLP
23.2 Consent of KPMG LLP
23.3 Consent of Deloitte & Touche LLP
99.1 Press release, issued May 26, 1999 (previously filed)
</TABLE>
3
<PAGE> 4
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 hereunto duly authorized.
CoreComm Limited
By: /s/ Gregg N. Gorelick
-------------------------------
Name: Gregg N. Gorelick
Title: Vice President-Controller
Dated: July 9, 1999
4
<PAGE> 5
INDEPENDENT AUDITORS' REPORT
The Board of Directors
MegsINet, Inc.:
We have audited the accompanying consolidated balance sheets of MegsINet,
Inc. and subsidiary as of December 31, 1998 and 1997 and the related
consolidated statements of operations, stockholders' deficit, and cash flows for
the year ended December 31, 1998. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit of financial statements includes examining, on a test
basis, evidence supporting the amounts and disclosures in those financial
statements. An audit of financial statements also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of MegsINet,
Inc. and subsidiary as of December 31, 1998 and 1997 and the results of their
operations and their cash flows for the year ended December 31, 1998 in
conformity with generally accepted accounting principles.
KPMG LLP
St. Louis, Missouri
February 15, 1999
F-1
<PAGE> 6
MEGSINET, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
----------- ---------
<S> <C> <C>
ASSETS
Cash........................................................ $ 1,071,584 $ 284,041
Prepaid expenses and other current assets................... 544,112 53,623
----------- ----------
Total current assets.............................. 1,615,696 337,664
Property and equipment, net................................. 26,802,413 1,501,692
----------- ----------
Total assets...................................... $28,418,109 $1,839,356
=========== ==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Equipment payable........................................... $ 9,964,881 $ --
Current portion of notes payable............................ 3,757,164 --
Current portion of capital lease obligations................ 2,096,865 356,871
Note payable to stockholder................................. 156,158 172,477
Accounts payable............................................ 1,465,367 171,482
Accrued liabilities......................................... 383,376 51,000
Deferred revenue............................................ 641,985 202,851
----------- ----------
Total current liabilities......................... 18,465,796 954,681
----------- ----------
Notes payable, less current portion......................... 6,956,178 --
Capital lease obligations, less current portion............. 5,084,112 $1,013,160
Commitments and contingencies
Stockholders' deficit:
Preferred stock, no par value, 3,000,000 and no shares
authorized and 1,200 and no shares issued at December
31, 1998 and 1997, respectively........................ -- --
Common stock, no par value, 30,000,000 shares authorized
and 10,141,442 and 7,121,386 shares issued at December
31, 1998 and
1997, respectively..................................... -- --
Paid-in capital........................................... 4,005,988 790,541
Retained deficit.......................................... (6,093,965) (919,026)
----------- ----------
Total stockholders' deficit....................... (2,087,977) (128,485)
----------- ----------
Total liabilities and stockholders' deficit....... $28,418,109 $1,839,356
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE> 7
MEGSINET, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<S> <C>
Revenues.................................................... $ 4,172,072
Cost of sales............................................... 4,866,702
-----------
Costs in excess of revenues............................... (694,630)
-----------
Operating expenses:
Salaries and compensation................................. 1,734,675
Other operating expense................................... 2,086,804
-----------
Total operating expenses.......................... 3,821,479
-----------
Loss from operations................................... (4,516,109)
Interest expense............................................ 658,830
-----------
Net loss............................................... $(5,174,939)
===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 8
MEGSINET, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
TOTAL
PREFERRED COMMON PAID-IN RETAINED STOCKHOLDERS'
STOCK STOCK CAPITAL DEFICIT DEFICIT
--------- -------- --------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1997........ $ -- -- 790,541 (919,026) (128,485)
Issuance of preferred stock, 1,200
shares............................ -- -- 1,500,000 -- 1,500,000
Issuance of common stock, 2,527,199
shares, net of $63,110 issue
costs............................. -- -- 1,439,447 -- 1,439,447
Issuance of common stock, 492,857
shares, in lieu of compensation... -- -- 276,000 -- 276,000
Net loss............................ -- -- -- (5,174,939) (5,174,939)
-------- -------- --------- ---------- ----------
Balance at December 31, 1998........ $ -- -- 4,005,988 (6,093,965) (2,087,977)
======== ======== ========= ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 9
MEGSINET, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss.................................................. $(5,174,939)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.......................... 1,082,032
Compensation paid through issuance of stock............ 276,000
Changes in operating working capital:
Prepaid expenses and other current assets............ (490,489)
Accounts payable..................................... 1,293,885
Accrued liabilities.................................. 332,376
Deferred revenue..................................... 439,134
-----------
Net cash used in operating activities............. (2,242,001)
-----------
Cash flows from investing activities -- capital
expenditures.............................................. (9,858,130)
-----------
Cash flows from financing activities:
Proceeds from notes payable............................... 10,713,342
Payments on note payable to stockholder................... (16,319)
Payments on capital lease obligations..................... (748,796)
Issuance of stock......................................... 2,939,447
-----------
Net cash provided by financing activities......... 12,887,674
-----------
Net increase in cash.............................. 787,543
Cash, beginning of year..................................... 284,041
-----------
Cash, end of year........................................... $ 1,071,584
===========
Supplemental disclosure of cash flow information -- cash
paid for interest......................................... $ 667,287
===========
Supplemental disclosure of non cash investing and financing
activities:
Capital lease obligations of $6,559,742 were incurred in
1998 when the Company entered into equipment leases.
Equipment payable of $9,964,881 was incurred in 1998 when
the Company purchased equipment.
The Company paid $19,817 of commissions through issuance
of common stock.
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 10
MEGSINET, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(1) DESCRIPTION OF THE BUSINESS
MegsINet, Inc. was formed to develop and operate a national packet based
data network and to provide a broad range of telecommunications services. At
December 31, 1998, the Company had constructed a network that served 50 markets
in the United States. From inception through the end of 1998, the Company
provided a variety of Internet connection and web hosting services to its
customer base.
During 1998, MegsINet formed a wholly owned subsidiary called
Megsinet-CLEC, Inc. (Megsinet-CLEC). This subsidiary will provide local exchange
telephone service and long distance telephone service in competition with
incumbent and competitive local exchange telephone companies and long distance
providers. Megsinet-CLEC has received authority to provide local telephone
service in seven states and has filed applications in two additional states as
of December 31, 1998. Megsinet-CLEC has received authority to provide long
distance service in 36 states and has filed applications in eight additional
states as of December 31, 1998.
MegsINet is an Illinois Corporation formed in 1995.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The presentation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual results can differ from those estimates.
All significant intercompany balances and transactions have been eliminated
in consolidation.
PROPERTY AND EQUIPMENT
Property and equipment consist primarily of network communications
equipment, computer equipment, furniture and fixtures, and equipment being built
for use by Megsinet-CLEC, all of which are stated at cost. Property and
equipment under capital leases are stated at the present value of minimum lease
payments.
Depreciation on property and equipment is computed using the straight-line
method over estimated service lives of three to five years.
EQUIPMENT PAYABLE
Equipment payable represents amounts due for equipment which has been
received by MegsINet, but which has not yet been installed. Upon installation,
MegsINet will enter into a capital lease under an arrangement with Ascend
Communications, Inc. (Ascend) as discussed in note 5. As no lease agreement has
been signed at December 31, 1998, the entire balance has been classified as
current.
REVENUE RECOGNITION AND DEFERRED REVENUE
MegsINet's customers generally pay for service in advance. Revenue is
recognized ratably over the service period. Deferred revenue represents the
unearned portion of customer payments.
INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
F-6
<PAGE> 11
MEGSINET, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
carrying amounts of existing assets and liabilities and their respective tax
bases and operating losses and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
STOCK-BASED COMPENSATION
MegsINet applies the intrinsic value-based method of accounting prescribed
by Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock
Issued to Employees", and related interpretations, in accounting for its fixed
plan stock options. Pro forma information regarding net income as calculated
under the provisions of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," is disclosed in note 9.
(3) PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
1998 1997
----------- ---------
<S> <C> <C>
Telecommunications equipment................... $24,766,423 1,496,862
Computer equipment............................. 482,151 183,401
Telephone equipment............................ 147,357 2,285
Furniture and fixtures......................... 42,514 16,119
Leasehold improvements......................... 127,213 15,563
Construction in progress....................... 2,531,325 --
----------- ---------
28,096,983 1,714,230
Less accumulated depreciation and
amortization................................. 1,294,570 212,538
----------- ---------
Net property and equipment................... $26,802,413 1,501,692
=========== =========
</TABLE>
(4) LEASES
MegsINet is obligated under various capital leases for telecommunications
equipment that expires at various dates during the next five years. At December
31, 1998 and 1997, the gross amount of equipment and related accumulated
amortization recorded under capital leases was as follows:
<TABLE>
<CAPTION>
1998 1997
---------- ---------
<S> <C> <C>
Telecommunications equipment.................... $8,110,081 1,496,862
Less accumulated amortization................... 933,428 135,028
---------- ---------
$7,176,653 1,361,834
========== =========
</TABLE>
MegsINet also has several noncancelable operating leases for
telecommunications equipment that expire over the next three years. MegsINet is
required to pay all executory costs such as maintenance and insurance. Rental
expense for operating leases during 1998 totaled approximately $304,000.
F-7
<PAGE> 12
MEGSINET, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum lease payments under noncancelable operating leases (with
initial or remaining lease terms in excess of one year) and future minimum
capital lease payments as of December 31, 1998 are:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
---------- ----------
<S> <C> <C>
Year ending December 31:
- -----------------------------
1999......................................... $2,864,659 481,831
2000......................................... 3,292,654 372,508
2001......................................... 2,267,504 265,688
2002......................................... 102,006 --
2003......................................... 973 --
---------- ----------
Total minimum lease payments......... 8,527,796 $1,120,027
==========
Less amount representing interest (at rates
ranging from 8.5% to 26.44%)................. 1,346,819
----------
Present value of net minimum capital
lease payments....................... 7,180,977
Less current installments of obligations under
capital leases............................... 2,096,865
----------
Obligations under capital leases,
excluding current installments....... $5,084,112
==========
</TABLE>
(5) NOTES PAYABLE
Notes payable at December 31, 1998 consist of the following:
<TABLE>
<S> <C>
Borrowings under Ascend working capital promissory note,
interest at 8.5%.......................................... $2,000,000
Borrowings under Cisco working capital promissory note,
interest at 13.5%......................................... 2,021,885
Note payable to Cisco for equipment, interest at 12.75%..... 6,691,457
----------
Total notes payable............................... 10,713,342
Less current installments................................... 3,757,164
----------
Notes payable, less current installments.................... $6,956,178
==========
</TABLE>
In 1998, MegsINet entered into an agreement with Ascend to lease up to $16
million in telecommunications equipment under a capital lease agreement. In
addition, Ascend agreed to loan MegsINet up to $4.0 million in working capital
(the Ascend Note), limited by a ratio of $1 in working capital for each $4 in
equipment purchased or leased. At December 31, 1998, MegsINet was obligated
under capital leases with Ascend related to this agreement totaling
approximately $4.4 million and had received approximately $10.0 million in
equipment for which no formal lease agreement had been signed (see note 2). The
obligation related to this equipment is classified as equipment payable. As of
December 31, 1998, MegsINet had borrowed $2.0 million under the Ascend Note.
F-8
<PAGE> 13
MEGSINET, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The terms of the Ascend Note require MegsINet to make monthly principal
payments beginning six months after a minimum draw of $500,000 is made. Interest
payments start in the month following the borrowing. Based on the timing of
borrowings on the Ascend Note, MegsINet will begin to make payments of $37,118
in April 1999, increasing to $74,236 in June 1999. The amount outstanding at
December 31, 1998 is scheduled to be repaid in November 2001.
The Ascend Note is secured by warrants to purchase MegsINet stock at $6.50
per share. The number of warrants held by Ascend at December 31, 1998 is
approximately 355,000. The terms of the warrants restrict Ascend's ability to
exercise the warrants unless the Company is in default. If MegsINet repays the
Ascend Note without default, 90% of these warrants expire.
In 1998, MegsINet also entered into an agreement with Cisco Systems Capital
Corporations (Cisco) whereby MegsINet can purchase up to $16 million in
telecommunications equipment under a promissory note (the Cisco Equipment Note).
In addition, Cisco has agreed to loan MegsINet up to $4.0 million in working
capital (the Cisco Note) limited by a ratio of $1 in working capital for each $4
in equipment purchases; however, the first $2.0 million in working capital is
subject to only a 1 to 2 ratio. At December 31, 1998, MegsINet was obligated
under the Cisco Equipment Note totaling $6,691,457 and had borrowed
approximately $2.0 million under the Cisco Note.
The terms of the Cisco Equipment Note require MegsINet to make monthly
principal and interest payments beginning in April 1999. MegsINet will make
payments of $261,655. The amount outstanding at December 31, 1998 is scheduled
to be repaid in September 2001. The Cisco Equipment Note is secured by the
telecommunications equipment being purchased.
The terms of the Cisco Note require MegsINet to make monthly principal and
interest payments beginning in April 1999. MegsINet will make payments of
$179,350. The amount outstanding at December 31, 1998 is scheduled to be repaid
in March 2000. The Cisco Note is secured by common stock held by the president
of MegsINet and a life insurance policy on the president equal to the
outstanding balance of the note. The Cisco Note also carries conversion rights.
These conversion rights allow Cisco to convert all or part of the Cisco Note
obligation to common stock at the market value determined on the date of
conversion.
The aggregate maturities of notes payable subsequent to December 31, 1998
are as follows: 1999, $3,757,164; 2000, $4,007,670; and 2001, $2,948,508.
The Company did not have any notes payable obligations outstanding at
December 31, 1997.
(6) RELATED-PARTY TRANSACTIONS
At December 31, 1998 and 1997, MegsINet had an unsecured note payable to a
stockholder in the amount of $156,158 and $172,477, respectively. The note
carries an interest rate of 8.5% and is due upon demand.
(7) CHANGES IN CAPITAL STRUCTURE
In July 1997, MegsINet's Board of Directors authorized a 477-to-1 split for
each share of common stock. All share data presented has been revised to reflect
this transaction.
In June 1998, MegsINet increased the authorized common shares to 30
million.
During 1998, MegsINet authorized 3 million shares of preferred stock, of
which 1,200 shares were issued as 1998 Series Convertible Preferred Stock. Such
stock has a liquidation value of $1,250 per share and is entitled to dividends
of $100 per share per year. As of December 31, 1998, MegsINet had not declared
the 1998 dividends, therefore no amount has been accrued. Unpaid dividends
totaled $60,000 at December 31, 1998.
F-9
<PAGE> 14
MEGSINET, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(8) INCOME TAXES
No income tax benefit was recorded during 1998. The actual income tax
benefit for 1998 differs from the expected income tax benefit computed by
applying the U.S. federal corporate tax rate of 34% to loss before income taxes
as follows:
<TABLE>
<S> <C>
Computed "expected" income tax benefit................... $(1,759,480)
State income taxes....................................... (206,996)
Non-utilization of net operating loss.................... 1,966,476
-----------
Tax benefit......................................... $ --
===========
</TABLE>
The tax effects of temporary differences that give rise to deferred tax
assets at December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
---------- --------
<S> <C> <C>
Net operating loss carryforwards................. $2,008,196 165,959
Start-up costs................................... 124,239 --
Difference in depreciation on property, plant,
and equipment.................................. 89,606 89,606
---------- --------
Gross deferred tax assets................... 2,222,041 255,565
Less valuation allowance......................... (2,222,041) (255,565)
---------- --------
Net deferred tax assets..................... $ -- --
========== ========
</TABLE>
The valuation allowance for deferred tax assets as of December 31, 1998 and
1997 was $2,222,041 and $255,565, respectively. The net change in the valuation
allowance for the year ended December 31, 1998 was an increase of $1,966,476.
(9) STOCK-BASED COMPENSATION
In 1998, MegsINet adopted a stock option plan (the Plan) pursuant to which
the Company's Board of Directors may grant stock options to MegsINet employees.
The Plan authorizes grants of options to purchase up to 2,000,000 shares of
authorized but unissued common stock. Stock options are granted with an exercise
price equal to the stock's fair market value at the date of grant. All stock
options under this plan have five-year terms and vest 25% per year from the date
of grant. During the year ended December 31, 1998, 191,960 options were issued
under this plan.
MegsINet also has the right to issue options to officers and directors of
MegsINet. During 1998, the Company issued options to purchase 650,000 shares of
MegsINet's common stock to officers and directors with exercise prices ranging
from $.56 to $1.38 per share. These options vest at different rates over the
next three years.
The per share weighted-average fair value of stock options granted during
1998 was $0.36 on the date of grant using the Black-Sholes option-pricing model
(excluding a volatility assumption) with the following weighted-average
assumptions: no expected dividend yield, risk-free interest rate of 6.0%, and an
expected life equal to the term of the respective option.
MegsINet applies APB Opinion No. 25 in accounting for its stock options.
MegsINet has issued options which qualify for fixed plan treatment and,
accordingly, no compensation cost has been recognized for its stock
F-10
<PAGE> 15
MEGSINET, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
options in the consolidated financial statements. Had MegsINet determined
compensation cost based on the fair value at the grant date for its stock
options under SFAS No. 123, MegsINet's 1998 net loss would have been increased
to the pro forma amount of approximately $5,266,000.
Stock option activity during 1998 is as follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
<S> <C> <C>
Balance at December 31, 1997................ 250,000 $0.36
Granted..................................... 841,960 0.90
--------- -----
Balance at December 31, 1998................ 1,091,960 0.78
========= =====
</TABLE>
At December 31, 1998, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was as follows:
<TABLE>
<CAPTION>
NUMBER WEIGHTED-AVERAGE WEIGHTED-AVERAGE SHARES WEIGHTED-AVERAGE
OF SHARES EXERCISE PRICE CONTRACTUAL LIFE EXERCISABLE EXERCISE PRICE
- --------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C>
150,000 $0.22 4.3 years 150,000 $0.22
550,000 0.56 5.5 63,000 0.56
241,960 1.25 5.0 28,430 1.25
150,000 1.38 5.0 -- --
</TABLE>
During 1997, MegsINet issued options to purchase 150,000 shares of
MegsINet's common stock to an officer with an exercise price of $.22 per share.
The agreement states that the options are 100% vested upon grant. At December
31, 1997, all options were still outstanding.
During 1997, MegsINet also issued options to purchase 100,000 shares of
MegsINet's common stock to a director of MegsINet with an exercise price of
$.56, which was equal to the market value of the stock at the date of issue. The
options, which were 100% vested upon grant, remained outstanding at December 31,
1997.
During 1998 and 1997, MegsINet issued 492,857 and 984,800 shares,
respectively, of common stock to employees in lieu of compensation.
(10) COMMITMENTS AND CONTINGENCIES
MegsINet is involved in certain litigation which occurs in the normal
course of business. In the opinion of management, the ultimate results of these
matters will not have a material impact on the financial position of MegsINet.
F-11
<PAGE> 16
MEGSINET, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(11) CONTINUED OPERATIONS
In February 1999, the Company sold 2,000,000 shares of 1999A Series 10%
Senior Convertible Preferred Stock (the Preferred Stock Transaction) in the
amount of $5,000,000, less cost of issuance.
Also in February 1999, MegsINet entered into a definitive agreement whereby
all of MegsINet's outstanding stock will be acquired, and MegsINet will be
merged into the acquiring company (the Merger Transaction). At the close of the
Merger Transaction, MegsINet will cease to exist as a separate entity. This
agreement is subject to shareholder approval. At the close of the Merger
Transaction, the acquiring company will assume the obligations and liabilities
of MegsINet and be responsible for funding future operations. Management
believes the Preferred Stock Transaction will provide MegsINet adequate funding
through the close of the Merger Transaction.
(12) SUBSEQUENT EVENT (UNAUDITED)
On May 3, 1999, MegsINet entered into a revised agreement that changes
certain terms of the Merger Transaction (see note 11). The primary change in the
new agreement results in the survival of MegINet as a wholly-owned subsidiary of
the acquiring enterprise.
F-12
<PAGE> 17
MEGSINET, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
MARCH 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Cash ......................................................... $ 3,381,580
Prepaid expenses and other current assets .................... 1,594,341
------------
Total current assets ............................... 4,975,921
Property and equipment, net .................................. 45,518,521
------------
Total assets ....................................... $ 50,494,442
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Equipment payable ............................................ $ 25,757,434
Current portion of notes payable ............................. 6,043,139
Current portion of capital lease obligations ................. 2,702,925
Accounts payable ............................................. 2,152,894
Accrued liabilities .......................................... 997,190
Deferred revenue ............................................. 935,378
------------
Total current liabilities .......................... 38,588,960
Notes payable, less current portion .......................... 7,885,422
Capital lease obligations, less current portion .............. 4,691,112
Commitments and contingencies
Stockholders' deficit:
Preferred stock, no par value, 3,000,000 shares authorized
and 2,001,200 shares issued ................................ --
Common stock, no par value, 30,000,000 shares authorized
and 10,200,632 shares issued ............................... --
Paid-in capital ............................................ 8,955,745
Retained deficit ........................................... (9,626,797)
------------
Total stockholders' deficit ........................ (671,052)
------------
Total liabilities and stockholders' deficit ........ $ 50,494,442
============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-13
<PAGE> 18
MEGSINET, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1999 1998
---- ----
<S> <C> <C>
Revenues ......................... $ 1,602,729 $ 996,919
Cost of sales .................... 2,675,431 476,368
----------- -----------
Costs in excess of revenues .... (1,072,702) 520,551
----------- -----------
Operating expenses:
Salaries and compensation ...... 1,001,112 203,753
Other operating expense ........ 899,202 244,761
----------- -----------
Total operating expenses 1,900,314 448,514
----------- -----------
Income (loss) from
operations ................ (2,973,016) 72,037
Interest expense ................. 559,816 85,642
----------- -----------
Net (loss) .................. $(3,532,832) $ (13,605)
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-14
<PAGE> 19
MEGSINET, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
THREE MONTHS ENDED MARCH 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
TOTAL
PREFERRED COMMON PAID-IN RETAINED STOCKHOLDERS'
STOCK STOCK CAPITAL DEFICIT DEFICIT
----- ----- ------- ------- -------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1998 $ -- -- 4,005,988 (6,093,965) (2,087,977)
Issuance of common stock,
59,160 shares ............ -- -- 66,287 -- 66,287
Issuance of preferred
stock, 2,000,000 shares .. -- -- 5,000,000 -- 5,000,000
Commission paid ............ -- -- (75,000) -- (75,000)
Merger related fees ........ -- -- (41,530) (41,530)
Net loss ................... -- -- -- (3,532,832) (3,532,832)
---------- ---------- ---------- ---------- ----------
BALANCE AT MARCH 31, 1999 .. $ -- -- 8,955,745 (9,626,797) (671,052)
========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-15
<PAGE> 20
MEGSINET, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss .................................................................. $ (3,532,832) $ (13,605)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization .......................................... 726,917 111,909
Changes in operating working capital:
Prepaid expenses and other current assets ............................ (1,050,229) (15,895)
Accounts payable ..................................................... 687,526 (171,482)
Accrued liabilities .................................................. 613,814 69,860
Deferred revenue ..................................................... 293,393 (202,851)
------------ ------------
Net cash used in operating activities ............................ (2,261,411) (222,064)
------------ ------------
Cash flows from investing activities -- capital expenditures ................ (18,976,005) (130,905)
------------ ------------
Cash flows from financing activities:
Proceeds from notes payable ............................................... 19,007,783 --
Payments on note payable to stockholder ................................... (156,158) (4,120)
Payments on capital lease obligations ..................................... (253,963) (114,903)
Issuance of stock ......................................................... 4,949,750 362,366
------------ ------------
Net cash provided by financing activities ......................... 23,547,412 243,343
------------ ------------
Net increase (decrease) in cash ................................... 2,309,996 (109,626)
Cash, beginning of period ................................................... 1,071,584 284,041
------------ ------------
Cash, end of period ......................................................... $ 3,381,580 $ 174,415
============ ============
Supplemental disclosure of cash flow information -- cash
paid for interest ......................................................... $ 566,747 $ 85,642
============ ============
</TABLE>
Supplemental disclosure of non cash investing and financing activities:
Capital lease obligations of $467,020 and $1,108,213 were incurred in the
three months ended March 31, 1999 and 1998, respectively, when the Company
entered into equipment leases.
Equipment payable of $15,792,553 and zero were incurred in the three months
ended March 31, 1999 and 1998, respectively, when the Company purchased
equipment.
The Company paid $75,000 and zero of commissions through issuance of
common stock in the three months ended March 31, 1999 and 1998, respectively.
See accompanying notes to condensed consolidated financial statements.
F-16
<PAGE> 21
MEGSINET, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three months ended March 31, 1999 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1999. For further information, refer to the consolidated
financial statements and footnotes thereto for the year ended December 31, 1998.
NOTE 2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
MARCH 31,
1999
(UNAUDITED)
-----------
<S> <C>
Telecommunications equipment .... $42,305,441
Computer equipment .............. 643,492
Telephone equipment ............. 178,096
Furniture and fixtures .......... 61,245
Leasehold improvements .......... 179,325
Construction in progress ........ 4,172,407
-----------
47,540,006
Less accumulated depreciation and
amortization .................. 2,021,485
-----------
Net property and equipment .... $45,518,521
===========
</TABLE>
F-17
<PAGE> 22
MEGSINET, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
NOTE 3. NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<CAPTION>
MARCH 31, 1999
(UNAUDITED)
-----------
<S> <C>
Borrowings under Ascend working capital promissory
note, interest at 8.5% ......................... $ 4,000,000
Borrowings under Cisco working capital promissory
note, interest at 13.5% ........................ 2,021,885
Note payable to Cisco for equipment, interest at
12.75% ......................................... 7,906,676
-----------
Total notes payable .................... 13,928,561
Less current installments ........................ 6,043,139
-----------
Notes payable, less current installments ......... $ 7,885,422
===========
</TABLE>
NOTE 4. RELATED-PARTY TRANSACTIONS
At March 31, 1999 and 1998, MegsINet had an unsecured note payable to a
stockholder in the amount of zero and $156,158, respectively. The note had an
interest rate of 8.5% and was due upon demand.
NOTE 5. CHANGES IN CAPITAL STRUCTURE
During 1999, the Company issued 2,000,000 shares of 1999A Series
Convertible Preferred Stock. Such stock had a liquidation value of $2.50 per
share and was entitled to dividends of $0.25 per share per year. As of March 31,
1999, the Company had not declared the 1999 dividends; therefore, no amount had
been accrued. Unpaid dividends totaled $125,000 at March 31, 1999.
NOTE 6. COMMITMENTS AND CONTINGENCIES
MegsINet is involved in certain litigation which occurs in the normal
course of business. In the opinion of management, the ultimate results of these
matters will not have a material impact on the financial position, results of
operations or cash flows of MegsINet.
NOTE 7. MERGER TRANSACTION
In May 1999, all of the outstanding stock of MegsINet was purchased by
CoreComm Limited for total consideration of approximately $16.8 million in cash
and 1.4 million shares of CoreComm Limited common stock. In addition, CoreComm
Limited repaid $2.5 million of MegsINet debt.
F-18
<PAGE> 23
REPORT OF INDEPENDENT AUDITORS
Board of Directors
USN Communications, Inc.
We have audited the accompanying consolidated balance sheet of USN
Communications, Inc. and subsidiaries (the "Company") as of December 31, 1998,
and the related consolidated statements of operations, redeemable preferred
stock, common stockholders' deficit and cash flows for the year then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
an assessment of the accounting principles used and significant estimates made
by management, as well as an evaluation of the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
report.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of USN
Communications, Inc. and subsidiaries at December 31, 1998, and the consolidated
results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As more fully described in Note 1 of
the Notes to Consolidated Financial Statements, on February 18, 1999, the
Company filed voluntary petitions for reorganization under Chapter 11 of title
11 of the United States Code. This matter raises substantial doubt about the
Company's ability to continue as a going concern. The financial statements do
not include any adjustments to reflect the future effects on the recoverability
and classification of assets or the amounts and classification of liabilities
that may result from the outcome of this uncertainty.
Ernst & Young LLP
Chicago, Illinois
April 13, 1999
F-19
<PAGE> 24
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
USN Communications, Inc.
Chicago, Illinois
We have audited the accompanying consolidated balance sheet of USN
Communications, Inc. and subsidiaries (the "Company") as of December 31, 1997,
and the related consolidated statements of operations, redeemable preferred
stock, common stockholders' equity (deficit) and cash flows for each of the two
years in the period ended December 31, 1997. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
as of December 31, 1997, and the results of its operations and its cash flows
for each of the two years in the period ended December 31, 1997 in conformity
with generally accepted accounting principles.
Deloitte & Touche LLP
Chicago, Illinois
March 9, 1998
F-20
<PAGE> 25
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31
---------------------
1998 1997
--------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 3,767 $ 87,454
Marketable equity securities.............................. -- 8,181
Accounts receivable, net.................................. 24,902 23,917
Net assets of discontinued operations held for sale....... 19,250 --
Other current assets...................................... 2,270 1,444
--------- --------
Total current assets................................... 50,189 120,996
Property and equipment, net................................. 14,985 16,802
Other assets................................................ 34,162 33,402
--------- --------
Total assets........................................... $ 99,336 $171,200
========= ========
LIABILITIES, REDEEMABLE PREFERRED STOCK
AND COMMON STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable.......................................... $ 53,145 $ 20,485
Accrued expenses and other current liabilities............ 12,981 7,179
17% Senior Secured Note................................... 10,000 --
Capital lease obligations and notes payable............... 607 559
--------- --------
Total current liabilities.............................. 76,733 28,223
14 5/8% Senior Discount Notes............................... 140,504 100,002
14% Senior Discount Notes................................... 13,877 34,580
9% Convertible Subordinated Discount Notes.................. 32,966 30,188
9% Consent Convertible Notes................................ 10,450 --
Accrued interest............................................ 9,385 7,374
Capital lease obligations and notes payable................. 628 556
--------- --------
Total liabilities...................................... 284,543 200,923
Commitments and contingent liabilities......................
</TABLE>
F-21
<PAGE> 26
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS -- (CONT.)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31
---------------------
1998 1997
--------- --------
<S> <C> <C>
REDEEMABLE PREFERRED STOCK:
9% Cumulative Convertible Pay-In-Kind Preferred Stock:
$1 par value; 30,000 shares authorized at 1997; 10,920
shares outstanding at December 31,1997................. -- 11
9% Cumulative Convertible Pay-In-Kind Preferred Stock,
Series A: $1 par value; 150,000 shares authorized at
1997; 45,209 shares outstanding at December 31, 1997... -- 45
Accumulated unpaid dividends.............................. -- 1,516
Additional paid-in-capital................................ -- 55,705
--------- --------
Total redeemable preferred stock....................... -- 57,277
COMMON STOCKHOLDERS' DEFICIT:
Common stock, $.01 par value, 100,000,000 and 30,000,000
shares authorized at December 31, 1998 and 1997,
respectively; 23,585,741 and 7,282,511 shares issued at
December 31, 1998 and 1997, respectively............... 235 73
Additional paid-in capital................................ 260,227 74,642
Treasury stock, 10,000 shares............................. (1) (1)
Accumulated other comprehensive income.................... -- 8,181
Accumulated deficit....................................... (445,668) (169,895)
--------- --------
Total common stockholders' deficit..................... (185,207) (87,000)
--------- --------
Total liabilities, redeemable preferred stock, and common
stockholders' deficit..................................... $ 99,336 $171,200
========= ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-22
<PAGE> 27
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------
1998 1997 1996
----------- --------- ----------
<S> <C> <C> <C>
NET SERVICE REVENUE............................... $ 132,503 $ 47,200 $ 9,814
COST OF SERVICES.................................. 117,957 41,272 9,256
----------- --------- ----------
Gross profit.................................... 14,546 5,928 558
EXPENSES:
Sales and marketing............................. 82,134 62,375 12,612
General and administrative...................... 110,635 41,538 20,665
Non-recurring charges........................... 28,987 -- --
----------- --------- ----------
OPERATING LOSS.................................... (207,210) (97,985) (32,719)
OTHER INCOME (EXPENSE):
Interest income................................. 3,570 3,420 1,376
Interest expense................................ (30,099) (15,333) (1,797)
Realized gain on sale of marketable
securities................................... 11,714 -- 8,079
Other income (expense).......................... (311) 6 14
----------- --------- ----------
Other income (expense) -- net................... (15,126) (11,907) 7,672
----------- --------- ----------
NET LOSS FROM CONTINUING OPERATIONS............... (222,336) (109,892) (25,047)
DISCONTINUED OPERATIONS:
Loss from operations of discontinued division... (4,919) -- --
Provision for estimated loss on disposal of
discontinued operations (including estimated
operating loss of $6.2 million during phase
out period).................................. (47,939) -- --
----------- --------- ----------
Total loss from discontinued operations...... (52,858) -- --
----------- --------- ----------
NET LOSS.......................................... $ (275,194) $(109,892) $ (25,047)
=========== ========= ==========
PREFERRED DIVIDENDS............................... 579 2,211 3,691
=========== ========= ==========
NET LOSS TO COMMON SHAREHOLDERS -- BASIC AND
DILUTED......................................... $ (275,773) $(112,103) $ (28,738)
=========== ========= ==========
LOSS PER COMMON SHARE -- BASIC AND DILUTED
Net loss from continuing operations............. $ (10.51) $ (15.55) $ (5.65)
Discontinued operations......................... (2.49) -- --
----------- --------- ----------
Net loss........................................ $ (13.00) $ (15.55) $ (5.65)
=========== ========= ==========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING --
BASIC AND DILUTED............................... 21,203,771 7,206,886 5,082,028
=========== ========= ==========
</TABLE>
See Notes to Consolidated Financial Statements.
F-23
<PAGE> 28
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SERIES A
9 % PIK 9 % PIK SERIES A-2 SERIES A ACCUMULATED ADDITIONAL
PREFERRED PREFERRED PREFERRED PREFERRED UNPAID PAID-IN
STOCK STOCK STOCK STOCK DIVIDENDS CAPITAL TOTAL
--------- --------- ---------- --------- ----------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996.......... $ 26 $ 16 $ 3,810 $ 40,544 $ 44,396
Accumulated dividends on Series A
and A-2 Preferred Stock......... 3,466 3,466
Conversion of Series A and A-2
Preferred to Class A Common
Stock........................... (26) (16) (7,276) (40,544) (47,862)
Issuance of 10,000 shares of 9%
PIK Preferred Stock............. $ 10 9,990 10,000
Costs incurred related to issuance
of 9% PIK Preferred Stock....... (180) (180)
Accumulated dividends on Series A
9% PIK Preferred Stock.......... 225 225
---- ---- ---- ---- ------- -------- --------
BALANCE, DECEMBER 31, 1996........ 10 -- -- -- 225 9,810 10,045
---- ---- ---- ---- ------- -------- --------
Issuance of 920 shares of 9% PIK
Preferred Stock as payment of
dividends....................... 1 (920) 919 --
Issuance of 45,209 shares of
Series A 9% PIK Preferred
Stock........................... $ 45 45,164 45,209
Costs incurred related to issuance
of Series A 9% PIK Preferred
Stock........................... (188) (188)
Accumulated dividends on 9% PIK
Preferred Stock................. 941 941
Accumulated dividends on Series A
9% PIK Preferred Stock.......... 1,270 1,270
---- ---- ---- ---- ------- -------- --------
BALANCE, DECEMBER 31, 1997........ 11 45 -- -- 1,516 55,705 57,277
---- ---- ---- ---- ------- -------- --------
Accumulated dividends on 9% PIK
Preferred Stock................. 114 114
Accumulated dividends on Series A
9% PIK Preferred Stock.......... 465 465
Conversion of 9% PIK and Series A
9% PIK Preferred Stock to Common
Stock........................... (11) (45) (2,095) (55,705) (57,856)
---- ---- ---- ---- ------- -------- --------
BALANCE, DECEMBER 31, 1998........ $ -- $ -- $ -- $ -- $ -- $ -- $ --
==== ==== ==== ==== ======= ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-24
<PAGE> 29
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' DEFICIT
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL COMMON OTHER ACCUMU-
COMMON PAID-IN STOCK HELD COMPREHENSIVE LATED
STOCK CAPITAL IN TREASURY INCOME DEFICIT TOTAL
------ ---------- ----------- ------------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996.......... $ 31 $ 255 $ (29,054) $ (28,768)
Conversion of Series A and A-2
Preferred Stock to Class A
Common Stock.................... 27 47,835 47,862
Issuance of 50,000 shares of
common stock.................... 1 5 6
Compensation grants of 220,000
shares of common stock.......... 2 31 33
Repricing of common stock......... 11 (11)
Repurchase of 10,000 shares of
common stock.................... $(1) (1)
Issuance of stock warrants........ 6,000 6,000
Accumulated unpaid preferred
dividends....................... (3,691) (3,691)
Net loss.......................... (25,047) (25,047)
------ -------- --- -------- --------- ---------
BALANCE, DECEMBER 31, 1996........ 72 54,115 (1) -- (57,791) (3,606)
------ -------- --- -------- --------- ---------
Issuance of 97,251 shares of
common stock.................... 1 531 532
Compensation expense on stock
options......................... 644 644
Issuance of stock warrants........ 19,352 19,352
Accumulated dividends on 9% PIK
Preferred Stock................. (941) (941)
Accumulated dividends on Series A
9% PIK Preferred Stock.......... (1,271) (1,271)
Comprehensive income (loss):
Net loss........................ (109,892) (109,892)
Unrealized gain of
available-for-sale
securities................... $ 8,181 8,181
---------
Comprehensive loss.............. (101,711)
------ -------- --- -------- --------- ---------
BALANCE, DECEMBER 31, 1997........ 73 74,642 (1) 8,181 (169,895) (87,000)
------ -------- --- -------- --------- ---------
Issuance of 8,628,861 shares of
common stock.................... 86 137,984 138,070
</TABLE>
F-25
<PAGE> 30
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' DEFICIT
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 -- (CONT.)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL COMMON OTHER ACCUMU-
COMMON PAID-IN STOCK HELD COMPREHENSIVE LATED
STOCK CAPITAL IN TREASURY INCOME DEFICIT TOTAL
------ ---------- ----------- ------------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Costs incurred related to issuance
of stock........................ (10,764) (10,764)
Accumulated dividends on 9% PIK
Preferred Stock................. (114) (114)
Accumulated dividends on Series A
9% PIK Preferred Stock.......... (465) (465)
Conversion of 9% PIK and Series A
9% PIK to 6,130,175 shares of
common stock.................... 61 57,795 57,856
Issuance of 1,544,194 shares of
common stock upon exercise of
warrants and options............ 15 16 31
Compensation expense on stock
options......................... 554 554
Comprehensive income (loss):
Net loss........................ (275,194) (275,194)
Unrealized gain on available --
for -- sale securities....... 3,533 3,533
Realized gain on sale of
marketable securities........ (11,714) (11,714)
---------
Comprehensive loss.............. (283,375)
------ -------- --- -------- --------- ---------
BALANCE, DECEMBER 31, 1998........ $ 235 $260,227 $(1) $ -- $(445,668) $(185,207)
====== ======== === ======== ========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
F-26
<PAGE> 31
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------
1998 1997 1996
--------- --------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................. $(275,194) $(109,892) $(25,047)
Adjustments to reconcile net loss to net cash flows
from operating activities:
Depreciation....................................... 9,317 2,834 558
Amortization....................................... 252 738 1,771
Non-cash interest on debt obligations.............. 29,726 15,179 1,654
Provision for losses on accounts receivable........ 33,964 4,314 30
Stock compensation award expense................... 554 645 33
Gain on sale of marketable securities.............. (11,714) -- --
(Gain)loss on disposal of property and equipment... 298 -- (8,079)
Non-recurring charges.............................. 25,980 -- --
Loss on discontinued operations.................... 52,858 -- --
Changes in:
Accounts receivable............................. (34,949) (25,227) (1,850)
Other assets.................................... (492) (1,179) (226)
Accounts payable................................ 32,597 12,577 4,820
Accrued expenses................................ 2,643 4,002 2,425
--------- --------- --------
Net cash flows from operating activities...... (134,160) (96,009) (23,911)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment................... (29,910) (15,200) (2,259)
Proceeds from sale of marketable securities.......... 11,714 -- --
Purchase of subsidiary, net of cash acquired......... (72,108) -- --
Deposits............................................. (6,280) (959) (495)
Proceeds from sale of property and equipment......... 441 -- --
Proceeds from the sale of assets..................... -- -- 9,533
Purchase of licensing agreement...................... -- (900) --
--------- --------- --------
Net cash flows from investing activities...... (96,143) (17,059) 6,779
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock............................. 138,101 532 6
Issuance of preferred stock.......................... -- 45,209 10,000
Costs incurred related to issuance of stock.......... (10,764) (485) (180)
Repurchase of common stock........................... -- -- (1)
Proceeds from Consent Convertible Notes.............. 10,000 -- 27,644
Proceeds from Senior Notes........................... 10,000 100,002 30,203
</TABLE>
F-27
<PAGE> 32
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONT.)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------
1998 1997 1996
--------- --------- --------
<S> <C> <C> <C>
Debt acquisition costs............................... -- (4,715) (2,920)
Repayment of capital lease obligations and notes
payable............................................ (721) (839) (568)
--------- --------- --------
Net cash flows from financing activities...... 146,616 139,704 64,184
--------- --------- --------
NET (DECREASE) INCREASE IN CASH...................... (83,687) 26,636 47,052
CASH AND CASH EQUIVALENTS -- Beginning of period..... 87,454 60,818 13,766
--------- --------- --------
CASH AND CASH EQUIVALENTS -- End of period........... $ 3,767 $ 87,454 $ 60,818
========= ========= ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Conversion of preferred stock to common stock........ $ 57,856 -- --
========= ========= ========
Declared dividends................................... $ 579 -- --
========= ========= ========
Capital lease obligations incurred................... $ 841 $ 928 $ 592
========= ========= ========
Issuance of stock warrants........................... -- $ 19,352 $ 6,000
========= ========= ========
Dividends paid in kind............................... -- $ 920 --
========= ========= ========
Cash paid for interest............................... $ 173 $ 138 $ 32
========= ========= ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-28
<PAGE> 33
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUBSEQUENT EVENT
On February 18, 1999, (the "Petition Date") USN Communications, Inc. (the
"Company") and certain of its subsidiaries filed voluntary petitions for
reorganization (the "Filing") under Chapter 11 ("Chapter 11") of Title 11 of the
United States Code ("Bankruptcy Code") in the United States Bankruptcy Court for
the District of Delaware (the "Bankruptcy Court"). In Chapter 11, the Company
will continue to manage its affairs and operate its business as a debtor in
possession while it develops a plan of reorganization. As a debtor in possession
in Chapter 11, the Company may not engage in transactions outside of the
ordinary course of business without approval, after notice and hearing, of the
Bankruptcy Court.
As a result of the Filing, the Company is currently in default under all of
its debt agreements in effect prior to the Petition Date. As a result, all
unpaid principal of, and accrued prepetition interest on, such debt became
immediately due and payable. The payment of such debt and accrued but unpaid
prepetition interest is prohibited during the pendency of the Company's Chapter
11 case without the approval of the Bankruptcy Court. The Bankruptcy Court has
authorized the payment, by the Company, of the Company's $15 million aggregate
principal amount of prepetition senior secured notes with a $20 million
debtor-in-possession financing facility.
In accordance with the Bankruptcy Code, the Company can seek court approval
for the rejection of executory contracts, including real property leases. Any
such rejection may give rise to a prepetition unsecured claim for breach of
contract. In connection with the Company's Chapter 11 case, a review is being
undertaken of all the Company's obligations under its executory contracts,
including real property leases.
On April 2, 1999, the Bankruptcy Court authorized the Company to (1) sell
substantially all of the Company's assets, excluding USN Wireless, Inc., to
CoreComm Limited ("CoreComm") for approximately $27 million in cash, warrants to
purchase 350,000 shares of CoreComm common stock and a contingent payment based
on future operating results that caps the total consideration at $85 million,
and (2) sell the capital stock of USN Wireless, Inc. to Unified Signal
Corporation.
The accompanying consolidated financial statements have been prepared on a
going concern basis of accounting and do not reflect any adjustments that might
result should the Company be unable to continue as a going concern. The
Company's recurring losses from operations and the related Chapter 11 filing
raise substantial doubt about its ability to continue as a going concern.
Because the Company has agreed to sell assets and as a result of the
Chapter 11 case, the Company may liquidate or settle liabilities for amounts
other than those reflected in the financial statements. Further, a plan of
reorganization could materially change the amounts currently recorded in the
financial statements. The financial statements do not give effect to any
adjustments to the carrying value of assets, or amounts and classification of
liabilities that might be necessary as a consequence of these matters.
2. ORGANIZATION
USN Communications, Inc. ("USN"), was incorporated under the laws of the
State of Delaware on April 20, 1994 and completed an initial public offering in
February 1998. USN holds controlling investments in several other companies, of
which the active companies include: US Network Corporation, USN Communications
Northeast, Inc. ("USNCN"), USN Communications Midwest, Inc and USN Solutions,
Inc. Its continuing subsidiaries operate in a single business segment, primarily
as a reseller of a broad range of telecommunication services in various cities
in the Midwest and the Northeast regions of the United States.
F-29
<PAGE> 34
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONT.)
3. SUMMARY OF ACCOUNTING POLICIES
A summary of the significant accounting policies applied in the preparation
of the accompanying consolidated financial statements follows:
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those estimates.
Principles of Consolidation -- The accompanying consolidated financial
statements include the accounts of USN Communications, Inc. and its
subsidiaries. Significant intercompany balances and transactions have been
eliminated in consolidation.
Revenue Recognition -- The Company recognizes revenues in the period in
which telephone services are provided. For the services provided in which the
Company has operated as a commission agent only, commission revenues are
recorded at the net commissions earned.
Cash and Cash Equivalents -- Cash and cash equivalents are defined as cash
in banks, time deposits and highly liquid short-term investments with initial
maturities from dates of acquisition of three months or less.
Fair Value of Financial Instruments -- The carrying values of financial
instruments included in current assets and liabilities approximate fair values
due to the short-term maturities of these instruments. At December 31, 1998 and
1997, the fair value of long-term liabilities was approximately $77.5 and $186.3
million, respectively.
Marketable Equity Securities -- All marketable securities are classified as
available-for-sale and are available to support current operations or to take
advantage of other investment opportunities. These securities are stated at
estimated fair value based upon market quotes. Unrealized gains and losses are
computed on the basis of specific identification and are included in Common
Stockholders' Deficit as a component of Comprehensive Income.
Concentration of Credit Risk -- Financial instruments which potentially
subject the Company to concentration of credit risk consist principally of trade
receivables. The Company's customers are concentrated in two specific geographic
regions, the Midwest and the Northeast. No single customer accounted for a
significant amount of the Company's sales in 1998, 1997, or 1996 and there were
no significant accounts receivable from a single customer at December 31, 1998
or 1997. The Company reviews a customer's credit history before extending
credit. The Company establishes an allowance for doubtful accounts based upon
factors surrounding the credit risk of specific customers, historical trends and
other information.
Property and Equipment -- Purchases of property and equipment are carried
at cost. Depreciation is provided on the straight-line basis. Furniture and
equipment are depreciated over five to ten years. Computer hardware and software
are depreciated over three to five years. Leasehold improvements and assets
leased under capital leases are amortized over the shorter of the related lease
term or the estimated useful life of the asset.
Intangible Assets and Deferred Charges -- Debt acquisition costs are
amortized over the life of the related debt. The value of the warrants issued
with the Senior Notes is amortized over the life of those notes. The cost of a
licensing agreement for billing services is being amortized over three years.
Impairment of Long-Lived Assets -- Management reviews long-lived assets and
the related intangible assets for impairment of value whenever events or changes
in circumstances indicate the carrying amount of such assets may not be
recoverable. If the Company determines it is unable to recover the carrying
value of
F-30
<PAGE> 35
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONT.)
the assets, the assets will be written down using an appropriate method. During
1998, management determined that its property and equipment was impaired based
on undiscounted future cash flows. Accordingly, the Company adjusted property
and equipment to fair value resulting in an impairment loss of approximately
$9.2 million, which has been included in Non-recurring Charges.
Stock-Based Compensation -- During 1996, the Company implemented Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). In accordance with the provisions of SFAS No.
123, the Company has elected to recognize compensation under the "intrinsic
value" method prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," which requires the proforma
disclosure of net income and earnings per share as if the fair value method had
been applied.
Earnings per Share Calculations -- On December 31, 1997, the Company
adopted Statement of Financial Accounting Standards No. 128, "Earnings Per
Share", which requires the disclosure of two earnings per common share
computations; basic and diluted. Earnings per common share ("EPS") is computed
by dividing net income or loss by the weighted average number of shares of
common stock (basic) plus common stock equivalents (diluted) outstanding during
the year. As all of the Company's warrants and options are antidilutive, they
have been excluded from the calculation of diluted EPS. Accordingly, basic EPS
is equal to diluted EPS.
Comprehensive Income -- On January 1, 1998, the Company adopted Statement
of Financial Accounting Standards No. 130 "Reporting Comprehensive Income",
which establishes standards for reporting and display of comprehensive income
and its components. Other comprehensive income consists solely of unrealized
gains on available-for-sale securities. The Company has chosen to disclose
comprehensive income in the Statements of Stockholders' Equity for all periods
presented.
Business Segments -- On January 1, 1998, the Company adopted SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information", which
requires reporting segment information consistent with the way management
internally utilizes information to assess performance and allocate resources.
The Company's continuing operations consist of one business segment: competitive
local exchange telecommunication services.
Reclassifications -- Certain prior year amounts have been reclassified to
conform to the current year presentation.
4. ACQUISITION AND DISCONTINUED OPERATIONS
On February 20, 1998, the Company used a portion of the net proceeds from
its initial public offering to acquire all of the outstanding capital stock of
Hatten Communications Holding Company, Inc., a Connecticut corporation ("Hatten
Communications" now known as USN Wireless, Inc.), pursuant to a Stock Purchase
Agreement dated January 7, 1998, for approximately $69.1 million, net of cash
acquired, including the repayment of approximately $14.0 million of existing
indebtedness and the payment of certain fees and expenses. The Company made
additional investments of $3 million in Hatten Communications during 1998.
In November 1998, the Company's Board of Directors approved the hiring of
an investment banking firm to solicit bids for the sale of USN Wireless, Inc.
The USN Wireless, Inc. business has been classified as discontinued operations
in the accompanying financial statements. On April 2, 1999, the Bankruptcy Court
approved the asset sale of USN Wireless, Inc. for approximately $19.25 million,
net of expected disposition costs.
F-31
<PAGE> 36
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONT.)
The net assets and estimated loss on disposal of discontinued operations at
December 31, 1998 are summarized as follows (in thousands):
<TABLE>
<S> <C>
Current assets.............................................. $ 9,558
Fixed assets................................................ 1,634
Goodwill and other intangibles, net of amortization......... 61,484
Current liabilities......................................... (11,682)
Provision for estimated loss on sale of discontinued
operations................................................ (41,744)
--------
Net assets of discontinued operations....................... $ 19,250
========
Estimated loss on sale of discontinued operations........... $ 41,744
Operating losses from measurement date to December 31,
1998...................................................... 2,195
Estimated operating losses from January 1, 1999 to
anticipated disposal date................................. 4,000
--------
Estimated loss on disposal of discontinued operations....... $ 47,939
========
</TABLE>
The loss from discontinued operations through the measurement date is
summarized as follows (in thousands):
<TABLE>
<S> <C>
Revenues.................................................... $33,054
Cost of service............................................. 21,880
Selling, general and administrative......................... 16,077
-------
Operating loss.............................................. (4,903)
Other....................................................... (16)
-------
Net loss.................................................... $(4,919)
=======
</TABLE>
5. RESTRUCTURING
During 1998, the Company completed its restructuring plan to reduce its
headcount by 910 employees. The headcount reduction represented approximately
56% of its workforce. As a result, the Company eliminated its customer
acquisition sales force and consolidated its operations into 11 main facilities
located in cities serving over 80% of the Company's current customers. In
addition, the Company discontinued its telemarketing efforts. In connection with
these headcount reduction programs, a charge of approximately $19.8 million has
been recorded in Non-recurring Charges, comprised of $2.8 million for severance
and $17.0 million for facility closing costs and related fixed asset disposals
and reserves. A restructuring reserve of approximately $3.2 million remains at
December 31, 1998 for costs primarily associated with lease termination.
F-32
<PAGE> 37
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONT.)
6. ACCOUNTS RECEIVABLE
Accounts receivable at December 31 consists of the following (in
thousands):
<TABLE>
<CAPTION>
1998 1997
-------- -------
<S> <C> <C>
Billed..................................................... $ 29,369 $10,790
Unbilled................................................... 13,735 17,664
-------- -------
Gross accounts receivable.................................. 43,104 28,454
Allowance for doubtful accounts............................ (18,202) (4,537)
-------- -------
Net accounts receivable.................................... $ 24,902 $23,917
======== =======
</TABLE>
Unbilled accounts receivable comprises access charges, features and usage
for revenue earned but not yet billed to customers. A majority of the unbilled
accounts receivable at December 31, 1998 and 1997 were billed within 30 and 90
days after year end, respectively.
7. PROPERTY AND EQUIPMENT
Property and equipment at December 31 consist of the following (in
thousands):
<TABLE>
<CAPTION>
1998 1997
-------- -------
<S> <C> <C>
Furniture and equipment.................................... $ 9,365 $ 5,343
Computer hardware.......................................... 13,172 6,710
Computer software.......................................... 8,848 6,311
Leasehold improvements..................................... 5,378 2,098
-------- -------
36,763 20,462
Less accumulated depreciation.............................. (12,587) (3,660)
Less impairment reserve.................................... (9,191) --
-------- -------
Total................................................. $ 14,985 $16,802
======== =======
</TABLE>
8. OTHER ASSETS
Other assets at December 31 consist of the following (in thousands):
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Debt acquisition costs (net of accumulated amortization:
1998 -- $7,539; 1997 -- $2,851)........................... $25,448 $30,136
Deposits.................................................... 8,283 2,003
Licensing agreement (net of accumulated amortization:
$1998 -- $178; 1997 -- $104).............................. 222 796
Other....................................................... 209 467
------- -------
Total..................................................... $34,162 $33,402
======= =======
</TABLE>
F-33
<PAGE> 38
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONT.)
9. ACCRUED EXPENSES
Accrued expenses at December 31 consist of the following (in thousands):
<TABLE>
<CAPTION>
1998 1997
------- ------
<S> <C> <C>
Excise taxes................................................ $ 3,340 $ 111
Restructuring reserves...................................... 3,159 --
Payroll and benefits........................................ 3,151 5,534
Professional services....................................... 1,524 946
Other....................................................... 1,807 588
------- ------
Total..................................................... $12,981 $7,179
======= ======
</TABLE>
10. OPERATING LEASES
The Company leases certain office space and equipment under operating
leases. Future minimum lease commitments under noncancelable operating leases as
of December 31, 1998 are approximately as follows (amounts in thousands):
<TABLE>
<CAPTION>
<S> <C>
1999........................................................ $ 9,106
2000........................................................ 8,645
2001........................................................ 7,622
2002........................................................ 6,140
2003........................................................ 5,282
Thereafter.................................................. 6,240
-------
Total..................................................... $43,035
=======
</TABLE>
Rent expense for the years ended December 31, 1998, 1997 and 1996 was
approximately $9.5 million, $3.9 million and $1.0 million, respectively.
11. PRIVATE PLACEMENT OFFERINGS
14% Senior Notes and 9% Convertible Notes -- In September 1996, the Company
received approximately $55 million in cash, net of commissions paid, in exchange
for 48,500 units consisting of $48.5 million aggregate principal amount at
maturity of 14% Senior Discount Notes ("14% Senior Notes") due 2003 and warrants
to purchase 790,780 shares of Common Stock, and 36,000 units consisting of $36
million aggregate principal amount at maturity of 9% Convertible Subordinated
Notes ("Convertible Notes") due 2004.
The 14% Senior Notes were sold at a unit price, before commissions, of
$622.75 per $1,000 face amount. These notes accrete interest at an annual rate
of 14% from September 30, 1996 to March 31, 2000. Thereafter, the notes bear
interest at an annual rate of 14%, semiannually in arrears in cash.
The Convertible Notes were sold at a unit price, before commissions, of
$767.90 per $1,000 face amount and are convertible into Common Stock at a
conversion price of $10.436 per share. These notes will accrete interest at an
annual rate of 9% from September 30, 1996 to September 30, 1999. Thereafter, the
notes will bear interest at an annual rate of 9%, and will be paid semiannually
in arrears in cash.
F-34
<PAGE> 39
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONT.)
14 5/8% Senior Notes -- In August 1997, the Company received approximately
$96.5 million in cash, net of commissions paid, in exchange for 152,725 units
consisting of $152.7 million aggregate principal amount at maturity of 14 5/8%
Senior Discount Notes due 2004 ("14 5/8% Senior Notes") and warrants to purchase
2,053,900 shares of Common Stock. In connection with this offering, the Company
paid a consent fee to the holders of the outstanding 14% Senior Notes and
Convertible Notes consisting of warrants to purchase 145,160 shares of Common
Stock at an exercise price of $.01 per share. The Company also granted those
holders an option, which was exercised in October 1997, to purchase up to $10.0
million in aggregate proceeds to the Company of convertible notes of the Company
("Consent Convertible Notes") on terms substantially similar to the existing
Convertible Notes. Additionally, the Company granted to holders of the 14%
Senior Notes an option, for a specified period of time, to exchange all of the
14% Senior Notes for 14 5/8% Senior Notes having an accreted value equal to the
accreted value of such 14% Senior Notes at the time of such exchange. A portion
of this option was exercised in March 1998.
The 14 5/8% Senior Notes were sold at a unit price, before commissions, of
$654.78 per $1,000 face amount. These notes accrete interest at an annual rate
of 14 5/8% from August 18, 1997 to August 15, 2000. Thereafter, the notes bear
interest at an annual rate of 14 5/8% payable semiannually in arrears in cash.
In March 1998, the holders of the 14% Senior Notes exchanged $31.5 million
aggregate principal amount at maturity of the Company's 14% Senior Notes for
$33.6 million aggregate principal amount at maturity of the Company's 14 5/8%
Senior Discount Notes due 2004 (the "14 5/8% Senior Notes").
9% Consent Convertible Notes -- In August 1997, in connection with the 1997
private placement offering, the Company issued an option to the holders of the
14% Senior Notes to purchase $13.0 million aggregate principal amount at
maturity of the Company's 9% Consent Convertible Subordinated Discount Notes due
2006 ("Consent Notes") for an aggregate purchase price of $10 million and
convertible into common stock at a conversion price of $10.121 per share based
on accreted value at the time of conversion. Pursuant to the option, which was
exercised by the holders in October 1997, the Consent Notes were sold in January
1998 at a price of $767.90 per $1,000 face amount. These notes accrete interest
at an annual rate of 9%, compounded semiannually, until January 13, 2001.
Thereafter interest will bear interest at an annual rate of 9% payable
semiannually in arrears in cash.
17% Senior Secured Note -- In November 18, 1998, the Company received
approximately $10 million in cash in exchange for the issuance and sale of a $10
million 17% Senior Secured Note ("17% Note") due January 15, 1999. Interest is
payable upon the maturity of the 17% Note. The 17% Note is secured by a first
priority lien on substantially all assets of the Company, including the
Company's accounts receivable and the stock of the Company's directly owned
subsidiaries.
On January 20, 1999, the 17% Note was cancelled in exchange for a
replacement $10.0 million 17% Senior Secured Note due February 15, 1999, and the
Company received an additional $2.5 million in cash in exchange for a new $2.5
million 17% Senior Secured Note due February 15, 1999 (collectively the "New 17%
Notes"). Interest on the New 17% Notes is payable in cash upon maturity. As was
the case with the 17% Note, the New 17% Notes are secured by a first priority
lien on substantially all assets of the Company, including the Company's
accounts receivable and the stock of the Company's directly owned subsidiaries.
On February 8, 1999, the Company received an additional $2.5 million in
cash under the provisions of the New 17% Notes, bringing the total amount due
under the New 17% Notes to $15 million. Also on February 8, 1999, the maturity
date for the New 17% Notes was changed from February 15, 1999 to February 16,
1999.
On February 23, 1999, the New 17% Notes, including accrued interest, were
exchanged for a replacement $16.3 million 14% Class B Senior Secured Note due
June 30, 1999 (the "Class B Notes"). On February 25, 1999, the Company received
$2.0 million in cash in exchange for the issuance and sale of a $2 million 14%
Class A Senior Secured Notes due June 30, 1999 (the "Class A Notes"). Interest
on the Class A Notes and
F-35
<PAGE> 40
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONT.)
Class B Notes is payable upon maturity. The Class A Notes and Class B Notes are
secured by a first priority lien on substantially all assets of the Company,
including the Company's accounts receivable and the stock of the Company's
directly owned subsidiaries.
12. REDEEMABLE PREFERRED STOCK
In August 1997, the Board of Directors authorized the issuance of up to
150,000 shares of $1 par value preferred stock designated as 9% Cumulative
Convertible Pay-In-Kind Preferred Stock, Series A ("Series A 9% Preferred
Stock"). In connection with the private placement offering in August 1997,
described in Note 11, the Company issued 30,209 shares of its Series A 9%
Preferred Stock to certain of its existing stockholders and their affiliates for
an aggregate purchase price of $30.2 million.
In October 1997, the Company issued an additional 15,000 shares of its
Series A 9% Preferred Stock for an aggregate purchase price of $15.0 million.
In February 1998, in conjunction with the initial public offering, all of
the Company's outstanding 9% Preferred Stock and Series A Preferred Stock,
including dividends accrued through the conversion date, were converted to
6,130,175 shares of Common Stock.
13. COMMON STOCK
In February 1998, the Company issued and sold 8,600,000 shares of Common
Stock (of which 600,000 shares were sold pursuant to the exercise of the
underwriters' over-allotment option) in its initial public offering for net
proceeds of approximately $127.0 million. In March 1998, the Company issued and
sold 28,861 additional shares pursuant to the exercise of the underwriters'
over-allotment option for net proceeds of $0.4 million.
In August 1998, the Company adopted a Stockholder Rights Plan pursuant to
which rights were distributed as a dividend at a rate of one Right for each
share of Common Stock held by stockholders of record on August 24, 1998. The
Rights are exercisable 10 days after certain events involving the acquisition of
15% or more of the Company's outstanding common stock or the commencement of a
tender or exchange offer for at least 15% of the common stock, subject to
certain exceptions. Upon the occurrence of such an event, each Right, unless
redeemed by the Company, entitles the holder to receive, upon exercise and
payment of the exercise price, common stock equal to twice the exercise price of
the Right. The initial exercise price of a Right is $50, subject to adjustment.
There are 1,000,000 shares of preferred stock reserved for issuance upon
exercise of the Rights.
14. STOCK WARRANTS
Pursuant to the 14% Senior Notes discussed in Note 11, the Company has
48,450 warrants outstanding at December 31, 1998. Each warrant can be exercised
for 12.69 shares of the Company's Common Stock at an exercise price of $0.01 per
share, expiring September 30, 2003. An additional 14,516 warrants outstanding at
December 31, 1998 can be exercised for 10 shares of the Company's Common Stock
at an exercise price of $0.01 per share, expiring August 15, 2004.
Pursuant to the 14 5/8% Senior Notes discussed in Note 11, the Company has
472,440 warrants outstanding at December 31, 1998. Each warrant can be exercised
for 1.34 shares of the Company's Common Stock at an exercise price of $0.01 per
share. The warrants expire August 15, 2004.
15. STOCK OPTION PLAN
The Company has granted options to acquire shares of Common Stock to
certain officers and other employees under the 1994 Stock Option Plan. These
options generally become exercisable at a rate of 25%
F-36
<PAGE> 41
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONT.)
every six months over a period of two years after the date of grant, although
with respect to certain grants no vesting occurs until twelve months after the
grant date.
In connection with the financing described in Note 11 and the issuance of
the 9% Preferred Stock described in Note 12, the Company granted options to
purchase 319,610 shares of Common Stock at an exercise price of $0.15 per share.
These options were not issued under the 1994 Stock Option Plan, but rather, were
issued pursuant to separate stock option agreements between the Company and the
holders. Upon the conversion of the 9% Preferred Stock to Common Stock in 1998,
253,240 options became exercisable.
In 1998 and 1997, the Board of Directors authorized the grant of options to
purchase 1,248,900 and 993,400 shares, respectively, of Common Stock to
substantially all non-executive officer employees of the Company and 807,500 and
1,137,000 shares, respectively, of Common Stock to the Company's executive
officers and directors. These options have an exercise price ranging from $3.56
to $11.56. Options granted to directors vested 100% on the grant date. One third
of all other options vested on February 9, 1998 or a year after the employee's
hire date, whichever is later, with an additional one-third of the options
vesting on each of the two anniversaries following the initial vesting date.
Stock option transactions are summarized as follows:
<TABLE>
<CAPTION>
PRICE PRICE PRICE
PER PER PER
1998 SHARE 1997 SHARE 1996 SHARE
---------- ----------- --------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at January 1............. 3,245,540 $0.11- 8.80 1,108,990 $0.11-8.80 190,500 $ 0.11
Granted.............................. 1,056,400 3.56-11.56 2,355,400 0.15-8.80 1,033,240 0.11-8.80
Exercised............................ (115,970) 0.15 (37,250) 0.11 (50,000) 0.11
Canceled............................. (1,753,650) 0.15- 8.80 (181,600) 8.80 (64,750) 0.11
---------- --------- ---------
Outstanding at
December 31........................ 2,432,320 0.11-11.56 3,245,540 0.11-8.80 1,108,990 0.11-8.80
---------- --------- ---------
Options exercisable at December
31................................. 1,452,288 0.11-11.56 557,190 0.11-8.80 106,620 0.11-8.80
========== ========= =========
</TABLE>
The following table summarizes information about options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
WTD. AVG. WTD.
REMAINING WTD. AVG. AVG.
RANGE OF NUMBER LIFE OF EXERCISE NUMBER EXERCISE
EXERCISE PRICE OUTSTANDING CONTRACT PRICE EXERCISABLE PRICE
-------------- ----------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$0.11 to $4.80 819,520 7.64 yrs $ 0.15 809,520 $ 0.15
$4.81 to $8.80 1,575,300 5.96 yrs 8.78 605,268 8.80
$8.80 to $11.56 37,500 6.41 yrs 11.56 37,500 11.56
--------- ---------
2,432,320 1,452,288
========= =========
</TABLE>
For proforma information regarding net loss and loss per share, the fair
value for the options awarded in 1998 and 1997 was estimated as of the date of
the grant using the minimum value valuation model with the following weighted
average assumptions for 1998 and 1997, respectively: risk-free interest rates of
5.34% and 6.15%; dividend yields of 0%; and an expected life of the option of
ten years. The weighted average fair value per share of options granted in 1998
and 1997 was $2.12 and $3.64, respectively.
For purposes of proforma disclosures, the estimated fair value of the
options is amortized over the options' vesting period. Therefore, in the year of
adoption and subsequently affected years, the effect of
F-37
<PAGE> 42
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONT.)
applying SFAS No. 123 for providing proforma loss and loss per share are not
likely to be representative of the effects on reported income or loss in future
years.
Had compensation cost for these plans been determined based on the fair
value at the grant dates for awards as prescribed by SFAS No. 123, proforma net
loss to common shareholders (in thousands) and loss per common share for the
years ended December 31, 1998 and 1997 would have been:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Proforma net loss to common stockholders.................... $(278,572) $(114,609)
Proforma net loss per common share -- basic and diluted..... $ (13.14) $ (15.90)
</TABLE>
The effect on the Company's reported net loss, on a proforma basis, was not
material for 1996.
16. EMPLOYEE BENEFIT PLAN
On January 1, 1995, the Company adopted a qualified 401(k) plan covering
all eligible employees in which the Company contributions are discretionary.
Employees are permitted to make annual contributions through salary deductions
up to 15% of their annual salary. The plan can be amended or terminated at any
time by the Board of Directors. The Company made contributions to the plan of
approximately $414,000 in 1998 and made no contributions to the plan in 1997 or
1996.
17. INCOME TAXES
The Company incurred net losses of $275.2 million, $109.9 million and $25.0
in 1998, 1997 and 1996, respectively. Accordingly, no provision for current
federal or state income taxes has been made to the financial statements.
The Company's deferred tax asset components at December 31 comprise (in
thousands):
<TABLE>
<CAPTION>
1998 1997
--------- --------
<S> <C> <C>
Net operating loss carry-forwards........................... $ 129,947 $ 57,977
Accrued liabilities and asset valuation reserves............ 15,349 1,715
Amortization of intangibles................................. 74 146
Subtotal.................................................... 145,370 59,838
Valuation allowance......................................... (145,370) (59,838)
--------- --------
Total..................................................... $ -- $ --
========= ========
</TABLE>
As of December 31, 1998 and 1997, the Company had not recognized deferred
income tax assets related to deductible temporary differences and cumulative net
operating losses. The ability of the Company to fully realize deferred tax
assets in future years is contingent upon its success in generating sufficient
levels of taxable income before the statutory expiration periods for utilizing
such net operating losses lapse. After an assessment of all available evidence,
including historical and projected operating trends, the Company was unable to
conclude that realization of such deferred tax assets in the near future was
more likely than not. Accordingly, a valuation allowance was recorded to offset
the full amount of such assets.
At December 31, 1998, the Company had net operating loss carry-forwards for
income tax purposes of approximately $351.2 million. The ability of the Company
or the Company's subsidiaries, as the case may be, to utilize their net
operating loss carry-forwards to offset future taxable income may be subject to
certain limitations contained in the Internal Revenue Code of 1986, as amended
(the "Code"). These operating
F-38
<PAGE> 43
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONT.)
losses begin to expire in 2009 for Federal income tax purposes. Of the net
operating loss carry-forwards remaining at December 31, 1998, $26.3 million can
be applied only against future taxable income of the Company's subsidiary,
USNCN.
18. COMMITMENTS
In 1995 and 1996, the Company entered into agreements with two
non-affiliated telecommunications companies ("TelCos") to allow the Company to
resell the TelCos' local telephone service in various regional markets. The
agreements have terms of up to ten years and contain minimum purchase
commitments of local access lines, ranging from zero to 150,000 lines. These
commitments are measured by the number of lines in place on the last day of each
12-month period. The agreements allow for ramp-up periods and carryover pools
for shortfalls or excesses before any commitment levels are required to be met.
So long as the Company maintains cumulative net shortfalls lower than
established caps, no payments will be due to the TelCos other than for normal
usage, access and related charges. Even if no lines were sold by the Company,
the earliest required payment for any shortfall amount is in 2000.
In July 1996, the Company entered into an agreement with a third
telecommunications company to allow the Company to resell long-distance
telephone service. The agreement is for a term of 33 months and contains an
annual purchase commitment of $12 million, with a minimum monthly commitment of
$600,000 to qualify for the contract rates. This agreement was amended in 1998
to extend the term to 35 months, increase the revenue commitment for the last 12
months to $24 million and increase the minimum monthly commitment to $1.2
million to qualify for the contract rates. The agreement allows for a ramp-up
period before commitment levels are required to be met.
In 1994, USNCN executed an exclusive agreement with a non-affiliated
telecommunications company ("TelCo One"), whereby TelCo One allows USNCN to
establish a local private network on its infrastructure in which to provide
service to customers. Under this agreement, TelCo One provides network
maintenance and access to telephone switches. The initial term of the agreement
expires in 2004.
Although no measurement date for the purchase commitments has been reached,
the Company would not have met the minimum purchase levels at December 31, 1998.
No provisions have been made for potential losses which may be incurred due to
the Company's inability to fulfill any purchase commitments.
19. LEGAL MATTERS
The Company is defendant in a class action lawsuit alleging the violation
of state and federal securities laws in connection with the Company's initial
public offering and subsequent events. In addition, the Company is a defendant
in various lawsuits arising out of the ordinary course of business, as well as
various collection lawsuits in the period preceding the Filing. All of these
lawsuits have been stayed as a result of applicable provisions of the Bankruptcy
Code by virtue of the Filing.
20. YEAR 2000 (UNAUDITED)
Although the Company is not aware of any material operational issues or
costs associated with preparing its internal systems for the Year 2000, there
can be no assurance that the Company will not experience serious unanticipated
negative consequences and/or material costs caused by undetected errors or
defects in the technology used in its internal systems, which include third
party software and hardware technology.
F-39
<PAGE> 44
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
DEBTOR-IN-POSSESSION
CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31,
1999
----
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ......................................... $ 6,887
Accounts receivable, net .......................................... 15,905
Net assets of discontinued operations held for sale ............... 19,259
Other current assets .............................................. 2,163
---------
Total current assets ........................................... 44,214
Property and equipment, net ......................................... 10,640
Other assets ........................................................ 8,606
---------
Total assets ................................................... $ 63,460
=========
LIABILITIES AND COMMON STOCKHOLDERS' DEFICIT
LIABILITIES NOT SUBJECT TO COMPROMISE
CURRENT LIABILITIES:
Accounts payable .................................................. $ 4,261
Accrued expenses and other current liabilities .................... 1,257
17% Senior Secured Note ........................................... 18,330
---------
Total current liabilities ...................................... 23,848
LIABILITIES SUBJECT TO COMPROMISE
Accounts payable and accrued expenses ............................. 62,275
Capital lease obligations and notes payable ....................... 211,857
---------
Total liabilities subject to compromise......................... 274,132
COMMON STOCKHOLDERS' DEFICIT:
Common stock, $.01 par value, 100,000,000 shares authorized,
23,585,741 shares issued ......................................... 235
Additional paid-in capital ........................................ 260,253
Treasury stock, 10,000 shares ..................................... (1)
Accumulated deficit ............................................... (495,007)
---------
Total common stockholders' deficit ............................. (234,520)
---------
Total liabilities and common stockholders' deficit .................. $ 63,460
=========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
F-40
<PAGE> 45
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
DEBTOR-IN-POSSESSION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1999 1998
---- ----
<S> <C> <C>
NET SERVICE REVENUE .................. $ 24,496 $ 32,421
COST OF SERVICES ..................... 22,458 26,637
------------ ------------
Gross profit ....................... 2,038 5,784
EXPENSES:
Sales and marketing ................ 3,347 24,425
General and administrative ......... 15,822 20,088
------------ ------------
OPERATING LOSS ....................... (17,131) (38,729)
OTHER INCOME (EXPENSE):
Interest income .................... -- 1,568
Interest expense ................... (5,389) (7,062)
Other income (expense) ............. (547) 3
------------ ------------
Other income (expense)-- net ....... (5,936) (5,491)
------------ ------------
NET LOSS BEFORE REORGANIZATION
ITEMS .............................. $ (23,067) $ (44,220)
============ ============
REORGANIZATION ITEMS:
Interest income .................... $ 141 --
Professional fees .................. (1,607) --
Write-off of debt acquisition
costs ............................ (24,806) --
------------ ------------
Total reorganization expense ....... (26,272) --
------------ ------------
NET LOSS ............................. $ (49,339) $ (44,220)
============ ============
PREFERRED DIVIDENDS .................. -- $ 579
============ ============
NET LOSS TO COMMON SHAREHOLDERS--BASIC
AND DILUTED ........................ $ (49,339) $ (44,799)
============ ============
NET LOSS PER COMMON SHARE-- BASIC AND
DILUTED ............................ $ (2.09) $ (3.12)
============ ============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING--BASIC AND DILUTED ..... 23,585,741 14,366,749
============ ============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
F-41
<PAGE> 46
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
DEBTOR-IN-POSSESSION
CONDENSED CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' DEFICIT (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL COMMON ACCUMU-
COMMON PAID-IN STOCK HELD LATED
STOCK CAPITAL IN TREASURY DEFICIT TOTAL
----------- --------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1998 .. 235 260,227 (1) (445,668) (185,207)
Compensation expense on stock
options ................... 26 26
Net loss .................... (49,339) (49,339)
---------- --------- ---------- --------- ---------
BALANCE, MARCH 31, 1999 ..... $ 235 $ 260,253 $ (1) $(495,007) $(234,520)
========== ========= ========== ========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
F-42
<PAGE> 47
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
DEBTOR-IN-POSSESSION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1999 1998
----------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ..................................... $ (49,339) $ (44,220)
Adjustments to reconcile net loss to net
cash flows from operating activities:
Depreciation ............................... 2,880 2,152
Amortization ............................... 50 63
Non-cash interest on debt obligations ...... 5,352 7,017
Provision for losses on accounts
receivable .............................. 1,330 2,442
Stock compensation award expense ........... 26 173
Loss on disposal of property and
equipment ............................... 547 --
Changes in operating assets and liabilities:
Accounts receivable ..................... 7,667 (19,559)
Other assets ............................ 214 (269)
Accounts payable ........................ 3,640 2,868
Accrued expenses ........................ (858) 9,089
Changes in reorganization items:
Reorganization expense .................. 26,272 --
Payments of reorganization costs ........ (1,607) --
--------- ---------
Net cash flows from operating
activities ......................... (3,826) (40,244)
CASH FLOWS FROM INVESTING ACTIVITIES:
Deposits ..................................... 92 (1,390)
Purchase of property and equipment ........... -- (5,763)
Purchase of subsidiary, net of cash
acquired ................................... -- (69,054)
--------- ---------
Net cash flows from investing
activities ......................... 92 (76,207)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Senior Notes ................... 7,000 --
Issuance of common stock ..................... -- 138,068
Costs incurred related to issuance of stock .. -- (10,764)
Proceeds from Consent Convertible Notes ...... -- 10,000
Repayment of capital lease obligations and
notes payable .............................. (146) (144)
--------- ---------
Net cash flows from financing
activities ......................... 6,854 137,160
--------- ---------
NET INCREASE IN CASH ......................... 3,120 20,709
CASH AND CASH EQUIVALENTS -- Beginning of
Period ..................................... 3,767 87,454
--------- ---------
CASH AND CASH EQUIVALENTS -- End of
Period ..................................... $ 6,887 $ 108,163
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Conversion of preferred stock to common
stock ...................................... -- $ 57,856
========= =========
Dividends paid in kind ....................... -- $ 2,095
========= =========
Declared dividends ........................... -- $ 579
========= =========
Capital lease obligations incurred ........... -- $ 288
========= =========
Cash paid for interest ....................... $ 33 $ 45
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
F-43
<PAGE> 48
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
DEBTOR-IN-POSSESSION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Unaudited)
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The unaudited, condensed consolidated financial statements of USN
Communications, Inc. (the "Company") included herein have been prepared in
accordance with generally accepted accounting principles for interim financial
information. The interim financial statements reflect all adjustments,
consisting only of normal recurring adjustments, which are, in the opinion of
management, necessary for a fair presentation of the results for the interim
periods presented. The condensed consolidated financial statements should be
read in conjunction with the audited consolidated financial statements at
December 31, 1998 and the notes thereto. The results of operations for the
interim periods should not be considered indicative of results to be expected
for the full year.
2. CHAPTER 11 PROCEEDINGS
On February 18, 1999, (the "Petition Date") the Company and certain of
its subsidiaries filed voluntary petitions for reorganization (the "Filing")
under Chapter 11 ("Chapter 11") of Title 11 of the United States Code
("Bankruptcy Code") in the United States Bankruptcy Court for the District of
Delaware (the "Bankruptcy Court"). In Chapter 11, the Company has continued to
manage its affairs and operate its business as a debtor in possession while it
develops a plan of reorganization. As a debtor in possession in Chapter 11, the
Company may not engage in transactions outside of the ordinary course of
business without approval, after notices and hearing, of the Bankruptcy Court.
On April 2, 1999, the Bankruptcy Court authorized the Company to (1) sell
substantially all of the Company's assets, excluding USN Wireless, Inc. to
CoreComm Limited ("CoreComm") for approximately $27 million in cash, warrants to
purchase 350,000 shares of CoreComm common stock and a contingent payment based
on future operating results that caps the total consideration at $85 million,
and (2) sell the capital stock of USN Wireless, Inc. The closing of the sale of
assets to CoreComm occurred on May 26, 1999. The Company continues to own the
capital stock of USN Wireless, Inc.
As a result of the Filing, the Company is currently in default under of
all of its debt agreements in effect prior to the Petition Date. As a result,
all unpaid principal of, and accrued prepetition interest on, such debt became
immediately due and payable. The payment of such debt and accrued but unpaid
prepetition interest is prohibited during the pendency of the Company's Chapter
11 case without the approval of the Bankruptcy Court. The Bankruptcy Court has
authorized the payment, by the Company, of the Company's $15 million aggregate
principal amount of prepetition senior secured notes with a $20 million
debtor-in-possession financing facility. The debtor-in-possession financing
facility was discharged with a portion of the proceeds from the sale of assets
to CoreComm.
The accompanying condensed consolidated financial statements have been
prepared on a going concern basis of accounting and do not reflect any
adjustments that might result should the Company be unable to continue as a
going concern, other than the discontinuation of interest expense subsequent to
the filing date of approximately $3.8 million. The Company's recurring
F-44
<PAGE> 49
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
DEBTOR-IN-POSSESSION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Unaudited) (Continued)
losses from operations and the related Chapter 11 filing raise substantial doubt
about its ability to continue as a going concern.
Because the Company sold assets and may sell additional assets, and as a
result of the Chapter 11 case, the Company may liquidate or settle liabilities
for amounts other than those reflected in the financial statements. Further, a
plan of reorganization could materially change the amounts currently recorded
in the financial statements. The financial statements do not give effect to any
adjustments to the carrying value of assets, or amounts and classification of
liabilities that might be necessary as a consequence of these matters.
3. FINANCIAL REPORTING FOR BANKRUPTCY PROCEEDINGS
The American Institute of Certified Public Accountants Statement of
Position 90-7, "Financial Reporting by Entities in Reorganization Under the
Bankruptcy code" ("SOP 90-7"), provides guidance for financial reporting by
entities that have filed petitions with the Bankruptcy Court and expect to
reorganize under Chapter 11 of the Bankruptcy Code.
Under SOP 90-7, the financial statements of an entity in a Chapter 11
reorganization proceeding should distinguish transactions and events that are
directly associated with the reorganization from those of the operations of the
ongoing business as it evolves. Accordingly, SOP 90-7 requires the following
financial reporting/accounting treatments in respect of each of the financial
statements.
Consolidated Balance Sheet
The balance sheet separately classifies pre-petition liabilities
subject to compromise (generally unsecured and undersecured claims) and
post-petition liabilities not subject to compromise (fully secured claims). The
Senior Secured Notes, of which $15.3 million is pre-petition, have been
presented as not subject to compromise (see Note 2). Pre-petition liabilities
are reported on the basis of the expected amount of such allowed claims, as
opposed to the amounts for which those allowed claims may be settled. Under an
approved final plan of reorganization, those claims may be settled at amounts
substantially less than their allowed amounts.
When a liability subject to settlement becomes an allowed claim and that
claim differs from the net carrying amount of the liability, the net carrying
amount is adjusted to the amount of the allowed claim. The resulting gain or
loss is classified as a reorganization item in the Consolidated Statement of
Operations.
Consolidated Statements of Operations
Pursuant to SOP 90-7, revenues and expenses, realized gains and losses,
and provisions for losses resulting from the reorganization of the business are
reported in the Consolidated Statement of Operations separately as
reorganization items. Professional fees are expensed as incurred. Interest
expense is reported only to the extent that it will be paid during the
proceeding or that it is probable that it will be an allowed claim.
Consolidated Statements of Cash Flows
Reorganization items are reported separately within the operating,
investing and financing categories of the Consolidated Statement of Cash Flows.
4. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
1999
(UNAUDITED)
-----------
<S> <C>
Billed .......................... $ 25,041
Unbilled ........................ 8,768
--------
Gross accounts receivable ....... 33,809
Allowance for doubtful accounts . (17,904)
--------
Net accounts receivable ......... $ 15,905
========
</TABLE>
Unbilled accounts receivable comprises access charges, features and usage
for revenue earned but not yet billed to customers. A majority of the unbilled
accounts receivable were billed within 30 days after the March 31, 1999.
5. NET ASSETS OF DISCONTINUED OPERATIONS
The USN Wireless, Inc. business has been classified as discontinued
operations in the accompanying financial statements. On April 2, 1999, the
Bankruptcy Court approved the asset sale of USN Wireless, Inc.
The net assets of discontinued operations are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
MARCH 31,
1999
(UNAUDITED)
-----------
<S> <C>
Current assets ..................................... $ 9,223
Fixed assets ....................................... 1,521
Goodwill and other intangibles, net of
amortization ....................................... 59,681
Current liabilities ................................ (9,422)
Provision for estimated loss on sale of discontinued
operations ....................................... (41,744)
--------
Net assets of discontinued operations .............. $ 19,259
========
</TABLE>
F-45
<PAGE> 50
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
DEBTOR-IN-POSSESSION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Unaudited) (Continued)
6. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
March 31, 1999
(UNAUDITED)
---------------
<S> <C>
Furniture and equipment ..... $ 9,221
Computer hardware ........... 11,476
Computer software ........... 8,504
Leasehold improvements ...... 5,755
--------
34,956
Less accumulated depreciation (15,125)
Less impairment reserve ..... (9,191)
--------
Total ..................... $ 10,640
========
</TABLE>
7. OTHER ASSETS
Other assets consist of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31, 1999
(UNAUDITED)
--------------
<S> <C>
Deposits ................................... $ 8,191
Licensing agreement, net of accumulated
amortization $211 ........................ 189
Other ...................................... 226
-------
Total .................................... $ 8,606
=======
</TABLE>
F-46
<PAGE> 51
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
DEBTOR-IN-POSSESSION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Unaudited) (Continued)
8. NOTES PAYABLE
On November 18, 1998, the Company received approximately $10 million in
cash in exchange for the issuance and sale of a $10 million 17% Senior Secured
Note ("17% Note") due January 15, 1999. Interest was payable upon the maturity
of the 17% Note. The 17% Note was secured by a first priority lien on
substantially all assets of the Company, including the Company's accounts
receivable and the stock of the Company's directly owned subsidiaries.
On January 20, 1999, the 17% Note was cancelled in exchange for a
replacement $10.0 million 17% Senior Secured Note due February 15, 1999, and the
Company received an additional $2.5 million in cash in exchange for a new $2.5
million 17% Senior Secured Note due February 15, 1999 (collectively the "New 17%
Notes"). Interest on the New 17% Notes was payable in cash upon maturity. As was
the case with the 17% Note, the New 17% Notes were secured by a first priority
lien on substantially all assets of the Company, including the Company's
accounts receivable and the stock of the Company's directly owned subsidiaries.
On February 8, 1999, the Company received an additional $2.5 million in
cash under the provisions of the New 17% Notes, bringing the total amount due
under the New 17% Notes to $15 million. Also on February 8, 1999, the maturity
date for the New 17% Notes was changed from February 15, 1999 to February 16,
1999.
On February 23, 1999, the New 17% Notes, including accrued interest, were
exchanged for a replacement $16.3 million 14% Class B Senior Secured Note due
June 30, 1999 (the "Class B Notes"). On February 25, 1999, the Company received
$2.0 million in cash in exchange for the issuance and sale of a $2 million 14%
Class A Senior Secured Notes due June 30, 1999 (the "Class A Notes"). Interest
on the Class A Notes and Class B Notes is payable upon maturity. The Class A
Notes and Class B Notes are secured by a first priority lien on substantially
all assets of the Company, including the Company's accounts receivable and the
stock of the Company's directly owned subsidiaries.
9. LEGAL MATTERS
The Company is defendant in a class action lawsuit alleging the violation
of state and federal securities laws in connection with the Company's initial
public offering and subsequent events. In addition, the Company is a defendant
in various lawsuits arising out of the ordinary course of business, as well as
various collection lawsuits in the period preceding the Filing. All of these
lawsuits have been stayed as a result of applicable provisions of the Bankruptcy
Code by virtue of the Filing.
F-47
<PAGE> 52
CORECOMM LIMITED
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The unaudited pro forma financial information gives effect to (i) the
acquisition of the assets and related liabilities of OCOM Corporation in June
1998, (ii) the acquisition of all of the outstanding capital stock of Digicom,
Inc. in April 1998, (iii) the acquisition of all of the operating assets of
Wireless Outlet in April 1998, (iv) the acquisition in November 1998 of Stratos
Internet Group, Inc., (v) the acquisition of MegsINet in May 1999 and (vi) the
acquisition of certain assets of USN Communications, Inc. ("USN") in May 1999.
The pro forma financial information is based on the historical financial
statements of CoreComm, OCOM, Digicom, Wireless Outlet, Stratos, MegsINet and
USN.
The acquisitions have been accounted for using the purchase method of
accounting. Accordingly, assets acquired and liabilities assumed have been
recorded at their estimated fair value, which are subject to further adjustment
based upon appraisals and other analysis. The contribution of assets initially
acquired by Cellular Communications of Puerto Rico, Inc. ("CCPR") from CCPR to
CoreComm were accounted for at historical cost in a manner consistent with a
transfer of entities under common control which is similar to that used in a
"pooling of interests." CoreComm's historical financial statements include the
results of the contributed companies for all periods owned by CCPR.
The unaudited pro forma condensed consolidated statement of operations
for the three months ended March 31, 1999 and for the year ended December 31,
1998 gives effect to the acquisitions as if they had been consummated on January
1, 1998. The unaudited pro forma condensed consolidated balance sheet as of
March 31, 1999 gives effect to the acquisitions of MegsINet and certain assets
of USN as if they had been consummated on March 31, 1999.
The pro forma adjustments are based upon available information and
assumptions that management believes are reasonable at the time made. Management
believes that any variations from the available information and assumptions
applied will not have a material effect on the pro forma financial statements
presented. The unaudited pro forma condensed consolidated financial statements
do not purport to present the financial position or results of operations of
CoreComm had the acquisitions occurred on the dates specified, nor are they
necessarily indicative of the financial position or results of operations that
may be achieved in the future. The unaudited pro forma condensed consolidated
statements of operations do not reflect any adjustments for synergies that
management expects to realize commencing upon consummation of the proposed
acquisitions. No assurances can be made as to the amount of cost savings or
revenue enhancements, if any, that may be realized.
The unaudited pro forma financial statements should be read in
conjunction with the financial statements and notes thereto of CoreComm and OCOM
(its predecessor) incorporated by reference and the financial statements and
notes thereto of MegsINet and USN appearing elsewhere in this Form 8-K and
incorporated by reference.
F-48
<PAGE> 53
CORECOMM LIMITED
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
CORECOMM MEGSINET USN
HISTORICAL HISTORICAL HISTORICAL ADJUSTMENTS PROFORMA
---------- ---------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C>
Revenues ........................... $ 3,596 $ 1,603 $ 24,496 $ -- $ 29,695
Operating expenses ................. 2,848 2,675 22,458 -- 27,981
Selling, general and administrative
expenses ......................... 5,784 1,174 16,239 -- 23,197
Corporate expenses ................. 2,292 -- -- -- 2,292
Depreciation ....................... 428 727 2,880 4,035
Amortization ....................... 151 -- 50 1,371(B) 1,572
-------- ------- -------- ------- --------
Operating (loss) ................... (7,907) (2,973) (17,131) (1,371) (29,382)
Interest income and other .......... 1,564 -- (547) -- 1,017
Interest expense ................... (14) (560) (5,389) 5,389 (574)
Income tax ......................... (165) -- -- -- (165)
-------- ------- -------- ------- --------
Net income (loss) before
reorganization items.............. $ (6,522) $(3,533) $(23,067) $ 4,018 $(29,104)
======== ======= ======== ======= ========
Number of weighted average shares
outstanding ...................... 13,212 1,407(A) 14,619
======== ======= ========
Basic and diluted net
loss per share ................... $ (0.49) $ (1.99)
======== ========
</TABLE>
F-49
<PAGE> 54
CORECOMM LIMITED
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PREDECESSOR
(OCOM) PROFORMA
JANUARY 1, FOR
1998 ACQUISITIONS
TO MAY COMPLETED PRIOR
CORECOMM 31, OTHER TO DECEMBER 31, MEGSINET USN
HISTORICAL 1998(1) ACQUISITIONS(2) ADJUSTMENTS 1998 HISTORICAL HISTORICAL
---------- ----------- --------------- ----------- --------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues ..................... $ 6,713 $ 1,452 $ 3,334 $ -- $ 11,499 $ 4,172 $ 132,503
Operating expenses ........... 5,584 772 2,025 -- 8,381 4,867 117,957
Selling, general and
administrative
expenses ................... 13,989 3,205 1,077 -- 18,271 2,739 183,200
Non-recurring
charges .................... -- -- -- -- -- -- 28,987
Compensation charge
from the issuance
of stock options ........... 4,586 -- -- (4,586)(C) -- -- --
Depreciation ................. 749 255 133 -- 1,137 1,082 9,317
Amortization ................. 231 2 -- 195(B) 428 -- 252
-------- ------- ------- ------- -------- ------- ---------
Operating income
(loss) ..................... (18,426) (2,782) 99 4,391 (16,718) (4,516) (207,210)
Interest income and
other ...................... 2,632 -- -- -- 2,632 -- 14,973
Interest expense ............. (21) -- -- -- (21) (659) (30,099)
Income tax ................... (440) -- -- -- (440) -- --
-------- ------- ------- ------- -------- ------- ---------
Net income (loss)
from continuing
operations ................. $(16,255) $(2,782) $ 99 $ 4,391 $(14,547) $(5,175) $(222,336)
======== ======= ======= ======= ======== ======= =========
Number of weighted
average shares
outstanding ................ 13,190
========
Basic and diluted net
loss per share ............. $ (1.23)
========
</TABLE>
<TABLE>
<CAPTION>
ADJUSTMENTS PROFORMA
----------- --------
<S> <C> <C>
Revenues ..................... $ -- $ 148,174
Operating expenses ........... -- 131,205
Selling, general and
administrative
expenses ................... -- 204,210
Non-recurring
charges .................... -- 28,987
Compensation charge
from the issuance
of stock options ........... -- --
Depreciation ................. 11,536
Amortization ................. 5,485 (B) 6,165
-------- ---------
Operating (loss) ............. (5,485) (233,929)
Interest income and
other ...................... -- 17,605
Interest expense ............. 30,099 (680)
Income tax ................... -- (440)
-------- ---------
Net income (loss)
from continuing
operations ................. $ 24,614 $(217,444)
======== =========
Number of weighted
average shares
outstanding ................ 1,407(A) 14,597
======== =========
Basic and diluted net
loss per share ............. $ (14.90)
=========
</TABLE>
- ----------
(1) CoreComm's predecessor for the period from January 1, 1998 to May 31,
1998.
(2) For the periods from January 1, 1998 to date of acquisition.
F-50
<PAGE> 55
CORECOMM LIMITED
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
MARCH 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
CORECOMM MEGSINET USN
HISTORICAL HISTORICAL HISTORICAL ADJUSTMENTS PROFORMA
---------- ---------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents ......... $ 37,838 $ 3,382 $ 6,887 $ (48,107)(D) $ --
Marketable securities ............. 87,471 (6,031)(D) 81,440
Net assets of discontinued
operations held for sale ........ 19,259 (19,259)(E)
Accounts receivable, net and
other ........................... 5,759 1,594 18,068 25,421
-------- -------- --------- --------- --------
Total Current Assets ............. 131,068 4,976 44,214 (73,397) 106,861
Fixed assets, net ................. 5,282 45,518 10,640 61,440
LMDS license costs ................ 25,366 25,366
Goodwill, net ..................... 3,916 54,852(A) 58,768
Other, net ........................ 5,440 8,606 (7,717)(D)(E) 6,329
-------- -------- --------- --------- --------
$171,072 $ 50,494 $ 63,460 $ (26,262) $258,764
======== ======== ========= ========= ========
Accounts payable and accrued
expenses ........................ $ 6,667 $ 3,151 $ 5,518 $ (5,518)(E) $ 9,818
Equipment Payable ................. 25,757 25,757
17% senior secured note ........... 18,330 (18,330)(E)
Current portion of note payable and
capital lease obligations ....... 170 8,745 8,915
Other ............................. 466 935 1,401
------- -------- --------- --------- --------
Total Current
Liabilities .................... 7,303 38,588 23,848 (23,848) 45,891
Liabilities subject to compromise.. 274,132 (274,132)(E)
Non-current liabilities ........... 456 12,577 (2,500)(D) 10,533
Shareholders' equity (deficit) .... 163,313 (671) (234,520) 274,218(A)(E) 202,340
-------- -------- --------- --------- --------
$171,072 $ 50,494 $ 63,460 $ (26,262) $258,764
======== ======== ========= ========= ========
</TABLE>
F-51
<PAGE> 56
CORECOMM LIMITED
PRO FORMA ADJUSTMENTS (UNAUDITED)
<TABLE>
<S> <C>
A.(1) Purchase price of MegsINet:
CoreComm shares issued to MegsINet shareholders....................... 1,407,000
Approximate value of CoreComm stock based on market
price around date of announcement......................... $ 21.375
-------------
30,075,000
Value of MegsINet stock options converted to CoreComm
stock options................................................. 4,052,000
Cash portion of purchase price (including fees of
$500,000)..................................................... 17,251,000
-------------
Total purchase price.................................................. 51,378,000
MegsINet shareholders' deficiency at March 31, 1999................... 671,000
-------------
Excess of purchase price over net tangible assets
acquired...................................................... $ 52,049,000
=============
A.(2) Purchase price of USN(1)
Cash portion of purchase price: (including fees of
$1,500,000)................................................... $ 26,800,000
Value of CoreComm stock warrants...................................... 4,900,000
-------------
Total purchase price 31,700,000
Assets acquired, including receivables, fixed assets
and other assets at March 31, 1999............................ 28,897,000
-------------
Excess of purchase price over net tangible assets
acquired ..................................................... $ 2,803,000
=============
A.(3) Excess of purchase price over tangible net assets
acquired:
MegsINet.............................................................. $ 52,049,000
USN................................................................... 2,803,000
-------------
Total......................................................... $ 54,852,000
=============
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31,1998 MARCH 31, 1999
---------------- --------------
<S> <C> <C>
B. To record the amortization of intangibles(2)
Amortization of intangibles over 10 years:
For the acquisitions completed prior to December 31, 1998 (one
year of amortization less the historical amount recorded) $ 195,000 $ --
============= ===========
For the MegsINet and USN acquisitions ......................... $ 5,485,000 $ 1,371,000
============= ===========
C. To adjust for compensation recorded in connection with the spin
off of CoreComm to the shareholders of CCPR ............. $ (4,586,000) $ --
============= ===========
D. Cash portion of purchase for MegsINet ......................... $ 17,251,000
Cash portion of purchase price for USN ........................ 26,800,000
To record payment of certain MegsINet liabilities ............. 2,500,000
To record payment of certain USN deposits ..................... 700,000
Cash balance of USN not acquired .............................. 6,887,000
Shortfall in cash adjusted in marketable securities............ (6,031,000)
-------------
Net adjustment to Pro Forma cash .............................. $ 48,107,000
=============
E. Assets and liabilities of USN not acquired:
Assets
Net assets of discontinued operations held for sale ........... $ 19,259,000
Other, net .................................................... 8,417,000
Cash .......................................................... 6,887,000
Liabilities
Accounts payable and accrued expenses ......................... 5,518,000
17% Senior Secured Note ....................................... 18,330,000
Liabilities subject to compromise ............................. 274,132,000
-------------
Net liabilities not acquired .................................. 263,417,000
Stockholders deficit of USN ................................... (234,520,000)
-------------
Net assets acquired ........................................... $ 28,897,000
=============
</TABLE>
- ----------
(1) The purchase price for certain assets of USN consists of an upfront
payment of approximately $25.3 million in cash, warrants to purchase
an aggregate of 350,000 shares of CoreComm Common Stock, and a
contingency payment based on future operating results, that caps the
total cash consideration at $85 million.
(2) The excess of the purchase price over the net tangible assets acquired
is being allocated to intangible assets. The intangible assets arising
from the purchase include customer lists and goodwill. The amount of
each individual intangible is not currently determinable. The amounts
of each intangible will be determined based on appraisals and other
analyses. The amortization period for each may vary, although it is
assumed in the Pro Forma Adjustment that 10 years is a representative
blended amortization period.
F-52
<PAGE> 57
Exhibit Index
<TABLE>
<S> <C>
Exhibit
No.
- -------
23.1 Consent of Ernst & Young LLP
23.2 Consent of KPMG LLP
23.3 Consent of Deloitte & Touche LLP
99.1 Press release, issued May 26, 1999*
</TABLE>
* Previously filed
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-75027) pertaining to the CoreComm Limited 1998 Stock Option
Plan of our report dated April 13, 1999, with respect to the consolidated
financial statements of USN Communications, Inc. included in this Current
Report (Form 8-K/A).
/s/ Ernst & Young LLP
Chicago, Illinois
July 6, 1999
<PAGE> 1
Exhibit 23.2
Independent Auditors' Consent
The Board of Directors
Corecomm Limited:
We consent to the incorporation by reference in the registration statement (No.
333-75027) on Form S-8 of Corecomm Limited of our report dated February 15,
1999, with respect to the consolidated balance sheets of MegsINet, Inc. and
subsidiary as of December 31, 1998, and 1997, and the related consolidated
statements of operations, stockholders' deficit, and cash flows for the year
ended December 31, 1998, which report appears in the Form 8-K/A of Corecomm
Limited.
KPMG LLP
St. Louis, Missouri
July 7, 1999
<PAGE> 1
Exhibit 23.3
INDEPENDENT AUDITORS' CONSENT
To the Board of Directors and Stockholders of USN Communications, Inc.:
We consent to the incorporation by reference in Registration Statement No.
333-75027 of CoreComm Limited on Form S-8 of our report dated March 9, 1998,
relating to the consolidated financial statements of USN Communications, Inc.
and subsidiaries for the years ended December 31, 1997 and 1996, appearing in
this Form 8-K/A of CoreComm Limited.
Deloitte & Touche LLP
Chicago, Illinois
July 7, 1999
