<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-24521
CORECOMM LIMITED
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Bermuda Not Applicable
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Cedar House Secretary CoreComm Limited
41 Cedar Avenue 110 East 59th Street
Hamilton, HM 12, Bermuda New York, NY 10022
(441) 295-2244 (212) 906-8485
(Address, including zip code, and (Name, address, including zip code,
telephone number, including area code and telephone number, including area code
of Registrant's principal executive offices) of agent for service)
</TABLE>
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ______
The number of shares outstanding of the issuer's common stock as of June 30,
1999 was 16,146,778.
<PAGE> 2
CoreComm Limited and Subsidiaries
Index
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
<S> <C> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
June 30, 1999 and December 31, 1998 2
Condensed Consolidated Statements of Operations -
Three and six months ended June 30, 1999, for the
period from April 1, 1998 (date operations
commenced) to June 30, 1998 and for the period
from January 1, 1998 to May 31, 1998 3
Condensed Consolidated Statement of Shareholders' Equity -
Six months ended June 30, 1999 4
Condensed Consolidated Statements of Cash Flows -- Six months ended
June 30, 1999, for the
period from April 1, 1998 (date operations
commenced) to June 30, 1998 and for the period
from January 1, 1998 to May 31, 1998 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 12
Item 3. Quantitative and Qualitative Disclosure about Market Risk 19
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 21
</TABLE>
<PAGE> 3
CoreComm Limited and Subsidiaries
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CoreComm Limited and Subsidiaries
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------- -------------
(Unaudited) (See Note)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 30,663,000 $ 26,161,000
Marketable securities 45,482,000 110,718,000
Accounts receivable-trade, less allowance for doubtful
accounts of $23,683,000 (1999) and $742,000 (1998) 13,870,000 1,125,000
Due from affiliates 5,472,000 1,954,000
Other 3,638,000 669,000
------------- -------------
Total current assets 99,125,000 140,627,000
Fixed assets, net 68,570,000 3,582,000
Goodwill, net of accumulated amortization of
$1,379,000 (1999) and $230,000 (1998) 75,837,000 4,028,000
LMDS license costs 25,366,000 25,366,000
Other, net of accumulated amortization of
$94,000 (1999) and $1,000 (1998) 2,307,000 2,923,000
------------- -------------
$ 271,205,000 $ 176,526,000
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 10,569,000 $ 1,937,000
Accrued expenses 12,154,000 4,247,000
Due to affiliate 106,000 --
Equipment payable 25,991,000 --
Current portion of notes payable and
capital lease obligations 8,552,000 133,000
Deferred revenue 1,370,000 411,000
------------- -------------
Total current liabilities 58,742,000 6,728,000
Notes payable 6,970,000 283,000
Capital lease obligations 4,425,000 218,000
Commitments and contingent liabilities
Shareholders' equity:
Series preferred stock - $.01 par value, authorized
1,000,000 shares; issued and outstanding none -- --
Common stock - $.01 par value; authorized 75,000,000 shares; issued
and outstanding 16,147,000 (1999)
and 13,199,000 (1998) shares 161,000 132,000
Additional paid-in capital 239,738,000 185,420,000
(Deficit) (38,831,000) (16,255,000)
------------- -------------
201,068,000 169,297,000
------------- -------------
$ 271,205,000 $ 176,526,000
============= =============
</TABLE>
Note: The balance sheet at December 31, 1998 has been derived from the audited
financial statements at that date.
See accompanying notes.
2
<PAGE> 4
CoreComm Limited and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
For the Period
from April 1, The Predecessor
Three 1998 (date (OCOM)
Months operations Six Months For the Period
Ended commenced) to Ended from January 1,
June 30, June 30, June 30, 1998 to May 31,
1999 1998 1999 1998
------------ ------------ ------------ ----------------
<S> <C> <C> <C> <C>
REVENUES $ 12,436,000 $ 1,261,000 $ 16,032,000 $ 1,452,000
COSTS AND EXPENSES
Operating 11,302,000 1,067,000 14,150,000 772,000
Selling, general and administrative 13,736,000 1,417,000 19,520,000 3,205,000
Corporate 1,851,000 -- 4,143,000 --
Depreciation 1,282,000 97,000 1,710,000 255,000
Amortization 1,021,000 61,000 1,172,000 2,000
------------ ------------ ------------ ------------
29,192,000 2,642,000 40,695,000 4,234,000
------------ ------------ ------------ ------------
Operating (loss) (16,756,000) (1,381,000) (24,663,000) (2,782,000)
OTHER INCOME (EXPENSE)
Interest income and other, net 1,306,000 -- 2,870,000 --
Interest expense (204,000) -- (218,000) --
------------ ------------ ------------ ------------
(Loss) before income tax provision (15,654,000) (1,381,000) (22,011,000) (2,782,000)
Income tax provision (400,000) -- (565,000) --
------------ ------------ ------------ ------------
Net (loss) $(16,054,000) $ (1,381,000) $(22,576,000) $ (2,782,000)
============ ============ ============ ============
Basic and diluted net (loss) per
share $ (1.15) $ (.10) $ (1.66) $ (.21)
============ ============ ============ ============
Weighted average shares 14,012,000 13,184,000 13,614,000 13,184,000
============ ============ ============ ============
</TABLE>
See accompanying notes.
3
<PAGE> 5
CoreComm Limited and Subsidiaries
Condensed Consolidated Statement of Shareholders' Equity
(Unaudited)
<TABLE>
<CAPTION>
Common Stock Additional
------------------------ Paid-In
Shares Par Capital (Deficit)
---------- -------- ------------ ------------
<S> <C> <C> <C> <C>
Balance, December 31, 1998 13,199,000 $132,000 $185,420,000 $(16,255,000)
Exercise of stock options 245,000 2,000 2,109,000
Exercise of warrants 1,296,000 13,000 9,020,000
Common stock issued for acquisition 1,407,000 14,000 30,062,000
Stock options issued for acquisition 4,027,000
Warrants issued for acquisition 9,100,000
Net (loss) for the six months ended
June 30, 1999 (22,576,000)
---------- -------- ------------ ------------
Balance, June 30, 1999 16,147,000 $161,000 $239,738,000 $(38,831,000)
========== ======== ============ ============
</TABLE>
See accompanying notes.
4
<PAGE> 6
CoreComm Limited and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
The
For the period Predecessor
from April 1, (OCOM)
1998 (date For the Period
operations from January
Six Months Ended commenced) 1, 1998 to
June 30, to June 30, May 31,
1999 1998 1998
------------- ------------ -----------
<S> <C> <C> <C>
Net cash (used in) operating activities $ (18,468,000) $ (417,000) $(3,638,000)
INVESTING ACTIVITIES
Purchase of fixed assets (7,255,000) (232,000) (623,000)
Acquisitions, net of cash acquired (47,082,000) -- --
Purchase of marketable securities (56,856,000) -- --
Proceeds from sale of marketable securities 123,713,000 -- --
------------- ------------ -----------
Net cash provided by (used in) investing activities 12,520,000 (232,000) (623,000)
FINANCING ACTIVITIES
Capital contributions -- 850,000 4,261,000
Principal payments (443,000) -- --
Principal payments of capital lease obligations (251,000) -- --
Proceeds from exercise of stock options and warrants 11,144,000 -- --
------------- ------------ -----------
Net cash provided by financing activities 10,450,000 850,000 4,261,000
------------- ------------ -----------
Increase in cash and cash equivalents 4,502,000 201,000 --
Cash and cash equivalents at beginning of period 26,161,000 -- --
------------- ------------ -----------
Cash and cash equivalents at end of period $ 30,663,000 $ 201,000 $ --
============= ============ ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest $ 122,000 $ -- $ --
Income taxes paid 919,000 -- --
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES
Capital contributions of non-cash net assets $ -- $ 29,059,000 $ --
Liabilities incurred to acquire fixed assets 3,089,000 -- --
Common stock, stock options and warrants issued
for acquisitions 43,203,000 -- --
</TABLE>
See accompanying notes.
5
<PAGE> 7
Corecomm Limited and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and six months ended June 30,
1999 are not necessarily indicative of the results that may be expected for the
year ending December 31, 1999. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's annual report on Form 10-K for the year ended December 31, 1998.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," which is required to be adopted in fiscal years
beginning after June 15, 2000. Management does not anticipate that the adoption
of this standard will have a significant effect on earnings or the financial
position of the Company.
The shares issuable upon the exercise of stock options and warrants are excluded
from the calculation of net (loss) per share as their effect would be
antidilutive.
NOTE 2. ORGANIZATION AND BUSINESS
CoreComm Limited (the "Company"), formerly a wholly-owned subsidiary of Cellular
Communications of Puerto Rico, Inc. ("CCPR"), was formed in March 1998
(operations commenced in April 1998) in order to succeed to the businesses and
assets that were operated by OCOM Corporation and as an appropriate vehicle to
pursue new telecommunications opportunities outside of Puerto Rico and the U.S.
Virgin Islands. On June 1, 1998, CCPR acquired certain operating assets and
related liabilities from OCOM Corporation Telecoms Division ("OCOM"). OCOM is
the predecessor business to the Company. In September 1998, CCPR made a cash
contribution to the Company of $150,000,000 and distributed 100% of the
outstanding shares of the Company on a one-for-one basis to CCPR's shareholders.
6
<PAGE> 8
Corecomm Limited and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
NOTE 3. ACQUISITIONS
In May 1999, the Company acquired 100% of the stock of MegsINet Inc., a national
Internet service provider ("ISP") with a national Asynchronous Transfer Mode
network and local telecommunications facilities in Chicago for a total
consideration of $16.8 million in cash and 1.4 million shares of the Company's
common stock. In addition, the Company exchanged MegsINet stock options for
options to purchase 197,000 shares of the Company's common stock, repaid $2.0
million of MegsINet debt and incurred acquisition related costs of $1.2 million.
The Company's common stock was valued at $30.1 million, the fair value on the
date prior to the announcement. The Company's stock options were valued at $4.0
million using the Black-Scholes option pricing model.
Also in May 1999, the Company acquired the wireline assets of USN
Communications, Inc., which was a competitive local exchange carrier ("CLEC")
that operated on a resale basis, for a cash payment of $26.4 million, warrants
to purchase 250,000 shares of the Company's common stock at a price of $30 per
share and 100,000 shares at a price of $50 per share and a potential contingent
cash payment to be paid in July 2000 which is capped at $58.6 million. The
contingent payment is payable only if the USN assets meet or exceed operating
performance thresholds. The warrants were valued at $9.1 million based on an
appraisal as of the date of issuance. In addition, the Company incurred
acquisition related costs of $1.0 million.
These acquisitions have been accounted for as purchases, and accordingly, the
net assets and results of operations of the acquired businesses have been
included in the consolidated financial statements from the dates of acquisition.
The aggregate purchase price of $90.6 million exceeded the estimated fair value
of the net tangible assets acquired by $72.9 million, which is included in
goodwill. Under the purchase method of accounting, the purchase price is
allocated to the assets acquired and liabilities assumed based on the estimated
fair values at acquisition. However, changes to the allocation of the purchase
price are expected as valuations or appraisals of assets and liabilities are
completed. Although the Company cannot ascertain what the changes will be at
this time, such changes are not expected to be significant.
In April and June 1998, CCPR acquired the stock of Digicom, Inc. and certain
operating assets and related liabilities of JeffRand Corp. (known as the
Wireless Outlet) and OCOM Corporation. CCPR contributed these businesses to the
Company. These acquisitions were accounted for as purchases by CCPR, and,
accordingly, the net assets and results of operations of the acquired businesses
have been included in the consolidated financial statements from the dates of
acquisition. The contribution of the assets from CCPR to the Company was
accounted for at historical cost in a manner consistent with a transfer of
entities under common control which is similar to that used in a "pooling of
interests". The Company's financial statements include the results of the
contributed companies for all periods owned by CCPR. In November 1998, a
wholly-owned subsidiary of the Company acquired substantially all of the assets
and certain liabilities of Stratos Internet Group, Inc. ("Stratos"), an ISP in
the Cleveland-Akron, Ohio area. This acquisition has been accounted for as a
purchase, and, accordingly, the net assets and results of operations of Stratos
have been included in the consolidated financial statements from the date of
acquisition.
7
<PAGE> 9
Corecomm Limited and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
NOTE 3. ACQUISITIONS - CONTINUED
The pro forma unaudited consolidated results of operations for the six months
ended June 30, 1999 and 1998 assuming consummation of the acquisitions and
receipt of the capital contributions from CCPR as of January 1, 1998 are as
follows. The pro forma net (loss) and net (loss) per share do not give effect to
interest income that may have been earned had the $150,000,000 cash capital
contribution from CCPR been made on January 1, 1998.
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1999 1998
---- ----
<S> <C> <C>
Total revenue $ 55,736,000 $ 72,272,000
Net (loss) (58,279,000) (86,117,000)
Basic and diluted net (loss) per share (3.91) (5.90)
</TABLE>
A significant component of the pro forma results is associated with the
acquisition of certain assets of USN. Although USN quickly developed a large
customer list and revenue base in 1997 and 1998, it had difficulties under its
previous management providing services, including billing, customer care and
other operational areas, and filed for bankruptcy in February 1999. Since the
acquisition, we have been focusing on improving the operations of USN. We do not
intend to actively sell additional lines through USN until we are satisfied with
the quality of the USN operations. Consequently, consistent with our due
diligence, transaction structure and purchase price, we expect that revenues
associated with USN assets will decline significantly over the next several
months as customers continue to leave or "churn" off the service.
NOTE 4. FIXED ASSETS
Fixed assets consist of:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------ -----------
(unaudited)
<S> <C> <C>
Operating equipment $ 44,825,000 $ 720,000
Computer hardware and software 10,488,000 2,450,000
Other equipment 6,402,000 987,000
Construction in progress 9,118,000 5,000
------------ -----------
70,833,000 4,162,000
Accumulated depreciation (2,263,000) (580,000)
------------ -----------
$ 68,570,000 $ 3,582,000
============ ===========
</TABLE>
8
<PAGE> 10
Corecomm Limited and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
NOTE 5. ACCRUED EXPENSES
Accrued expenses consist of:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
----------- ----------
(unaudited)
<S> <C> <C>
Payroll and related $ 3,248,000 $1,263,000
Professional fees 925,000 527,000
Taxes, including income taxes 2,826,000 1,246,000
Toll and interconnect 840,000 --
Accrued equipment purchases 1,733,000 --
Other 2,582,000 1,211,000
----------- ----------
$12,154,000 $4,247,000
=========== ==========
</TABLE>
NOTE 6. EQUIPMENT PAYABLE
Equipment payable represents amounts due for equipment which has been received
by MegsINet, but which has not yet been installed. Upon installation, MegsINet
will enter into a capital lease under an arrangement with Ascend Communications,
Inc., ("Ascend"). In 1998, MegsINet entered into an agreement with Ascend to
lease up to $16 million in operating equipment under a capital lease agreement.
At June 30, 1999, MegsINet was obligated under capital leases with Ascend
related to this agreement totaling approximately $4.2 million and had received
approximately $26.0 million in equipment for which no formal lease agreement had
been signed. As no lease agreement for this equipment has been signed, the
entire balance has been classified as current.
NOTE 7. LEASES
The Company has capital leases for certain of its operating equipment. Future
minimum lease payments under these capital leases as of June 30, 1999 are:
<TABLE>
<S> <C>
July 1 to December 31, 1999 $2,103,000
Year ending December 31:
2000 3,938,000
2001 2,716,000
2002 200,000
2003 19,000
----------
Total minimum lease payments 8,976,000
Less amount representing interest (at rates
ranging from 8.5% to 26.44%) (1,163,000)
Present value of net minimum ----------
capital lease payments 7,813,000
Current portion (3,388,000)
----------
$4,425,000
==========
</TABLE>
9
<PAGE> 11
Corecomm Limited and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
NOTE 8. NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
----------- --------
(unaudited)
<S> <C> <C>
Borrowing under Ascend working capital promissory
note, interest at 8.5% $ 3,849,000 $ --
Note payable to Cisco for equipment,
interest at 12.75% 7,945,000 --
Other 340,000 363,000
----------- --------
12,134,000 363,000
Less current portion 5,164,000 80,000
----------- --------
$ 6,970,000 $283,000
=========== ========
</TABLE>
MegsINet originally borrowed $4 million from Ascend under the working capital
promissory note dated August 1998. MegsINet is required to make monthly
principal and interest payments of $148,000 through January 2002. The Company
has issued a warrant to Ascend to purchase approximately 13,000 shares of the
Company's common stock at $30.95 per share in connection with the promissory
note. The warrant expires in August 2008.
In 1998, MegsINet entered into an agreement with Cisco Systems Capital
Corporation ("Cisco"), whereby MegsINet can purchase up to $16 million in
operating equipment under a promissory note. MegsINet has borrowed $7,945,000 as
of June 30, 1999. MegsINet is required to make monthly principal and interest
payments of $320,000 beginning in July 1999 through September 2001. The Company
has guaranteed the obligations of MegsINet under the promissory note.
NOTE 9. RELATED PARTY TRANSACTIONS
Some of the officers and directors of the Company are also officers or directors
of NTL Incorporated ("NTL"). NTL provides the Company with management,
financial, legal and technical services, access to office space and equipment
and use of supplies. Amounts charged to the Company by NTL consist of salaries
and direct costs allocated to the Company where identifiable, and a percentage
of the portion of NTL's corporate overhead which cannot be specifically
allocated to NTL (which is agreed upon by the Boards of Directors of NTL and the
Company). NTL's charges to the Company commenced after the spin-off from CCPR in
September 1998. It is not practicable to determine the amounts of these expenses
that would have been incurred had the Company operated as an unaffiliated
entity. In our opinion, this allocation method is reasonable. For the six months
ended June 30, 1999, NTL charged the Company $817,000 which is included in
corporate expenses.
10
<PAGE> 12
Corecomm Limited and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
NOTE 9. RELATED PARTY TRANSACTIONS (CONTINUED)
OCOM provided, and now a subsidiary of the Company provides, billing and
software development services to subsidiaries of CCPR and subsidiaries of NTL.
Certain officers and directors of the Company are officers and directors of
CCPR. The Company charges an amount in excess of its costs to provide these
services. General and administrative expenses were reduced by $346,000 and
$29,000 in the six months ended June 30, 1999 and in the period from April 1,
1998 (date operations commenced) to June 30, 1998, respectively, as a result of
these charges.
At June 30, 1999, due from affiliates included $5,472,000 due from NTL. At
December 31, 1998, due from affiliates included $128,000 due from CCPR and
$1,826,000 due from NTL. At June 30, 1999, due to affiliate included $106,000
due to CCPR.
NOTE 10. COMMITMENTS AND CONTINGENT LIABILITIES
As of June 30, 1999, the Company had purchase commitments of $27,000,000
outstanding.
The Company is involved in various disputes, arising in the ordinary course of
its business, which may result in pending or threatened litigation. None of
these matters are expected to have a material adverse effect on the Company's
financial position, results of operations or cash flows.
11
<PAGE> 13
Corecomm Limited and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
The following discussion of the results of operations of the Company includes a
comparison to the results of operations of OCOM, the predecessor business to the
Company. The Company was formed in March 1998 and did not have any prior
operations. Since OCOM represented a significant portion of the Company's
business until May 1999, the comparison with OCOM's historical operating results
gives the reader a basis to evaluate the Company's present business. However,
the historical results of OCOM are not indicative of the Company's future
results. OCOM's primary historical business was its cellular long distance
resale business that has been and currently is a highly competitive segment of
the long distance telephone market. OCOM and now the Company have diversified
into other telecommunications businesses.
As a result of the completion of the acquisitions of 100% of the stock of
MegsINet Inc. and the wireline assets of USN Communications, Inc. in May 1999,
the Company consolidated the results of operations of these businesses from the
dates of acquisition. The results of these businesses are not included in the
1998 results.
Three Months Ended June 30, 1999 and the Period from April 1, 1998 (date
- ------------------------------------------------------------------------
operations commenced) to June 30, 1998
- --------------------------------------
The increase in revenues to $12,436,000 from $1,261,000 is primarily due to
acquisitions in 1999, which accounted for $7,986,000 of the increase. The
remainder of the increase is primarily due to an increase in CLEC and ISP
revenues due to an increase in customers.
Operating costs increased to $11,302,000 from $1,067,000 primarily due to
acquisitions in 1999, which accounted for $7,761,000 of the increase. The
remainder of the increase is primarily due to the increase in revenues.
Operating costs as a percentage of revenues increased to 91% from 85%. The
increase in percentage terms is the result of an increase in the fixed component
of operating expenses due to the migration toward a facilities-based
infrastructure through new leases in 1999 and the MegsINet acquisition in May
1999. Operating costs as a percentage of revenues is expected to remain higher
than 1998 levels until customer and revenue growth exceeds the increases in
facilities-based infrastructure costs.
Selling, general and administrative expenses increased to $13,736,000 from
$1,417,000 primarily due to acquisitions in 1999, which accounted for $5,281,000
of the increase. The remainder of the increase is a result of increased selling
and marketing costs and increased customer service costs. These costs are
expected to increase in the foreseeable future.
Corporate expenses include the costs of the Company's officers and headquarters
staff, the costs of operating the headquarters and costs incurred for strategic
planning and evaluation of business opportunities. There were no corporate
expenses for the period from April 1, 1998 (date operations commenced) to June
30, 1998 because the Company was a subsidiary of CCPR until September 1998.
Depreciation expense increased to $1,282,000 from $97,000 as a result of
acquisitions in 1999 which accounted for $558,000 of the increase and an
increase in fixed assets, primarily computer hardware and software.
12
<PAGE> 14
Corecomm Limited and Subsidiaries
Amortization expense increased to $1,021,000 from $61,000 due to the
amortization of goodwill from the acquisitions in 1999.
Interest income and other, net, increased to income of $1,306,000 from zero
primarily due to interest income on the Company's cash, cash equivalents and
marketable securities.
Interest expense increased to $204,000 from zero due to interest on the notes
payable and capital leases.
The income tax provision of $400,000 in 1999 is for state and local income tax.
Six Months Ended June 30, 1999 and the Period from January 1, 1998 to May 31,
- -----------------------------------------------------------------------------
1998 for the Predecessor (OCOM)
- -------------------------------
The increase in revenues to $16,032,000 from $1,452,000 is primarily due to
acquisitions in 1999 and 1998, which accounted for $12,809,000 of the increase.
OCOM's revenues increased to $3,223,000 from $1,452,000 as a result of an
increase in CLEC revenues, offset by the decline in cellular long distance
revenue as a result of customers switching to other long distance providers. The
Company expects its cellular long distance revenue to continue to decline.
Operating costs increased to $14,150,000 from $772,000 primarily due to
acquisitions in 1999 and 1998, which accounted for $10,878,000 of the increase.
Operating costs as a percentage of revenues increased to 88% from 53%. This
increase is the result of the increased proportion of CLEC business, which has
higher associated operating costs compared to cellular long distance.
Selling, general and administrative expenses increased to $19,520,000 from
$3,205,000 primarily due to acquisitions in 1999 and 1998, which accounted for
$7,742,000 of the increase. The remainder of the increase is a result of
increased selling and marketing costs and increased customer service costs.
These costs are expected to increase in the foreseeable future.
Corporate expenses include the costs of the Company's officers and headquarters
staff, the costs of operating the headquarters and costs incurred for strategic
planning and evaluation of business opportunities. OCOM did not incur corporate
expenses in the period from January 1, 1998 to May 31, 1998.
Depreciation expense increased to $1,710,000 from $255,000 as a result of
acquisitions in 1999 and 1998, which accounted for $996,000 of the increase and
an increase in fixed assets, primarily computer hardware and software.
Amortization expense increased to $1,172,000 from $2,000 due to the amortization
of goodwill from the acquisitions in 1999 and 1998.
Interest income and other, net, increased to income of $2,870,000 from zero
primarily due to interest income on the Company's cash, cash equivalents and
marketable securities.
Interest expense increased to $218,000 from zero due to interest on the notes
payable and capital leases.
The income tax provision of $565,000 in 1999 is for state and local income tax.
13
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Corecomm Limited and Subsidiaries
Liquidity and Capital Resources
We will likely be required to raise additional debt and/or equity financing in
the next twelve months, and we are currently considering various alternatives
for raising capital, including possibly a public debt offering and vendor
financing. We intend to fund our near term capital expenditures, debt service,
operating losses and working capital requirements with cash and securities on
hand of $76,145,000 at June 30, 1999. To date, no definitive agreements have
been reached, and we cannot be certain that any such agreements will be executed
or on what terms they will be entered into. There can be no assurances that: (1)
actual capital expenditures will not exceed the amounts estimated, (2)
additional financing will be obtained or will be available on acceptable terms,
(3) conditions precedent to advances under future credit facilities will be
satisfied when funds are required or (4) the Company and its subsidiaries will
be able to generate sufficient cash from operations to meet capital
requirements, debt service and other obligations when required.
Historical Uses of Cash. For the six months ended June 30, 1999, cash used in
operating activities increased to $18,468,000 from the $3,638,000 used by OCOM
in the period from January 1, 1998 to May 31, 1998, primarily due to the
increase in the net loss to $23,651,000 from $2,782,000. The net loss increased
as a result of acquisitions and an increase in selling and marketing costs and
customer service expenses.
For the six months ended June 30, 1999, cash used to purchase fixed assets
increased to $7,255,000 from the $623,000 used by OCOM in the period from
January 1, 1998 to May 31, 1998. The increase was due to acquisitions and as a
result of an increase in computer hardware and software purchases. The cash used
for acquisitions of $47,082,000 in the six months ended June 30, 1999 is
primarily for payments in connection with the MegsINet and USN acquisitions.
Our operations have been funded by the $150 million cash capital contribution
from CCPR in connection with the spin-off. We expect to experience substantial
negative cash flow for the next several years due to the continuing development
of our Smart Local Exchange Carrier ("LEC") network and our other businesses.
Our cash flow requirements will depend upon:
- - acquisition opportunities
- - our network development schedules;
- - operating results; and
- - technological developments.
Acquisitions. In May 1999, we acquired MegsINet and certain assets of USN
Communications. The USN acquisition includes a contingent payment in July 2000
which is payable only if the USN assets meet or exceed operating performance
thresholds. The total additional cash consideration that we may pay for the USN
assets is capped at $58.6 million. Also, we will require significant capital to
fund the expansion and operations related to those acquisitions. In the future,
we plan to make further appropriate acquisitions which may require significant
capital expenditures.
14
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Corecomm Limited and Subsidiaries
Network Construction. We intend to significantly expand our telecommunications
infrastructure in the United States over the next several years. We have already
begun the process of installing switches, Internet points-of-presence, and other
telecommunications facilities in many states. The anticipated amount of such
expenditures has yet to be determined, and will be related to the speed and
location of equipment deployment, as well as the mix of resold vs.
facilities-based services.
We are in the final stages of constructing Smart LEC networks in Cleveland,
Ohio; Columbus, Ohio; and Chicago, Illinois. We expect our Smart LEC network to
be operational in these markets and to begin migrating our existing customers
onto the network by the end of 1999. We are currently developing three
additional markets: Detroit, Michigan; New York, New York; and Boston,
Massachusetts, which we expect to be operational in 2000. These six markets
comprise approximately 18 million total access lines. In connection with these
markets, we are in the process of establishing collocation facilities in
approximately 125 Incumbent Local Exchange Carriers' ("ILEC") central offices.
We have also identified approximately 30 additional markets where we intend to
deploy our Smart LEC networks in 2000-2003.
We believe that our Smart LEC strategy enables us to enter and construct our
networks into new cities with relatively low up-front expenditures and a
significant proportion of success-based capital expenditures. Depending on the
size of the market, we expect our up-front capital expenditures to be
approximately $7 to $10 million, which includes the costs of installing our
switch facility and our collocation facilities and other related initial set-up
and installation expenses.
The significant majority of the additional capital costs will be based on
subscriber levels. These costs will include equipment to increase network
capacity, such as ports and modems in our switch and access devices. These costs
will vary based on the type, volume and services of each customer, but are
estimated to be approximately $400-500 per line. For example, a sample target
market may have 1 million business lines and 2 million residential lines, for a
total of 3 million lines. Our total level of capital expenditures for that
market will depend on our level of penetration. If we are able to gain 3%
overall penetration of the market, we would serve approximately 90,000 lines,
and based on approximately $400-500 per line, we would spend approximately
$35-45 million on additional capital costs developing and expanding our networks
in the market. A lower or higher penetration would decrease or increase,
respectively, our additional capital costs.
15
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Corecomm Limited and Subsidiaries
The foregoing summary of the cost structure of our entry into a typical market
does not purport to be indicative of our performance, but is provided solely as
a basis for understanding our basic cost structure for individual communications
services in a typical target market. You should be aware that our actual
performance could differ materially from our current expectations.
Network Maintenance. Our businesses will also consume capital to acquire new
customers and to finance the working capital required to support these new
customers. These businesses will also require additional billing, customer
service and other back-office infrastructure. These capabilities can be expanded
in-house or can be outsourced to reduce up-front capital requirements. To date,
our strategy has been to utilize the expertise developed by our management to
develop in-house billing and back-office capabilities.
LMDS. Local Multipoint Distribution Service ("LMDS") is a newly authorized fixed
broadband wireless service that may be used to provide high-speed data transfer,
telephone service, telecommunications network transmission, Internet access,
video broadcasting, video conferencing, and other services. The spectrum is
useable for communications services from a fixed antenna, but is not suitable
for mobile or portable communications. LMDS can be used to provide a wireless
high-capacity broadband service for the "last mile" to a home or office.
The amount of capital required to construct the LMDS systems is not easily
quantifiable at this time, but is likely to be several times the $25 million
cost of the licenses. In addition to up-front network construction costs, a
significant ongoing capital requirement will be the cost to acquire customer
premise equipment to receive and transmit LMDS signals. The network and customer
premise equipment costs are not easily quantifiable because a defacto standard
has yet to emerge among the LMDS auction winners and because insufficient orders
have been placed with manufacturers who determine likely prices for equipment.
As license holders choose equipment manufacturers and one or more equipment
standard emerges, prices will become more easily quantifiable. We will deploy
this LMDS network only if we determine that we can achieve sufficient returns on
our capital invested, from reduced costs associated with providing our services
or from new services which we can offer through LMDS technology.
Our ability to raise additional capital will be dependent on a number of
factors, such as general economic and market conditions, which are beyond our
control. If we are unable to obtain additional financing or to obtain it on
favorable terms, we may be required to delay the construction of our Smart LEC
network, forego attractive business opportunities, or take other actions which
could adversely affect our business, results of operations and financial
condition.
16
<PAGE> 18
Corecomm Limited and Subsidiaries
YEAR 2000
We have a comprehensive Year 2000 project designed to identify and assess the
risks associated with our information systems, operations and infrastructure,
suppliers, and customers that are not Year 2000 compliant, and to develop,
implement and test remediation and contingency plans to mitigate these risks.
The project comprises four phases: (1) identification of risks, (2) assessment
of risks, (3) development of remediation and contingency plans and (4)
implementation and testing.
Our assessment is primarily focused on both our information technology, or "IT",
systems, in particular our billing, provisioning and customer service systems,
and the readiness of the significant facilities-based carriers that we depend
upon for our resale services. Our leased office space and other non-IT equipment
which may have embedded technology that may be affected by the year 2000 problem
is being separately assessed.
- We have completed the assessment of our financial IT systems,
which will require upgrades from vendors at nominal additional
cost. The upgrades will be placed into service before December
1999.
- Our evaluation of the billing, provisioning and customer service
IT systems has progressed from assessments to renovation and
validation, except for the IT systems of USN and MegsINet. We
expect to incur nominal costs to complete the renovation and
validation of these systems since they are new systems that were
designed to be year 2000 ready. We expect to complete these tasks
by September 1999. We have engaged a consulting firm to assist us
in this process.
- The billing, provisioning and customer service IT systems used by
USN and MegsINet will require significant remediation at an
estimated cost of $700,000 to $1 million. The cost includes
non-mission critical improvements and integration with our other
IT systems that will be performed in conjunction with the year
2000 related work. We have engaged a consulting firm to assist
us in this process. The mission critical work is expected to be
completed and tested prior to December 1999. In the event of any
significant remediation difficulties, we would accelerate our
conversion project and migrate our customer base to the IT
systems described in the paragraph above. If this were to occur,
it would likely result in delays in billing our customers until
the migration was completed. We would still complete the
remediation of the portions of the USN and MegsINet IT systems
that we intend to integrate into our other IT systems.
- Most of our IT hardware is currently year 2000 ready. Primarily
all of the cost of upgrades and purchases of hardware and data
communications equipment to complete the implementation of year
2000 readiness is part of our planned growth and upgrade capital
expenditures in 1999 and is not expected to be significantly
different than expenditures in previous years. We have purchased
a new server at USN for approximately $250,000 as part of the
year 2000 project and for other uses. We expect to complete these
upgrades by September 1999.
17
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Corecomm Limited and Subsidiaries
- Our evaluation of the readiness of our significant vendors is
still in process. We have requested information from these
vendors in order to determine the extent to which we may be
vulnerable to their failure to correct their own year 2000
problems. We have received responses from approximately half of
these vendors through July 28, 1999. However, we believe that all
of the facilities-based vendors that we rely upon for wholesale
service, including billing data, and for Internet connections,
are telephone companies that are required to report their year
2000 readiness to state public utility commissions. We anticipate
that such reporting will assist us in our evaluation of their
readiness. A majority of the vendors who have not yet responded
to our inquiries are telephone companies and other public
utilities.
- We currently believe the most reasonably likely worst case
scenario with respect to the Year 2000 is the failure of one or
more of our significant facilities-based vendors, including
utilities, to be ready for the year 2000. This could cause a
temporary interruption in our provision of service to customers
or in our ability to bill our customers, or both. Either or both
could have a material adverse effect on our operations, although
it is not possible at this time to quantify the amount of
revenues and gross profit that might be lost, or the costs that
could be incurred. Our contingency plan to address some of these
risks involve switching customers to another wholesale provider,
which would require time to implement and may be constrained due
to capacity and/or training limitations.
As the Year 2000 project continues, we may discover additional problems, may not
be able to develop, implement or test remediation or contingency plans, or may
find that the costs of these activities exceed current expectations. In many
cases, we are relying on assurances from suppliers that new and upgraded
information systems and other products will be Year 2000 ready. We are testing
such third- party systems and products. However, we cannot be sure that our
tests will be adequate or that, if problems are identified, they will be
addressed by the supplier in a timely and satisfactory way.
Because we use a variety of information systems and have additional systems
embedded in our operations and infrastructure, we cannot be sure that all of our
systems will work together in a Year 2000-ready fashion. Furthermore, we cannot
be sure that we will not suffer business interruptions, either because of our
own Year 2000 problems or those of third-parties upon whom we rely on for
services. We are continuing to evaluate our Year 2000-related risks and
corrective actions. However, the risks associated with the Year 2000 problem are
pervasive and complex; they can be difficult to identify and address, and can
result in material adverse consequences to us. Even if we, in a timely manner,
complete all of our assessments, identify and test remediation plans believed to
be adequate, and develop contingency plans believed to be adequate, some
problems may not be identified or corrected in time to prevent material adverse
consequences to us.
18
<PAGE> 20
Corecomm Limited and Subsidiaries
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements contained herein constitute "forward-looking statements" as
that term is defined under the Private Securities Litigation Reform Act of 1995.
When used herein, the words, "believe," "anticipate," "should," "intend,"
"plan," "will," "expects," "estimates," "projects," "positioned," "strategy,"
and similar expressions identify such forward-looking statements. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
the Company, or industry results, to be materially different from those
contemplated, projected, forecasted, estimated or budgeted, whether expressed or
implied, by such forward-looking statements. Such factors include the following:
general economic and business conditions, industry trends, the Company's ability
to continue to design and build its network, install facilities, obtain and
maintain any required government licenses or approvals and finance construction
and development, all in a timely manner, at reasonable costs and on satisfactory
terms and conditions, as well as assumptions about customer acceptance, churn
rates, overall market penetration and competition from providers of alternative
services, the impact of new business opportunities requiring significant
up-front investment, Year 2000 readiness and availability, terms and deployment
of capital.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
There have been no material changes in the reported market risks since the end
of the most recent fiscal year, except as follows. As a result of the MegsINet
and USN acquisitions, the amount of our liabilities (notes payable and capital
leases) at fixed interest rates has increased. However, we do not currently
believe it is necessary to manage this exposure to interest rate changes. We do
not use interest rate derivative instruments to manage our exposure to interest
rate changes.
19
<PAGE> 21
Corecomm Limited and Subsidiaries
PART II.OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 3, 1999, the Company held its annual meeting of
stockholders. The following management proposal was adopted: the
ratification of the selection of Ernst & Young LLP as the
Company's independent auditors for 1999. The stockholders
approved the proposal by a vote of 11,517,080 shares in favor,
188 shares against and 150 shares abstaining from voting.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
27. Financial Data Schedule
(b) Reports on Form 8-K.
During the quarter ended June 30, 1999, the Company filed a
current report on Form 8-K, dated May 26, 1999, reporting under
Item 2, Acquisition or Disposition of Assets, the completion of
its previously announced acquisitions of MegsINet Inc. and
certain assets of USN Communications, Inc.
No financial statements were filed with this report.
20
<PAGE> 22
Corecomm Limited and Subsidiaries
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CORECOMM LIMITED
Date: August 10, 1999 By: /s/ J. Barclay Knapp
-------------------------
J. Barclay Knapp
President, Chief Executive Officer and
Chief Financial Officer
Date: August 10, 1999 By: /s/ Gregg Gorelick
--------------------------
Gregg Gorelick
Vice President-Controller and Treasurer
(Principal Accounting Officer)
21
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