<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, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-24521
---------------------------------------------------------
CORECOMM LIMITED
----------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Bermuda 13-4068932
---------------------------------- -----------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
Cedar House 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 of and telephone number, including
Registrant's principal executive offices) area code of agent for service)
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,
2000 was 40,149,984.
<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, 2000 and December 31, 1999 .................................................. 2
Condensed Consolidated Statements of Operations -
Three and six months ended June 30, 2000 and 1999 ................................... 3
Condensed Consolidated Statement of Shareholders' Equity -
Six months ended June 30, 2000 ...................................................... 4
Condensed Consolidated Statements of Cash Flows -
Six months ended June 30, 2000 and 1999 ............................................. 5
Notes to Condensed Consolidated Financial Statements ................................. 6
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition ................................................... 11
Item 3. Quantitative and Qualitative Disclosure about Market Risk ............................. 17
PART II. OTHER INFORMATION
------------------------------
Item 4. Submission of Matters to a Vote of Security Holders.................................... 18
Item 6. Exhibits and Reports on Form 8-K ...................................................... 18
SIGNATURES.......................................................................................... 19
----------
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CoreComm Limited and Subsidiaries
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
-----------------------------------------------
(Unaudited) (See Note)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 26,028,000 $ 86,685,000
Marketable securities 58,192,000 92,041,000
Accounts receivable-trade, less allowance for doubtful
accounts of $2,280,000 (2000) and $3,949,000 (1999) 6,952,000 7,875,000
Due from NTL Incorporated 1,421,000 195,000
Other 9,421,000 5,791,000
-----------------------------------------------
Total current assets 102,014,000 192,587,000
Fixed assets, net 109,739,000 90,619,000
Goodwill, net of accumulated amortization of $12,040,000 (2000) and $7,262,000
(1999) 53,110,000 57,888,000
LMDS license costs 25,366,000 25,366,000
Other, net of accumulated amortization of $4,345,000 (2000) and $2,202,000
(1999) 22,686,000 25,643,000
-----------------------------------------------
$312,915,000 $392,103,000
===============================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,126,000 $ 13,851,000
Accrued expenses 54,358,000 32,215,000
Equipment payable - 4,702,000
Current portion of notes payable and capital lease obligations 17,726,000 19,127,000
Deferred revenue 3,079,000 1,400,000
-----------------------------------------------
Total current liabilities 79,289,000 71,295,000
Notes payable 176,853,000 179,318,000
Capital lease obligations 8,402,000 14,564,000
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 40,150,000 (2000) and 38,556,000 (1999) shares 402,000 386,000
Additional paid-in capital 318,913,000 246,319,000
Deferred non-cash compensation (28,104,000) -
(Deficit) (242,840,000) (119,779,000)
-----------------------------------------------
48,371,000 126,926,000
-----------------------------------------------
$312,915,000 $392,103,000
===============================================
</TABLE>
Note: The balance sheet at December 31, 1999 has been derived from the audited
balance sheet at that date.
See accompanying notes.
2
<PAGE> 4
CoreComm Limited and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2000 1999 2000 1999
-------------------------------------- ---------------------------------------
<S> <C> <C> <C> <C>
REVENUES $ 19,397,000 $ 12,436,000 $ 38,356,000 $ 16,032,000
COSTS AND EXPENSES
Operating 27,854,000 11,302,000 51,700,000 14,150,000
Selling, general and administrative 27,988,000 13,736,000 48,921,000 19,520,000
Corporate 2,800,000 1,851,000 5,196,000 4,143,000
Non-cash compensation 32,186,000 - 32,186,000 -
Nonrecurring charges (408,000) - 1,018,000 -
Depreciation 6,891,000 1,282,000 12,105,000 1,710,000
Amortization 3,165,000 1,021,000 6,335,000 1,172,000
-------------------------------------- ---------------------------------------
100,476,000 29,192,000 157,461,000 40,695,000
-------------------------------------- ---------------------------------------
Operating (loss) (81,079,000) (16,756,000) (119,105,000) (24,663,000)
OTHER INCOME (EXPENSE)
Interest income and other, net 1,681,000 1,306,000 3,850,000 2,870,000
Interest expense (3,725,000) (204,000) (7,534,000) (218,000)
-------------------------------------- ---------------------------------------
(Loss) before income tax provision (83,123,000) (15,654,000) (122,789,000) (22,011,000)
Income tax provision (67,000) (400,000) (272,000) (565,000)
-------------------------------------- ---------------------------------------
Net (loss) $(83,190,000) $(16,054,000) $(123,061,000) $(22,576,000)
====================================== =======================================
Basic and diluted net (loss) per share $(2.08) $(.51) $(3.12) $(.74)
====================================== =======================================
Weighted average shares 40,047,000 31,527,000 39,501,000 30,632,000
====================================== =======================================
</TABLE>
See accompanying notes.
3
<PAGE> 5
CoreComm Limited and Subsidiaries
Condensed Consolidated Statement of Shareholders' Equity
(Unaudited)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL DEFERRED
---------------------------- PAID-IN NON-CASH
SHARES PAR CAPITAL COMPENSATION (DEFICIT)
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1999 38,556,000 $386,000 $246,319,000 $ - $(119,779,000)
Exercise of stock options 1,559,000 16,000 12,028,000
Exercise of warrants 35,000 - 276,000
Deferred non-cash
compensation 60,290,000 (31,338,000)
Non-cash compensation
expense 3,234,000
Net (loss) for the six months
ended June 30, 2000 (123,061,000)
-------------------------------------------------------------------------------------
Balance, June 30, 2000 40,150,000 $402,000 $318,913,000 $(28,104,000) $(242,840,000)
=====================================================================================
</TABLE>
The Condensed Consolidated Statement of Shareholders' Equity reflects on a
retroactive basis the 3-for-2 stock split by way of a stock dividend paid on
February 2, 2000.
See accompanying notes.
4
<PAGE> 6
CoreComm Limited and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
2000 1999
---------------------------------------------
<S> <C> <C>
Net cash (used in) operating activities $(60,282,000) $(18,468,000)
INVESTING ACTIVITIES
Purchase of fixed assets (35,681,000) (7,255,000)
Acquisitions, net of cash acquired - (47,082,000)
Increase in other assets (2,484,000) -
Purchase of marketable securities (32,018,000) (56,856,000)
Proceeds from sales of marketable securities 67,626,000 123,713,000
---------------------------------------------
Net cash provided by (used in) investing activities (2,557,000) 12,520,000
FINANCING ACTIVITIES
Proceeds from borrowing, net of financing costs 1,209,000 -
Proceeds from exercise of stock options and warrants 12,320,000 11,144,000
Principal payments (2,842,000) (443,000)
Principal payments of capital lease obligations (8,505,000) (251,000)
-------------------------------------------
Net cash provided by financing activities 2,182,000 10,450,000
-------------------------------------------
Increase (decrease) in cash and cash equivalents (60,657,000) 4,502,000
Cash and cash equivalents at beginning of period 86,685,000 26,161,000
-------------------------------------------
Cash and cash equivalents at end of period $26,028,000 $30,663,000
===========================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $ 7,609,000 $ 122,000
Income taxes paid 364,000 919,000
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING
ACTIVITIES
Liabilities incurred to acquire fixed assets $20,457,000 $ 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, 2000 are not necessarily indicative of the results that
may be expected for the year ending December 31, 2000. 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,
1999.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is required to be adopted by the
Company effective January 1, 2001. Management does not anticipate that the
adoption of this standard will have a significant effect on results of
operations, financial condition or cash flows of the Company.
In January 2000, the Company declared a 3-for-2 stock split by way of a stock
dividend, which was paid on February 2, 2000. The condensed consolidated
financial statements and the notes thereto give retroactive effect to the stock
split.
The shares issuable upon the exercise of stock options, warrants and
convertible securities are excluded from the calculation of net loss per share
as their effect would be antidilutive.
NOTE 2. ACQUISITIONS
In May 1999, the Company acquired 100% of the stock of MegsINet Inc. and the
competitive local exchange carrier ("CLEC") assets of USN Communications, Inc.
These acquisitions were accounted for as purchases, and, accordingly, the net
assets and results of operations of the acquired businesses were included in
the consolidated financial statements from the dates of acquisition.
The pro forma unaudited consolidated results of operations for the six months
ended June 30, 1999 assuming consummation of the acquisitions as of January 1,
1999 are as follows:
<TABLE>
<CAPTION>
<S> <C>
Total revenue $55,736,000
Net (loss) (57,511,000)
Basic and diluted net (loss) per share (1.72)
</TABLE>
6
<PAGE> 8
CoreComm Limited and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
NOTE 2. ACQUISITIONS (CONTINUED)
A significant component of the pro forma results is associated with the
acquisition of certain assets of USN. Although USN quickly developed a large
customer list and revenue base in 1997 and 1998, it had difficulties under its
previous management providing services, including billing, customer care and
other operational areas, and filed for bankruptcy in February 1999. Since the
acquisition, we have been focusing on improving these operations, and have been
successful in many areas. However, we did not actively continue to sell
additional lines in these markets because we were not fully satisfied with the
quality of the operations. Consequently, and consistent with our due diligence,
transaction structure and purchase price, revenues associated with the USN
assets have declined significantly since our acquisition, and additional
declines may continue as customers leave or "churn" off the service.
NOTE 3. PENDING ACQUISITIONS
On March 10, 2000, the Company announced that it had entered into a definitive
agreement to acquire ATX Telecommunications Services, Inc. ("ATX"), which is a
facilities based CLEC and integrated communications provider serving the
Mid-Atlantic states. The Company will pay a total consideration consisting of:
(a) approximately 12.4 million shares of the Company's common stock, (b) $250
million of convertible preferred stock and (c) $150 million in cash, of which
up to $110 million, at the Company's option, may be paid in three year senior
notes. If senior notes are issued, the principal amount thereof shall be
increased by up to $9 million. The convertible preferred stock will pay
dividends at 3%, subject to adjustment, and will be convertible into common
stock at $44.36 per share if the senior notes are not issued or $32.11 per
share, subject to adjustment, if the senior notes are issued. Under the
agreement's cap provisions, the shares of common stock to be issued will be
reduced if the Company's stock price at closing exceeds $46.38 per share, and
the number of common shares underlying the convertible preferred stock will be
reduced if the Company's stock price at closing exceeds $44.36 per share. The
transaction is subject to regulatory and shareholder approval and other
customary closing conditions.
On March 13, 2000, the Company and Voyager.net, Inc. ("Voyager.net") announced
a definitive agreement to merge in a stock and cash transaction. Voyager.net is
the largest full-service Internet communications company in the Midwest, and is
rapidly expanding into Digital Subscriber Line ("DSL") delivery of its
services. Under the agreement, Voyager.net shareholders will receive 0.292
shares of the Company's common stock and $3 in cash for each share of
Voyager.net common stock (an aggregate of approximately 9.2 million shares and
approximately $95 million in cash). Under the agreement's collar provisions,
the shares of common stock issued will be reduced if the Company's stock price
at closing exceeds $56.97 per share, and increased if the Company's common
stock price at closing is below $41.17 per share. If the Company's stock price
at closing is below $33.03 per share, there would be no further adjustment to
the number of shares of the Company's common stock issued and Voyager.net would
have the right to terminate the transaction, subject to the Company's right to
adjust further the shares issued. The ratio of cash and stock consideration
that Voyager.net stockholders are entitled to receive is subject to adjustment
if less than 80% of the value of the merger consideration would be in the form
of the Company's common stock based on the price prior to closing. Using the
closing price of the Company's common stock on August 10, 2000 of $11.81,
Voyager.net shareholders would receive 0.4943 shares of the Company's common
stock and $1.46 in cash for each share of Voyager.net common stock (an
7
<PAGE> 9
CoreComm Limited and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
NOTE 3. PENDING ACQUISITIONS (CONTINUED)
aggregate of approximately 15.6 million shares of the Company's common stock
and approximately $46.2 million in cash). The transaction is subject to
shareholder approval and other customary closing conditions. Holders of over a
majority of the voting shares of Voyager.net have entered into an agreement
with the Company to vote in favor of the transaction.
NOTE 4. FIXED ASSETS
Fixed assets consist of:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
---------------------------------------------
(unaudited)
<S> <C> <C>
Operating equipment $ 66,993,000 $ 50,290,000
Computer hardware and software 28,354,000 17,455,000
Other equipment 20,615,000 9,300,000
Construction-in-progress 16,821,000 24,681,000
---------------------------------------------
132,783,000 101,726,000
Accumulated depreciation (23,044,000) (11,107,000)
---------------------------------------------
$109,739,000 $ 90,619,000
=============================================
</TABLE>
NOTE 5. ACCRUED EXPENSES
Accrued expenses consist of:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
---------------------------------------------
(unaudited)
<S> <C> <C>
Payroll and related $ 2,966,000 $ 2,903,000
Taxes, including income taxes 6,270,000 6,089,000
Accrued equipment purchases 20,370,000 13,455,000
Toll and interconnect 11,686,000 637,000
Other 13,066,000 9,131,000
---------------------------------------------
$54,358,000 $32,215,000
=============================================
</TABLE>
8
<PAGE> 10
CoreComm Limited and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
NOTE 6. NOTES PAYABLE
Notes payable consist of:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
-------------------------------------------
(unaudited)
<S> <C> <C>
6% Convertible Subordinated Notes $175,000,000 $175,000,000
Working capital promissory note, interest at 8.5% 2,303,000 3,077,000
Note payable for equipment, interest at 12.75% 5,551,000 6,238,000
Other 222,000 283,000
-------------------------------------------
183,076,000 184,598,000
Less current portion 6,223,000 5,280,000
-------------------------------------------
$176,853,000 $179,318,000
===========================================
</TABLE>
NOTE 7. 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 Board of Directors
of NTL and the Company). 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 the opinion of management, this allocation method is
reasonable. For the six months ended June 30, 2000 and 1999, NTL charged the
Company $649,000 and $817,000, respectively, which is included in corporate
expenses.
The Company provides NTL with access to office space and equipment and the use
of supplies. In the fourth quarter of 1999, the Company began charging NTL a
percentage of the Company's office rent and supplies expense. 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 the opinion of
management, this allocation method is reasonable. For the six months ended June
30, 2000, the Company charged NTL $123,000, which reduced corporate expenses.
A subsidiary of the Company provides billing and software development services
to subsidiaries of NTL. The Company charges an amount in excess of its costs to
provide these services. General and administrative expenses were reduced by
$468,000 and $346,000 for the six months ended June 30, 2000 and 1999,
respectively, as a result of these charges.
9
<PAGE> 11
CoreComm Limited and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
NOTE 8. NONRECURRING CHARGES
Nonrecurring charges of $1,018,000 in the six months ended June 30, 2000 are
for restructuring costs relating to the Company's announcement in March 2000 of
a reorganization of certain of its operations. The original charge consisted of
employee severance and related costs of $580,000 for approximately 70 employees
to be terminated, primarily from the sales and customer operations departments,
formerly within USN, and lease exit costs of $846,000. As of June 30, 2000,
$441,000 of the provision had been used, including $164,000 for employee
severance and related costs and $277,000 for lease exit costs. As of June 30,
2000, $408,000 of the provision had been reversed, including $165,000 due to a
reduction in the number of employees who will receive severance payments and
$243,000 due to a reduction in the number of facilities to be closed. As of
June 30, 2000, none of the employees to be terminated remain with the Company.
The provision for severance and related costs will be used in 2000 and the
provision for leases will be used through 2003.
NOTE 9. NON-CASH COMPENSATION
In April 2000, the Compensation and Option Committee of the Board of Directors
approved the issuance of options to purchase approximately 2.7 million shares
of the Company's common stock to various employees at an exercise price which
was less than the fair market value of the Company's common stock on the date
of the grant. In accordance with APB Opinion No. 25, "Accounting for Stock
Issued to Employees," in April 2000, the Company recorded a non-cash
compensation expense of approximately $29.0 million and a non-cash deferred
expense of approximately $31.3 million. In the three months ended June 30,
2000, $3.2 million of the deferred non-cash compensation was charged to
expense. The Company will charge the deferred expense to non-cash compensation
expense over the vesting period of the stock options as follows: $6.5 million
in 2000, $12.9 million in 2001, $7.5 million in 2002 and $1.2 million in 2003.
NOTE 10. COMMITMENTS AND CONTINGENT LIABILITIES
As of June 30, 2000, the Company had purchase commitments of approximately
$34,000,000 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.
10
<PAGE> 12
CoreComm Limited and Subsidiaries
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition.
RESULTS OF OPERATIONS
As a result of the completion of the acquisitions of 100% of the stock of
MegsINet Inc. and the CLEC assets of USN Communications, Inc. in May 1999, we
consolidated the results of operations of these businesses from the dates of
acquisition.
A significant component of the results since May 1999 is associated with the
acquisition of certain assets of USN. Although USN quickly developed a large
customer list and revenue base in 1997 and 1998, it had difficulties under its
previous management providing services, including billing, customer care and
other operational areas, and filed for bankruptcy in February 1999. Since the
acquisition, we have been focusing on improving these operations, and have been
successful in many areas. However, we did not actively continue to sell
additional lines in these markets because we were not fully satisfied with the
quality of the operations. Consequently, and consistent with our due diligence,
transaction structure and purchase price, revenues associated with the USN
assets have declined significantly since our acquisition, and additional
declines may continue as customers leave or "churn" off the service.
Three Months Ended June 30, 2000 and 1999
-----------------------------------------
The increase in revenues to $19,397,000 from $12,436,000 is primarily due to
acquisitions in 1999. The remainder of the increase is due to an increase in
customers, offset by the decline in prepaid cellular debit card and cellular
long distance revenues as a result of our termination of these services in the
third quarter of 1999. We had revenues of $811,000 in the three months ended
June 30, 1999 from the provision of these services.
Operating costs increased to $27,854,000 from $11,302,000 as a result of an
increase in the fixed component of operating expenses due to our migration to a
facilities-based infrastructure. Operating costs as a percentage of revenues is
expected to remain higher than 1999 levels until customer and revenue growth
exceeds the increase in facilities-based infrastructure costs. In the three
months ended June 30, 1999, operating costs included $663,000 related to the
prepaid cellular debit card and cellular long distance services.
Selling, general and administrative expenses increased to $27,988,000 from
$13,736,000 primarily due to increases in selling and marketing costs and
customer service costs. These costs are expected to increase in the foreseeable
future as we grow our operations and customer base.
Corporate expenses include the costs of our officers and headquarters staff,
the costs of operating the headquarters and costs incurred for strategic
planning and evaluation of business opportunities. Corporate expenses were
$2,800,000 in 2000 and $1,851,000 in 1999.
11
<PAGE> 13
CoreComm Limited and Subsidiaries
In April 2000, the Compensation and Option Committee of the Board of Directors
approved the issuance of options to purchase approximately 2.7 million shares
of the Company's common stock to various employees at an exercise price which
was less than the fair market value of the Company's common stock on the date
of the grant. In accordance with APB Opinion No. 25, "Accounting for Stock
Issued to Employees," in April 2000, the Company recorded a non-cash
compensation expense of approximately $29.0 million and a non-cash deferred
expense of approximately $31.3 million. In the three months ended June 30,
2000, $3.2 million of the deferred non-cash compensation was charged to
expense. The Company will charge the deferred expense to non-cash compensation
expense over the vesting period of the stock options as follows: $6.5 million
in 2000, $12.9 million in 2001, $7.5 million in 2002 and $1.2 million in 2003.
Nonrecurring charges of $1,018,000 in the six months ended June 30, 2000 are
for restructuring costs relating to the Company's announcement in March 2000 of
a reorganization of certain of its operations. The original charge consisted of
employee severance and related costs of $580,000 for approximately 70 employees
to be terminated, primarily from the sales and customer operations departments,
formerly within USN, and lease exit costs of $846,000. As of June 30, 2000,
$441,000 of the provision had been used, including $164,000 for employee
severance and related costs and $277,000 for lease exit costs. As of June 30,
2000, $408,000 of the provision had been reversed, including $165,000 due to a
reduction in the number of employees who will receive severance payments and
$243,000 due to a reduction in the number of facilities to be closed. As of
June 30, 2000, none of the employees to be terminated remain with the Company.
The provision for severance and related costs will be used in 2000 and the
provision for leases will be used through 2003.
Depreciation expense increased to $6,891,000 from $1,282,000 as a result of an
increase in fixed assets partially through acquisitions in 1999.
Amortization expense increased to $3,165,000 from $1,021,000 due to the
amortization of goodwill and other intangibles from the acquisitions in 1999.
Interest income and other, net, increased to $1,681,000 from $1,306,000
primarily due to interest income on the Company's cash, cash equivalents and
marketable securities.
Interest expense increased to $3,725,000 from $204,000 primarily due to
interest on the 6% Convertible Subordinated Notes issued in October 1999 and
interest on notes payable and capital leases of acquired businesses.
The income tax provision of $67,000 and $400,000 in 2000 and 1999,
respectively, is for state and local income tax.
Six Months Ended June 30, 2000 and 1999
---------------------------------------
The increase in revenues to $38,356,000 from $16,032,000 is primarily due to
acquisitions in 1999. The remainder of the increase is due to an increase in
customers, offset by the decline in prepaid cellular debit card and cellular
long distance revenues as a result of our termination of these services in the
third quarter of 1999. We had revenues of $1,898,000 in the six months ended
June 30, 1999 from the provision of these services.
12
<PAGE> 14
CoreComm Limited and Subsidiaries
Operating costs increased to $51,700,000 from $14,150,000 as a result of an
increase in the fixed component of operating expenses due to our migration to a
facilities-based infrastructure. Operating costs as a percentage of revenues is
expected to remain higher than 1999 levels until customer and revenue growth
exceeds the increase in facilities-based infrastructure costs. In the six months
ended June 30, 1999, operating costs included $1,553,000 related to the prepaid
cellular debit card and cellular long distance services.
Selling, general and administrative expenses increased to $48,921,000 from
$19,520,000 primarily due to increases in selling and marketing costs and
customer service costs. These costs are expected to increase in the foreseeable
future as we grow our operations and customer base.
Corporate expenses include the costs of our officers and headquarters staff,
the costs of operating the headquarters and costs incurred for strategic
planning and evaluation of business opportunities. Corporate expenses were
$5,196,000 in 2000 and $4,143,000 in 1999.
In April 2000, the Compensation and Option Committee of the Board of Directors
approved the issuance of options to purchase approximately 2.7 million shares
of the Company's common stock to various employees at an exercise price which
was less than the fair market value of the Company's common stock on the date
of the grant. In accordance with APB Opinion No. 25, "Accounting for Stock
Issued to Employees," in April 2000, the Company recorded a non-cash
compensation expense of approximately $29.0 million and a non-cash deferred
expense of approximately $31.3 million. In the three months ended June 30,
2000, $3.2 million of the deferred non-cash compensation was charged to
expense. The Company will charge the deferred expense to non-cash compensation
expense over the vesting period of the stock options as follows: $6.5 million
in 2000, $12.9 million in 2001, $7.5 million in 2002 and $1.2 million in 2003.
Nonrecurring charges of $1,018,000 in the six months ended June 30, 2000 are
for restructuring costs relating to the Company's announcement in March 2000 of
a reorganization of certain of its operations. The original charge consisted of
employee severance and related costs of $580,000 for approximately 70 employees
to be terminated, primarily from the sales and customer operations departments,
formerly within USN, and lease exit costs of $846,000. As of June 30, 2000,
$441,000 of the provision had been used, including $164,000 for employee
severance and related costs and $277,000 for lease exit costs. As of June 30,
2000, $408,000 of the provision had been reversed, including $165,000 due to a
reduction in the number of employees who will receive severance payments and
$243,000 due to a reduction in the number of facilities to be closed. As of
June 30, 2000, none of the employees to be terminated remain with the Company.
The provision for severance and related costs will be used in 2000 and the
provision for leases will be used through 2003.
Depreciation expense increased to $12,105,000 from $1,710,000 as a result of an
increase in fixed assets, partially through acquisitions in 1999.
Amortization expense increased to $6,335,000 from $1,172,000 due to the
amortization of goodwill and other intangibles from the acquisitions in 1999.
Interest income and other, net, increased to $3,850,000 from $2,870,000
primarily due to interest income on the Company's cash, cash equivalents and
marketable securities.
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CoreComm Limited and Subsidiaries
Interest expense increased to $7,534,000 from $218,000 primarily due to
interest on the 6% Convertible Subordinated Notes issued in October 1999 and
interest on notes payable and capital leases of acquired businesses.
The income tax provision of $272,000 and $565,000 in 2000 and 1999,
respectively, is for state and local income tax.
LIQUIDITY AND CAPITAL RESOURCES
We will require significant resources to fund the construction of our
facilities-based network, develop and expand our existing businesses and fund
near term operating losses and debt service. In addition, we will require
resources to finance the cash consideration to complete our proposed
acquisitions of ATX and Voyager.net. We intend to use cash and securities on
hand of $84.2 million at June 30, 2000 to meet a portion of these requirements.
We require additional financing to fund our planned operations, capital
expenditures and acquisitions.
We have recently obtained commitments for $310 million of financing, in the form
of a commitment for a fully underwritten $150 million senior secured bank
facility, $110 million of Senior Notes to be issued to the ATX shareholders as a
replacement for cash consideration, and a $50 million commitment for Convertible
Preferred Stock. The completion of these financings are subject to obtaining
approximately $50 Million of financing on terms that would be subordinated to
the bank facility, completion of definitive documentation and customary and
other final closing conditions, including, in certain cases, the completion of
the acquisitions of ATX and Voyager.net. We expect to complete all of these
conditions in the next several weeks.
Our ability to raise additional capital in the future 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 (Local Exchange Carrier) network, forego attractive business opportunities,
or take other actions which could adversely affect our business, results of
operations and financial condition.
Acquisitions. In May 1999, we acquired MegsINet and the CLEC assets of USN
Communications. The USN acquisition includes a potential contingent payment to
be paid in September 2000, which is capped at $58.6 million. The contingent
payment is payable only if the USN assets meet or exceed operating performance
thresholds. We have submitted a written notice to the regulatory trustee for
USN that no contingent payment is due to USN. A representative of the trustee
is currently auditing the information contained in our written notice.
On March 10, 2000, we announced that the Company had entered into a definitive
agreement to acquire ATX Telecommunications Services, Inc. and on March 13,
2000, the Company and Voyager.net, Inc. announced a definitive agreement to
merge in a stock and cash transaction. Assuming the issuance of the Senior
Notes, we will require $40 million in cash for the ATX acquisition and
approximately $46.2 million in cash for the Voyager.net merger based on
CoreComm's closing stock price of $11.81 per share on August 10, 2000, as well
as cash for the payment of indebtedness under the Voyager credit agreement (as
of August 10, 2000, the amount was approximately $23.8 million). In addition, we
will issue senior notes and new shares of convertible preferred stock and common
stock to the shareholders of ATX, and new shares of common stock to the
shareholders of Voyager.net. In the future, we plan to make further appropriate
acquisitions which may require significant acquisition related and capital
expenditures.
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CoreComm Limited and Subsidiaries
Historical Uses of Cash. For the six months ended June 30, 2000, cash used in
operating activities increased to $60,282,000 from $18,468,000 in the six
months ended June 30, 1999 primarily due to the increase in the net loss to
$123,061,000 from $22,576,000.
For the six months ended June 30, 2000, cash used to purchase fixed assets
increased to $35,681,000 from $7,255,000 in the six months ended June 30, 1999.
Proceeds from borrowings, net of financing costs, of $1,209,000 is from
additions to the note payable for equipment.
Network Construction. We intend to significantly expand our telecommunications
infrastructure in the United States over the next several years. We have
installed switches and other facilities, and we are in the process of
installing additional switches, Internet points-of-presence, and other
telecommunications facilities in many states. The anticipated amount of such
expenditures in the future will be related to the number of new markets
entered, the speed and location of equipment deployment, the timing and
integration of acquisitions, as well as the mix of resold vs. facilities-based
services.
We have deployed our Smart LEC facilities in Columbus, Ohio, Cleveland, Ohio,
Chicago, Illinois and Detroit, Michigan and are currently developing two
additional markets: New York, New York, and Boston, Massachusetts. 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 135 Incumbent Local Exchange Carrier ("ILEC") central offices. We
have also identified approximately 30 additional markets where we intend to
deploy our Smart LEC network in 2001-2003.
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.
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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.
Operations. Our businesses will also consume capital to acquire new customers
and to finance the working capital required to support these new customers.
These businesses will also require additional billing, customer service and
other back-office infrastructure. These capabilities can be expanded in-house
or can be outsourced to reduce up-front capital requirements. To date, our
strategy has been to utilize the expertise developed by our management to
develop in-house billing and back-office capabilities.
LMDS. Local Multipoint Distribution Service ("LMDS") is a 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 our 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. 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.
Sources of Liquidity. In October 1999, we issued $175 million principal amount
of 6% Convertible Subordinated Notes due 2006, and received net proceeds of
$168.5 million. Interest on the Convertible Subordinated Notes is payable
semiannually on April 1 and October 1 of each year, which commenced on April 1,
2000. We expect to experience substantial negative cash flow for the next
several years due to the continued development of our Smart LEC network and our
other businesses. Our cash flow requirements will depend upon:
- our network development schedules;
- acquisition opportunities;
- operating results; and
- technological developments.
In addition to the financing sources described above, we are currently
negotiating with equipment manufacturers, including Cisco Systems, Inc., Lucent
Technologies, Inc. and others to provide us with additional vendor financing. In
the aggregate, such financings are anticipated to be significant. We are
presently in the process of negotiating terms for these transactions. However,
until definitive agreements are reached with each vendor, we cannot be certain
that the proposed financings will occur, that the terms will not change or that
any alternative financing on terms satisfactory to us will be available.
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CoreComm Limited and Subsidiaries
We are a holding company with no significant assets other than cash and
securities and investments in and advances to our subsidiaries. We are
therefore likely to be dependent upon receipt of funds from our subsidiaries to
meet our own obligations. However, our subsidiaries' proposed debt agreements
may prevent the payment of dividends, loans or other distributions to us
(except in certain limited circumstances).
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, 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.
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CoreComm Limited and Subsidiaries
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 31, 2000, the Company held its annual meeting of stockholders.
The following management proposals were adopted: (i) the reelection of
two directors to the Board of Directors, (ii) the ratification of the
adoption of the CoreComm Limited 1999 Stock Option Plan, (iii) the
ratification of the adoption of the CoreComm Limited 2000 Stock Option
Plan and (iv) the ratification of the selection of Ernst & Young LLP
as the Company's independent auditors for 2000. The stockholders
approved the election of George S. Blumenthal by a vote of 36,715,522
shares in favor and 43,085 shares withheld from voting. The
stockholders approved the election of Barclay Knapp by a vote of
36,715,522 shares in favor and 43,085 shares withheld from voting. The
stockholders approved the second proposal by a vote of 22,609,009
shares in favor, 4,928,858 shares against and 207,105 shares
abstaining from voting. The stockholders approved the third proposal
by a vote of 22,623,638 shares in favor, 4,914,284 shares against and
207,050 shares abstaining from voting. The stockholders approved the
fourth proposal by a vote of 36,753,265 shares in favor, 2,087 shares
against and 2,535 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, 2000, the Company filed a current
report on Form 8-K, dated May 31, 2000 (filed June 1, 2000), reporting
under Item 5, Other Events, that the Company announced the formation
of a new subsidiary, tentatively named CoreComm FiberCo. No financial
statements were filed with this report.
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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
<TABLE>
<S> <C>
Date: August 10, 2000 By: /s/ Barclay Knapp
-------------------------
Barclay Knapp
President, Chief Executive Officer and
Chief Financial Officer
Date: August 10, 2000 By: /s/ Gregg N. Gorelick
--------------------------
Gregg N. Gorelick
Vice President-Controller and Treasurer
(Principal Accounting Officer)
</TABLE>
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