<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 March 31, 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
of incorporation or organization) Identification No.)
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, (Name, address, including zip code,
and telephone number, and telephone number, including area code
including area code of of agent for service)
Registrant's principal
executive offices)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
The number of shares outstanding of the issuer's common stock as of March 31,
2000 was 39,821,623.
<PAGE> 2
CoreComm Limited and Subsidiaries
Index
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
- ------- --------------------- ----
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
March 31, 2000 and December 31, 1999 ................................................. 2
Condensed Consolidated Statements of Operations -
Three months ended March 31, 2000 and 1999 .......................................... 3
Condensed Consolidated Statement of Shareholders' Equity -
Three months ended March 31, 2000 ................................................... 4
Condensed Consolidated Statements of Cash Flows -
Three months ended March 31, 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 ............................ 15
PART II. OTHER INFORMATION
- -------- -----------------
Item 6. Exhibits and Reports on Form 8-K ..................................................... 16
SIGNATURES ........................................................................................ 17
- ----------
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CoreComm Limited and Subsidiaries
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
---- ----
(Unaudited) (See Note)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 71,636,000 $ 86,685,000
Marketable securities 55,670,000 92,041,000
Accounts receivable-trade, less allowance for doubtful
accounts of $4,520,000 (2000) and $3,949,000 (1999) 7,543,000 7,875,000
Due from NTL Incorporated 504,000 195,000
Other 8,414,000 5,791,000
------------- -------------
Total current assets 143,767,000 192,587,000
Fixed assets, net 94,668,000 90,619,000
Goodwill, net of accumulated amortization of $9,651,000 (2000)
and $7,262,000 (1999) 55,499,000 57,888,000
LMDS license costs 25,366,000 25,366,000
Other, net of accumulated amortization of $3,275,000 (2000)
and $2,202,000 (1999) 24,550,000 25,643,000
------------- -------------
$ 343,850,000 $ 392,103,000
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,422,000 $ 13,851,000
Accrued expenses 35,546,000 32,215,000
Equipment payable -- 4,702,000
Current portion of notes payable and capital lease obligations 18,848,000 19,127,000
Deferred revenue 1,703,000 1,400,000
------------- -------------
Total current liabilities 57,519,000 71,295,000
Notes payable 178,418,000 179,318,000
Capital lease obligations 11,468,000 14,564,000
Other 238,000 --
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 39,822,000 (2000) and 38,556,000
(1999) shares 398,000 386,000
Additional paid-in capital 255,459,000 246,319,000
(Deficit) (159,650,000) (119,779,000)
------------- -------------
96,207,000 126,926,000
------------- -------------
$ 343,850,000 $ 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 MARCH 31,
2000 1999
---- ----
<S> <C> <C>
REVENUES $ 18,959,000 $ 3,596,000
COSTS AND EXPENSES
Operating 23,846,000 2,848,000
Selling, general and administrative 20,933,000 5,784,000
Corporate 2,396,000 2,292,000
Nonrecurring charges 1,426,000 --
Depreciation 5,214,000 428,000
Amortization 3,170,000 151,000
------------ ------------
56,985,000 11,503,000
------------ ------------
Operating (loss) (38,026,000) (7,907,000)
OTHER INCOME (EXPENSE)
Interest income and other, net 2,169,000 1,564,000
Interest expense (3,809,000) (14,000)
------------ ------------
(Loss) before income tax provision (39,666,000) (6,357,000)
Income tax provision (205,000) (165,000)
------------ ------------
Net (loss) $(39,871,000) $ (6,522,000)
============ ============
Basic and diluted net (loss) per
share $ (1.02) $ (.22)
============ ============
Weighted average shares 38,955,000 29,727,000
============ ============
</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, 1999 38,556,000 $ 386,000 $ 246,319,000 $(119,779,000)
Exercise of stock options 1,231,000 12,000 8,864,000
Exercise of warrants 35,000 -- 276,000
Net (loss) for the three months ended
March 31, 2000 (39,871,000)
------------- ------------- ------------- -------------
Balance, March 31, 2000 39,822,000 $ 398,000 $ 255,459,000 $(159,650,000)
============= ============= ============= =============
</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>
THREE MONTHS ENDED MARCH 31,
2000 1999
---- ----
<S> <C> <C>
Net cash (used in) operating activities $(38,836,000) $ (9,039,000)
INVESTING ACTIVITIES
Purchase of fixed assets (18,245,000) (2,154,000)
Increase in other assets (150,000) (1,806,000)
Purchase of marketable securities (20,015,000) (45,492,000)
Proceeds from sale of marketable
securities 57,426,000 69,643,000
------------ ------------
Net cash provided by investing activities 19,016,000 20,191,000
FINANCING ACTIVITIES
Proceeds from borrowing, net of
financing costs 1,209,000 --
Proceeds from exercise of stock options
and warrants 9,152,000 538,000
Principal payments (1,307,000) --
Principal payments of capital lease
obligations (4,283,000) (13,000)
------------ ------------
Net cash provided by financing activities 4,771,000 525,000
------------ ------------
Increase (decrease) in cash and
cash equivalents (15,049,000) 11,677,000
Cash and cash equivalents at beginning of
period 86,685,000 26,161,000
------------ ------------
Cash and cash equivalents at end of
period $ 71,636,000 $ 37,838,000
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION
Cash paid for interest $ 6,514,000 $ 8,000
Income taxes paid 299,000 --
SUPPLEMENTAL SCHEDULE OF
NONCASH INVESTING ACTIVITIES
Liabilities incurred to acquire fixed
assets $ 15,906,000 $ 148,000
</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 months ended March 31, 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 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 three months
ended March 31, 1999 assuming consummation of the acquisitions as of January 1,
1999 are as follows:
<TABLE>
<S> <C>
Total revenue $29,695,000
Net (loss) (29,112,000)
Basic and diluted net (loss) per share (.88)
</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 continue to actively 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 3% convertible preferred stock and (c) $150 million in cash, of which
up to $70 million, at the Company's option, may be paid in senior notes with a
two-year maturity. The convertible preferred stock will be convertible into
common stock at $44.36 per share. 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 $57 per
share, and increased if the Company's common stock price at closing is below $41
per share. If the Company's stock price at closing is below $33 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
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.
7
<PAGE> 9
CoreComm Limited and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
NOTE 4. FIXED ASSETS
Fixed assets consist of:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
---- ----
(unaudited)
<S> <C> <C>
Operating equipment $ 56,382,000 $ 50,290,000
Computer hardware and software 23,853,000 17,455,000
Other equipment 17,333,000 9,300,000
Construction-in-progress 13,419,000 24,681,000
------------- -------------
110,987,000 101,726,000
Accumulated depreciation (16,319,000) (11,107,000)
------------- -------------
$ 94,668,000 $ 90,619,000
============= =============
</TABLE>
NOTE 5. ACCRUED EXPENSES
Accrued expenses consist of:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
---- ----
(unaudited)
<S> <C> <C>
Payroll and related $ 3,050,000 $ 2,903,000
Taxes, including income taxes 5,969,000 6,089,000
Accrued equipment purchases 13,455,000 13,455,000
Toll and interconnect 6,853,000 637,000
Other 6,219,000 9,131,000
----------- -----------
$35,546,000 $32,215,000
=========== ===========
</TABLE>
NOTE 6. NOTES PAYABLE
Notes payable consist of:
<TABLE>
<CAPTION>
MARCH 31, 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% 2,694,000 3,077,000
Note payable for equipment, interest at 12.75% 6,661,000 6,238,000
Other 252,000 283,000
------------ ------------
184,607,000 184,598,000
Less current portion 6,189,000 5,280,000
------------ ------------
$178,418,000 $179,318,000
============ ============
</TABLE>
8
<PAGE> 10
CoreComm Limited and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
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 three
months ended March 31, 2000 and 1999, NTL charged the Company $397,000 and
$362,000, 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 three months ended
March 31, 2000, the Company charged NTL $61,000, 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
$199,000 and $193,000 for the three months ended March 31, 2000 and 1999,
respectively, as a result of these charges.
NOTE 8. NONRECURRING CHARGES
Nonrecurring charges of $1,426,000 in 2000 are for restructuring costs relating
to the Company's announcement in March 2000 of a reorganization of certain of
its operations. The 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 of USN, and lease exit costs of
$846,000. As of March 31, 2000, none of the provision had been used. The
provision for severance and related costs will be used in 2000 and the provision
for leases will be used through 2003.
NOTE 9. COMMITMENTS AND CONTINGENT LIABILITIES
As of March 31, 2000, the Company had purchase commitments of approximately
$54,000,000 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.
9
<PAGE> 11
CoreComm Limited and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
NOTE 10. SUBSEQUENT EVENT
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 the second quarter of 2000, the Company will record a non-cash
compensation expense of approximately $29.0 million and a non-cash deferred
expense of approximately $31.3 million. The Company will charge the deferred
expense to non-cash compensation expense over the vesting period of the stock
options as follows: $9.7 million in 2000, $12.9 million in 2001, $7.5 million in
2002 and $1.2 million in 2003.
10
<PAGE> 12
CoreComm Limited and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
RESULTS OF OPERATIONS
Three Months Ended March 31, 2000 and 1999
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 2000 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 continue to actively 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.
The increase in revenues to $18,959,000 from $3,596,000 is primarily due to
acquisitions in 1999, which accounted for $13,967,000 of the increase. The
remainder of the increase is primarily due to an increase in CLEC revenues from
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 $1,087,000 in the
three months ended March 31, 1999 from the provision of these services.
Operating costs increased to $23,846,000 from $2,848,000 primarily due to
acquisitions in 1999, which accounted for $15,298,000 of the increase. Operating
costs as a percentage of revenues increased to 126% from 79%. The remainder of
the absolute increase, as well as the increase in percentage terms is the 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 March 31, 1999, operating costs included $890,000 related
to the prepaid cellular debit card and cellular long distance services.
Selling, general and administrative expenses increased to $20,933,000 from
$5,784,000 primarily due to acquisitions in 1999, which accounted for $8,428,000
of the increase. The remainder of the increase is a result of increased selling
and marketing costs and increased customer service costs. These costs are
expected to increase in the foreseeable future as we grow our operations and
customer base.
Corporate expenses include the costs of 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 $2,396,000 in
2000 and $2,292,000 in 1999.
11
<PAGE> 13
CoreComm Limited and Subsidiaries
Nonrecurring charges of $1,426,000 in 2000 are for restructuring costs relating
to the Company's announcement in March 2000 of a reorganization of certain of
its operations. The 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 of USN, and lease exit costs of
$846,000. As of March 31, 2000, none of the provision had been used. 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 $5,214,000 from $428,000 as a result of an
increase in fixed assets and acquisitions in 1999, which accounted for
$3,168,000 of the increase.
Amortization expense increased to $3,170,000 from $151,000 due to the
amortization of goodwill and other intangibles from the acquisitions in 1999.
Interest income and other, net, increased to $2,169,000 from $1,564,000
primarily due to interest income on the Company's cash, cash equivalents and
marketable securities.
Interest expense increased to $3,809,000 from $14,000 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.
Non-cash compensation expense. 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 the second quarter of
2000, the Company will record a non-cash compensation expense of approximately
$29.0 million and a non-cash deferred expense of approximately $31.3 million.
The Company will charge the deferred expense to non-cash compensation expense
over the vesting period of the stock options as follows: $9.7 million in 2000,
$12.9 million in 2001, $7.5 million in 2002 and $1.2 million in 2003.
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. We estimate that these requirements
will aggregate approximately $222 million from April 1, 2000 to December 31,
2000, which excludes the effect of the proposed acquisitions of ATX and
Voyager.net. We intend to use cash and securities on hand of $127.3 million at
March 31, 2000 to meet a portion of our operating and capital requirements. We
require additional financing to fund our planned operations and capital
expenditures in 2000. In addition, we require additional financing to complete
our proposed acquisitions. We are currently negotiating with equipment
manufacturers to provide us with vendor financing, and we currently anticipate
obtaining additional financing in the future. However, there can be no assurance
that the proposed financings will occur.
Acquisitions. In May 1999, we acquired MegsINet and the CLEC 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 have to pay for
the USN assets is capped at $58.6 million. We do not expect the actual
contingent payment to be significant.
12
<PAGE> 14
CoreComm Limited and Subsidiaries
In the future, we plan to make further appropriate acquisitions which may
require significant acquisition related and capital expenditures. 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. We will require between $80 million and $150 million in cash
for the ATX acquisition and approximately $95 million in cash for the
Voyager.net merger. In addition, we will issue 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. We are evaluating our financing
options and will have to issue additional debt and/or equity to fund the cash
portion of these acquisitions. There can be no assurance that we will be able to
obtain the required financing.
Historical Uses of Cash. For the three months ended March 31, 2000, cash used in
operating activities increased to $38,836,000 from $9,039,000 in the three
months ended March 31, 1999 primarily due to the increase in the net loss to
$39,871,000 from $6,522,000. The net loss increased as a result of acquisitions
and an increase in selling and marketing costs and customer service expenses as
we have grown the business.
For the three months ended March 31, 2000, cash used to purchase fixed assets
increased to $18,245,000 from $2,154,000 in the three months ended March 31,
1999. The increase was due to acquisitions and as a result of an increase in
fixed asset purchases.
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 2000
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 (Local Exchange Carrier) facilities in Columbus,
Ohio, Cleveland, Ohio and Chicago, Illinois and are currently developing three
additional markets: Detroit, Michigan, 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 2000-2002.
We believe that our Smart LEC strategy enables us to enter and construct our
networks into new cities with relatively low up-front expenditures and a
significant proportion of success-based capital expenditures. Depending on the
size of the market, we expect our up-front capital expenditures to be
approximately $7 to $10 million, which includes the costs of installing our
switch facility and our collocation facilities and other related initial set-up
and installation expenses.
13
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CoreComm Limited and Subsidiaries
The significant majority of the additional capital costs will be based on
subscriber levels. These costs will include equipment to increase network
capacity, such as ports and modems in our switch and access devices. These costs
will vary based on the type, volume and services of each customer, but are
estimated to be approximately $400-$500 per line. For example, a sample target
market may have 1 million business lines and 2 million residential lines, for a
total of 3 million lines. Our total level of capital expenditures for that
market will depend on our level of penetration. If we are able to gain 3%
overall penetration of the market, we would serve approximately 90,000 lines,
and based on approximately $400-$500 per line, we would spend approximately
$35-$45 million on additional capital costs developing and expanding our
networks in the market. A lower or higher penetration would decrease or
increase, respectively, our additional capital costs.
The foregoing summary of the cost structure of our entry into a typical market
does not purport to be indicative of our performance, but is provided solely as
a basis for understanding our basic cost structure for individual communications
services in a typical target market. You should be aware that our actual
performance could differ materially from our current expectations.
Operations. Our businesses will also consume capital to acquire new customers
and to finance the working capital required to support these new customers.
These businesses will also require additional billing, customer service and
other back-office infrastructure. These capabilities can be expanded in-house or
can be outsourced to reduce up-front capital requirements. To date, our strategy
has been to utilize the expertise developed by our management to develop
in-house billing and back-office capabilities.
LMDS. Local Multipoint Distribution Service ("LMDS") is a 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.
14
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CoreComm Limited and Subsidiaries
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.
Our ability to raise additional capital will be dependent on a number of
factors, such as general economic and market conditions, which are beyond our
control. If we are unable to obtain additional financing or to obtain it on
favorable terms, we may be required to delay the construction of our Smart LEC
network, forego attractive business opportunities, or take other actions which
could adversely affect our business, results of operations and financial
condition.
We are a holding company with no significant assets other than cash and
securities and investments in and advances to our subsidiaries. We are therefore
likely to be dependent upon receipt of funds from our subsidiaries to meet our
own obligations. However, our subsidiaries' proposed debt agreements may prevent
the payment of dividends, loans or other distributions to us (except in certain
limited circumstances).
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.
15
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CoreComm Limited and Subsidiaries
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
27. Financial Data Schedule
(b) Reports on Form 8-K.
During the quarter ended March 31, 2000, the Company filed the
following current reports on Form 8-K:
(i) Report dated January 18, 2000, reporting under Item
5, Other Events, that the Company's Board of
Directors declared a 3-for-2 stock split by way of a
stock dividend.
(ii) Report dated February 29, 2000, reporting under Item
5, Other Events, that the Company unveiled its $10
million state-of-the-art Technology Management Center
in Cleveland.
(iii) Report dated March 10, 2000, reporting under Item 5,
Other Events, the announcement that the Company
entered into a definitive agreement to acquire ATX.
(iv) Report dated March 13, 2000, reporting under Item 5,
Other Events, the announcement that the Company and
Voyager.net entered into a definitive agreement to
merge in a stock and cash transaction.
No financial statements were filed with these reports.
16
<PAGE> 18
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: May 11, 2000 By: /s/ Barclay Knapp
-------------------------
Barclay Knapp
President, Chief Executive Officer and
Chief Financial Officer
Date: May 11, 2000 By: /s/ Gregg N. Gorelick
--------------------------
Gregg N. Gorelick
Vice President-Controller and Treasurer
(Principal Accounting Officer)
17
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