<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 1, 2000
REGISTRATION NO. 333-47984
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------------
CORECOMM LIMITED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 4812 23-3032245
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
110 EAST 59TH STREET, 26TH FLOOR
NEW YORK, NEW YORK 10022
(212) 906-8440
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
RICHARD J. LUBASCH, ESQ.
CORECOMM LIMITED
110 EAST 59TH STREET, 26TH FLOOR
NEW YORK, NEW YORK 10022
(212) 906-8440
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPY TO:
JOHN C. KENNEDY, ESQ.
PAUL, WEISS, RIFKIND,
WHARTON & GARRISON
1285 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019
(212) 373-3000
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC:
At such time or times on and after this Registration Statement becomes
effective as the selling securityholders may determine.
------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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--------------------------------------------------------------------------------
<PAGE> 2
PROSPECTUS
CORECOMM LIMITED
-------------------------
6% CONVERTIBLE SUBORDINATED NOTES DUE 2006, SHARES OF
SERIES B SENIOR CONVERTIBLE EXCHANGEABLE PREFERRED STOCK
AND SHARES OF COMMON STOCK
-------------------------
Selling securityholders who are identified in this prospectus may use this
prospectus to offer and sell:
- our 6% convertible subordinated notes due 2006
- shares of our Series B senior convertible exchangeable preferred stock
- shares of our common stock, including common stock that will be issued
upon conversion of the convertible notes, upon conversion of or as
dividends on our Series B preferred stock or as payment of interest on
our senior unsecured notes
- rights to purchase shares of Series C junior participating preferred
stock, which rights are attached to each share of common stock
We will not receive any proceeds from the sale of the convertible notes,
the Series B preferred stock, the common stock or the rights by the selling
securityholders. The offering price for the convertible notes or the Series B
preferred stock is not set but will be determined according to negotiation
between a selling securityholder and the prospective purchaser. The offering
price for the common stock will be negotiated or, if sold on the Nasdaq National
Market, at the prevailing market price. We will pay all expenses (other than
selling commissions and fees and stock transfer taxes) of the registration and
sale of the convertible notes, the Series B preferred stock and the common
stock.
Our common stock is traded on the Nasdaq National Market under the symbol
COMM. On October 31, 2000, the last reported sales price of the common stock was
$5.75 per share. There is no public market for the convertible notes or the
Series B preferred stock, and we do not intend to apply for listing of them on
the Nasdaq National Market or any other securities exchange or to seek approval
for quotation of them through any automated quotation system.
WE URGE YOU TO CAREFULLY READ THE "RISK FACTORS" SECTION BEGINNING ON PAGE
11, WHERE WE DESCRIBE SPECIFIC RISKS ASSOCIATED WITH THESE SECURITIES, BEFORE
YOU MAKE YOUR INVESTMENT DECISION.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is November 1, 2000
<PAGE> 3
In this prospectus, "we," "us" and "our" refer to CoreComm Limited and,
unless the context requires otherwise, its consolidated subsidiaries.
CoreComm Limited was incorporated in Delaware in February 2000 as "ATX
Telecommunications Services, Inc." Our predecessor for accounting purposes is
CoreComm Limited, a Bermuda corporation. As part of our acquisition of ATX in
September 2000, CoreComm Bermuda was merged into a newly-formed Delaware
corporation. The newly-formed Delaware corporation then merged into ATX with ATX
being the surviving corporation and changing its name to "CoreComm Limited."
Unless otherwise noted, all references to our historical business are to the
historical business of CoreComm Bermuda and not that of ATX.
The term "Acquisitions" refers to the acquisitions of MegsINet Inc. and
certain assets of USN Communications, Inc. in May 1999, the assets of Stratos
Internet Group, Inc. in November 1998, the operating assets and related
liabilities of OCOM Corporation in June 1998, and Digicom, Inc. and the
operating assets of JeffRand Corp. (known as Wireless Outlet) in April 1998.
None of the convertible notes, the Series B preferred stock, the common
stock or the rights have been recommended by any federal or state securities
commission or regulatory authority. Furthermore, these authorities have not
confirmed that this prospectus is truthful or complete. Any representation to
the contrary is a criminal offense.
-------------------------
WE HAVE NOT UNDERTAKEN ANY ACTION TO PERMIT A PUBLIC OFFERING OF THE
SECURITIES OFFERED BY THIS PROSPECTUS OUTSIDE THE UNITED STATES OR TO PERMIT THE
POSSESSION OR DISTRIBUTION OF THIS PROSPECTUS OUTSIDE THE UNITED STATES. PERSONS
OUTSIDE THE UNITED STATES WHO COME INTO POSSESSION OF THIS PROSPECTUS MUST
INFORM THEMSELVES ABOUT AND OBSERVE ANY RESTRICTIONS RELATING TO THE OFFERING OF
THE SECURITIES OFFERED BY THIS PROSPECTUS AND THE DISTRIBUTION OF THIS
PROSPECTUS OUTSIDE OF THE UNITED STATES.
-------------------------
Smart LEC(SM) is a service mark of CoreComm Limited.
<PAGE> 4
PROSPECTUS SUMMARY
This summary highlights information about us which is contained elsewhere
in this prospectus. This summary may not contain all the information that is
important to you. You should read the entire prospectus, including the section
entitled "Risk Factors" and the financial statements and related notes,
carefully before making a decision. Various statements in this prospectus are
forward-looking statements. Please refer to the section entitled "Special Note
Regarding Forward-Looking Statements." Smart LEC(SM) is a service mark of
CoreComm Limited.
We are an innovative communications company that provides integrated
telephone, Internet and high-speed data services to business and residential
customers in targeted markets throughout the United States. We are exploiting
the convergence of telecommunications and information services through our Smart
LEC(SM) network strategy. The Smart LEC network strategy involves the ownership
of telephone switching equipment and the leasing of the local telephone lines
that run directly to homes and businesses combined with the provision of a
national network that carries Internet traffic. This configuration of locally
and nationally owned and leased facilities allows us to deliver a wide range of
communications services at a lower cost to start with in each area in which we
provide services. Our goal is to expand our facilities, geographical reach and
services to become a significant switch-based communications provider in
selected major markets across the United States. We currently offer services to
business and residential customers located principally in Ohio, Illinois,
Michigan, Wisconsin, Indiana, Minnesota, New York, Pennsylvania, Maryland, New
Jersey, Virginia, Delaware, Washington, D.C. and Massachusetts. We are a
competitive local exchange carrier. A competitive local exchange carrier,
sometimes referred to as a "CLEC," is a local telephone service provider
competing against the established local telephone service provider that was the
service provider in a region prior to the opening of local telephone service to
competition. As of June 30, 2000, on a pro forma basis, taking into account the
completed acquisitions of ATX and Voyager, we would have had more than 230,000
business and residential local telephone access lines in service and 460,000
Internet customers. We currently operate an Internet network that connects
approximately 89 cities using approximately 55,000 miles of leased circuits. We
believe that this network will allow us to take advantage of economies of scale
in the delivery of voice, video and data. We have been developing our packaged
service offerings since 1996 and have recently expanded our products to include
high-speed services utilizing digital subscriber line (DSL) technology.
Our success primarily depends upon our management's approach to our
network, back office and customer acquisition, as well as our ability to:
- target large, underserved segments in concentrated metropolitan areas,
addressing the underlying demand for consumer choice in traditional
telephone as well as growing demand for high-speed data services;
- capture multiple revenue streams through offering customers bundled
service offerings, differentiated from other providers;
- deliver "Internet Centric" product offerings and support to our
customers;
- leverage proven management talent; and
- utilize Smart LEC strategy to maximize speed to market and minimize
investment risk.
Business Strategy Overview
A core part of our business strategy is to offer bundled communications
services, including local and long distance telephone services, Internet access
and high speed data services, all with a single bill. We believe that an
integrated telephone and Internet strategy utilizing DSL technology will be
particularly appealing to our targeted customer base and will significantly
enhance our ability to attract, retain and gain additional revenues from our
subscribers.
1
<PAGE> 5
Our service offerings are based on the following customer proposition:
"Customers buy what they need and pay for what they get." We combine and price
our products to give the customer increased flexibility, choice, and "value for
money," while also enhancing convenience and simplicity. With this strategy, we
believe that we can capture a larger share of our customers' communications
expenditures and increase customer retention. In addition, we are currently
investigating ways to add video services, including multichannel television, as
a part of our bundled offerings. Our bundling of services is differentiated from
other incumbent operators because we face fewer regulatory requirements, and can
often be differentiated from other operators because we are not constrained by
the technical limits or cost structure of a less advanced or less capital
efficient network architecture. We believe that our DSL proposition is
especially important as we compete against data service providers utilizing
cable modems, who have difficulty guaranteeing a direct correlation between
price paid and speed of access received.
The Internet is a key management tool in the marketing, provisioning and
billing of our services, as well as in the ongoing support of our customers. We
also use the Internet as a sales tool by attracting customers through our web
site, www.core.com. We are actively developing and incorporating systems to
deliver "Internet Centric" operational support systems which are planned to add
functionality in the areas of electronic billing, web-based customer care and
e-commerce and e-services. We use the Internet as an efficient means of
communication with our business and residential customers, providing on-line
sign-up and self-provisioning of services. We believe that using the Internet to
communicate with the customer will be not only convenient for the customer, but
will also increase our operating efficiency. We believe that by encouraging the
self-provisioning of communications products, especially in the broader
residential market, we will particularly attract the most data-intensive and
higher margin customers at lower customer acquisition and operating costs. We
recently acquired Voyager.net, Inc. with this aspect of our business strategy in
mind.
We intend to focus on both residential and small to medium-sized business
customers, including the Small Office/Home Office (SOHO) market, located in
major metropolitan areas in the United States. These segments contain many
communications-intensive customers that we believe are often underserved by both
existing incumbent carriers and new entrants. We seek to attract customers in
these segments by offering innovative services, superior customer service and
overall value. By targeting both of these sectors, we expand our potential
revenue base, leverage our marketing costs over a greater number of potential
customers and increase network utilization with more subscribers. We believe
that marketing and provisioning through the Internet will allow us to deploy our
strategy more rapidly than we could with only a direct sales force. Our recent
acquisition of ATX Telecommunications Services, Inc. has added a number of large
metropolitan areas to our network.
Communications Industry
We are participating in the large and rapidly changing U.S. wireline
telecommunications industry. We believe that the wireline telecommunications
industry benefits from positive price elasticity, as well as growing,
non-cyclical demand for services. According to the U.S. Census Bureau, the total
wireline segment of the U.S. telecommunications market was estimated to be
approximately $208 billion in 1998. Approximately 50% of this revenue is derived
from local service and network access. In addition, demand for access to the
Internet and data services is having a significant effect on the U.S.
communications industry, and is expected to continue its rapid growth. Various
estimates project this segment to grow significantly over the next several
years.
2
<PAGE> 6
RECENT DEVELOPMENTS
On September 29, 2000, we completed two significant strategic acquisitions.
We acquired Voyager.net, Inc., a large independent Internet communications
company focused on the Midwestern United States, with approximately 368,000
subscribers as of June 30, 2000. We acquired Voyager for approximately $36.1
million in cash and 19,431,081 million shares of our common stock. In addition,
we repaid approximately $24.0 million of Voyager debt including accrued
interest.
We also acquired ATX Telecommunications Services, Inc., a competitive local
exchange carrier providing integrated voice and high-speed data services,
including long distance, local, wireless and network services through the use of
telephone switching equipment and other physical facilities. On June 30, 2000,
ATX had approximately 130,000 installed local access lines. We acquired ATX for
approximately $39.3 million in cash, approximately $108.7 million of our senior
unsecured notes due 2003, 12,398,334 million shares of our common stock and
$250.0 million liquidation preference of our Series B preferred stock.
Voyager and ATX have been integrated into CoreComm, and the companies
operate as one entity.
The cash portion of the merger consideration was funded in part from cash
on hand and in part through funds made available under a $150.0 million senior
secured credit facility and through the issuance of $50.0 million liquidation
preference of our Series A preferred stock to a group of investors.
-------------------------
We were incorporated in Delaware in February 2000. Our common stock is
listed on the Nasdaq National Market and trades under the symbol "COMM." Our
office is located at 110 East 59th Street, New York, New York 10022, and our
telephone number is (212) 906-8485.
3
<PAGE> 7
THE OFFERING OF CONVERTIBLE NOTES
Securities Offered............ Up to $175,000,000 aggregate principal amount
of our 6% convertible subordinated notes due
2006. These notes were originally issued by
CoreComm Limited (Bermuda), and had been
covered by a registration statement filed by
that entity. Subsequently, on September 29,
2000, CoreComm Limited (Bermuda) merged into
us. Accordingly, we assumed the notes, and we
are filing this registration statement.
Maturity...................... October 1, 2006
Interest...................... April 1 and October 1 of each year, commencing
April 1, 2000
Conversion.................... The convertible notes, unless previously
redeemed, will be convertible at the option of
the holder of them at any time after 90 days
following the date of their original issuance
and prior to maturity into 6,388,416 shares of
common stock at a conversion price of $27.39
per share, subject to adjustment. Please refer
to the section entitled "Description of
Convertible Notes -- Conversion."
Optional Redemption........... On or after October 1, 2002, we may redeem some
or all of the convertible notes at any time at
the redemption prices, and subject to certain
limitations, described in the section
"Description of Convertible Notes" under the
heading "Optional Redemption."
Ranking....................... The convertible notes are general unsecured
obligations ranking junior to all of our
existing and future senior debt (as we define
it in this prospectus). In addition, they will
effectively rank behind all of our secured debt
to the extent of the value of the assets
securing that debt and all existing and future
debts and other liabilities of our
subsidiaries. As of June 30, 2000, on a pro
forma basis, after giving effect to the
financing transactions we completed in
connection with the acquisitions of ATX and
Voyager, the convertible notes would have been
subordinated to $75.0 million of outstanding
indebtedness under our $150.0 million senior
secured credit facility and approximately
$108.7 million of senior unsecured notes.
As of June 30, 2000, on a pro forma basis,
after giving effect to the financing
transactions we completed in connection with
the acquisitions of ATX and Voyager, the
convertible notes would have been effectively
subordinated to $33.3 million of indebtedness
and $121.1 million of other liabilities of our
subsidiaries. In addition, our subsidiaries
have guaranteed our obligations under the
$150.0 million senior secured credit facility.
Change of Control............. If we experience specific kinds of changes in
control, we must offer to repurchase the
convertible notes at the prices listed in the
section "Description of Convertible Notes"
under the heading "Repurchase at the Option of
Holders."
Risk Factors.................. Please refer to "Risk Factors" for a discussion
of risk factors that should be considered in
evaluating an investment in the convertible
notes.
4
<PAGE> 8
Use of Proceeds............... The selling securityholders will receive all of
the net proceeds from the sale of the offered
securities sold under this prospectus. We will
not receive any proceeds from those sales.
THE OFFERING OF SERIES B PREFERRED STOCK
Preferred Stock Offered....... 250,000 shares of our Series B Senior
Convertible Exchangeable Preferred Stock held
by selling stockholders who are the former sole
stockholders of ATX prior to its merger with
CoreComm. The preferred stock was issued to the
former sole stockholders of ATX as part of the
consideration they received in connection with
the merger between ATX and CoreComm.
Liquidation Preference........ $1,000 per share liquidation preference, plus
any accumulated and unpaid dividends.
Dividends..................... Cumulative annual dividends at an initial
annual rate of $30.00 per share are payable
quarterly in arrears on September 30, December
31, March 31 and June 30 of each year
commencing December 31, 2000 when, if and as
declared by our board of directors. If the
senior unsecured notes issued by us to the
original holders of the shares Series B
preferred stock remain outstanding on September
29, 2001, the annual dividend rate will then
increase to $50.00 per share, and if any of
those senior unsecured notes remain outstanding
on March 29, 2002, the annual dividend rate
will then increase to $70.00 per share. At our
option we may pay dividends either in cash or
in shares of our common stock. Our ability to
declare and pay dividends may be limited by
applicable law and the terms of documents that
govern our indebtedness.
If we elect to pay dividends in the form of
shares of our common stock, the shares will be
valued at 98% of the volume weighted average
sale price of our common stock during the five
trading days ending on the last trading day
before the dividend payment date.
Conversion.................... Each share of Series B preferred stock is
convertible at any time at the option of the
holder into that number of whole shares of our
common stock as is equal to the liquidation
preference of $1,000 per share divided by the
then applicable conversion price. The initial
conversion price is $32.11. If we have repaid
any of our senior unsecured notes on or prior
to March 29, 2001, the conversion price will
increase, depending on the amount of senior
unsecured notes that we have repaid, to up to
$36.05 if all of our senior unsecured notes
have been repaid. The conversion price is
subject to further adjustment upon the
occurrence of specified events.
Change of Control............. In the event we experience a change of control,
holders of the Series B preferred stock will
have a one-time option to convert their shares
of Series B preferred stock into shares of our
common stock at a special conversion price
equal to the greater of (1) the market price
per share of our common stock as of the date of
the change of control and (2) $5.29. See
"Description of the Series B Preferred
Stock -- Change of Control."
5
<PAGE> 9
Exchange at CoreComm's
Option........................ After September 29, 2002, we may exchange all
or some of the shares of Series B preferred
stock for shares of our common stock, if our
common stock has traded at a price equal to or
greater than 125% of the conversion price for a
specified trading period. After September 29,
2005 we may exchange all or some of the shares
of Series B preferred stock for shares of our
common stock if the closing price of our common
stock is equal to or greater than the then
applicable conversion price for a specified
time.
Mandatory Redemption.......... We are required on September 29, 2020 to redeem
any shares of Series B preferred stock that
then remain outstanding. At our option we may
redeem the outstanding shares for cash, in an
amount equal to $1,000 per share, plus accrued
unpaid dividends to the redemption date, or in
shares of our common stock. If we elect to
redeem shares and Series B preferred stock
using shares of our common stock, those shares
of common stock will be valued at 98% of the
volume weighted average sale price of our
common stock during the five trading day period
ending on the last trading day before the
redemption date.
Voting Rights................. Holders of Series B preferred stock will have
no voting rights with respect to general
corporate matters except as provided by
Delaware law or, in limited circumstances, as
provided in our certificate of incorporation
relating to the Series B preferred stock. See
"Description of the Convertible Preferred
Stock -- Voting Rights."
Ranking....................... With respect to dividends and liquidation
preference, the Series B preferred stock will
rank senior to our common stock and senior to
our common stock and senior to or equally with
other existing and future series of our
preferred stock. The Series B preferred stock
will rank senior to our common stock and senior
to or equally with other existing and future
series of our preferred stock. We may issue
additional series of preferred stock that rank
equally with our Series B preferred stock,
including additional shares of Series B
preferred stock, without a vote of the holders
of Series B preferred stock. We may only create
series or classes of preferred stock that rank
senior to the Series B preferred stock if the
creation of those senior shares is approved by
the holders of a majority of the outstanding
shares of Series B preferred stock.
No Listing.................... The Series B preferred stock is not listed for
trading on any securities exchange or market,
and we do not currently intend to, nor are we
required to, list the shares of Series B
preferred stock on any securities exchange or
market.
THE OFFERING OF COMMON STOCK
Securities Offered............ Common stock, par value $0.01 per share
including:
- 10,713,555 shares held by selling
stockholders who are the former sole
stockholders of ATX prior to its merger with
CoreComm. The shares of common stock were
issued to the former sole stockholders of ATX
as part of the consideration
6
<PAGE> 10
they received in connection with the merger between ATX and CoreComm;
- up to 3,500,000 shares of common stock
issuable as payments of interest of the
registrant's senior unsecured notes. The
senior unsecured notes, which are not being
registered on this registration statement,
were issued to the former sole stockholders
of ATX as part of the consideration they
received in connection with the merger
between ATX and CoreComm;
- shares issuable upon conversion of the
convertible notes;
- shares issuable upon conversion of the Series
B preferred stock; and
- shares that may be issued as dividends on the
Series B preferred stock;
Voting Rights................. Holders of common stock will have one vote per
share.
Use of Proceeds............... The selling securityholders will receive all of
the net proceeds from the sale of the offered
securities sold under this prospectus. We will
not receive any proceeds from those sales.
Lock-up and Other Restrictions
on Transfer................... The current holders of 10,713,555 of the shares
of common stock offered by this prospectus, who
were the sole stockholders of ATX
Telecommunications Services, Inc. prior to its
merger with CoreComm Limited, are subject to
the following restrictions on transfer:
- They are prohibited from directly or
indirectly offering, selling, assigning,
pledging, encumbering or otherwise
transferring or disposing of that common
stock prior to June 29, 2001, subject to
limited exceptions. However, if less than 50%
of the aggregate principal amount of our
senior unsecured notes issued to them in the
merger has been repaid by February 29, 2001,
the registration on transfer will cease with
respect to 2,678,389 of those shares,
although the holders of those shares may only
transfer their shares in accordance with the
volume limitations set forth in Rule 144(e)
of the Securities Act.
- In any public offering, relating to those
shares, each must use his or its best efforts
to achieve a sufficiently broad distribution
such that no person or related group will
purchase stock representing more than 5% of
the total voting power of our outstanding
securities, assuming the full conversion of
all of our outstanding convertible
securities, subject to exceptions and
qualifications.
For more information regarding these
restrictions, please see the section of this
prospectus entitled "Description of Capital
Stock -- Stockholders' Agreement."
Nasdaq National Market
Symbol........................ "COMM"
7
<PAGE> 11
Rights to Purchase Series C
Preferred Stock............. Each share of common stock has an associated
right to purchase our Series C junior
participating preferred stock. Each right
entitles the holder to purchase one-one
hundredth of a share of Series C preferred
stock for a purchase price of initially $50.00,
subject to adjustment. The rights will not be
separable from the common stock until the tenth
business day after it is publicly announced
that a party has acquired more than 18% of our
outstanding common stock or the tenth business
day after a tender offer for more than 18% of
our outstanding common stock is announced. If a
party acquires 18% of our outstanding common
stock or if our board of directors otherwise
determines in good faith that there is an
adverse acquiror, the right will effectively
entitle the holder to purchase, for the payment
of the purchase price, common stock worth twice
the purchase price at a price per share equal
to the then current market price. See
"Description of Capital Stock -- The
Shareholder Rights Plan."
8
<PAGE> 12
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
The following summary financial data of CoreComm and its predecessor, OCOM
Corporation Telecoms Division, has been derived from, and should be read in
conjunction with, the historical consolidated financial statements and related
notes included in this prospectus. The summary historical financial data relates
to OCOM as it was operated prior to its acquisition by CoreComm.
The following pro forma financial data as of and for the six months ended
June 30, 2000 and for the year ended December 31, 1999, gives effect to the ATX
and Voyager mergers, as well as the acquisitions of MegsINet and USN. This
information should be read in conjunction with the unaudited pro forma financial
data included elsewhere in this prospectus.
Interim data for the six months ended June 30, 2000 and 1999 are unaudited
but include, in our opinion, all adjustments consisting only of normal recurring
adjustments necessary for a fair presentation of that data. Results for the six
months ended June 30, 2000 are not necessarily indicative of the results that
may be expected for any other interim period or the year as a whole.
In 2000, we recorded a non-cash compensation expense of approximately $32.2
million in accordance with APB opinion No. 25, "Accounting for Stock Issued to
Employees."
In 1999, we acquired 100% of the stock of MegsINet Inc. and some of the
assets of USN Communications, Inc. In addition, we issued $175.0 million in
aggregate principal amount of 6.00% convertible subordinated notes due 2006.
<TABLE>
<CAPTION>
HISTORICAL
----------------------------------
PRO FORMA
---------------------------- SIX MONTHS ENDED
SIX MONTHS YEAR ENDED JUNE 30, YEAR ENDED
ENDED DECEMBER 31, ------------------- DECEMBER 31,
JUNE 30, 2000 1999 2000 1999 1999
------------- ------------ --------- ------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues.......................... $ 151,982 $ 297,873 $ 38,356 $16,032 $ 58,151
Operating expenses................ 343,707 576,016 157,461 40,695 161,376
Net (loss)........................ (203,767) (297,983) (123,061) (22,576) (103,524)
Basic and diluted net (loss) per
common share(1)................. (2.98) (4.78) (3.12) (.74) (3.03)
Basic and diluted weighted average
number of common shares(1)...... 71,330 66,018 39,501 30,632 34,189
Ratio of Earnings to Fixed
Charges(2)...................... n/a n/a -- -- --
<CAPTION>
HISTORICAL
-----------------------------------------------
FOR THE PERIOD THE PREDECESSOR (OCOM)
FROM APRIL 1, ------------------------------
1998 (DATE FOR THE PERIOD
OPERATIONS FROM YEAR ENDED
COMMENCED) TO JANUARY 1, 1998 DECEMBER 31,
DECEMBER 31, TO ------------
1998 MAY 31, 1998 1997
-------------- --------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues.......................... $ 6,713 $1,452 $ 3,579
Operating expenses................ 25,139 4,234 7,954
Net (loss)........................ (16,255) (2,782) (4,379)
Basic and diluted net (loss) per
common share(1)................. (.55) (.09) (.15)
Basic and diluted weighted average
number of common shares(1)...... 29,678 29,664 29,419
Ratio of Earnings to Fixed
Charges(2)...................... -- -- --
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 2000
------------------------
HISTORICAL PRO FORMA
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital (deficiency)................................ $ 22,725 $ 16,003
Fixed assets -- net......................................... 109,739 173,489
Total assets................................................ 312,915 1,147,765
Long-term debt and capital leases........................... 185,255 368,300
Shareholders' equity........................................ 48,371 631,695
</TABLE>
---------------
(1) After giving retroactive effect to the 3-for-2 stock split by way of stock
dividend paid in September 1999 and the 3-for-2 stock split by way of stock
dividend paid in February 2000. The weighted average number of common shares
prior to September 1998 are equivalent to the historical weighted average
shares of CoreComm's former parent company, Cellular Communications of
Puerto Rico, Inc. (since CCPR shareholders received one CoreComm common
share for each CCPR share owned). We have never declared or paid any cash
dividends.
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<PAGE> 13
(2) For purposes of computing the ratio of earnings to fixed charges, earnings
consist of earnings before income taxes plus fixed charges. Fixed charges
consist of interest, amortization of debt issuance costs and the portion of
rental expense that represents the interest factor. Earnings were
insufficient to cover our fixed charges by $122,789,000 and $22,011,000 for
the six month periods ended June 30, 2000 and 1999, respectively;
$102,793,000 and $15,815,000 for the year ended December 31, 1999 and the
period from April 1, 1998 to December 31, 1998, respectively; $2,782,000 for
OCOM's period from January 1, 1998 to May 31, 1998; and $4,379,000 for
OCOM's fiscal year ended December 31, 1997.
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<PAGE> 14
RISK FACTORS
You should consider carefully all of the information set forth in this
prospectus and incorporated by reference in this prospectus. Please refer to
"Where You Can Find More Information." You should particularly evaluate the
following risks before deciding to purchase the convertible notes, the Series B
preferred stock or the common stock, including the common stock that is issuable
upon conversion of the convertible notes or upon conversion of or as dividends
on the Series B preferred stock. Various statements in this prospectus
(including some of the following risk factors) constitute forward-looking
statements. Please refer to the section entitled "Special Note Regarding
Forward-Looking Statements."
RISK FACTORS RELATING TO OUR BUSINESS:
WE ARE AT RISK OF NOT BEING ABLE TO FINANCE OUR OPERATIONS, DEVELOP FURTHER
OUR BUSINESS, FUND OUR CAPITAL COMMITMENTS AND SERVICE OUR INDEBTEDNESS,
UNLESS WE RAISE ADDITIONAL SIGNIFICANT AMOUNTS OF CASH.
We intend to fund our requirements from cash, cash equivalents and
marketable securities on hand, future issuances of both public and private debt
and equity, and funds internally generated by operations. Specifically, we
presently have commitments available to us for additional financing of $125.0
million. $75.0 million of that $125.0 million is in the form of a $150.0 million
senior secured credit facility provided to us by The Chase Manhattan Bank, under
which $75.0 million has already been drawn, and $50.0 million of that $125.0
million is available to us in the form of a senior unsecured credit facility for
which we have received a commitment from The Chase Manhattan Bank and Chase
Securities Inc. The $125.0 million in additional financing remains subject to
various conditions, including, but not limited to, the ongoing satisfaction of
financial covenants related to the Company's operations. The Company may pursue
additional forms of financing, but no assurances can be made that such financing
will be available.
In general, we cannot give you any assurance that sufficient resources will
be available to meet our expected requirements and obligations. Thus, we cannot
assure you that we will be able to repay our present or future indebtedness.
Accordingly, we may be required to consider a number of measures, including:
- refinancing all or a portion of our debt;
- seeking modifications of the terms of our debt;
- seeking additional debt or equity financing, which, in the case of debt,
would be subject to obtaining necessary lender consents; or
- a combination of these measures.
In addition, as a result of the general conditions of the capital markets
in our industry, we have eliminated business projects from our current plans,
including our entry into several markets.
We cannot assure you that the above measures can be accomplished, and if
accomplished, whether they will be adequate to pay our obligations or on terms
favorable to us.
WE EXPECT TO INCUR NET LOSSES AND NEGATIVE CASH FLOW FROM OPERATIONS.
On a pro forma basis giving effect to the Voyager merger and the ATX
merger, we would have had net losses available to common stockholders for the
six months ended June 30, 2000 and for the fiscal year ended December 31, 1999
of approximately $212.6 million and $315.6 million, respectively.
Capital and operating expenditures for our Smart LEC network and our other
businesses will result in negative cash flow, which we expect will continue at
least until we establish an adequate customer base for our services.
We also expect to incur substantial future operating losses, and we cannot
assure you that we will achieve or sustain profitability in the future. If we
fail to become profitable, it could adversely affect our ability to sustain our
operations and to obtain additional required funds. In addition, failing to
become profitable would adversely affect our ability to make the required
payments on our indebtedness.
11
<PAGE> 15
For more information, please refer to the section of this prospectus
entitled "Unaudited Pro Forma Financial Data."
WE HAVE HISTORICALLY HAD A DEFICIENCY OF EARNINGS TO FIXED CHARGES, AND OUR
EARNINGS IN THE FUTURE MAY NOT BE SUFFICIENT TO COVER THOSE FIXED CHARGES.
For the six months ended June 30, 2000, the year ended December 31, 1999,
the period from April 1, 1998 to December 31, 1998, for OCOM's period from
January 1, 1998 to May 31, 1998, and for OCOM's fiscal years ended December 31,
1997, 1996 and 1995, our earnings were insufficient to cover fixed charges by
approximately $122.8 million, $102.8 million, $15.8 million, $2.8 million, $4.4
million, $1.1 million and $4.2 million, respectively.
OUR SUBSTANTIAL INDEBTEDNESS COULD ADVERSELY AFFECT OUR FINANCIAL HEALTH AND
PREVENT US FROM FULFILLING OUR DEBT OBLIGATIONS.
We have substantial debt and debt service obligations. As of June 30, 2000,
on a pro forma basis, after giving effect to the financing transactions we
completed in connection with our acquisitions of ATX and Voyager, we would have
had $391.9 million of consolidated indebtedness outstanding and $631.7 million
of stockholders' equity. We are also currently negotiating with equipment
manufacturers for significant vendor financing. In addition, from time to time,
we may pursue additional debt financing arrangements. Although the indenture
governing the convertible notes does not restrict our or our subsidiaries'
ability to incur additional indebtedness, our senior unsecured notes and the
credit agreement governing our senior secured credit facility contain
significant restrictions on our subsidiaries' abilities to incur additional
indebtedness. We anticipate that the credit agreement that will govern our
senior unsecured credit facility will contain restrictions similar to those
contained in the senior secured credit facility. See "Description of Convertible
Notes" and "Description of Our Other Indebtedness."
The substantial amount of debt that we have and that we or our subsidiaries
may incur in the future could have important consequences for you. For example,
it could:
- make it more difficult for us to satisfy our obligations with respect to
the convertible notes;
- limit our ability to obtain additional financing, if we need it, for
working capital, capital expenditures, acquisitions, debt service
requirements or other purposes;
- increase our vulnerability to adverse economic and industry conditions;
- require us to dedicate a substantial portion of our cash flow from
operations to payments on our debt, thereby reducing funds available for
operations, future business opportunities or other purposes;
- limit our flexibility in planning for, or reacting to, changes in our
business and the industry in which we compete; and
- place us at a competitive disadvantage compared to our competitors that
have less debt.
RESTRICTIONS IMPOSED BY OUR DEBT AGREEMENTS MAY SIGNIFICANTLY LIMIT OUR
ABILITY TO EXECUTE OUR BUSINESS STRATEGY AND INCREASE THE RISK OF DEFAULT
UNDER OUR DEBT OBLIGATIONS.
The senior unsecured notes and the credit agreement governing our senior
secured credit facility contain a number of covenants which may significantly
limit our or our subsidiaries' ability to, among other things:
- borrow additional money;
- make capital expenditures and other investments;
- pay dividends;
- merge, consolidate or dispose of our assets;
- enter into transactions with related entities;
- incur additional liens; and
- refinance junior indebtedness.
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<PAGE> 16
It is an event of default under our senior unsecured notes and the credit
agreement for our senior secured credit facility if we experience certain change
of control events including the acquisition by a person or group of more than
35% of voting power or a change in the majority of persons on our board.
In addition, the senior secured credit agreement contains financial
maintenance covenants. If we fail to comply with these covenants, we will be in
default under that credit agreement. A default, if not waived, could result in
acceleration of our indebtedness, in which case the debt would become
immediately due and payable. If this occurs, we may not be able to repay our
debt or borrow sufficient funds to refinance it. Even if new financing is
available, it may not be on terms that are acceptable to us. In addition,
complying with these covenants may cause us to take actions that we otherwise
would not take, or not take actions that we otherwise would take.
We anticipate that the credit agreement that will govern our senior
unsecured credit facility will contain substantially similar covenants and
change of control events as those applicable to our senior secured credit
agreement.
Please refer to the sections of this prospectus entitled "Description of
Convertible Notes -- Certain Covenants" and "Description of Our Other
Indebtedness."
TO DEVELOP OUR BUSINESS, FUND OUR CAPITAL COMMITMENTS AND SERVICE OUR
INDEBTEDNESS AND OTHER OBLIGATIONS, WE WILL REQUIRE A SIGNIFICANT AMOUNT OF
CASH.
The continued development, construction and operation of our business will
require substantial capital.
Our Smart LEC strategy will require large amounts of capital to build and
maintain the network, including building through acquisitions. In addition, our
businesses that resell services provided by larger, facilities-based companies
will require additional money to acquire new customers and to finance the
support of these new customers. Our businesses will also require additional
billing, customer service and other back-office expenditures.
In addition, we will require significant amounts of capital to finance our
other capital expenditures, meet our operating costs and meet all of our debt
service and other obligations as they become due.
We intend to fund these requirements from cash, cash equivalents and
marketable securities on hand, future issuances of both public and private debt
and equity and funds internally generated by operations. We cannot give you any
assurance that sufficient resources will be available to meet our expected
requirements and obligations.
As a result, we cannot assure you that we will be able to repay our present
or future indebtedness. Accordingly, we may be required to consider a number of
measures, including:
- limiting or eliminating business projects, including entry into
additional markets;
- refinancing all or a portion of our debt;
- seeking modifications of the terms of our debt;
- seeking additional debt financing, which would be subject to obtaining
necessary lender consents;
- seeking additional equity financing; or
- a combination of these measures.
We cannot assure you that any of the possible measures can be accomplished,
or can be accomplished in sufficient time to make timely payments with respect
to our indebtedness. In addition, we cannot assure you that any measures can be
accomplished on terms which will be favorable to us and our subsidiaries.
13
<PAGE> 17
WE FACE HEAVY COMPETITION IN THE TELECOMMUNICATIONS INDUSTRY FOR ALL OF THE
SERVICES WE PROVIDE AT PRESENT AND THOSE WE INTEND TO PROVIDE IN THE FUTURE.
General. Some of our present competitors and potential future competitors
may have greater financial, technical, marketing, personnel and other resources
than we have. The competitive environment could have a variety of adverse
effects on us. For example, it could:
- require price reductions in the fees for services and require increased
spending on marketing, network capacity and product development;
- negatively impact our ability to generate greater revenues and profits
from sources other than our core local and long distance telephone,
cellular and Internet service businesses;
- limit our ability to develop new products and services;
- limit our ability to continue to grow its subscriber base; and
- result in attrition in our subscriber base.
Any of the above events could have an adverse impact on revenues or result
in an increase in costs as a percentage of revenues, either of which could have
a material adverse effect on our business, financial condition and operating
results.
Local Telephone Business. In each of our markets, we face competition from
larger, better capitalized incumbent local exchange carriers, including
Ameritech and Bell Atlantic, now Verizon, as well as other providers of
telecommunications services, such as GTE, other competitive local exchange
carriers and cable television companies. An incumbent local exchange carrier is
an established local telephone service provider that was the monopoly service
provider in a region prior to the opening of local telephone service to
competition. We also will face competition or prospective competition from other
telecommunications companies. For example, AT&T, MCI WorldCom and Sprint, among
other carriers, have begun to offer local telecommunications services in major
U.S. markets using their own facilities or by resale of the incumbent local
exchange carriers' or other providers' services. In fact, some of our potential
competitors, including AT&T, MCI WorldCom and Sprint, have entered into
interconnection agreements with Ameritech to provide local exchange service in
states in which we will operate.
In addition to these long distance carriers, entities that currently offer
or are potentially capable of offering switched telecommunications services
include:
- other competitive local exchange carriers;
- other long distance carriers;
- wireless telephone system operators;
- large customers who build private networks;
- cable television companies; and
- other utilities.
Competition in the competitive local exchange carrier business will
continue to intensify in the future due to the increase in the size, resources
and number of market participants. Many have committed substantial resources to
building their networks or to purchasing competitive local exchange carriers or
inter-exchange carriers with complementary facilities. By building or purchasing
a network or entering into interconnection agreements or resale agreements with
incumbent local exchange carriers, including regional Bell operating companies,
which are incumbent local exchange carriers created by AT&T's divestiture of its
local exchange business, a provider can offer single source local and long
distance services similar to those we will offer. These additional alternatives
may provide these competitors with greater flexibility and a lower cost
structure than ours. Some of these competitive local exchange carriers and other
providers of local exchange service are acquiring or being acquired by
inter-exchange carriers. Any of these combined entities may have resources far
greater than ours. These combined entities may provide a bundled package
14
<PAGE> 18
of telecommunications products, including local and long distance telephone,
that is in direct competition with the products we offer or plan to offer.
Internet Services. The Internet services market is extremely competitive.
We compete directly or indirectly with the following categories of companies:
- established online services, such as America Online, the Microsoft
Network and Prodigy;
- local, regional and national Internet service providers, which are
vendors that provide subscribers access to the Internet, such as
EarthLink Network, Inc. and Internet America;
- national telecommunications companies, such as AT&T and GTE;
- regional Bell operating companies, such as Ameritech and Bell Atlantic,
now Verizon; and
- online cable services, such as Excite@Home and Roadrunner.
This competition will likely increase as large diversified
telecommunications and media companies acquire Internet service providers and as
Internet service providers consolidate into larger, more competitive companies.
Diversified competitors may bundle other services and products with Internet
connectivity services, potentially placing us at a significant competitive
disadvantage. As a result, our businesses may suffer.
Our DSL service offering will also face competition from traditional
telephone companies, cable modem service providers, competitive
telecommunications companies, traditional and new national long distance
carriers, other Internet service providers, on-line service providers and
wireless and satellite service providers. Many of these competitors have longer
operating histories, greater name recognition and better strategic relationships
than we will have.
Local Multipoint Distribution Service. Depending on the services
ultimately offered through our local multipoint distribution service business,
it could face the same competition as our competitive local exchange carrier
business. Local multipoint distribution service is a telecommunications system
that provides wireless multi-channel video services and wireless data services.
To the extent that local multipoint distribution service is used to deliver pay
television, our planned local multipoint distribution service business will
compete with franchised cable television systems and may face competition from
several other types of multichannel video service providers, such as:
- multichannel multipoint distribution systems;
- satellite master antenna television systems;
- direct broadcast satellite, and other television receive-only satellite
dishes;
- video service from telephone companies; and
- open video system operators.
Multichannel video service providers face competition from other sources of
entertainment, such as movie theaters and computer on-line (including Internet)
services. Further, premium movie services offered by multichannel video service
providers have encountered significant competition from the home video industry.
In areas in which several off-air television broadcasts can be received without
the benefit of terrestrial distribution systems, multichannel video service
providers have experienced competition from these broadcasters. Internet service
providers also serve as a source of competition to multichannel video service
providers.
The Telecommunications Act of 1996 relaxed the regulatory barriers to entry
by incumbent local exchange carriers for the provision of video programming in
their local telephone service areas, and substantially reduced current and
future regulatory burdens on franchised cable television systems. This may
result in significant additional competition to local multipoint distribution
service operators from local telephone companies and franchised cable television
systems.
15
<PAGE> 19
Other Businesses. In addition to our competitive local exchange carrier,
Internet and local multipoint distribution service businesses, our other
businesses face strong competition as well. These competitive businesses include
long distance service, cellular service and paging service. Our long distance
service faces competition from long distance carriers, including
facilities-based carriers such as AT&T, MCI WorldCom and Sprint and resellers of
long distance service. Our cellular service faces competition from other
cellular carriers, such as VodaFone AirTouch and AT&T, and from personal
communications service carriers, such as Sprint PCS. Our paging services are
similarly exposed to competition from other providers of paging services
operating in the same local markets, regionally or nationally.
THE TELECOMMUNICATIONS INDUSTRY IS HIGHLY REGULATED BY THE FEDERAL GOVERNMENT
AND BY STATE GOVERNMENTS, AND POTENTIAL REGULATORY CHANGES COULD HAVE AN
ADVERSE EFFECT ON OUR OPERATIONS.
Local Telephone and Other Businesses. Our telephone businesses are subject
to extensive regulation by the FCC and by the public utility commissions of
various states. Changes in statutes, regulations or judicial interpretations
could have material adverse effects on our operations. The FCC is currently
considering various aspects of local exchange competition, including pricing
flexibility for incumbent local exchange carriers with regard to interstate
access charges assessed on inter-exchange carriers, universal service payments,
eligibility to provide universal service, access to telecommunications services
by persons with disabilities, telephone number portability, rates for resold
services and separate network elements, availability of various incumbent local
exchange carrier network elements, access to advanced services (e.g., DSL)
provided by incumbent local exchange carriers, collocation in incumbent local
exchange carrier central offices, and reciprocal compensation for calls to
Internet service providers. A number of these issues are the subject of court
cases. An unfavorable decision on any one of these items could decrease our
revenues, increase our costs, and make it more difficult to attract and retain
customers. It is impossible to determine at this time how the FCC will rule on
any of these issues.
Internet Services. We will provide Internet services through data
transmissions over public telephone lines and their networks. These
transmissions are subject to the regulation of the FCC and state public utility
commissions described above. As an Internet service provider, we will not be
subject to direct regulation by the FCC or any other governmental agency, other
than regulations applicable to businesses generally. However, we could become
subject to FCC or other regulatory agency regulation, especially as Internet
services and telecommunications services converge. Changes in the regulatory
environment could decrease our revenues, increase our costs and affect our
service offerings.
There have been various regulations and court cases relating to liability
of Internet service providers and other online service providers for information
carried on or through their services or equipment, including in the areas of
copyright, indecency, obscenity, defamation and fraud. The United States Supreme
Court declared the Communications Decency Act of 1996 to be unconstitutional as
it applies to the transmission of indecent on-line communications to minors, and
a lower court declared the 1998 Federal Child Online Protection Act to be
unconstitutional. Other federal and state statutes continue to prohibit the
online distribution of obscene materials. The law in this area is unsettled and
there may be new legislation and court decisions that expose Internet service
providers to liabilities or affect their services.
Additional laws and regulations may be adopted with respect to the
Internet, covering issues such as Universal Service Fund support payments,
content, user privacy, pricing, libel, obscene material, indecency, taxation,
gambling, intellectual property protection and infringement and technology
export and other controls. Other federal Internet-related legislation has been
introduced which may limit commerce and discourse on the Internet. The FCC has
ruled that Internet service providers are enhanced service providers, calls to
Internet service providers are jurisdictionally interstate, and that Internet
service providers should not pay access charges applicable to telecommunications
carriers. An appeals court, however, recently overturned the FCC's conclusion
that calls to Internet service providers are necessarily interstate. Further,
FCC and judicial decisions on this issue may impact inter-carrier compensation
for calls to Internet service providers, which could affect Internet service
providers' costs.
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<PAGE> 20
In addition, because users may download materials and subsequently
distribute them to others, persons may potentially make claims against us for
defamation, negligence, copyright or trademark infringement, personal injury or
other claims based on the nature, content, publication and distribution of these
materials. We also could be exposed to liability with respect to the offering of
third-party content that may be accessible through its services. It is also
possible that if any third-party content provided through our services contains
errors, third parties who access this material could make claims against us for
losses incurred in reliance on this information. We also will offer e-mail
services, which will expose us to other potential risks, such as liabilities or
claims resulting from unsolicited e-mail, lost or misdirected messages, illegal
or fraudulent use of e-mail or interruptions or delays in e-mail service. These
claims, whether with or without merit, likely would divert management's time and
attention, may result in negative publicity and could result in significant
costs to investigate and defend.
OUR RELIANCE ON INCUMBENT LOCAL EXCHANGE CARRIERS AND OTHER FACILITIES-BASED
PROVIDERS OF TELECOMMUNICATIONS SERVICES AND CHANGES TO ITS AGREEMENTS WITH
THESE PROVIDERS COULD HAVE A MATERIAL ADVERSE EFFECT ON US.
We depend upon our agreements with the incumbent local exchange carriers
operating in our existing and targeted markets. There are two primary types of
agreements that we enter into with these providers:
- interconnection agreements, which specify how we connect our network with
the network of the incumbent local exchange carriers in each of our
markets; and
- resale agreements, through which we provide telecommunications services
on a resale basis.
Federal legislation regulating the telecommunications industry has enhanced
competition in the local service market by requiring the incumbent local
exchange carriers to provide access to their networks through interconnection
agreements and to offer separate elements of their network and retail services
at prescribed rates to other telecommunications carriers. The termination of any
of our contracts with our carriers or a reduction in the quality or increase in
cost of their services could have a material adverse effect on our financial
condition and results of operations.
Our interconnection agreements require the incumbent local exchange
carriers to provide sufficient transmission capacity to keep blocked calls
between our networks within industry limits. Accordingly, we are partially
dependent on the incumbent local exchange carriers to provide customers with
superior service and avoid blocked calls. The failure by the incumbent local
exchange carriers to comply with their obligations under our interconnection
agreements could result in customer dissatisfaction and the loss of existing and
potential customers. In addition, the rates charged to us under the
interconnection agreements may limit our flexibility to price our services at
rates that are low enough to attract a sufficient number of customers and permit
us to operate profitably.
Interconnection agreements are subject to review and approval by various
federal and state regulators. In addition, parties to the agreements may seek to
have the agreements modified based upon the outcome of regulatory or judicial
rulings occurring after the dates of the agreements. The outcome of these
rulings, or any modified agreements, could have a material adverse effect on our
financial condition and results of operations. In addition, some aspects of
interconnection agreements, including the price and economic terms of these
agreements, have been subject to litigation and regulatory action. Please refer
to the section of this prospectus entitled "Government Regulation of the
Telecommunications Service Business."
We rely on telecommunications carriers to transmit our traffic over local
and long distance networks. Our dependence on other facilities-based carriers
means that we depend on the quality and condition of their networks. These
networks may experience disruptions that are not easily remedied. Thus, the
following conditions of the facilities-based carriers could cause interruption
in service and/or reduced capacity for our customers:
- physical damage;
- power loss; and
- software defects.
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<PAGE> 21
We depend upon cooperation with the incumbent local exchange carriers and
other providers for the provision and repair of transmission facilities and to
provide the services and network components that are ordered. We may not be able
to obtain the facilities and services we require at satisfactory quality levels,
rates, terms and conditions, which could delay the buildout of our networks and
degrade the quality of service to our subscribers. In particular, we depend upon
the quality of copper lines owned by telephone companies that deliver services
to our end users. Particularly sensitive to the quality of these lines will be
our DSL offering. The quality of service we will be able to provide through that
offering will depend in part on the quality of the copper lines.
In addition, we depend upon certain suppliers of network services, hardware
and software. If these suppliers fail to provide network services, equipment or
software in the quantities, at the quality levels or at the times required, or
if we cannot develop alternative sources of supply, it will be difficult, if not
impossible, for us to provide our services.
The pace at which we are able to add new customers and services could be
adversely affected if the incumbent local exchange carriers do not provide us
with necessary network elements, collocation space, intercompany network
connections and the means to share information about customer accounts, service
orders and repairs on a timely basis. In addition, our ability to provide
high-speed data services through technologies such as DSL will depend upon our
ability to obtain space from the various incumbent local exchange carriers for
situating our equipment in the incumbent local exchange carriers' central
offices and elsewhere. In many instances, the incumbent local exchange carriers
do not timely or fully provide these services or facilities. Also, the rules
governing which elements the incumbent local exchange carriers must provide, the
cost methodology for providing these elements, and the types of equipment that
may be placed together are currently under FCC and judicial review.
In the event that our long distance carriers are unable to handle the
growth in customer usage, we could try to transfer traffic to a carrier with
sufficient capacity, but we cannot be sure that additional capacity will be
available. If any of the local exchange carriers are unable to handle the growth
in customer usage, we will be required to use another local carrier, which could
be difficult in light of the limited number of local carriers with their own
facilities. In the event we elect to use other carriers, the charges for
services may exceed those under the existing contracts, which could have a
material adverse effect on our financial condition and results of operations.
In addition, the accurate and prompt billing of our customers will depend
upon the timeliness and accuracy of call detail records provided by the carriers
whose services we will resell. We cannot be sure that our carriers will continue
to provide accurate information on a timely basis. A carrier's failure to do so
could have a material adverse effect on our ability to bill our customers and,
therefore, on our operating results.
OUR PLANNED LOCAL MULTIPOINT DISTRIBUTION SERVICE SYSTEM INVOLVES NEW AND
LARGELY UNTESTED TECHNOLOGY, SO THERE IS A RISK THAT UNANTICIPATED TECHNICAL
PROBLEMS WILL CAUSE DIFFICULTIES FOR THIS BUSINESS.
Our planned local multipoint distribution service high-speed wireless
telecommunications system will use new technology with a limited operating
history whose system architecture remains subject to further development and
refinement. In the past, other companies using local multipoint distribution
service have experienced technical difficulties, some of which have affected
subscriber acceptance of their systems. Additional technical issues may arise in
the course of system deployment that could adversely affect reception quality
and our ability to cover different service areas. In addition, we believe that a
significant percentage of the households in our local multipoint distribution
service markets may be located in "shadowed" areas capable of receiving the
transmitted signal only with the assistance of "repeaters," which we may deploy.
Two-way services that we may launch will require the development and mass
production of special equipment. We cannot be sure that the equipment needed for
two-way services will become commercially available at an acceptable cost. You
should also be aware that our ability to support high service volumes will be
limited to the technology involved in local multipoint distribution service,
including limited available bandwidth.
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WE MAY NOT BE ABLE TO IMPLEMENT SUCCESSFULLY OUR BUSINESS STRATEGY BECAUSE
DOING SO DEPENDS ON FACTORS BEYOND OUR CONTROL, WHICH COULD ADVERSELY AFFECT
OUR RESULTS OF OPERATIONS.
Our success depends on our ability to implement our business strategy in
order to increase our earnings and cash flow. Our results of operations and cash
flow will be adversely affected if we cannot fully implement our business
strategy. Successful implementation depends on factors specific to the
telecommunications industry and numerous other factors beyond its control. These
include changes in:
- general economic conditions;
- adverse changes in local markets;
- lack of attractiveness of a particular product;
- evolving consumer preferences;
- federal, state and local regulations;
- risks of product tampering; and
- our continued ability to hire and retain qualified management personnel.
In addition, because of these and other factors, we may not be able to
implement our expansion and business plans, including the construction of the
Smart LEC network, within planned time periods and budgets. If we cannot
implement our expansion and business plans in a timely fashion or if there are
delays or cost overruns, our business, financial condition and results of
operations will be adversely affected.
THE OPERATING RESULTS OF THE OPERATIONS WE ACQUIRED IN THE VOYAGER MERGER
FLUCTUATE, WHICH COULD ADVERSELY AFFECT OUR RESULTS OF OPERATIONS.
The operating results of the operations we acquired in the Voyager merger
have significantly fluctuated on both a quarterly and annual basis. We expect
that these fluctuations will continue due to a variety of factors, many of which
are outside of our control. Should these fluctuations continue, our financial
condition and results of operations may be materially adversely affected.
BECAUSE OF THE FAST PACE OF TECHNOLOGICAL CHANGE IN THE TELECOMMUNICATIONS
INDUSTRY, THERE IS A RISK THAT WE WILL FALL BEHIND OR WILL FAIL TO SUCCESSFULLY
ADDRESS THIS CHANGE, WHICH COULD HARM OUR ABILITY TO COMPETE AND COULD
MATERIALLY AND ADVERSELY AFFECT OUR BUSINESS AND RESULTS OF OPERATIONS.
The telecommunications industry is subject to rapid and significant changes
in technology. We cannot predict the effect of technological changes on our
business. However, the cost of implementing emerging and future technologies may
be significant.
The Internet services market is characterized by rapid technological
change, evolving industry standards, changes in member needs and frequent new
service and product introductions. Our future success depends, in part, on our
ability to use leading technologies effectively, develop our technical
expertise, enhance our existing services and develop new services that meet
changing member needs on a timely and cost-effective basis. In particular, we
must provide subscribers with the appropriate products, services and guidance to
best take advantage of the rapidly evolving telecommunications industry. Our
failure to respond in a timely, cost-efficient and effective manner to new and
evolving technologies, such as those offering greater bandwidth services, among
others, could have a negative impact on our business and financial results.
OUR INTERNET BUSINESS DEPENDS ON CONTINUED GROWTH OF THE INTERNET AS A MEDIUM
OF COMMUNICATION AND COMMERCE.
Our future success in the Internet service provider business substantially
depends on continued growth in the use of the Internet. Although we believe that
Internet usage and popularity will continue to grow, it
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<PAGE> 23
cannot be certain that this growth will continue or that it will continue in its
present form. If Internet usage declines or evolves away from our business, our
growth in this case will slow or stop and our financial results may suffer.
OUR SERVICES DEPEND UPON OUR NETWORK INFRASTRUCTURE, AND THE FAILURE TO HAVE
SUFFICIENT CAPACITY TO ACCOMMODATE NEW USERS, TO MAINTAIN RELIABILITY OR TO
MAINTAIN SECURITY COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR ABILITY TO
ATTRACT AND RETAIN CUSTOMERS.
Success in our businesses depends, in part, on the capacity, reliability
and security of its network infrastructure. Network capacity constraints may
occur in the future, both at the local and national levels. These capacity
constraints would result in slowdowns, delays or inaccessibility when members
try to use a particular service. Poor network performance could cause customers
to discontinue service with us. Reducing the incidence of these problems
requires constantly expanding and improving our infrastructure, which could be
very costly and time consuming.
Our Internet services network infrastructure is composed of a complex
system of routers, switches, transmission lines and other hardware used to
provide Internet access and other services. This network infrastructure will
require continual upgrades and adaptation as the number of customers and the
amount and type of information they wish to transmit over the Internet
increases. This development of network infrastructure will require substantial
financial, operational and managerial resources. We cannot be certain that we
will be able to upgrade or adapt our network infrastructure to meet additional
demand or changing customer requirements on a timely basis and at a commercially
reasonable cost, or at all. If we fail to upgrade our network infrastructure on
a timely basis or adapt it to an expanding customer base, changing customer
requirements or evolving industry standards, our business could be adversely
affected.
We also have to protect our infrastructure against fire, power loss,
telecommunications failure, computer viruses, security breaches and similar
events. We do not currently maintain a redundant or backup network operations
center. A significant portion of our computer equipment, including critical
equipment dedicated to our Internet access services, is presently located at two
network operating centers: one in East Lansing, Michigan and the other in New
Berlin, Wisconsin. A natural disaster or other unanticipated occurrence at our
switch or collocation facilities, network operations center or points-of-
presence through which members connect to the Internet, in the networks of
telecommunications carriers we will use, or in the Internet backbone in general
could cause interruptions in our Internet services.
OUR GROWTH STRATEGY AND INTEGRATION OF OUR ACQUISITIONS MAY NOT BE SUCCESSFUL.
We may not be able to integrate successfully the businesses formerly
operated by Voyager and ATX or those of the other companies we have acquired
into our operations. In addition, in the future, we may acquire or try to
acquire products and businesses from, make investments in, or enter into
strategic alliances with, companies that have products or distribution networks
in our current markets or areas into which we intend to expand our operations.
Our prior acquisitions, including those of ATX and Voyager, and our possible
future acquisitions, investments, strategic alliances or related efforts are
subject to the following risks:
- the difficulty of assimilating the operations of the respective entities;
- the potential disruption of our ongoing business;
- the failure successfully to incorporate licensed or acquired trademarks
and technology rights into our provision of services;
- the inability to maintain uniform standards, controls, procedures and
policies; and
- the impairment of relationships with employees and customers as a result
of changes in management.
In addition, we may not be able to identify appropriate candidates for
future acquisitions, investments, strategic alliances or other similar
transactions.
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<PAGE> 24
We cannot assure you that we will be successful in overcoming these risks
or any other problems encountered with these acquisitions, investments,
strategic alliances or related efforts.
WE DEPEND ON THE SERVICES OF A SMALL NUMBER OF KEY MANAGEMENT PEOPLE.
We believe that our success depends to a significant extent upon the
abilities and continued efforts of CoreComm's current senior management,
including George S. Blumenthal, the Chairman of the board of directors, J.
Barclay Knapp, our President, Chief Executive Officer and Chief Financial
Officer and Patty J. Flynt, our Senior Vice President and Chief Operating
Officer. The loss of the services of any of these people could have a negative
effect upon our results of operations and financial condition. You should be
aware that several members of senior management are officers and/or directors of
other companies and that none of these individuals have entered into employment
agreements with us.
MANY OF OUR OFFICERS AND DIRECTORS FACE POTENTIAL CONFLICTS OF INTEREST BECAUSE
THEY ARE OFFICERS AND DIRECTORS OF OTHER COMPANIES IN THE TELECOMMUNICATIONS
INDUSTRY, WHICH COULD IMPEDE THEIR ABILITY TO MAKE DECISIONS FOR US. IN
ADDITION, SOME OF OUR OFFICERS AND OTHER EMPLOYEES ARE EMPLOYED BY OUR
AFFILIATES.
Many of our directors and officers are also directors and officers of other
companies in our industry, and some are employed by our historical affiliates.
In addition, some of our officers and all of our directors are also officers
and/or directors of NTL Incorporated, a commonly managed historical affiliate,
which is a telecommunications company that has historical ties to CoreComm. From
time to time, opportunities may arise that would be pursued by one or more of
these companies and us at the same time. In addition, CoreComm and NTL have
entered into various transactions and service arrangements. Because all of our
directors will be directors of NTL, decisions about these opportunities or
transactions may result in conflicts of interest. In those instances, our board
of directors will seek to act, with the advice of its counsel, in a manner
consistent with each director's duties to us and our stockholders under
applicable law.
Furthermore, many of our officers and employees will allocate their
business time between us and NTL. These officers and employees will not be
available on a full-time basis to us in the future, and they may have duties to
these other companies which may interfere with their duties to us.
WE MAY BE REQUIRED TO MAKE SIGNIFICANT CAPITAL EXPENDITURES RELATING TO THE
INFORMATION SYSTEMS INFRASTRUCTURE OF THE OPERATIONS ACQUIRED IN THE ATX
MERGER.
The billing, customer service and management information systems associated
with the operations acquired in the ATX merger are vital to those operations'
growth and ability to bill customers, monitor costs and respond to customer
service issues. As these operations grow, their need for sophisticated systems
will increase. The cost of implementing these systems has been, and will
continue to be, significant. Furthermore, any of the following developments
could negatively affect the former ATX operations and our results of operations.
- the failure to adequately and timely identify all information and
processing needs;
- the failure of systems to operate as expected;
- the failure to upgrade systems as necessary; and
- failure by third party service providers to deliver necessary systems or
services.
WHILE A PRIVATE COMPANY, ATX RELIED TO A SIGNIFICANT EXTENT ON SERVICES AND
OTHER ASSISTANCE PROVIDED AT MARKET COST BY ITS AFFILIATES AND OWNERS. THIS
ASSISTANCE WILL NO LONGER BE AVAILABLE ON THE SAME SCALE.
For fifteen years, ATX operated as a private company. Only a short time
prior to the ATX merger did ATX begin to implement initiatives to create and
expand its management infrastructure so that its growth could be sustained. For
instance, ATX shared employees with University City Housing, an entity
controlled by the majority stockholder of ATX. University City Housing provided
general accounting, cash management, tax return preparation, payroll and human
resources services to ATX. Under a transition
21
<PAGE> 25
services agreement, these arrangements will continue to be provided, but on a
scale that will be reduced over time. Failure to replace the services and
assistance formerly provided by affiliates and owners of ATX on terms acceptable
to us could result in material disruptions to our business and operations.
WE MAY BE UNABLE TO PAY OUR DEBT OBLIGATIONS IF A CHANGE OF CONTROL OCCURS
UNDER THE INDENTURE.
Upon specified change of control events, holders of the convertible notes
may require us to repurchase all or a portion of their convertible notes at a
purchase price equal to 101% of the principal amount of the convertible notes,
plus any additional amounts and any accrued and unpaid interest on the
convertible notes. Our ability to repurchase the convertible notes upon a change
of control event will be limited by the terms of our other debt agreements, and
the debt agreements of our subsidiaries. It is an event of default under the
senior unsecured notes and the credit agreement for our secured credit facility
if we experience certain change of control events including the acquisition by a
person or group of more than 35% of voting power or a change in the majority of
persons on our board. Upon such a change of control event, we may also be
required immediately to repay the outstanding principal and other amounts owed
by us under our other financing agreements. In particular, our subsidiaries
could be required in the future to make a repurchase offer to the holders of any
indebtedness.
We may not be able to repay amounts outstanding under our other financing
agreements or the financing agreements of our subsidiaries, repurchase any
indebtedness of our subsidiaries or obtain necessary consents, if any, to
repurchase the convertible notes. Any requirement to offer to purchase the
convertible notes may result in our having to refinance our outstanding
indebtedness, which we may not be able to do. In addition, even if we were able
to refinance that debt, the financing may be on unfavorable terms.
Please refer to the section of this prospectus entitled "Description of Our
Other Indebtedness."
OUR ANTI-TAKEOVER DEFENSE PROVISIONS MAY DETER POTENTIAL ACQUIRORS AND MAY
DEPRESS OUR STOCK PRICE.
Our certificate of incorporation and by-laws contain provisions that could
have the effect of making it more difficult for a third party to acquire, or of
discouraging a third party from attempting to acquire, control of us. These
provisions include the following:
- we may issue preferred stock with rights senior to those of our common
stock and Series B preferred stock;
- we have a classified board of directors;
- our by-laws prohibit action by written consent by shareholders; and
- we require advance notice for nomination of directors and for shareholder
proposals.
The indenture for the convertible notes also contains provisions that could
have the effect of making it more difficult for a third party to acquire, or of
discouraging a third party from attempting to acquire, control of us. These
provisions would require us to make an offer to purchase all of the convertible
notes. Provisions such as these in our or our subsidiaries' indebtedness may
decrease the likelihood that stockholders will receive a possibly substantial
premium for their shares over then current market prices, and may limit the
ability of stockholders to approve transactions that they may deem to be in
their best interest.
In addition, under our shareholder rights plan, holders of our common stock
are entitled to one preferred share purchase right for each outstanding share of
common stock they hold, exercisable under certain defined circumstances
involving a potential change of control as discussed in this prospectus. The
preferred share purchase rights have the anti-takeover effect of causing
substantial dilution to a person or group that attempts to acquire us on terms
not approved by our board of directors. Those provisions could have a material
adverse effect on the premium that potential acquirors might be willing to pay
in an acquisition or that investors might be willing to pay in the future for
shares of our common stock. Please refer to the section entitled "Description of
the Capital Stock -- The Stockholder Rights' Plan."
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<PAGE> 26
RISK FACTORS RELATING TO OUR EQUITY SECURITIES:
WE MAY ISSUE ADDITIONAL COMMON STOCK OR PREFERRED STOCK, WHICH COULD DILUTE
YOUR INTERESTS.
Our articles of incorporation do not limit the issuance of additional
common stock or additional series of preferred stock ranking ratably with or
junior to the Series B preferred stock. We may not, without the approval of a
majority of the then outstanding Series B preferred stock, issue any securities
senior to the Series B preferred stock. The issuance of additional common stock
or preferred stock on parity with the Series B preferred stock could dilute the
interests of holders of the Series B preferred stock. None of the provisions
relating to the Series B preferred stock affords the holders of the Series B
preferred stock protection in the event of a highly leveraged or other
transactions that might adversely affect their interests.
OUR ABILITY TO PAY DIVIDENDS IS RESTRICTED.
We have never paid cash dividends on our common stock. In addition, the
payment of any dividends by us in the future will be at the discretion of our
board of directors and will depend upon, among other things, future earnings,
operations, capital requirements, our general financial condition, the general
financial condition of our subsidiaries and general business conditions. The
terms of our senior secured credit facility restrict our ability to pay
dividends on our common stock but do not restrict our ability to pay dividends
on the Series A preferred stock or the Series B preferred stock. We expect that
our senior unsecured credit facility will contain similar provisions. The terms
of our Series A preferred stock and Series B preferred stock also restrict our
ability to pay dividends on stock that is junior to that stock, including our
common stock.
Furthermore, because we might never declare or pay cash dividends on our
common stock, you might not realize any benefit of common stock received upon
conversion of your Series B preferred stock without selling the common stock.
In addition, our or our subsidiaries' future debt instruments may restrict
our payment of dividends or the payment of dividends or distributions to us by
our subsidiaries. Please refer to the section of this discussion of risk factors
entitled "Restrictions imposed by our debt agreements may significantly limit
our ability to execute our business strategy and increase the risk of default
under our debt obligations" and the section of this prospectus entitled
"Dividend Policy."
HOLDERS OF SERIES B PREFERRED STOCK WILL HAVE LIMITED VOTING RIGHTS.
Holders of Series B preferred stock will not have any voting rights, other
than with respect to changes in the preferences, special rights or other powers
and privileges of the Series B preferred stock, with respect to the creation of
any class or series of securities senior to the Series B preferred stock, and
otherwise by operation of law.
THERE MIGHT NOT BE AN ACTIVE OR LIQUID MARKET FOR THE SERIES B PREFERRED
STOCK.
There has previously been no trading market for the Series B preferred
stock. We cannot assure you that a market for the Series B preferred stock will
develop or, if one does develop, that it will be maintained. If an active
trading market for the Series B preferred stock fails to develop or be
sustained, the trading price of the Series B preferred stock could be materially
adversely affected. Even if actively traded, the Series B preferred stock may
trade at a discount from its initial offering price depending upon prevailing
interest rates, the market for similar securities, our performance and other
factors.
RISK FACTORS RELATING TO OUR CONVERTIBLE NOTES:
THE CONVERTIBLE NOTES ARE SUBORDINATED AND UNSECURED.
The convertible notes are general unsecured obligations ranking junior to
all our existing and future senior debt. In addition, the convertible notes are
effectively junior to all our existing and future secured indebtedness to the
extent of the value of the assets securing that indebtedness. As of June 30,
2000, on a pro forma basis, after giving effect to the financing transactions we
completed in connection with our
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<PAGE> 27
acquisitions of ATX and Voyager, the convertible notes would have been
subordinated to $183.7 million of indebtedness, including $75.0 million of
indebtedness under our $150.0 million senior secured credit facility, and
approximately $108.7 million of senior unsecured notes. As a result of this
subordination, in the event of our bankruptcy, liquidation or reorganization or
other similar events, our assets will be available to pay obligations on the
convertible notes only after all of our senior debt (as defined in this
prospectus) and all of our secured debt, to the extent of the value of the
assets securing that debt, has been paid in full, and there may not be
sufficient assets remaining to pay amounts due on any or all of the convertible
notes then outstanding. In addition, to the extent our assets cannot satisfy in
full the secured indebtedness, the holders of the secured indebtedness would
have a claim for any shortfall that would rank equally in right of payment with
the convertible notes. The indenture governing the convertible notes does not
prohibit or limit our or our subsidiaries' incurrence of additional debt,
including senior debt or secured debt, and the incurrence of any such additional
indebtedness could adversely affect our ability to pay our obligations on the
convertible notes.
Please refer to the sections entitled "Description of Convertible
Notes -- Subordination of Convertible Notes" and "Description of Our Other
Indebtedness."
BECAUSE MANY OF OUR ASSETS ARE HELD BY OUR SUBSIDIARIES, YOUR RIGHT TO RECEIVE
PAYMENT ON THE CONVERTIBLE NOTES IS EFFECTIVELY JUNIOR TO OUR SUBSIDIARIES'
EXISTING INDEBTEDNESS, AND PAYMENT ON THE CONVERTIBLE NOTES DEPENDS, TO A
SIGNIFICANT EXTENT, ON RECEIVING INCOME FROM OUR SUBSIDIARIES, WHICH HAVE NO
OBLIGATIONS TO MAKE ANY PAYMENTS ON THE CONVERTIBLE NOTES.
To a significant extent, we are dependent upon dividends and other
intercompany transfers of funds from our direct and indirect subsidiaries to
meet our debt service obligations, including those related to the convertible
notes. Our subsidiaries are separate legal entities that have no obligation to
pay any amounts due under the convertible notes. Our subsidiaries do not
guarantee the payment of the convertible notes. Furthermore, our subsidiaries
are not obligated to make funds available to us, and creditors of our
subsidiaries will have a superior claim to our subsidiaries' assets. In
addition, our subsidiaries' ability to make any payments to us will depend on
their earnings, the terms of their indebtedness, business and tax considerations
and legal restrictions. All of our direct and indirect subsidiaries have
guaranteed our payment obligations under the senior secured credit facility and
have secured their obligations to pay under those guarantees with substantially
all of their assets.
Our subsidiaries are permitted to enter into various debt agreements that
restrict their ability to pay dividends, make advances or otherwise distribute
funds to us. However, the senior unsecured notes and the credit agreement
governing our senior secured credit facility prohibit our subsidiaries from
permitting the imposition of restrictions on their ability to pay dividends to
their parent companies. We expect the credit agreement governing our senior
unsecured credit facility to contain a similar prohibition. We cannot assure you
that any of our subsidiaries will be able to pay dividends or otherwise
distribute funds to us in an amount sufficient to pay the principal of or
interest on the convertible notes. Please refer to the section of this
prospectus entitled "Description of Our Other Indebtedness."
The convertible notes are effectively junior in right of payment to all of
our subsidiaries' existing or future indebtedness and other liabilities. As of
June 30, 2000, on a pro forma basis, after giving effect to the financing
transactions we completed in connection with the acquisitions of ATX and
Voyager, our subsidiaries would have had $33.3 million of indebtedness and
$121.1 million of other liabilities. Our subsidiaries intend to incur
significant indebtedness in the future, including vendor financing described in
the section of this prospectus entitled "Description of Our Other Indebtedness".
The indenture governing the convertible notes permits our subsidiaries to incur
indebtedness and other liabilities without restriction. If indebtedness is
issued by a subsidiary, the holders' claim for any shortfall would effectively
rank senior to the convertible notes with respect to such subsidiary's assets.
Accordingly, there might only be a limited amount of assets available to satisfy
your claims as a holder of the convertible notes upon an acceleration of the
maturity of the convertible notes.
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<PAGE> 28
YOU MAY FIND IT DIFFICULT TO SELL YOUR CONVERTIBLE NOTES.
Upon issuance, the initial purchasers of the convertible notes informed us
that they intended to make a market in the convertible notes. However, they are
not obligated to do so and any such market making may be discontinued at any
time without notice. We do not intend to apply for listing of the convertible
notes on any securities exchange or to seek approval for quotation through any
automated quotation system. Accordingly, we cannot assure you about the ongoing
development or liquidity of any market for the convertible notes. If an active
public market for the convertible notes does not develop or is interrupted, the
market price and liquidity of the convertible notes may be adversely affected.
The liquidity of any market for the convertible notes will depend upon
various factors, including:
- the number of holders of the convertible notes;
- the interest of securities dealers in making a market for the convertible
notes;
- the performance of the common stock into which the convertible notes may
be converted;
- our financial performance and prospects; and
- our industry's general outlook.
RISK FACTORS RELATING TO ALL OF THE SECURITIES OFFERED:
THE MARKET PRICE OF OUR COMMON STOCK, CONVERTIBLE NOTES AND THE SERIES B
PREFERRED STOCK COULD BE VOLATILE.
The market price of our common stock has been subject to volatility and, in
the future, the market price of our common stock and the convertible notes and
the Series B preferred stock could fluctuate widely in response to numerous
factors, many of which are beyond our control. These factors include, among
other things, actual or anticipated variations in our operating results,
earnings releases by us and our competitors, announcements of technological
innovations, changes in financial estimates by securities analysts, market
conditions in the industry and the general state of the securities markets,
governmental legislation or regulation, currency and exchange rate fluctuations,
as well as general economic and market conditions, such as recessions.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
In this prospectus there are "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Exchange Act of 1934, which are usually identified by the use of words such as
"will," "anticipates," "believes," "estimates," "expects," "projects," "plans,"
"intends," "should" or similar expressions. We intend those forward-looking
statements to be covered by the safe harbor provisions for forward-looking
statements contained in the Private Securities Reform Act of 1995 and are
including this statement for purposes of complying with these safe harbor
provisions.
These forward-looking statements reflect current views about our plans,
strategies and prospects, which are based on the information currently available
and on current assumptions.
Although we believe that our plans, intentions and expectations as
reflected in or suggested by those forward-looking statements are reasonable, we
can give no assurance that the plans, intentions or expectations will be
achieved. Listed below and discussed elsewhere in this prospectus are some
important risks, uncertainties and contingencies which could cause our actual
results, performances or achievements to be materially different from the
forward-looking statements made in this prospectus. These risks, uncertainties
and contingencies include, but are not limited to, the following:
- the success or failure of our efforts to implement current business
strategy;
- the success or failure of our efforts to integrate the businesses
formerly operated by Voyager and ATX and our other acquisitions;
- economic conditions generally and in the telecommunications markets
specifically;
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- industry trends;
- the actions of competitors and our ability to respond to those actions;
- changes in governmental regulations, tax rates and similar matters;
- legislative and regulatory changes;
- our ability to continue to design network routes, 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;
- our assumptions about customer acceptance, churn rates, overall market
penetration and competition from providers of alternative services;
- our actual funding requirements;
- availability, terms and deployment of capital; and
- other factors discussed under the heading "Risk Factors" and elsewhere in
this prospectus.
We assume no obligation to update publicly any forward-looking statements,
whether as a result of new information, future events or otherwise. In
evaluating forward-looking statements, you should consider these risks and
uncertainties, together with the other risks described from time to time in our
reports and documents filed with the Securities and Exchange Commission, and you
should not place undue reliance on those statements.
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USE OF PROCEEDS
The selling securityholders will receive all of the proceeds from the sale
of the securities sold under this prospectus. We will not receive any of the
proceeds from sales by the selling securityholders of the offered securities.
PRICE RANGE OF COMMON STOCK
Our common stock is quoted and traded on the Nasdaq National Market under
the symbol "COMM." On September 2, 1998, CoreComm's common shares began trading
on the Nasdaq National Market under the symbol "COMFV". Subsequently, on
September 3, 1998, the symbol was changed to "COMMF", and on September 17, 1999,
the symbol was changed to "COMM". For the periods indicated, the table below
provides information about the high and low sales prices for our common stock on
the Nasdaq National Market. The information provided below gives retroactive
effect to the 3-for-2 stock splits in September 1999 and February 2000.
<TABLE>
<CAPTION>
CORECOMM
------------------
COMMON SHARES
------------------
HIGH LOW
------- -------
<S> <C> <C>
1998
Third Quarter.......................................... $10.141 $ 4.445
Fourth Quarter......................................... 7.668 3.332
1999
First Quarter.......................................... $17.391 $ 7.277
Second Quarter......................................... 22.000 16.109
Third Quarter.......................................... 25.500 20.527
Fourth Quarter......................................... 39.582 23.832
2000
First Quarter.......................................... $49.313 $32.168
Second Quarter......................................... 42.813 14.813
Third Quarter.......................................... 20.438 7.875
Fourth Quarter (through October 31, 2000).............. 8.125 5.313
</TABLE>
The market price of shares of our common stock may fluctuate. As a result,
you are urged to obtain current market quotations. On October 31, 2000, the last
reported sales price per share for our common stock, as reported on the Nasdaq
National Market, was $5.75. As of October 12, 2000, there were approximately 313
record holders of our common stock. This figure does not reflect beneficial
ownership of shares held in nominee names.
DIVIDEND POLICY
Since our inception, we have not declared or paid any cash dividends on our
common stock. We currently intend to retain our earnings for use in the
operation and expansion of our business and for debt service and, therefore, we
do not anticipate paying cash dividends in the foreseeable future. Our and our
subsidiaries' present debt instruments restrict our ability to pay dividends on
our equity securities, including the common stock, and our or our subsidiaries'
future debt instruments may similarly restrict our payment of dividends. In
addition, the terms of our preferred stock restrict our ability to pay dividends
on any securities that rank equally or junior to the preferred stock including
the common stock.
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CAPITALIZATION
The following table shows our cash, cash equivalents and marketable
securities, and capitalization as of June 30, 2000, and pro forma to give effect
to the ATX and Voyager acquisitions, including the financing transactions we
completed in connection with these acquisitions. You should read this table
together with our consolidated financial statements and related notes included
in this prospectus and the information in the sections entitled "Unaudited Pro
Forma Financial Information," "Use of Proceeds" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
<TABLE>
<CAPTION>
AS OF JUNE 30, 2000
-----------------------
ACTUAL PRO FORMA
--------- ----------
(IN THOUSANDS)
<S> <C> <C>
Cash, cash equivalents and marketable securities............ $ 84,220 $ 101,278
========= ==========
Current portion of long-term debt........................... $ 17,726 $ 23,624
========= ==========
Long-term debt(1)
Subsidiary debt and capital lease obligations............. $ 10,255 $ 12,371
Senior secured credit facility............................ -- 75,000
Senior unsecured notes due 2003........................... -- 105,929
6% convertible subordinated notes due 2006................ 175,000 175,000
--------- ----------
Total long-term debt................................... 185,255 368,300
--------- ----------
Stockholder's equity:
Series preferred stock, par value $0.01 per share,
1,000,000 (actual) and 5,000,000 (pro forma) shares
authorized:
Series A preferred stock, liquidation preference
$50,000,000; none (actual) and 50,000 (pro forma)
shares issued and outstanding......................... -- --
Series B preferred stock, liquidation preference
$250,000,000; none (actual) and 250,000 (pro forma)
shares issued and outstanding......................... -- 3
Series C preferred stock, none issued or outstanding... -- --
Common stock, par value $0.01 per share; 75,000,000
(actual) and 200,000,000 (pro forma) shares authorized;
40,150,000 (actual) and 71,979,000 (pro forma) shares
issued and outstanding(2).............................. 402 720
Additional paid-in capital................................ 318,913 912,490
Deferred non-cash compensation............................ (28,104) (28,104)
(Deficit)................................................. (242,840) (242,840)
--------- ----------
48,371 642,269
Treasury Stock at cost, none (actual) and 1,329,000 (as
adjusted) shares....................................... -- (10,574)
--------- ----------
Total stockholder's equity............................. 48,371 631,695
--------- ----------
Total capitalization................................... $ 233,626 $ 999,995
========= ==========
</TABLE>
---------------
(1) We are negotiating with equipment manufacturers including Cisco Systems,
Inc., Lucent Technologies, Inc., and Nortel Networks Corporation for
significant vendor financing. The vendors may provide equipment financing to
one or more of our subsidiaries. We cannot assure you that any of these
negotiations will result in an agreement. Please refer to the section
entitled "Description of Our Other Indebtedness."
28
<PAGE> 32
(2) Does not include:
- approximately 18,552,000 shares issuable upon the exercise of options or
warrants;
- 6,388,416 shares issuable upon conversion of the convertible notes at the
current conversion price of $27.39 per share;
- a maximum of 3,481,898 shares issuable upon conversion of the Series A
preferred stock at a conversion price of $14.36 per share; and
- a maximum of 7,785,737 shares issuable upon conversion of the Series B
preferred stock at the initial conversion price of $32.11 per share.
29
<PAGE> 33
CORECOMM LIMITED
UNAUDITED PRO FORMA FINANCIAL DATA
In May 1999, we acquired MegsINet Inc. in exchange for cash and common
stock and acquired certain assets of USN Communications, Inc. in exchange for
cash and warrants to purchase common stock. In September 2000, we acquired ATX
in exchange for cash, notes, convertible preferred stock and common stock and we
acquired Voyager in exchange for cash and common stock. The unaudited pro forma
financial data presented below gives effect to the completed acquisitions of
MegsINet, USN, ATX and Voyager.
The pro forma financial data is based on our historical financial
statements and the historical financial statements of MegsINet, USN, ATX and
Voyager. We are treated as the acquiring company for purposes of these pro forma
financial data. Certain amounts in these historical financial statements have
been reclassified to conform to our presentation.
We expect to incur negative cash flow from operations at least until we
establish an adequate customer base for our services. We will require a
significant amount of cash to develop our business, fund our capital commitments
and service our indebtedness and other obligations. We expect to be able to meet
our cash requirements through December 31, 2001 with cash and securities on hand
of approximately $40.0 million as of September 30, 2000, the remaining $75.0
million commitment under our $150.0 million senior secured credit facility
provided by The Chase Manhattan Bank and the $50.0 million available under our
commitment for a senior unsecured credit facility from The Chase Manhattan Bank
and Chase Securities Inc. The $125.0 million in additional financing remains
subject to various conditions, including, but not limited to, the ongoing
satisfaction of financial covenants related to the Company's operations. In
addition, the $50.0 million senior unsecured credit facility is available only
on or after January 31, 2001. Thus, we have to manage our cash and securities on
hand to ensure they are adequate to meet our cash requirements until the amounts
committed under the two facilities become available. In general, we cannot give
any assurance that we will have sufficient resources available to meet our
expected cash requirements and obligations.
The MegsINet and USN acquisitions have been accounted for using the
purchase method of accounting, in which the assets acquired and liabilities
assumed have been recorded at their fair values. The ATX and Voyager
acquisitions have been accounted for using the purchase method of accounting, in
which the assets acquired and liabilities assumed have been recorded at their
estimated fair values. We are unaware of events other than those disclosed in
the notes to the unaudited pro forma financial data that would require a
material change to the preliminary purchase price allocation. However, a final
determination of necessary purchase accounting adjustments will be made upon the
completion of a study to be undertaken to determine the fair value of certain
assets and liabilities, including intangible assets. The actual financial
position and results of operations will differ, perhaps significantly, from the
unaudited pro forma amounts reflected in this prospectus because of a variety of
factors, including access to additional information, changes in value not
currently identified and changes in operating results between the dates of the
unaudited pro forma financial data and the dates on which the acquisitions take
place.
The unaudited pro forma condensed statements of operations for the six
months ended June 30, 2000 and the year ended December 31, 1999 give effect to
the MegsINet, USN, ATX and Voyager acquisitions as if they had been consummated
on January 1, 1999. The unaudited pro forma condensed balance sheet at June 30,
2000 give the effect to the ATX and Voyager mergers as if they had been
consummated on June 30, 2000.
ATX provided for bonuses and certain other compensation to its partners.
Upon the merger with CoreComm, the compensation of these individuals either
ceased or has been reduced to be more consistent with compensation levels of
other members of management. Approximately $4.2 million and $8.5 million of
expense in the six months ended June 30, 2000 and the year ended December 31,
1999, respectively, would not have been incurred had the merger been consummated
on January 1, 1999.
30
<PAGE> 34
The pro forma adjustments are based upon available information and
assumptions that we believe were reasonable at the time made. We believe that
any variations from the available information and assumptions applied will not
have a material effect on the pro forma financial data presented. The unaudited
pro forma condensed statements of operations do not purport to present our
results of operations had the acquisitions occurred on the dates specified, nor
are they necessarily indicative of the results of operations that may be
achieved in the future. The unaudited pro forma condensed statements of
operations do not reflect any adjustments for synergies that we expect to
realize. We cannot assure you as to the amounts of, or that any, cost savings or
revenue enhancements will be realized.
A significant component of the revenues included in the pro forma results
is the historical revenues of USN from January 1, 1999 through the date we
acquired the wireline 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 the acquisition, and additional
declines may continue as customers leave or "churn" off the service. However, we
anticipate that the future operating results derived from the USN assets will
improve, although we have no way of assuring this. Please refer to the section
entitled "Special Note Regarding Forward-Looking Statements."
The unaudited pro forma financial statements should be read in conjunction
with our financial statements and related notes, and with the financial
statements and related notes of USN, MegsINet, ATX and Voyager appearing
elsewhere in this prospectus.
31
<PAGE> 35
CORECOMM LIMITED
PRO FORMA CONDENSED BALANCE SHEET
(UNAUDITED)
JUNE 30, 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
CORECOMM ATX VOYAGER
(HISTORICAL) (HISTORICAL) (HISTORICAL) ADJUSTMENTS PRO FORMA
------------ ------------ ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
ASSETS:
Current assets:
Cash, cash equivalents
and securities..... $ 84,220 $ 3,531 $ 12,330 $ 1,197A,B,C,D,I $ 101,278
Other current
assets............. 17,794 26,414 9,567 -- 53,775
--------- ------- -------- -------- ----------
Total current assets.... 102,014 29,945 21,897 1,197 155,053
Fixed assets, net....... 109,739 13,311 25,525 24,914A 173,489
Local multipoint
distribution service
license costs......... 25,366 -- -- -- 25,366
Intangibles and other
assets, net........... 75,796 900 56,665 648,286A,C 781,647
Affiliate receivable,
net................... -- -- -- 12,210H 12,210
--------- ------- -------- -------- ----------
Total assets............ $ 312,915 $44,156 $104,087 $686,607 $1,147,765
========= ======= ======== ======== ==========
LIABILITIES AND
SHAREHOLDERS' EQUITY:
Current liabilities:
Other current
liabilities........ $ 61,563 $36,444 $ 15,974 $ -- $ 113,981
Current portion of
debt and capital
leases............. 17,726 -- 3,158 2,740A 23,624
Due to affiliates..... -- 1,445 -- -- 1,445
--------- ------- -------- -------- ----------
Total current
liabilities........... 79,289 37,889 19,132 2,740 139,050
Debt and capital
leases................ 185,255 -- 25,866 157,179A,C,I 368,300
Deferred income taxes... -- -- -- 8,720A 8,720
Shareholders' equity:
Preferred stock,
common stock and
additional paid-in
capital............ 319,315 -- -- 593,898A,B,D 913,213
Deferred non-cash
compensation....... (28,104) -- -- -- (28,104)
Acquired company
equity............. -- 6,267 59,089 (65,356) --
Deficit............... (242,840) -- -- -- (242,840)
--------- ------- -------- -------- ----------
48,371 6,267 59,089 528,542 642,269
Treasury stock at
cost.................. -- -- -- (10,574)B (10,574)
--------- ------- -------- -------- ----------
48,371 6,267 59,089 517,968 631,695
--------- ------- -------- -------- ----------
Total liabilities and
shareholders'
equity................ $ 312,915 $44,156 $104,087 $686,607 $1,147,765
========= ======= ======== ======== ==========
</TABLE>
32
<PAGE> 36
CORECOMM LIMITED
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
(UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
CORECOMM ATX VOYAGER
(HISTORICAL) (HISTORICAL) (PRO FORMA) ADJUSTMENTS PRO FORMA
------------ ------------ ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
REVENUES....................... $ 38,356 $76,566 $ 37,060 $ -- $ 151,982
COSTS AND EXPENSES
Operating...................... 51,700 51,338 14,751 -- 117,789
Selling, general and
administrative............... 48,921 30,730 16,336 (4,235)J 91,752
Corporate...................... 5,196 -- -- -- 5,196
Nonrecurring charges........... 1,018 -- -- -- 1,018
Non-cash compensation.......... 32,186 -- 50 -- 32,236
Depreciation and
amortization................. 18,440 1,445 18,575 57,256E 95,716
--------- ------- -------- -------- ---------
157,461 83,513 49,712 53,021 343,707
--------- ------- -------- -------- ---------
Operating (loss)............... (119,105) (6,947) (12,652) (53,021) (191,725)
OTHER INCOME/EXPENSE
Interest and other income...... 3,850 51 (1,248) -- 2,653
Interest expense............... (7,534) -- -- (6,889)F (14,423)
--------- ------- -------- -------- ---------
(Loss) before income taxes..... (122,789) (6,896) (13,900) (59,910) (203,495)
Income tax provision........... (272) -- -- -- (272)
--------- ------- -------- -------- ---------
Net (loss)..................... (123,061) (6,896) (13,900) (59,910) (203,767)
Preferred stock dividends...... -- -- -- (8,788)G (8,788)
--------- ------- -------- -------- ---------
Net (loss) available to common
shareholders................. $(123,061) $(6,896) $(13,900) $(68,698) $(212,555)
========= ======= ======== ======== =========
Net (loss) per common stock --
basic and fully diluted...... $ (3.12) $ (2.98)
========= =========
Weighted average shares
outstanding.................. 39,501 31,829A 71,330
========= ======== =========
</TABLE>
33
<PAGE> 37
CORECOMM LIMITED
NOTES TO THE UNAUDITED PRO FORMA FINANCIAL DATA
(IN THOUSANDS)
FOR THE SIX MONTHS ENDED AND AS OF JUNE 30, 2000
A. PURCHASE PRICE AND ALLOCATION OF PURCHASE PRICE:
<TABLE>
<CAPTION>
ATX VOYAGER TOTAL
-------- -------- --------
<S> <C> <C> <C>
Shares of CoreComm common stock issued................. 12,398 19,431 31,829
CoreComm common stock price............................ $14.4125 $ 7.9583
-------- -------- --------
178,686 154,638 333,324
Series B Preferred stock............................... 200,000 -- 200,000
Senior Unsecured Notes................................. 108,669 -- 108,669
Estimated merger related costs......................... 11,014 8,501 19,515
Cash consideration..................................... 39,360 36,130 75,490
-------- -------- --------
Purchase price......................................... 537,729 199,269 736,998
Net assets at June 30, 2000, after reclassification of
Voyager related party receivables (see Adjustment
H)................................................... 6,267 71,299 77,566
Less: Intangible assets................................ (638) (56,665) (57,303)
-------- -------- --------
5,629 14,634 20,263
-------- -------- --------
Excess of purchase price over net assets acquired...... $532,100 $184,635 $716,735
======== ======== ========
Preliminary allocation to:
Fixed assets........................................... $ 14,542 $ 10,372 $ 24,914
Deferred tax liability................................. (5,090) (3,630) (8,720)
Intangible assets...................................... 522,648 177,893 700,541
-------- -------- --------
$532,100 $184,635 $716,735
======== ======== ========
</TABLE>
The intangible assets arising from the ATX merger and the Voyager merger
may include customer lists, other intangibles and goodwill. The amount of each
individual intangible is not currently determinable. The amounts of each
intangible will be determined based on appraisals and other analyses. The
amortization period for each may vary, although it is assumed in Pro Forma
Adjustment E below, that 5 years is a representative blended amortization
period.
B. PHANTOM UNIT PAYMENT
We agreed to satisfy a former ATX shareholder's liability for payouts under
the ATX Phantom Unit plan. The shareholder contributed shares of CoreComm common
stock and in exchange we issued stock and options to the Phantom Unit holders.
34
<PAGE> 38
CORECOMM LIMITED
NOTES TO THE UNAUDITED PRO FORMA FINANCIAL DATA -- (CONTINUED)
(IN THOUSANDS)
<TABLE>
<S> <C>
Shares issued to an ATX shareholder and returned for Phantom
Unit obligation (1,684,779 shares) recorded as treasury
stock..................................................... $13,408
Shares to be issued for Phantom Unit obligation (356,097
shares) from treasury stock............................... (2,834)
-------
Net treasury stock.......................................... 10,574
Options issued for Phantom Unit obligation (options for
1,663,464 shares)......................................... (10,574)
-------
Net purchase price effect................................... $ 0
=======
Cash paid to an ATX shareholder and returned for Phantom
Unit obligation........................................... $ 1,732
Cash to be paid for Phantom Unit obligation................. (1,732)
-------
Net cash effect............................................. $ 0
=======
</TABLE>
<TABLE>
<S> <C> <C>
C. BANK FINANCING
Term Loan................................................... $ 50,000
Revolving Loan.............................................. 25,000
--------
75,000
Less: Financing Costs....................................... (5,048)
--------
Net cash received........................................... $ 69,952
========
D. ISSUANCE OF PREFERRED STOCK
Cash received for issuance of Series A preferred stock...... $ 50,000
========
E. DEPRECIATION AND AMORTIZATION
Depreciation of fixed asset allocation (over 5 years)....... $ 2,491
Amortization of intangibles (over 5 years).................. 70,054
Historical amortization of intangibles...................... (15,289)
--------
$ 57,256
========
F. INTEREST EXPENSE
Interest on bank financing.................................. $ 4,140
Amortization of fees on borrowings recorded as deferred
financing costs (8 year term)............................. 316
Interest on the senior unsecured notes at 6.47%............. 3,515
Historical interest expense on Voyager debt (1)............. (1,082)
--------
$ 6,889
========
G. PREFERRED STOCK DIVIDENDS
Dividends on the Series B preferred stock................... $ 6,663
Dividends at 8.5% on the Series A preferred stock........... 2,125
--------
$ 8,788
========
</TABLE>
<TABLE>
<S> <C> <C>
H. RELATED PARTY TRANSACTIONS
Reclassification of related party receivables and payable... $ 12,210
========
</TABLE>
35
<PAGE> 39
CORECOMM LIMITED
NOTES TO THE UNAUDITED PRO FORMA FINANCIAL DATA -- (CONTINUED)
(IN THOUSANDS)
<TABLE>
<S> <C> <C>
I. LONG-TERM DEBT
Payment of Voyager debt (1)................................. $ 23,750
========
J. HISTORICAL PARTNER BONUSES
ATX provided for bonuses and certain other compensation to
its partners. Upon the merger with CoreComm, the
compensation to these individuals ceased or has been
reduced to be more consistent with compensation levels of
other members of management............................... $ (4,235)
========
</TABLE>
---------------
(1) This facility was repaid at the closing of the Voyager merger.
36
<PAGE> 40
CORECOMM LIMITED
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
(UNAUDITED)
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
CORECOMM MEGSINET USN ATX VOYAGER
(HISTORICAL) (HISTORICAL) (HISTORICAL) (HISTORICAL) (PRO FORMA) ADJUSTMENTS PRO FORMA
------------ ------------ ------------ ------------ ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES.................. $ 58,151 $ 2,785 $ 36,919 $135,021 $ 64,997 $ 297,873
COSTS AND EXPENSES
Operating................. 58,561 3,740 33,784 85,477 22,570 204,132
Selling, general and
administrative.......... 74,185 3,489 23,330 49,393 27,475 $ (8,459)F 169,413
Corporate................. 7,996 -- -- -- -- -- 7,996
Non-cash compensation..... 1,056 -- -- -- -- -- 1,056
Depreciation and
amortization............ 19,578 1,679 4,883 1,820 36,873 128,586A,C 193,419
--------- ------- -------- -------- -------- --------- ---------
161,376 8,908 61,997 136,690 86,918 120,127 576,016
--------- ------- -------- -------- -------- --------- ---------
Operating (loss).......... (103,225) (6,123) (25,078) (1,669) (21,921) (120,127) (278,143)
OTHER INCOME/EXPENSE
Interest and other
income.................. 5,773 27 (646) 119 914 -- 6,187
Interest expense.......... (5,341) (814) (5,405) (47) (5,478) (8,211)B,D (25,296)
--------- ------- -------- -------- -------- --------- ---------
(Loss) before income
taxes................... (102,793) (6,910) (31,129) (1,597) (26,485) (128,338) (297,252)
Income tax provision...... (731) -- -- -- -- -- (731)
--------- ------- -------- -------- -------- --------- ---------
Net (loss)................ (103,524) (6,910) (31,129) (1,597) (26,485) (128,338) (297,983)
Preferred stock
dividends............... -- -- -- -- -- (17,575)E (17,575)
--------- ------- -------- -------- -------- --------- ---------
Net (loss) available to
common shareholders..... $(103,524) $(6,910) $(31,129) $ (1,597) $(26,485) $(145,913) $(315,558)
========= ======= ======== ======== ======== ========= =========
Net (loss) per common
stock -- basic and fully
diluted................. $ (3.03) $ (4.78)
========= =========
Weighted average shares
outstanding............. 34,189 31,829 66,018
========= ========= =========
</TABLE>
37
<PAGE> 41
CORECOMM LIMITED
NOTES TO THE UNAUDITED PRO FORMA FINANCIAL DATA
(IN THOUSANDS)
PRO FORMA ADJUSTMENTS FOR THE USN AND MEGSINET ACQUISITIONS -- FOR THE YEAR
ENDED DECEMBER 31, 1999
<TABLE>
<S> <C> <C>
A. DEPRECIATION AND AMORTIZATION
Amortization of intangibles................................. $ 5,053
To adjust USN depreciation for fixed assets not acquired and
for the write down of the fixed assets acquired to fair
value..................................................... (2,753)
--------
$ 2,300
========
B. DEBT NOT ASSUMED
To eliminate USN interest expense from debt not assumed..... $ 5,405
========
</TABLE>
PRO FORMA ADJUSTMENTS FOR THE ATX AND VOYAGER MERGERS -- FOR THE YEAR ENDED
DECEMBER 31, 1999
The intangible assets arising from the ATX merger and the Voyager merger
may include customer lists, other intangibles and goodwill. The amount of each
individual intangible is not currently determinable. The amounts of each
intangible will be determined based on appraisals and other analyses. The
amortization period for each may vary, although it is assumed in Pro Forma
Adjustment C below, that 5 years is a representative blended amortization
period.
<TABLE>
<S> <C> <C>
C. DEPRECIATION AND AMORTIZATION
Depreciation of fixed asset allocation (over 5 years)....... $ 4,983
Amortization of intangibles (over 5 years).................. 140,108
Historical amortization of intangibles...................... (18,805)
--------
$126,286
========
D. INTEREST EXPENSE
Interest on bank financing.................................. $ 8,280
Amortization of fees on borrowings recorded as deferred
financing costs (8 year term)............................. 631
Interest on the senior unsecured notes at 6.47%............. 7,030
Historical interest expense on Voyager debt (1)............. (2,325)
--------
$ 13,616
========
E. PREFERRED STOCK DIVIDENDS
Dividends on the Series B preferred stock................... $ 13,325
Dividends at 8.5% on the Series A preferred stock........... 4,250
--------
$ 17,575
========
F. HISTORICAL PARTNER BONUSES
ATX provided for bonuses and certain other compensation to
its partners. Upon the merger with CoreComm, the
compensation to these individuals ceased or has been
reduced to be more consistent with compensation levels of
other members of management............................... $ (8,459)
========
</TABLE>
---------------
(1) This facility was repaid at the closing of the Voyager merger.
38
<PAGE> 42
SELECTED HISTORICAL FINANCIAL DATA
The following selected historical financial data of CoreComm and its
predecessor, OCOM Corporation Telecoms Division, has been derived from, and
should be read in conjunction with, the historical consolidated financial
statements and related notes included in this prospectus. The summary historical
financial data relates to OCOM as it was operated prior to its acquisition by
CoreComm. The selected historical financial data as of December 31, 1999, 1998,
1997, 1996 and 1995 and for the year ended December 31, 1999, for the period
from April 1, 1998 to December 31, 1998, for the period from January 1, 1998 to
May 31, 1998, and for the years ended December 31, 1997, 1996 and 1995 have been
derived from the historical financial statements of CoreComm or OCOM audited by
Ernst & Young LLP, independent auditors.
Interim data for the six months ended June 30, 2000 and 1999 are unaudited
but include, in our opinion, all adjustments consisting only of normal recurring
adjustments necessary for a fair presentation of that data. Results for the six
months ended June 30, 2000 are not necessarily indicative of the results that
may be expected for any other interim period or the year as a whole.
In 2000, we recorded a non-cash compensation expense of approximately $32.2
million in accordance with APB opinion No. 25, "Accounting for Stock Issued to
Employees."
In 1999, we acquired 100% of the stock of MegsINet Inc. and some of the
assets of USN Communications, Inc. In addition, we issued $175.0 million in
aggregate principal amount of 6.00% convertible subordinated notes due 2006.
OCOM incurred one-time costs of $2,294,000 in 1995 in connection with the
expansion of its cellular long distance resale business into certain AT&T
Wireless markets.
39
<PAGE> 43
SELECTED HISTORICAL FINANCIAL DATA (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM APRIL 1,
1998 (DATE THE PREDECESSOR (OCOM)
OPERATIONS ------------------------------
SIX MONTHS ENDED COMMENCED) FOR THE PERIOD
JUNE 30, YEAR ENDED TO FROM JANUARY 1, YEAR ENDED
-------------------- DECEMBER 31, DECEMBER 31, 1998 TO MAY 31, DECEMBER 31,
2000 1999 1999 1998 1998 1997
--------- -------- ------------ -------------- --------------- ------------
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues............. $ 38,356 $ 16,032 $ 58,151 $ 6,713 $ 1,452 $ 3,579
Costs and expenses
Operating............ 51,700 14,150 58,561 5,584 772 1,581
Selling general and
administrative..... 48,921 19,520 74,185 11,940 3,205 5,934
Corporate............ 5,196 4,143 7,996 2,049 -- --
Non-recurring
charges............ 1,018 -- -- -- -- --
Non-cash
compensation....... 32,186 -- 1,056 4,586 -- --
Depreciation and
amortization....... 18,440 2,882 19,578 980 257 439
--------- -------- --------- -------------- ------- -------
157,461 40,695 161,376 25,139 4,234 7,954
--------- -------- --------- -------------- ------- -------
Operating (loss)..... (119,105) (24,663) (103,225) (18,426) (2,782) (4,375)
Other income
(expense)
Interest and other
income............. 3,850 2,870 5,773 2,632 -- (4)
Interest expense..... (7,534) (218) (5,341) (21) -- --
--------- -------- --------- -------------- ------- -------
(Loss) before income
taxes.............. (122,789) (22,011) (102,793) (15,815) (2,782) (4,379)
Income tax
provision.......... (272) (565) (731) (440) -- --
--------- -------- --------- -------------- ------- -------
Net (loss)........... $(123,061) $(22,576) $(103,524) $ (16,255) $(2,782) $(4,379)
========= ======== ========= ============== ======= =======
Basic and diluted net
(loss) per common
share(1)........... $ (3.12) $ (0.74) $ (3.03) $ (0.55) $ (0.09) $ (0.15)
Basic and diluted
weighted average
number of common
shares(1).......... 39,501 30,632 34,189 29,678 29,664 29,419
Ratio of earnings to
fixed charges(2)... -- -- -- -- -- --
<CAPTION>
THE PREDECESSOR (OCOM)
---------------------------
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
INCOME STATEMENT DATA
Revenues............. $ 5,103 $ 4,001
Costs and expenses
Operating............ 3,065 2,478
Selling general and
administrative..... 3,119 5,798
Corporate............ -- --
Non-recurring
charges............ -- --
Non-cash
compensation....... -- --
Depreciation and
amortization....... 149 137
------- -------
6,333 8,413
------- -------
Operating (loss)..... (1,230) (4,412)
Other income
(expense)
Interest and other
income............. 133 258
Interest expense..... -- --
------- -------
(Loss) before income
taxes.............. (1,097) (4,154)
Income tax
provision.......... -- --
------- -------
Net (loss)........... $(1,097) $(4,154)
======= =======
Basic and diluted net
(loss) per common
share(1)........... $ (0.04) $ (0.17)
Basic and diluted
weighted average
number of common
shares(1).......... 29,691 24,908
Ratio of earnings to
fixed charges(2)... -- --
</TABLE>
<TABLE>
<CAPTION>
THE PREDECESSOR
(OCOM)
JUNE 30, DECEMBER 31, ----------------
-------- -----------------------------------------------
2000 1999 1998 1997 1996 1995
-------- -------- -------- ------ ------ -------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficiency)....................... $ 22,725 $121,292 $133,899 $ (950) $(491) $ (42)
Fixed assets -- net................................ 109,739 90,619 3,582 1,269 270 226
Total assets....................................... 312,915 392,103 176,526 1,731 917 1,020
Long-term debt and capital leases.................. 185,255 193,882 501 -- -- --
Shareholders' equity............................... 48,371 126,926 169,297 -- -- --
Parent's investment (deficiency)................... -- -- -- 321 (208) (207)
</TABLE>
---------------
(1) After giving retroactive effect to the 3-for-2 stock split by way of stock
dividend paid in September 1999 and the 3-for-2 stock split by way of stock
dividend paid in February 2000. The weighted average number of common shares
prior to September 1998 are equivalent to the historical weighted average
shares of CoreComm's former parent company, Cellular Communications of
Puerto
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<PAGE> 44
Rico, Inc. (since CCPR shareholders received one CoreComm common share for
each CCPR share owned). We have never declared or paid any cash dividends.
(2) For purposes of computing the ratio of earnings to fixed charges, earnings
consist of earnings before income taxes plus fixed charges. Fixed charges
consist of interest, amortization of debt issuance costs and the portion of
rental expense that represents the interest factor. Earnings were
insufficient to cover our fixed charges by $122,789,000 and $22,011,000 for
the six month periods ended June 30, 2000 and 1999, respectively;
$102,793,000 and $15,815,000 for the year ended December 31, 1999 and the
period from April 1, 1998 to December 31, 1998, respectively; $2,782,000 for
OCOM's period from January 1, 1998 to May 31, 1998; and $4,379,000,
$1,097,000 and $4,154,000 for OCOM's fiscal years ended December 31, 1997,
1996 and 1995, respectively.
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<PAGE> 45
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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. The results of these businesses are not included in the 1998
results.
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 has been
successful in many areas. However, we did not 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.
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.
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 our common stock to various employees at an exercise price which was
less than the fair market value of our common stock on the date of the grant. In
accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees,"
in April 2000, we 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. We 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 an announcement in March 2000 of a
reorganization of some of our 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,
and lease exit costs of
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<PAGE> 46
$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 were still employed by us. 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 our cash, cash equivalents and marketable
securities.
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.
Year Ended December 31, 1999 and for the Period from April 1, 1998 (Date
Operations Commenced) to December 31, 1998
The increase in revenues to $58,151,000 from $6,713,000 is primarily due to
acquisitions in 1999, which accounted for $40,909,000 of the increase. The
remainder of the increase is primarily due to an increase in competitive local
exchange carrier and internet service provider revenues from an increase in
customers, offset by the decline in cellular long distance revenue as a result
of customers switching to other long distance providers. In the third quarter of
1999, we sold most of our prepaid cellular debit card business and we terminated
our cellular long distance business in certain markets. We had revenues in 1999
of $2,223,000 from the prepaid cellular debit card business and $519,000 from
the cellular long distance business in these markets.
Operating costs increased to $58,561,000 from $5,584,000 primarily due to
acquisitions in 1999, which accounted for $43,315,000 of the increase. The
remainder of the increase is primarily due to the increase in revenues.
Operating costs as a percentage of revenues increased to 101% from 83%. The
increase in percentage terms is the result of an increase in the fixed component
of operating expenses due to the migration toward a facilities-based
infrastructure. Operating costs as a percentage of revenues is expected to
remain higher than 1998 levels until customer and revenue growth exceeds the
increases in facilities-based infrastructure costs. In 1999, operating costs
were $2,543,000 from the prepaid cellular debit card business and $458,000 from
the cellular long distance business in the terminated markets.
Selling, general and administrative expenses increased to $74,185,000 from
$11,940,000 primarily due to acquisitions in 1999, which accounted for
$33,184,000 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 increased
to $7,996,000 from $2,049,000 because the 1998 expenses did not represent a full
period of results due to the fact that the spin-off from CCPR occurred on
September 2, 1998, at which time corporate expenses commenced. In addition,
allocated charges from NTL Incorporated (a company that has some of the same
officers and directors as us) have increased due to the sales in 1999 of other
affiliated companies.
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<PAGE> 47
The non-cash compensation charge of $1,056,000 in 1999 is recorded in
accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees,"
related to a change in employee stock option agreements. The non-cash
compensation charge of $4,586,000 in 1998 is recorded in accordance with APB
Opinion No. 25, as a one time charge related to our issuance of warrants and
stock options to holders of CCPR's stock options in connection with our
distribution to CCPR's shareholders.
Depreciation expense increased to $10,945,000 from $749,000 as a result of
acquisitions in 1999, which accounted for $7,176,000 of the increase and an
increase in fixed assets.
Amortization expense increased to $8,633,000 from $231,000 due to the
amortization of goodwill and other intangibles from the acquisitions in 1999.
Interest income and other, net, increased to $5,773,000 from $2,632,000
primarily due to interest income on our cash, cash equivalents and marketable
securities.
Interest expense increased to $5,341,000 from $21,000 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.
For the Period from April 1, 1998 (Date Operations Commenced) to December 31,
1998 and for the Year Ended December 31, 1997
As a result of the completion of the acquisitions of Digicom, Inc. in April
1998, certain assets of JeffRand Corp. (known as Wireless Outlet) in April 1998,
certain assets of OCOM Corporation in June 1998, and certain assets of Stratos
Internet Group, Inc. in November 1998, we consolidated the results of operations
of these businesses from the dates of acquisition. The following discussion
includes a comparison to the results of operations of OCOM, our predecessor
business. 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.
The increase in revenues to $6,713,000 from $3,579,000 is primarily due to
acquisitions in 1998, which accounted for $4,535,000 of the increase. OCOM's
revenues decreased to $2,178,000 from $3,579,000 because OCOM's revenues prior
to its acquisition in June 1998 of $1,452,000 are not included in the 1998
amount. OCOM's cellular long distance revenues continued to decline in 1998 as a
result of customers switching to other long distance providers. This reduction
in revenues was offset by increases in CLEC and cellular revenues.
Operating costs increased to $5,584,000 from $1,581,000 primarily due to
acquisitions in 1998, which accounted for $3,895,000 of the increase. Operating
costs as a percentage of revenues increased to 83% from 44%. This increase is
the result of the reduction in cellular long distance revenues which to date has
the highest gross margin of our telecommunications businesses.
Selling, general and administrative expenses increased to $11,940,000 from
$5,934,000 as a result of increased selling and marketing costs and increased
customer service costs. These increases were offset by a reduction in billing
costs due to the implementation of in-house billing in the fourth quarter of
1997.
The non-cash compensation charge of $4,586,000 in 1998 is a one time charge
related to our issuance of warrants and stock options to holders of CCPR's stock
options in connection with our distribution to CCPR's shareholders.
Depreciation expense increased to $749,000 from $428,000 as a result of an
increase in fixed assets, primarily computer hardware and software.
Amortization expense increased to $231,000 from $11,000 due to the
amortization of goodwill from the acquisitions in 1998.
Interest income and other, net, increased to income of $2,632,000 from
expense of $4,000 primarily due to $2,585,000 of interest income on our cash,
cash equivalents and marketable securities.
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<PAGE> 48
Interest expense increased to $21,000 from zero due to interest on the note
payable and capital leases.
LIQUIDITY AND CAPITAL RESOURCES
We will require significant resources to fund the construction of its
facilities-based network, develop and expand our existing businesses and fund
near term operating losses and debt service. We expect to be able to meet our
cash requirements through December 31, 2001 with cash and securities on hand of
approximately $40 million as of September 30, 2000, the remaining $75 million
commitment under our $150 million senior secured credit facility provided by the
Chase Manhattan Bank and the $50 million available under our commitment for a
senior unsecured credit facility from The Chase Manhattan Bank and Chase
Securities Inc. The $125 million in additional financing remains subject to
various conditions, including, but not limited to, the ongoing satisfaction of
financial covenants related to the Company's operations. In addition, the $50
million senior unsecured credit facility is available only on or after January
31, 2001. Thus, we have to manage our cash and securities on hand to ensure they
are adequate to meet our cash requirements until the amounts committed under the
two facilities become available. In general, we cannot give any assurance that
we will have sufficient resources available to meet our expected cash
requirements and obligations.
We are currently negotiating with equipment manufacturers, including Cisco
Systems, Inc., Lucent Technologies, Inc. and Nortel Networks Corporation 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 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 network, forego attractive business opportunities, or take other actions
which could adversely affect our business, results of operations and financial
condition.
Acquisitions and Related Financings. In May 1999, we acquired MegsINet and
the competitive local exchange carrier assets of USN Communications. The USN
acquisition includes a potential contingent payment to be paid in November 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.
In September 2000, we acquired ATX and Voyager. The total consideration for
the ATX acquisition consisted of $39.3 million in cash, $108.7 million principal
amount of senior notes due 2003, 12.4 million shares of newly issued common
stock, and 250,000 shares of newly issued Series B preferred stock. The total
consideration for the Voyager acquisition consisted of $36.1 million in cash,
19.4 million shares of newly issued common stock and the repayment of the $23.8
million principal amount and $248,000 accrued interest outstanding under the
Voyager credit agreement. In addition, we incurred acquisition related costs of
$16.2 million, of which $1.0 million has been paid through October 13, 2000. The
total purchase price, including debt repayment, was $797.5 million.
The senior notes due 2003 mature on September 29, 2003. Interest on the
notes is at an annual rate of 6.47% payable in either cash or common stock, at
our election, on October 1 and April 1 of each year beginning on April 1, 2001.
The notes require principal payments of approximately $2.1 million on January 1,
2001, approximately $640,000 on March 29, 2001, approximately $2.7 million on
January 1, 2002 and approximately $2.7 million on January 1, 2003.
The Series B preferred stock pays cumulative dividends at an initial annual
rate of $30 per share, payable quarterly in arrears, commencing on December 31,
2000, when, if and as declared by our board of directors. At our discretion, we
may pay dividends either in cash or in shares of our common stock. The
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<PAGE> 49
annual dividend will increase to $50 per share on September 29, 2001 if, by that
date, any of the senior notes due 2003 remain unpaid and to $70 per share on
March 29, 2002 if, by that date, any of the senior notes due 2003 remain unpaid.
The Series B preferred stock has a liquidation preference of $1,000 per share,
plus accumulated and unpaid dividends. The Series B preferred stock is
convertible at any time at the option of the holder into shares of common stock
at the stated liquidation preference of $1,000 divided by the conversion price
in effect at the time of conversion. The initial conversion price is $32.11. On
March 29, 2001, the conversion price will be reset to reflect any reduction in
the principal amount outstanding of the senior notes due 2003. On September 29,
2020, we will be required to redeem any shares of Series B preferred stock
outstanding for $1,000 per share plus accrued and unpaid dividends. At our
discretion, we may pay the redemption price either in cash or in shares of our
common stock.
In order to fund the cash portion of the ATX and Voyager acquisitions, we
obtained through our subsidiaries a $150 million senior secured credit facility
from The Chase Manhattan Bank, of which $100 million is in a term loan facility
and $50 million is in a revolving credit facility. In addition, we raised $50
million from the issuance of Series A preferred stock.
As of October 13, 2000, there was $50 million outstanding under the term
loan facility and $25 million outstanding under the revolving credit facility.
The term loan facility will amortize in equal quarterly installments of
principal commencing in September 2004 with a final maturity in September 2008.
The revolving credit facility is repayable in September 2008. In the event our
6% Convertible Notes due 2006 have not been converted or refinanced on or prior
to April 1, 2006, then the facilities mature and become payable in full on April
1, 2006. The interest rate on both our term loan facility and our revolving
credit facility is initially, at our option, either 3.25% per annum plus the
base rate, which is the higher of the prime rate or the federal funds effective
rate plus 0.5% per annum, or the reserve-adjusted London Interbank Offered Rate
plus 4.25% per annum. As of October 13, 2000, the effective rate on the amounts
outstanding was 11.04%. The applicable margin for our facilities will be subject
to reductions based on the ratio of our consolidated total debt to annualized
EBITDA. Interest is payable at least quarterly. The commitment fee on the unused
portion of the commitments is 1.25% per annum payable quarterly, subject to
reduction to 1% per annum based upon the amount borrowed under the facilities.
The Series A preferred stock pays cumulative dividends at 8.5% per annum of
the liquidation value of $1,000 per share, payable quarterly in arrears. At our
option, we may pay dividends either in cash, shares of our common stock or
additional shares of Series A preferred stock. The 50,000 shares of Series A
preferred stock originally issued are convertible at any time at the option of
the holder into shares of common stock at the stated liquidation value of $1,000
divided by the conversion price of $14.36. Any additional shares of Series A
preferred stock issued will have an initial conversion price equal to 120% of
the volume weighted average sale price of our common stock for a specified
period. On September 29, 2010, we will be required to redeem any shares of
Series A preferred stock outstanding for $1,000 per share plus accrued and
unpaid dividends. At our discretion, we may pay the redemption price either in
cash or in shares of our common stock. We may redeem the Series A preferred
stock at a redemption price of $1,000 per share, together with accrued and
unpaid dividends, payable either, at our option in cash or in shares of common
stock, or a combination of both, beginning on September 29, 2002 if the 25-day
volume weighted average sale price of our common stock exceeds certain targets.
In addition, the Series A preferred stock may be redeemed by us at any time
following September 29, 2005 at a redemption price of $1,010 per share, together
with accrued and unpaid dividends, payable either in cash or in shares of our
common stock, or a combination of both.
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 in the six
months ended June 30, 2000 is from additions to the note payable for equipment.
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<PAGE> 50
For the year ended December 31, 1999, cash used in operating activities
increased to $72,417,000 from $12,322,000 in the period from April 1, 1998 (date
operations commenced) to December 31, 1998, primarily due to the increase in the
net loss to $103,524,000 from $16,255,000. 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 year ended December 31, 1999, cash used to purchase fixed assets
increased to $20,575,000 from $2,341,000 in the period from April 1, 1998 (date
operations commenced) to December 31, 1998. The increase was due to acquisitions
and as a result of an increase in fixed asset purchases. The cash used for
acquisitions of $47,056,000 in the year ended December 31, 1999 is primarily for
payments in connection with the MegsINet and USN acquisitions.
Proceeds from borrowings, net of financing costs, of $168,545,000 in the
year ended December 31, 1999 is primarily from the issuance of the 6%
convertible notes.
Network Construction. 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 various states.
The amount of such expenditures in the next twelve months 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 we 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
131 incumbent local exchange carrier central offices. We have also identified
approximately 30 additional markets where we intend to deploy our Smart LEC
network in the future.
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.
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. Our 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.
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Local Multipoint Distribution Service. Local multipoint distribution
service 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. Local
multipoint distribution service 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 local multipoint
distribution service 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
local multipoint distribution service signals. We will deploy this local
multipoint distribution service 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 local
multipoint distribution service technology.
Sources of Liquidity. In October 1999, we issued $175 million principal
amount of 6% convertible notes, and received net proceeds of $168.5 million.
Interest on the convertible 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.
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' debt agreements prevent the payment
of dividends, loans or other distributions to us (except in certain limited
circumstances).
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
The Securities and Exchange Commission's rule related to market risk
disclosure requires that we describe and quantify our potential losses from
market risk sensitive instruments attributable to reasonably possible market
changes. Market risk sensitive instruments include all financial or commodity
instruments and other financial instruments (such as investments and debt) that
are sensitive to future changes in interest rates, currency exchange rates,
commodity prices or other market factors. We are not exposed to market risks
from changes in foreign currency exchange rates or commodity prices. We do not
hold derivative financial instruments nor do we hold securities for trading or
speculative purposes. Under our current policies, we do not use interest rate
derivative instruments to manage our exposure to interest rate changes.
The fair-market value of long-term fixed interest rate debt is subject to
interest rate risk. Generally the fair market value of fixed interest rate debt
will increase as interest rates fall and decrease as interest rates rise. The
fair value of our convertible notes was determined from the quoted market price.
The fair value of our other notes payable are estimated using discounted cash
flow analyses, based on our current incremental borrowing rates for similar
types of borrowing arrangements.
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<PAGE> 52
INTEREST RATE SENSITIVITY
AS OF DECEMBER 31, 1999
FOR THE YEARS ENDING DECEMBER 31
PRINCIPAL AMOUNT BY EXPECTED MATURITY
AVERAGE INTEREST RATE
<TABLE>
<CAPTION>
FAIR
VALUE
2000 2001 2002 2003 2004 THEREAFTER TOTAL 12/31/99
------ ------ ---- ---- ---- ---------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long-term Debt, including Current
Portion
Fixed Rate.......................... $5,280 $4,229 $89 $-- $-- $175,000 $184,598 $281,530
Average Interest Rate............... 11.3% 11.1% 8.0% 6.0%
</TABLE>
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<PAGE> 53
BUSINESS
References to "CoreComm" in this section are references to the business
operated by our predecessor, CoreComm Limited, a Bermuda corporation, prior to
September 29, 2000. CoreComm has since merged into ATX Telecommunications
Services, Inc., which has assumed the name "CoreComm Limited" and is a Delaware
corporation. References to "Voyager" in this section are references to the
business operated by Voyager.net, Inc. prior to September 29, 2000. References
to "ATX" in this section are references to the business operated by ATX
Telecommunications Services, Inc. prior to September 29, 2000. We now operate
the business formerly operated by all three companies.
(a) CORECOMM
The Smart LEC(SM) Overview
CoreComm's Smart LEC strategy is designed to allow it to enter
communications markets rapidly and to offer a variety of operating benefits,
including: improved operating margins, enhanced control of the customer
experience, success-based capital expenditures, and higher overall returns on
capital. In addition, CoreComm believes that the efficiency and broad reach of
this network strategy, in conjunction with CoreComm's diversified product
offering, enables it to operate under a business plan that requires only a small
share of each of its target markets for a successful return on investment.
The Smart LEC network strategy combines the building and owning of key
network facilities with the leasing of other services from the incumbent local
exchange carriers and other telecommunications carriers under the following
general principles:
CoreComm builds those parts of the network which it believes:
- significantly improve operating margins;
- are necessary to enhance the services to the customer; and
- are not generally available from other providers.
Conversely, CoreComm leases those portions of the network which it
believes:
- are disproportionately expensive to build;
- are readily available to be leased economically from other providers; and
- do not impact CoreComm's ability to interact with the customer.
CoreComm has deployed its Smart LEC facilities in Columbus, Ohio,
Cleveland, Ohio, Chicago, Illinois and Detroit, Michigan and is currently
developing 2 additional markets: New York, New York and Boston, Massachusetts.
These six markets comprise approximately 18 million total access lines. In
connection with these markets, CoreComm is in the process of establishing
collocation facilities in 131 ILEC central offices. CoreComm has also identified
approximately 30 additional markets where it intends deploy its Smart LEC
network in the future. CoreComm currently delivers its Internet services over
its broadband asynchronous transfer mode network, which has points of presence
in 89 cities and approximately 55,000 route miles of leased broadband circuits
throughout the United States.
Based upon its historical experience CoreComm is developing sophisticated
proprietary integrated systems and procedures that support all aspects of its
business, including customer provisioning systems, billing systems, and customer
care and collections support systems. Additionally, CoreComm's systems support
electronic bonding with the incumbent local exchange carrier in each of its
markets. CoreComm believes that an effective back office is essential to
efficiently serving its customers and achieving successful overall customer
satisfaction and retention.
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<PAGE> 54
BUSINESS STRATEGY
CoreComm's objective is to become a leading provider of integrated
communications services in its target markets. CoreComm believes that it will
successfully compete with the incumbent operators and achieve attractive returns
on capital by pursuing the following key strategies:
Provide Services to Both Business and Residential Customers. CoreComm
focuses on marketing and packaging its services with product offerings that are
tailored to small-to-medium-sized business customers and
communications-intensive residential markets. Because CoreComm's networks are
capital efficient and because it leases the "last mile" to the customer,
CoreComm believes that its business model uniquely allows it to serve profitably
both the business and residential communities. CoreComm believes that each
segment offers certain advantages: the small-to-medium-sized business market
offers high volume and revenue per customer, as well as increased geographical
concentration of users; the residential market offers a large, undeserved,
growing market with significantly less competition from other providers. For
example, in Ohio CoreComm is one of only a few competitive providers that market
local telecommunications services to the residential market. In addition,
targeting both sectors allows CoreComm to leverage the fixed cost aspects of its
network and operations.
Offer Bundled Services. CoreComm provides its customers with "one-stop
shopping," offering local and long distance telephone, Internet and data
services. CoreComm's services are packaged and priced in bundles which give the
customer increased flexibility, choice, and "value for money". CoreComm
emphasizes offerings which are easy to value by the consumer, and allows them to
"buy what they need and pay for what they get." CoreComm typically offers a
platform of basic services and then creates ways for customers to add additional
services easily and conveniently according to customer preferences. CoreComm's
current service offerings include: local dial tone and local calling; enhanced
telephone features, such as call waiting; long distance calling services;
dial-up and dedicated Internet access; and data services. CoreComm's integrated
offerings enhance convenience by giving the customer one point of contact for
all of these services, providing the services on a single bill and simplifying
the decision-making process. In addition to attracting customers, CoreComm
believes this strategy also improves its profitability by increasing its average
revenue per customer with additional higher margin services, reducing customer
acquisition and other operating costs, and improving customer retention.
Own and Operate Capital Efficient Networks. CoreComm's strategy is to
provide its full range of communications services over its capital efficient,
switch-based network infrastructure which combines the building of key network
facilities with the leasing of other elements from the incumbent local exchange
carrier or other telecommunications carriers. CoreComm believes that its network
strategy offers a variety of benefits including: attractive operating margins,
control of the customer experience, greater speed to market, broad geographic
reach, ability to serve both businesses and residential customers, success-based
capital expenditures, and higher overall returns on capital.
"Internet Centric" Strategy. CoreComm uses the Internet as a key tool of
its business strategy. Because CoreComm bundles Internet service into its basic
service packages, effectively all of its customers will have access to the
Internet. CoreComm intends to take advantage of this by using the Internet in a
variety of ways to communicate with its customers. CoreComm currently uses its
www.core.com web site as a sales tool where customers can sign up for service,
to increase awareness about CoreComm and its products and services, and to
access the large and growing number of Internet users. CoreComm also intends to
use the Internet to be able to efficiently communicate with virtually every
CoreComm customer, with full functionality, including online sign-up, feature
selection, billing, moves/adds/changes, and customer care. CoreComm currently
offers customers the ability to sign-up and access basic customer service
functions online and is in the process of expanding its systems for these
additional online services. CoreComm believes that communicating with the
customer electronically will significantly increase its operating efficiency by
reducing its sales costs, customer service costs and billing costs, as well as
the company's bad debt expense. CoreComm also believes that this strategy will
provide added convenience to the customer, which will further differentiate it
from its competitors.
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Effective Marketing Over Wide Areas. CoreComm develops and implements
efficient marketing techniques to attract business and residential customers.
CoreComm believes that its network will allow it to leverage its fixed cost
infrastructure to reach wide geographic areas within its target markets. In
addition, the ability to resell incumbent local exchange carrier services
expands CoreComm's overall potential service area even further. CoreComm's
ability to offer targeted, customer-convenient services over wide areas enables
it to utilize mass marketing strategies and other efficient methods of
communicating its offerings to CoreComm's potential customers. CoreComm believes
that these initiatives will increase the awareness of the CoreComm brand and
attract new customers in its target markets.
Leverage Experience of Proven Management. CoreComm's management team has
had significant experience in developing several successful communications
companies in the U.S., the United Kingdom and other countries. Many members of
CoreComm's management team have worked together for 10 to 15 years. CoreComm
believes that its management's experience will enhance the company's ability to
execute its business plan, and will contribute to its overall operational
success and results. CoreComm's management has designed attractive, bundled
communications services and product offerings. At NTL Incorporated, management
has had experience competing against incumbent operators by offering business
and residential customers bundled packages of integrated communications
services, including telephony, cable TV and Internet access. NTL's creative
marketing and product packaging strategies have resulted in NTL achieving
industry-leading customer penetration rates of 49% versus the industry average
of 35% and churn rates which are less than half the industry average. In
addition, CoreComm's management has previously developed its own internal
systems for billing, MIS and customer care. Management believes CoreComm
represents an effort to capitalize on management's history of experience and
operational success to exploit the significant communications opportunities in
the U.S.
Expand Through Strategic Acquisitions. CoreComm has expanded and grown its
operations through strategic acquisitions. CoreComm looks for acquisitions that
enhance its ability to execute its business strategy, including adding
complementary network and facilities, increasing revenues, and gaining
management talent. To this end, in September 2000 CoreComm completed the
acquisitions of ATX, a "smart build" CLEC and integrated communications provider
serving the mid-Atlantic states, and Voyager, the largest independent full
service Internet communications company in the midwest and Great Lakes region.
Moreover, in 1999 CoreComm completed the acquisitions of MegsINet, a Chicago
based Internet service provider, and the assets of USN, a competitive local
exchange carrier in the midwest and northeast providing service to business
customers. CoreComm intends to continue to pursue acquisition opportunities
which would accelerate the growth and success of its operations.
THE SMART LEC(SM) NETWORK
The Smart LEC strategy allows CoreComm to implement its own switch-based
telecommunications network without the significant additional expense, time
commitment and general financial risk of building its own complete local loops
and transmission facilities. CoreComm believes this strategy will improve its
overall return on capital and lower the level of risk associated with the
execution of its business plan, based on the following general advantages:
- reduced capital expenditures associated with leasing rather than building
complete local loop and transport facilities;
- greater certainty of return from success-based capital spending;
- increased network utilization as a result of the access to multiple
revenue streams and the ability to increase leased capacity
incrementally; and
- lower overall market penetration requirements as a result of reduced
network costs.
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Advantages of the Smart LEC network
CoreComm believes that this network strategy offers a variety of specific
benefits including:
Lower Overall Cost -- CoreComm believes that the Smart LEC network can
be deployed at a much lower cost than building conventional networks. The
cost of conventional networks includes the cost of all of the network
facilities included in the Smart LEC build, plus the construction of
conduit, transport capacity and associated infrastructure to connect
network access points, switch facilities and customers. The deployment of
these transmission route components involves significant expense, and their
elimination under CoreComm's strategy considerably decreases its capital
expenditure requirements. Whereas the construction of full network
facilities has been estimated to cost between $1,000 to $3,000 per line,
depending on the specifications of the network, CoreComm estimates that its
Smart LEC network will cost less than $500 per line, while still providing
comparable basic telephone services and additional advanced services.
Lower Required Customer Penetration -- Due to the reduced cost of
building the Smart LEC network, CoreComm's business model requires a lower
level of customer penetration to be successful as compared to a
full-facilities network. Because there is a reduced amount of up-front
investment, CoreComm believes that it can gain profitability and a
sufficient return on capital with a relatively small percentage of market
share. This advantage not only lowers CoreComm's exposure to risk, but also
gives it the flexibility to design its offerings to target a specific
subscriber base of communications-intensive users without the requirement
of necessarily attracting a large portion of the market. The ability to
serve both business and residential customers also increases CoreComm's
potential overall market.
Success-based Capital Expenditures -- An additional benefit of
CoreComm's Smart LEC network is the "success-based" cost structure of the
capital expenditures. Conventional full-facilities networks typically
require the network construction to be fully completed in advance of
obtaining customers, generating high initial capital expenditures. Under
CoreComm's Smart LEC strategy, certain switch and access facilities are
installed ahead of time, but the majority of capital is invested to
increase the capacity of the network based on its success in attracting
customers. CoreComm can therefore enter a market with a significantly lower
up-front investment, and add facilities and leased capacity over time as it
grows its customer base. A significant portion of CoreComm's network
expenses can therefore be incurred later and with more certain returns.
Control of the Customer Experience -- CoreComm believes that having
greater control over the services that it offers enhances its ability to
improve the overall customer experience. The facilities CoreComm installs
gives CoreComm control over the services provided to customers, including
the operation of features, phone numbers, and line testing and servicing.
Control over the implementation of the products enables CoreComm to better
manage the service and to more easily offer custom packages of products and
features. CoreComm believes that its delivery and marketing of targeted,
customer-convenient, easy-to-understand packages differentiates CoreComm
from its competition.
Ability to Serve Business and Residential Customers -- CoreComm's
Smart LEC network architecture is designed to reach both business and
residential customers. Because CoreComm is leasing rather than building the
local connection to the customer, CoreComm believes it can economically
reach the residential market despite its lower density relative to the
business market. As a result, CoreComm is able to reach and serve the
significant consumer segment, which has typically had significantly fewer
competitors than the business segment. In addition, there are significant
synergies which accrue from the ability to serve both business and
residential market segments, including economics of scale in marketing,
service operations and network utilization.
Higher Operating Margins -- CoreComm believes that deploying key
network infrastructure will enable it to achieve significantly higher gross
margins than the margins obtained under total service resale. Total service
resale, which is the resale of complete services from incumbent local
exchange carriers without installing owned facilities, typically generates
gross profit margins of approximately
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20-25%. Under the Smart LEC strategy, rather than reselling the entire
service, CoreComm will use its own facilities for network interconnection,
switching, features, and other network elements and lease only certain
unbundled network elements, such as local loops and transport. By design,
the facilities which CoreComm owns and installs are those which have a
significant positive impact on its gross margins. By utilizing CoreComm's
own facilities for certain key portions of the network, CoreComm believes
that it can increase its operating margins significantly above the margins
which can be achieved with resale.
Increased Speed to Market -- The Smart LEC strategy will also increase
the speed at which CoreComm can enter additional markets. The time needed
to construct a conventional network is extended by factors such as civil
construction, the permit application process, certifications, and network
management. Although constructing the Smart LEC network involves certain
similar procedures, the majority of the installation work takes place in
CoreComm's own facilities and leased collocations of the incumbent local
exchange carriers, and significant route network construction elements are
eliminated, which should contribute to an increased speed to market under
its strategy. Whereas conventional networks typically take between 18 to 24
months to construct, CoreComm believes its networks can generally be
installed in a 6 to 12 month time frame.
Access to Wide Geographical Areas -- CoreComm believes the cost
structure of the Smart LEC network will enable it to enter target areas
which may not be economical for a full facilities network. When building a
conventional network, density is a critical factor because the distance
between the local switch and customers has a significant impact on build
costs. In the Smart LEC network, although density is still important, it is
less critical because the local loops are already built and are simply
leased from incumbent local exchange carriers. The ability to lease certain
portions of the network therefore expands the potential territories that
can be economically served by CoreComm's network. In addition, CoreComm can
offer total service resale in areas that are not yet served by its network,
which expands its operating territory even further. Because incumbent local
exchange carriers are typically connected to all businesses and residences
in its region, CoreComm's ability to lease or resell these connections
gives it considerable geographic flexibility and reach within its target
markets. CoreComm believes that it will realize several advantages from
having the ability to serve broad geographical areas, including operating
synergies, marketing efficiencies and the enhancement of its overall
company image presented to potential customers.
Network Development and Architecture
Under its Smart LEC strategy, CoreComm builds those portions of the network
that it believes will significantly increase CoreComm's gross margins, are
necessary to control the services provided to the customer, and can be deployed
rapidly and efficiently. CoreComm leases those portions of the network that are
readily available to be leased economically from other providers. Accordingly,
CoreComm is building the Smart LEC network in each target market through a
combination of the following three central elements:
- Installing telephone and data equipment in CoreComm's target metropolitan
areas, including: Class 5 telephone switches, asynchronous transfer mode
switches and Internet point-of-presence equipment in its own facilities,
along with telephone access devices, DSL access equipment, modems and
other equipment in facilities collocated with the incumbent local
exchange carrier. These devices switch and route voice and data
transmissions across the network.
- Leasing the "last mile" or "local loop" (the portion of the network
extending from the end-office to the customer's premises). This local
connection is leased by CoreComm from incumbent local exchange carriers
as an "Unbundled Network Element" as provided under the
Telecommunications Act of 1996. These local loops are used to transport
voice and data services, for Internet access services, as well as for DSL
and other high capacity voice and data applications. For larger customers
or concentrated groups of users (such as multi-dwelling units), CoreComm
leases circuits with greater bandwidth for this local connection.
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- Leasing the transport capacity to carry voice and data both regionally
(between CoreComm's collocated facilities and its regional switch) and
nationally (between CoreComm's regional switches, its national Internet
points-of-presence, other carriers, and the Internet). CoreComm leases
these services from incumbent local exchange carriers, Competitive Local
Exchange Carriers (CLECs), Inter Exchange Carriers (IXCs), Competitive
Access Providers (CAPs) and other providers. CoreComm uses these leased
circuits to transport its own voice and data traffic and deliver it to
the most economical point of interconnection with other carriers. These
leased circuits are interconnected using CoreComm's national asynchronous
transfer mode facilities.
As a complement to the network described above, CoreComm also resells
complete services from incumbent local exchange carriers (total service resale).
Although CoreComm intends to serve customers primarily over its own network,
resale allows it to expand its target markets by adding service areas where its
facilities are not yet installed. This enables CoreComm to market its services
prior to and during the installation of its network, and then connect customers
to its facilities once they are in place. Resale also allows CoreComm to serve
customers that may not be within the current reach of its switch-based network.
Although providing service on a resale basis generates lower gross margins,
CoreComm believes that there are advantages to offering comprehensive
geographical coverage within its target markets, particularly when competing
with an incumbent local exchange carrier.
CoreComm believes that the quantity of existing and planned fiber transport
facilities available from other carriers will be sufficient to satisfy
CoreComm's needs for leased transport facilities and permit it to obtain these
facilities at competitive prices for the foreseeable future. Several factors
contribute to this view: there is significant transport capacity in place today
and CoreComm often has the ability to choose from multiple providers including
the incumbent local exchange carriers; the number of new providers building
networks continues to increase; most providers are consistently increasing their
network capacity; and advances in wave division multiplexing technology have
continued to increase the capacity of existing fiber plant. In addition, the
ability to lease transport from the incumbent local exchange carriers gives
CoreComm broad geographic coverage. As the volume of its traffic grows, however,
in the future it may become economical to build its own transport facilities in
certain markets.
CoreComm currently leases transport capacity from multiple carriers across
its regional and national networks, including, among others:
<TABLE>
<CAPTION>
INCUMBENT
LOCAL
EXCHANGE
CARRIERS OTHER CARRIERS
------------- --------------
<S> <C>
Ameritech ICG
Verizon IXC
Bell South Level 3
Frontier MCI WorldCom
SBC NEXTLINK
US West Qwest
</TABLE>
Nationally, as CoreComm constructs regional Smart LEC networks, its
asynchronous transfer mode network will interconnect these local networks and
other points-of-presence across the U.S. over leased circuits to provide
national data, voice and Internet connectivity.
Network Technologies
CoreComm's Smart LEC network is capable of carrying both voice and data
communications using the following technologies:
- Standard Telephone -- the traditional, reliable transmission of voice
over local loop copper wire and regional and national fiber optical
transmission path which, through the use of switches, becomes a dedicated
end-to-end circuit.
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- Internet Protocol (IP) -- the structure of data transmitted over the
Internet. Because Internet Protocol involves splitting data into
"packets" which are transmitted independently and reassembled at their
destination, Internet Protocol does not require a dedicated end-to-end
circuit and many different communications messages can be routed
simultaneously over the same transmission facilities, resulting in
greatly improved efficiency. This technology is currently being developed
to be used reliably for voice service.
- Digital Subscriber Line (DSL) -- a transmission technology that allows
for the transport of significant levels of voice and data at high speeds
over conventional, copper phone lines. These higher transmission rates
can be used for high-speed Internet access, to transport multiple voice
lines over a single loop, or for both simultaneously.
- Asynchronous Transfer Mode (ATM) -- a transport protocol that supports
many types of high-speed transmissions including voice, data, video,
audio and imaging. Asynchronous transfer mode allows for the use of
individual circuits for multiple simultaneous purposes, increasing
network efficiency.
- Digital Loop Carrier (DLC) -- an access technology allowing CoreComm to
aggregate and concentrate the voice traffic collected at the collocation
facility to more efficiently transport this traffic to its switches.
Local and Regional Network Deployment
CoreComm has identified six major metropolitan areas as the initial target
markets for the rollout of its regional Smart LEC networks. CoreComm's switches
in Columbus, Cleveland, Chicago and Detroit are currently active and it has
begun provisioning its residential and business customers that are in its
footprint through these four switches. In addition, CoreComm is currently
constructing its network in two additional markets: New York, New York and
Boston, Massachusetts. CoreComm expects the networks in these markets to be
installed in 2000. These six markets comprise 18 million total access lines.
CoreComm is in the process of establishing collocation facilities in 131
incumbent local exchange carrier central offices in these markets. The
significant majority of these are physical collocations, under which CoreComm
has space within the central office that is dedicated to its exclusive use.
CoreComm has also identified approximately 30 additional markets where it
may deploy its Smart LEC network in the future. These markets are in several
states, including: Pennsylvania, Maryland, Connecticut, Indiana, Wisconsin,
Missouri, Florida, Texas and California, among others. The buildout schedule, as
well as the final selection of CoreComm's markets, will depend on a number of
factors, including the success and speed of the rollout of the initial six
markets, incumbent local exchange carrier interconnection agreements, and other
factors. CoreComm will continue to offer its Internet services nationally over
its leased asynchronous transfer mode network.
Key data for CoreComm's initial six markets is listed in the following
table:
<TABLE>
<CAPTION>
ESTIMATED
BUSINESS ESTIMATED COLLOCATIONS IN
CITY LINES(2) RESIDENTIAL LINES(2) TOTAL LINES(2) PROGRESS(3)
---- --------- --------------------- -------------- ---------------
<S> <C> <C> <C> <C>
Cleveland, OH................ 423,733 922,473 1,346,206 24
Columbus, OH................. 273,345 597,662 871,007 12
Chicago, IL.................. 1,893,902 3,022,030 4,915,932 31
Detroit, MI.................. 851,821 1,775,068 2,626,889 22
New York, NY................. 1,782,190 3,858,804 5,640,994 20
Boston, MA................... 859,422 1,492,218 2,351,640 22
--------- ---------- ---------- ---
Total.............. 6,084,413 11,668,255 17,752,668 131
</TABLE>
---------------
(1) Based on CoreComm's current buildout schedule.
(2) CoreComm estimates based on FCC, iMarket and TargetPro. Represents estimated
lines within the MSA.
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(3) CoreComm is in various stages of the collocation process depending on the
market and its priority in CoreComm's buildout schedule. CoreComm's
collocation process consists of the following basic phases:
- Gathering of demographic data for each region and selection of specific
incumbent local exchange carrier facilities for collocation;
- Filing applications with the appropriate incumbent local exchange carriers
for collocation rights at each selected location;
- Upon receipt of each approval, doing an evaluation of each facility;
- Building by the incumbent local exchange carrier of a "cage" or
preparation of space in which its equipment will be placed; and
- Installing and testing of its equipment.
CoreComm has at least obtained approval of its applications for all
collocations in progress.
In determining target markets, CoreComm prepares detailed analyses of
telecommunications and demographic data. CoreComm's target markets are chosen
based on a number of factors, including:
- Overall size of the telecommunications market;
- Concentration of business and residential customers;
- The availability of local transport networks and providers;
- Demographic statistics;
- The location of CoreComm's existing resale customers;
- CoreComm's relationship with the incumbent local exchange carrier and
interconnection terms; and
- Regulatory environment.
CoreComm is currently authorized to operate as a competitive local exchange
carrier and/or long distance telecommunications provider in 25 U.S. states.
CoreComm believes that its Smart LEC strategy enables it to enter and
construct its network into new cities with relatively low up-front capital
expenditures, and a significant proportion of success-based capital
expenditures. Depending on the size of the market and other factors, CoreComm's
up-front costs to enter a market are expected to be approximately $7 to $10
million, which includes initial set-up costs associated with entering a market,
such as the installation of its switch and collocation facilities. Additional
capital expenditures will be based on subscriber levels and services offered and
are estimated to be approximately $400-$500 per line. Therefore, a significant
portion of the total capital expenditures in a given market will be incurred
only as CoreComm increases its subscriber base and the related capacity of the
network.
National Network
CoreComm currently has in place an asynchronous transfer mode network which
connects 89 U.S. cities. CoreComm has facilities located in each of these points
of presence, and has leased DS-1 to OC-3 circuits to interconnect this network
and to reach the major national Internet access points. Approximately 49 owned
asynchronous transfer mode switches are now being used across CoreComm's
network. The asynchronous transfer mode switches allow CoreComm to carry
multiple services efficiently over its circuits. CoreComm directly peers with
major backbone providers including WorldCom and PSINet. These peering
arrangements help CoreComm maintain a competitive low cost network. This
national network interconnects CoreComm's local Smart LEC networks as they are
deployed.
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CoreComm's national network currently interconnects its point-of-presence
facilities in the following cities:
Akron, OH
Albany, NY
Albuquerque, NM
Atlanta, GA
Austin, TX
Billings, MT
Birmingham, AL
Boise, ID
Boston, MA
Buffalo, NY
Champaign, IL
Charlotte, NC
Chicago, IL
Cincinnati, OH
Cleveland, OH
Colorado Springs, CO
Columbia, SC
Columbus, OH
Corpus Christie, TX
Dallas/Ft. Worth, TX
Dayton, OH
Denver, CO
Des Moines, IA
Detroit, MI
El Paso, TX
Flint, MI
Grand Rapids, MI
Green Bay, WI
Greensboro, NC
Greenville, SC
Hartford, CT
Houston, TX
Indianapolis, IN
Irvine, CA
Jackson, MS
Kansas City, MO
Knoxville, TN
Lansing, MI
Las Vegas, NV
Laurel, MD
Lexington, KY
Little Rock, AR
Los Angeles, CA
Louisville, KY
Madison, WI
Memphis, TN
Merriville, IN
Milwaukee, WI
Minneapolis/St. Paul, MN
Montgomery, AL
Nashville, TN
Newark, NJ
New Orleans, LA
New York, NY
Norfolk, VA
Oklahoma City, OK
Omaha, NE
Pensauken, NJ
Peoria, IL
Philadelphia, PA
Phoenix, AZ
Pittsburgh, PA
Portage, IN
Portland, OR
Raleigh/Durham, NC
Reno, NV
Richmond, VA
Rochester, NY
Rockford, IL
Sacramento, CA
Salt Lake City, UT
San Antonio, TX
San Diego, CA
San Francisco, CA
San Jose/Mae West, CA
Seattle, WA
South Bend, IN
Spokane, WA
Springfield, IL
St. Louis, MO
Stamford, CT
Syracuse, NY
Toledo, OH
Topeka, KS
Traverse City, MI
Tucson, AZ
Tulsa, OK
Washington, DC
Wichita, KS
CoreComm's national leased circuits currently cover approximately 3,000
miles of OC-3 circuits, approximately 27,000 miles of DS-3 circuits and
approximately 25,000 miles of DS-1 circuits.
Technology Management Center
CoreComm opened its state-of-the-art Technology Management Center (TMC)
during the first quarter of 2000. The TMC monitors CoreComm's national
facilities-based network, including its Internet backbone. Using the latest
network management software, the technology management center is able to provide
real-time information to ensure network reliability and instant network upgrades
to meet consumer demand. The TMC houses the latest in call routing and switching
equipment for local and long distance telephone services and features, and
Digital Subscriber Line (DSL) technology. The facility operates 24 hours, seven
days a week and has a staff of 25 professionals.
Local Multipoint Distribution Service Broadband Wireless Spectrum
As a complement to its Smart LEC network, CoreComm owns Local Multipoint
Distribution Service (LMDS) licenses for the broadband wireless spectrum.
CoreComm's licenses cover nearly all of the state of Ohio and represent more
than 10.5 million "POPs". With 1,150 MHz of spectrum, these licenses have much
greater bandwidth than cellular or PCS licenses (up to 30 MHz) or other fixed
wireless licenses (80-400 MHz). CoreComm is the fourth largest holder of this
spectrum in North America. NEXTLINK Communications, Inc. is the largest license
holder, and has licenses for major U.S. population centers outside of Ohio.
Local multipoint distribution service 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. LMDS uses frequencies in
the 28GHz to 31GHz range. The spectrum is useable for communication services
from a fixed antenna, but is not suitable for mobile or portable communications.
The service is subject to line of site limitations and
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rain attenuation, but current systems seek to reduce these impediments through
advanced system architecture and the strategic placement of transmitters. The
point-to-multipoint technology of local multipoint distribution service allows a
single hub site antenna to be used to form multiple paths with customer antennas
at numerous locations. Local multipoint distribution service can thus be used to
provide a wireless high-capacity broadband service for the "last mile" to a
subscriber's home or office.
As local multipoint distribution service technology advances, CoreComm
intends to use this spectrum to offer additional communications services and to
expand the reach of its network. For some locations, CoreComm believes that
local multipoint distribution service may offer a substantially lower cost
solution for providing high-quality broadband services than other competing
delivery systems such as fiber or copper extensions. Local multipoint
distribution service equipment is not in general commercial service at this
time, but technology is currently in development and CoreComm has established
relationships with several equipment vendors.
Through a wholly owned subsidiary, in June 1998, CoreComm was awarded
A-Block licenses in 15 markets in Ohio with a total of 10,573,982 POPs
(representing more than 95% of the POPs in Ohio). Each LMDS license covers a
defined Basic Trading Area, and CoreComm's A-Block local multipoint distribution
service licenses consist of 1,150 MHz of spectrum. CoreComm bid $25.2 million
for such licenses, for an average of $2.39 per POP. POPs are the estimated
population of a market. The number of POPs owned by an operator does not
represent the number of users of its services and is not necessarily indicative
of the number of potential subscribers.
Continuity of Management
CoreComm's management has extensive experience in developing and marketing
bundled communications services, building proprietary back office systems to
support residential and business customers, and designing and constructing large
integrated communications networks. CoreComm's management team's accomplishments
in the telecommunications industry span nearly 20 years. There are several
members of this team that have worked together for a decade or more:
- CoreComm's President and Chief Executive Officer, Barclay Knapp, was a
member of the original management team at Cellular Communications, Inc.
(CCI), which was an original applicant for cellular licenses in the
United States in 1982. Mr. Knapp is also the President and CEO of NTL
Incorporated.
- CoreComm's Chairman, George Blumenthal, was a member of the original
management team of Cellular Communications, Inc. Mr. Blumenthal also
serves as the Chairman of NTL.
- CoreComm's Chief Operating Officer, Patty Flynt, joined Cellular
Communications, Inc. in 1989, where she was the director of its
Management Information Services division. Ms. Flynt also served as the
MIS director at NTL.
In the key areas of its operations, CoreComm's management includes
individuals who have worked with CCI, NTL and their historical affiliates for
many years and have significant telecommunications industry experience. Below is
a partial list of several of those individuals and their area of expertise:
<TABLE>
<CAPTION>
PREVIOUS
HISTORICAL YEAR
NAME OPERATIONAL AREA AFFILIATES JOINED
---- -------------------- ------------------- -----------
<S> <C> <C> <C>
Thomas S. DellaRocco........................ Networks CCI, NTL 1984
Stefan Eckert............................... Sales CCI 1985
Beth K. Fisher.............................. Customer Operations CCI 1985
Kimberly K. Liston.......................... MIS CCI, NTL 1990
Donald B. Miller............................ Marketing CCI 1986
Paul J. Nelson.............................. Sales CCI 1991
</TABLE>
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<TABLE>
<CAPTION>
PREVIOUS
HISTORICAL YEAR
NAME OPERATIONAL AREA AFFILIATES JOINED
---- -------------------- ------------------- -----------
<S> <C> <C> <C>
Chris Y. Skudder............................ Customer Operations CCI, NTL 1992
Richard J. Lubasch.......................... General Counsel CCI, NTL 1986
Gregg N. Gorelick........................... Financial Controller CCI, NTL 1986
</TABLE>
The continuity of this team is due to their success in working together
throughout the corporate lineage that began with Cellular Communications, Inc.
in 1981. In addition to these individuals, there are other members of CoreComm's
management team and staff who were part of CCI, or part of a later joint venture
between CCI and AirTouch Communications, Inc. that was formed in 1991. Several
of CoreComm's directors have also been involved with each of these companies.
CCI was acquired by AirTouch Communications, Inc. in 1996.
Out of Cellular Communications, Inc., several publicly traded companies
were spun-off. CoreComm's management team developed these other communications
companies:
- NTL Incorporated, a telecommunications, cable television and Internet
provider which operates principally in the United Kingdom and Continental
Europe. NTL's franchise areas cover approximately 12 million homes,
representing approximately 50% of the homes and an even larger share of
the businesses in the United Kingdom. NTL has already achieved an
industry leading customer penetration rate of 49% in the original areas
it built-out and marketed.
- Cellular Communications of Puerto Rico, Inc. (CCPR), which operated the
dominant cellular business in Puerto Rico and the U.S. Virgin Islands,
and from which CoreComm Limited was spun-off in 1998.
- Cellular Communications International, Inc. (CCIL), which was a
co-founder of Ominitel Pronto Italia, S.p.A., which owns the second
cellular license in Italy.
The core management team remained intact and guided the above companies to
substantial success, culminating in the acquisitions of each of CCI, CCIL and
CCPR by major telecommunications companies.
<TABLE>
<CAPTION>
COMPANY TRANSACTION
------- --------------------------------------------
<S> <C>
Cellular Communications, Inc...................... Acquired by AirTouch for $2.5 billion
(August 1996)
Cellular Communications International, Inc........ Acquired by Mannesman and Olivetti for $1.8
billion (March 1999)
Cellular Communications of Puerto Rico, Inc....... Acquired by SBC Communications, Inc. for
$814 million (August 1999)
</TABLE>
PRODUCTS AND SERVICES
CoreComm currently offers its business and residential customers an
extensive array of voice and data services in order to satisfy and capture all
of their communications needs.
Bundled Packages
In CoreComm's current service offerings, it bundles communications products
and services in order to give its customers increased convenience, flexibility
and choice, at good "value for money." CoreComm typically offers a platform of
basic services, which represents a minimum selection of services to be offered,
and then creates ways for the customers to easily and conveniently increase the
other services purchased according to their tastes.
For example in CoreComm's current residential offering, it combines a basic
package of voice services with Internet access, which it calls the "e-Chat"
service. Under the e-Chat service, customers are offered
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a bundled package of communications services that includes local, long distance
and Internet service. Although the details of the offerings vary somewhat by
region, the service typically includes:
- Local dial tone
- Local calls
- Call waiting
- Caller-ID
- Personal "800" number
- Premium Internet Service
- 56K unlimited access
- 3 e-mail addresses
- personal web space
- Long distance service option (10 cents per minute)
Additional options and features (such as voice mail, three-way calling, an
additional line, and additional web site space) can be easily and flexibly added
to the service. The pricing for e-Chat varies by region, but in all areas
CoreComm's price is based on the exact retail pricing from the regional Bell
operating company for the same local telephone services.
This marketing strategy has been based on the successful experience of
management in penetrating the residential market and competing with incumbent
operators in its other communications companies. CoreComm believes that this
type of marketing strategy has many benefits for both potential customers and
CoreComm.
CoreComm believes that potential customers will be attracted to the
simplicity of both how it offers and prices the service, and of having
consolidated services with one provider on one invoice. In addition, CoreComm
believes that its proposition will be viewed as good "value for money." For the
same price that customers currently pay the incumbent operator for telephone
alone, from CoreComm they can get the same telephone service, plus Internet
access. CoreComm prices the service at the same rates as the regional Bell
operating company's telephone service so that it can be perceived simply, easily
and quickly as a valuable service. The ability to add additional features
conveniently enhances the overall flexibility, and allows customers to tailor
the service for their individual needs.
In addition, CoreComm believes that these types of bundled services will
improve its operating results. The structure and strategy of CoreComm's
residential product offerings will have a significant impact on its ability to
penetrate its target markets successfully. CoreComm believes that bundled
offerings like our e-Chat service will be attractive to potential customers. In
addition, CoreComm believes bundled packages improve customer retention because
customers typically must approach multiple providers in order to replace the
bundled CoreComm services. Finally, CoreComm believes that combining a feature-
rich telephone service with Internet access service will attract
communications-intensive users, who typically generate higher average revenue
and are more likely to subscribe to additional communications services, such as
high speed access.
Although the specific components of CoreComm's offerings will change, it
will continue its strategy of designing attractive marketing packages which give
the customer flexibility and choice, with convenient ways to subscribe to
additional services.
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Voice and Data Services
CoreComm currently offers the following voice, data and Internet services
to business and residential customers in its markets:
- Local Exchange Services -- including standard dial tone, local calling,
Centrex services, Emergency 911 services, operator assisted calling,
access to the long distance network, and other related services.
- Custom Calling Features -- including call waiting, call forwarding,
caller ID, voice mail, conference calling and other enhanced features.
- Long Distance Services -- including 1+ interLATA calls (which are calls
across Local Access and Transport Areas), intraLATA calls, international
calls, 800/888/877 toll free services, calling cards and other related
services.
- Internet Access Services -- including dial-up and dedicated access to the
Internet over conventional modems, ISDN, T-1, DS-3 and higher speed
connections.
- Web Site Hosting and Design -- including dedicated and shared site
hosting and, typically through third parties, web site design.
- Data Networking Services -- including a variety of data circuits and
networking solutions.
DSL Offering
DSL is a transmission technology that allows for the high speed transport
of significant levels of voice and data over conventional, copper phone lines.
DSL can deliver speeds of up to 7 Mbits per second, which is the equivalent of
more than 100 voice grade circuits, over a single copper loop.
DSL technology enables consumers to transfer data or access the Internet at
high speeds. In addition to significantly increasing data transfer rates, DSL
technology offers an alternative for providing multiple voice lines or voice and
data carried over the same pair of twisted copper wire. By using DSL, businesses
can obtain the same number of voice lines over a single loop that would normally
be obtained using a more expensive standard T1 or other circuit. DSL technology
also makes it possible for business or residential customers to obtain telephone
service and high-speed data service simultaneously over a standard copper
telephone line.
CoreComm believes there are several benefits to DSL, including:
- High bandwidth, high-speed, "always on" Internet connections;
- Dedicated, not shared bandwidth, which allows for "guaranteed"
performance levels;
- Ratable service, which allows CoreComm to tailor the service to the
customers' needs and allows the customers to determine how much money to
expend for the amount of high speed bandwidth they need;
- Ability to use the same loop for voice and data simultaneously;
- Enhanced security;
- Utilization of existing copper infrastructure, which allows faster
rollout and lowers deployment costs;
- Increased telephone margins as a result of providing multiple services
over a single local loop; and
- Deployment with success-based capital expenditures.
CoreComm believes its Smart LEC network is well suited to capitalize on DSL
technology. In CoreComm's own switch facilities and its collocation facilities,
CoreComm is deploying DSL access equipment (including DSLAMs). DSLAMs are
connected to the copper loops at the end office, and
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aggregate and concentrate the data traffic from the end user. DSL technology is
limited by the length of the loop being used, which typically must be less than
three miles, as well as other factors such as the condition and quality of the
copper line. CoreComm rolls out its DSL network and services simultaneously with
the telephone network. CoreComm uses DSL to provide high-speed Internet access
and data services and intends to use DSL to provide combined data and voice
services over a single copper loop, and voice circuit trunking to connect
multiple access lines.
CoreComm deploys multiple forms of DSL in order to provide a broad service
offering to its customers and to expand the DSL coverage of its target markets.
CoreComm's offerings include different forms of Asymmetric DSL including Rate
Adaptive DSL, Symmetric DSL and Integrated DSL. CoreComm's Asymmetric DSL
offering is expected to include G.lite as well. CoreComm believes that a widely
accepted standard, such as G.lite, will enhance its ability to penetrate its
target markets with DSL services.
Other Related Services
Cellular and Paging Services. As a complement to its voice and data
services, CoreComm also offers cellular and paging services. Although these are
not core products and do not utilize CoreComm's own networks, they are offered
as an additional service for its business and residential customers for added
choice and convenience. CoreComm is currently offering cellular services in Ohio
and Michigan, and may choose to add other markets in the future. CoreComm's
paging service is available nationally. CoreComm has resale agreements with the
three major providers of cellular service in Michigan and Ohio: AirTouch
Cellular, GTE Mobilenet Inc. and Ameritech Mobile Communications, Inc. In
addition, CoreComm sells retail cellular long distance telephone services to
cellular customers of various local cellular service providers who have chosen
it as their long distance service provider.
Internet Protocol Telephone. With recent advancements in the development
of telephone equipment using internet protocol, the overall quality of telephone
calls delivered over an internet protocol network has become increasingly
reliable and has become more equivalent to the circuit-switched network.
Although CoreComm is not currently using this technology to deliver its voice
traffic, CoreComm's local and national networks have been designed to allow for
the use of internet protocol telephone when and if reliable technology becomes
available.
Under this technology, CoreComm's platform would compress and convert voice
into internet protocol packets using voice compression algorithms, digital
signal processors and ancillary software. These packets would then be
transmitted via its national internet protocol network. Due to its scalability
and compression features, this technology would allow a greater quantity of
simultaneous voice calls and data to be carried over the network compared to
traditional circuit switching, thus utilizing significantly less bandwidth.
Potential services offered under this technology would include local and long
distance calling, fax transmission, call termination, national voicemail, and
other related services.
SALES AND MARKETING
CoreComm's marketing strategy is to provide business and residential
customers a bundled package of high quality telecommunications services,
delivered with quality care and service to the customer at prices which offer
"value for the money."
In its prior experience, CoreComm's management has had significant success
in marketing integrated communications products in several other operations both
in the U.S. and abroad. CoreComm believes much of this success was due to its
management's ability to creatively and effectively design and market integrated
communications products and services. CoreComm intends to capitalize on this
experience to develop service offerings to attract and retain business and
residential customers in its target markets.
A core part of CoreComm's strategy is to offer its customers bundled
telecommunications, Internet and data services. CoreComm's integrated service
offerings are packaged and priced to give the customer increased flexibility,
choice, and value, while also enhancing convenience. CoreComm's offerings can be
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created to allow flexibility to meet individual customer needs, and are
conveniently offered on a single bill. CoreComm believes that offering combined
packages of local and long distance telephone, Internet access and data services
is attractive to the potential business and residential customers in its target
markets. In addition to attracting customers, CoreComm believes this strategy
also improves its profitability by increasing average revenue per customer,
reducing customer acquisition costs and other operating costs, and improving
customer retention.
The broad reach of the Smart LEC network enables CoreComm to market its
services over wide geographical areas. By using a combination of resold and
switch-based services, CoreComm is not limited to offering services only in
areas where it has built its own networks. CoreComm capitalizes on its ability
to market over wide areas by utilizing mass marketing strategies and other
efficient methods of communicating with its potential customer base. For
example, CoreComm has contracted to be one of only four gate sponsors for the
new football stadium for the Cleveland Browns. Under this agreement, CoreComm
has prominent placement of advertisements throughout the stadium, an entry gate
known as the CoreComm Gate, game giveaway opportunities, and other related
advertising benefits. The broad reach of CoreComm's network across the Cleveland
area allows it to take advantage of such mass market opportunities. CoreComm
believes that these and other initiatives will increase the awareness of the
CoreComm brand and will attract new business and residential customers in its
target markets. CoreComm believes that the ability to market over larger areas
increases the efficiency and effectiveness of its marketing and advertising
programs.
In the business market, CoreComm focuses on a direct sales approach,
targeting small and medium-sized businesses. CoreComm believes that small to
medium-sized businesses represent a large and growing market which is currently
undeserved by the incumbent local exchange carriers and competitive providers.
CoreComm seeks to attract these target customers with customer-convenient
bundles, providing simplicity, flexibility and ease of decision-making. CoreComm
uses its sales force to sell directly to customers, to establish a relationship
with telecoms managers, and to better understand and service their
communications needs. CoreComm generally employs sales people with significant
experience in the telecommunications industry. In order to effectively
incentivize CoreComm's sales force, a large portion of their compensation is
performance-based and focused on sales and customer retention. CoreComm tries to
attract and retain qualified sales people by offering them the opportunity to
work with a successful management team in an entrepreneurial environment, with
equity participation through stock options.
CUSTOMER INTERFACE AND PROPRIETARY SYSTEMS
CoreComm believes that the customer experience must be easy, enjoyable, and
exceptional. CoreComm has developed integrated systems and procedures that will
substantially support all aspects of its business, including provisioning,
billing, customer care and collections. CoreComm's information services and
customer care operations are closely linked to ensure that all related
operations are effectively integrated. CoreComm believes this focus on the
customer experience will provide it with a competitive advantage in attracting
and retaining customers.
"Internet Centric" Approach
CoreComm is in the process of actively developing and incorporating systems
to deliver "Internet Centric" operational support systems. These customer-facing
systems are expected to add functionality in the areas of electronic billing,
web-based customer care and e-commerce. CoreComm is preparing to support a
substantial portion of its customer interactions over the Internet. CoreComm's
customers are able to order new services and interact with its customer care
department without using the telephone. They will also be able to view and pay
their bill online. CoreComm believes that this method of communicating with the
customer will not only be convenient for the customer, but will also increase
its operating efficiency.
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CoreComm employs a variety of techniques to effectively and efficiently
serve the customer, including:
Efficient Fulfillment of Services -- CoreComm's systems support
electronic tracking of orders from provisioning through installation.
Service orders will flow directly from the consumer to its back office, and
then on to the incumbent local exchange carrier. Administrative controls in
CoreComm's support systems are designed to provide timely identification
and resolution of customer concerns and issues.
Low-cost Billing -- CoreComm has developed a customer friendly, fully
integrated billing statement covering all of the communications services
supplied. The statement currently can be delivered electronically via
e-mail. Customers may elect to pay their bill automatically via credit card
or direct debit. CoreComm is further developing web-based electronic bill
presentment and payment capabilities. These services will reduce billing
costs while providing value-added services to customers such as the ability
to sort billing data and create customized reports.
Smart Customer Care -- CoreComm intends to continue to develop
sophisticated customer care systems that will increase its use of the
Internet as a means of communicating with its customers. CoreComm is
currently making customer care available via e-mail, which allows for
simple requests and changes to be processed without use of the phone and
for customer care associates to work from outside of its facilities.
CoreComm is currently expanding its web-based care services to include
significant additional functionality. These and other initiatives are
expected to improve the efficiency of CoreComm's customer care resources by
developing on-line tools which will enable customers to communicate more
efficiently with it and even service themselves when appropriate.
Electronic Bonding & Proprietary Systems
CoreComm views the efficiency and the accuracy of its communications and
interface with incumbent local exchange carriers as an important strategic
priority. CoreComm is currently bonded electronically with Ameritech and Bell
Atlantic. This electronic interface allows for more timely and accurate service
ordering and provisioning of its customers. CoreComm has real-time access to
customer information as well as real-time order entry and confirmation. CoreComm
provides service to customers through its proprietary systems, which are
designed to interface with the incumbent local exchange carriers' systems
through a variety of delivery mechanisms. CoreComm's systems and processes have
been developed to decrease the risk of human error associated with provisioning
customers by manual keying or fax.
CoreComm's customer interface systems has been developed and continues to
be enhanced in a client/server environment that allows for flexibility to
accommodate an expanding customer base, efficient entry into new markets,
switch-based services, and rapid development of additional functionality.
CoreComm's proprietary systems handles all pre-ordering activities, including
obtaining customer service records (CSR), finding and reserving telephone
numbers, verifying customer addresses, validating due dates, searching the
incumbent local exchange carrier's switches for feature availability (COFA), and
yellow page listings.
In addition, CoreComm has developed proprietary methods of ordering and
provisioning services through incumbent local exchange carriers by formatting
and sending electronic data interchange (EDI) messages. These systems use common
software for the actual sending and receiving of purchase orders and
acknowledgements, but use custom code for the content of these messages.
CoreComm typically uses off-the-shelf software for standard processes that is
readily available, and develop proprietary systems when such processes need to
be modified to meet its needs.
System Enhancements
Given the importance that CoreComm places on the efficiency, quality and
scale of its back office capabilities, CoreComm continuously upgrades its
proprietary systems in order to enhance their
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functionality and performance. CoreComm's recent and ongoing enhancements to its
information systems include the following:
- CoreComm's Rating and Billing engines are being re-engineered for
performance and scalability using a multi-tiered architecture.
- CoreComm provisioning systems for the Ameritech region have been enhanced
to support Ameritech's five state region. CoreComm's service order
management system has been enhanced to validate in real time the
incumbent local exchange carrier feature availability, integrate the
electronic generation of service order data, and integrate automated
switch activation software for its Class 5 switches, all within a single
system. The provisioning information is entered once, and it flows
through CoreComm's internal systems, its switch, and the incumbent local
exchange carrier systems without any manual processes.
- CoreComm has evaluated best of breed Interconnection Gateway packages
that will allow it to develop further electronic bonding with all future
incumbent local exchange carriers in its business plan going forward, and
are planning for the integration with its current back office systems
later this year.
- CoreComm has automated the migration processes to move customers from
resale to "on-net" via its service order management system, which has
been designed to eliminate any manual processes with the incumbent local
exchange carrier.
- CoreComm has purchased and installed a platform for its call centers
which has introduced skills-based routing of its inbound calls with
CoreComm's automated attendant. This allows CoreComm to service its
customers better by ensuring that a call is delivered to a customer
service representative with the skills necessary to handle the customer.
- CoreComm has integrated a new auto-dialer with its collections system,
which has significantly increased collection agent productivity and
effectiveness.
RECENT DEVELOPMENTS
In May 2000, we announced the formation of a new subsidiary, tentatively
named CoreComm FiberCo., that will initially concentrate on bringing fiber
directly to multiple dwelling units located in our service areas. Our planned
fiber-to-the-home offering will include local and long distance telephone
bundled with 10 megabit per second Ethernet access and full Internet service at
a competitive price point. We will initially target residential multiple
dwelling units and work together with landlords to construct facilities and
deliver services. Multiple dwelling units, whether "high-rise" or "campus
style," offer attractive density for cost-effective delivery of fiber-optics to
the home. Our target markets in the midwest offer substantial opportunity in the
"campus" segment, while the east coast cities offer the "high-rise" component.
(b) Voyager.net, Inc.
We acquired Voyager on September 29, 2000. It is now a wholly owned
subsidiary of CoreComm. Voyager is a large Internet communications company
focused in the Midwestern United States with approximately 368,000 subscribers
as of June 30, 2000. Voyager provides high-speed data communications services
and Internet access to residential and business subscribers. Services include
high-speed DSL, providing dedicated telecommunications services to business,
cable modem access, dial-up Internet access, Web-hosting, electronic commerce,
situating servers at a common location and long distance phone services. Voyager
operates the largest dial-up Internet network in the Midwest in terms of
geographic coverage, with approximately 200 Voyager-owned points of presence in
Michigan, Wisconsin, Ohio, Illinois, Indiana and Minnesota. Voyager has
competitive local exchange carrier status in Michigan, Ohio, Indiana and
Wisconsin.
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BUSINESS MODEL
The business model that Voyager has developed has resulted in substantial
revenue and subscriber growth, reduced customer acquisition costs and
significant cash flow from operations and includes customer satisfaction
efforts. Voyager's business model is based on the following key principles:
- Voyager controls the costs of acquiring new customers by focusing on
markets in the Midwestern United States, thereby reducing the need for
more expensive, broad-based marketing campaigns;
- Voyager focuses on delivering product quality and services and customer
care, which Voyager believes results in word-of-mouth referrals and
customer retention greater than the industry average;
- Voyager manages 100% of its network equipment and customer care
operations, which reduces its telecommunication costs and enhances
control over its network utilization, efficiency, scalability and
quality, and Voyager owns or leases 100% of its network equipment; and
- Voyager realizes cost savings and economies of scale from its acquired
businesses by reducing duplicated network infrastructure and taking steps
to consolidate sales and marketing, network operations, customer support
and back office operations.
Voyager has begun to implement a strategy to become a leading provider of
high-speed DSL services in the Midwest. DSL technology is a high-speed Internet
connectivity option using existing telephone wiring, widely heralded as the
next-generation Internet connectivity option. DSL enables connection speeds up
to 50 times faster than using a standard, 28.8 Kbps modem over existing phone
lines. Voyager's DSL deployment strategy will establish a network capable of
providing bundled phone, high-speed Internet and future communications services.
DSL technology is particularly well suited for small and medium-sized
businesses looking to connect their entire staff to the Internet over a single
high-speed Internet connection, or for customers looking to access the Internet
at top speeds. DSL includes the following benefits:
- provides a dedicated, "always on" connection;
- is faster than integrated services digital network and modem connections;
- is more affordable than dedicated T1 and frame relay connections; and
- is more reliable, and less complicated to use than dial-up connectivity
options.
Voyager has a two-tiered strategy to provide DSL services:
- provide DSL services directly as a competitive local exchange carrier to
customers in secondary and tertiary markets throughout our region; and
- continue to provide DSL services through existing relationships with
major data competitive local exchange carriers in selected major
metropolitan areas.
Voyager expects to soon begin deploying DSL services in approximately 40
cities from the central offices of 240 incumbent local exchange carriers,
reaching more than 400,000 small and medium-sized business customers and 3.8
million residential customers. Voyager is targeting secondary and tertiary
markets within its region, covering areas that are less competitive than the
major metropolitan areas. Target markets include Michigan cities of Alpena, Ann
Arbor, Battle Creek, Charlotte, Flint, Gaylord, Grand Rapids, Hastings,
Hillsdale, Jackson, Kalamazoo, Lansing, Petoskey, Sturgis, Three Rivers, and
Traverse City; Ohio cities of Akron, Canton, Dayton, Hamilton, Middletown,
Springfield, Toledo, Troy, and Youngstown; Indiana cities of Columbus, and
Seymour; Illinois cities of Aurora, Elgin, and Joliet; and Wisconsin cities of
Appleton, Kenosha, Madison, Milwaukee, Newberg, Stevens Point, Green Bay, and
Vandyne. When Voyager's DSL network is deployed in these cities, service will be
available in more than 170 cities and townships in the Midwest region.
Voyager is well positioned to begin offering DSL services directly to its
customers in its Midwest region as it has a strong presence, a large installed
customer base, and a substantial network infrastructure.
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Voyager's high-speed strategy is intended to establish Voyager as one of the
dominant providers of DSL services in the Midwest. Voyager's sales and marketing
plans include up-selling its installed customer base as well as attracting
customers from other providers in the region.
VOYAGER SERVICE OFFERINGS
Internet Access Services. Voyager offers a full range of dial-up, DSL, and
cable modem Internet access services to residential subscribers and dedicated,
web hosting, and dial-up Internet access to business customers. By selecting
between the various types of access services and pricing plans available,
subscribers can select services that fit their specific needs.
- DIAL-UP ACCESS. Voyager's residential access services are designed to
provide subscribers with reliable Internet access through standard
dial-up modems. Voyager's dial-up Internet access service includes:
-- local access numbers;
-- personal Web space;
-- multiple e-mail accounts;
-- toll-free customer support;
-- light usage plans; and
-- Internet chat and news groups.
Voyager also offers prepaid plans for quarterly, semi-annual and annual
access. A majority of its residential subscribers pay their monthly fee
automatically by a pre-authorized monthly charge to their credit card.
Additional service options include Web content filter service, e-mail alias
(forwarding) and national toll-free roaming service.
- DSL. Voyager provides DSL services to customers in Detroit, Chicago,
Milwaukee, and Minneapolis through agreements with Covad Communications
Company, @Link Networks, and USWest. Through these partnerships, Voyager
offers DSL service with speeds from 144 Kbps to 1.5 Mbps.
Voyager is engaged in activities to provide a variety of high-speed data
services directly to customers, such as synchronous DSL and asynchronous DSL,
and also provide the opportunity to offer high-quality voice services over DSL.
Service is expected to be available in up to 40 cities in Voyager's Midwest
market in 2000, with service becoming available in selected cities as soon as
the end of the third quarter of 2000.
- DEDICATED ACCESS. Voyager offers high-speed dedicated connections to
both business and residential subscribers at a range of speeds using
traditional telecommunications lines and frame relay communications
services for those customers requiring greater speed and reliability.
- CABLE MODEMS. Through a reseller arrangement with Millennium Digital
Media Systems, L.L.C., Voyager offers high-speed Internet access in
certain locations through the use of modems integrated with local cable
television networks and provides the technical and billing support to
this fast-growing segment of the Internet access business.
- VOYAGER.NETTV. Voyager.netTV allows individuals without a computer or
who need a second Internet terminal to access the Internet easily and
inexpensively through their television. The complete Voyager.netTV
service, which includes a set-top box, keyboard, remote control unit, all
necessary cables and unlimited Internet access, is available at a monthly
subscription rate, with no additional equipment, installation or set-up
costs. Voyager.netTV is a pre-configured set-top box that connects to a
customer's television in the same manner as a VCR or game system and is
controlled with the use of a wireless keyboard or remote control. A
built-in control pad, included on
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both the keyboard and remote, provides the user with a simple point and
click interface to call up Web sites or e-mail services that are
displayed in a large, easy-to-read format on the TV screen.
Web Services. Voyager's Web services help organizations and individuals
implement their Web site and e-commerce goals. Voyager offers various Web
hosting and other services that enable customers to establish a Web site
presence without maintaining their own Web servers and high-speed connectivity
to the Internet.
- WEB HOSTING. Voyager offers a diverse range of shared, dedicated and
co-location Web hosting services for small and medium businesses.
Voyager's Web hosting service includes state-of-the-art Web servers,
high-speed connections to the Internet at its network operations centers,
and registration of Voyager's customers' domain name and Internet
address. Voyager also offers Web page design, development, maintenance
and traffic reporting and consulting services. Voyager currently has over
12,900 Web hosting subscribers.
- CO-LOCATION. Voyager offers co-location services, providing
telecommunications facilities for customer-owned Web servers, for
customers who prefer to own and have physical access to their servers but
require the reliability, security and performance of its on-site
facilities. Voyager's co-location customers house their equipment at
Voyager's secure network operating centers and receive direct high-speed
connections to the Internet.
- E-COMMERCE. Voyager has launched a suite of Web hosting and e-commerce
solutions that enable businesses to easily and affordably create Web
sites and sell their products and services over the Internet. The product
suite includes EasyWeb, which allows a business to quickly create a Web
site online through a series of menu-driven screens and templates, and
EasyShop, a comprehensive e-commerce solution, which allows businesses to
accept real-time credit card purchases via their Web site.
- LOCAL CONTENT. The Voyager portal is a feature-rich web site including
personalized local news and weather, sports, entertainment, finance,
stock quotes, shopping, classifieds and chat services for Voyager
customers. Content is automatically tailored to individual customers
using a sophisticated database driven process that presents customers
with location-specific information. Customers can also customize the
layout and specific content options available to them. Content is made
available through revenue sharing and co-branding agreements with
organizations including CMGI Inc.'s MyWay.com, Wizshop.com, Amazon.com,
eToys, and local media. Customers access the portal page at
www.voyager.net.
Other Services and Offerings. Voyager also offers other enhanced
communications services to meet the one-stop shopping demands of residential and
business customers.
- VIRTUAL PRIVATE NETWORKS. Voyager's custom virtual private networks
solutions enable its customers to deploy tailored, Internet
protocol-based mission-critical business applications for internal
enterprise, business-to-business and business-to-customer data
communications on its network while also affording high-speed access to
the Internet. Voyager offers its customers a secure network on which to
communicate and access information between an organization's
geographically dispersed locations, collaborate with external groups or
individuals, including customers, suppliers, and other business partners
and use the Web to access information on the Internet and communicate
with other Web users.
- LONG DISTANCE AND OTHER TELECOMMUNICATIONS. Voyager currently resells
long distance telecommunications services as well as an 800 service,
calling cards and prepaid cards to its Internet customers through its
VoyagerLink operations. Voyager currently offers this interstate and
intrastate long-distance service to its customers at a fixed rate per
minute, with no set-up or monthly charges. Voyager also has begun
offering bundled voice and data services to customers who seek Internet
access and telecommunications services from a single source.
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SALES AND MARKETING
Marketing. Voyager's marketing philosophy is based on the belief that a
consumer's selection of an Internet service provider is often strongly
influenced by a personal referral. Accordingly, Voyager believes that the
customer satisfaction of its subscriber base has led to significant
word-of-mouth referrals. Voyager's referral incentive program awards subscribers
one month of free service for every customer referred. As a result, over 70% of
new sign-ups come from existing subscriber referrals. Voyager's proprietary
customer care and billing system automatically tracks and credits the
subscriber's account, thus providing Voyager with valuable marketing information
and flexibility with this program. Voyager also markets its services through
strategic relationships with value added resellers in the local communities,
such as computer stores, trade associations, unions, Web development companies,
local area network administrators and other retail stores which represent and
promote Voyager on a commission basis. These relationships are a significant
source of new customers. In addition, Voyager offers free Internet training
classes within its markets to cultivate interest in the Internet and increase
brand recognition. Voyager does not use mass marketing media as a major source
of acquiring new customers, but instead believes that by providing superior
customer service and developing strong relationships within local communities,
particularly in small- and medium-sized markets, Voyager can continue to grow at
rates greater than the industry average with very low costs per new customer
acquired.
Web-based Marketing. Voyager maintains a Web site (www.voyager.net) that
provides Internet users with the opportunity to learn about Voyager and enroll
in one of its Internet access service plans. Upon viewing information on
Voyager's services, potential customers can either subscribe online or contact a
customer support employee for enrollment. Customers who sign up online or
through Voyager's toll-free number have their accounts created immediately and
are thus able to use their accounts within minutes of account activation.
Free CDs and Diskettes. Upon the request of prospective customers, Voyager
distributes free software via CD and diskettes that contain both the Netscape
browser software for Windows 95, Windows 3.1 and Macintosh as well as
Microsoft's Internet Explorer 4.0. The software is configured to facilitate
installation and connection to a Voyager point of presence. Individuals
receiving the CD or diskettes have the opportunity to obtain the free browser
software contained on the CD by opening an account with Voyager, either online
or via a toll-free telephone number. New customers can be online in a matter of
minutes after opening an account online or by calling Voyager's toll-free
telephone number.
Business Sales and Support. Voyager has a business sales and support team
dedicated to selling and providing customized support to its growing small- and
medium-sized business customers. Voyager's business teams include support
personnel located throughout its target region. This strong local presence
allows it to meet face-to-face with its business customers to evaluate their
needs and respond with customized solutions. Voyager's locally-based sales and
support teams are supported by additional network engineers at its headquarters
for trouble-shooting on specific problems.
CUSTOMER SERVICE AND TECHNICAL SUPPORT
Voyager provides its customer service and technical support through two
large call centers located in East Lansing, Michigan and New Berlin, Wisconsin.
Voyager provides 100% of its customer care internally and does not outsource any
customer operations to third party providers. Voyager has staffed its call
centers with over 260 employees, or more than 50% of its workforce. Voyager's
two main centers are fully-integrated so that both centers can handle calls from
subscribers located anywhere within the region. This interoperability allows
Voyager to more efficiently handle support calls, thus reducing telephone hold
times. Voyager has upgraded its phone system that routes calls, tracks important
call-in data, automatically answers certain questions and moves customers
quickly through the call-in process. Its comprehensive staff training program
and incentive compensation program linked to customer satisfaction has led to
significant improvements in the time required to move subscribers through the
various calling queues. In addition to using Voyager's call centers, subscribers
can also e-mail questions directly to technical support staff, as well as find
solutions online through the use of the tutorials found at Voyager's Web site.
Voyager's free
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Internet training and educational classes within its markets also allow its
customers and potential subscribers to ask questions about the Internet and
Voyager's services.
NETWORK AND TECHNOLOGY
Network Infrastructure. Voyager designed and built its network to
specifically service Internet (data) traffic. The network is comprised primarily
of the latest Cisco Systems' routing and switching equipment, which provides a
common platform for increased flexibility and maintenance while allowing for the
use of advanced routing protocols to quickly and dependably deliver customer
traffic. Voyager has two network operating centers to oversee traffic flows and
general network operations, as opposed to a single network operating center as
found in many national networks, which helps create redundancy and ensures a
secure and reliable network. Voyager is continuously improving its network
infrastructure and connectivity costs through its relationships with incumbent
local exchange carriers such as Ameritech Corporation and GTE Corporation as
well as with competitive local exchange carriers such as Brooks Fiber (MCI
WorldCom), Phone Michigan (McLeodUSA), Time Warner, Coast to Coast and Focal
Communications.
Voyager's points of presence are linked to regional network points, or
hubs, which are its two network operating centers. These network points are
linked to the Internet by fiber optic connections and employ asynchronous
transfer mode, frame relay and other methods of handling traffic efficiently.
Interlinked network points allow Internet users to access sites located on other
network points. In the event that one of its subscribers wishes to access a Web
site that is located on another service provider's network, data is directed to
a network access point where information sharing is conducted under arrangements
known as peering. The flow of information across a network access point allows
information to be downloaded from one service provider's network to a subscriber
on another service provider's network.
Points of Presence. Voyager's approximately 200 dial-in points of presence
primarily utilize digital access servers manufactured by 3Com Corporation and
Lucent Technologies, Inc. These servers allow for a variety of customer
connections from standard dial-up to traditional telecommunications lines,
including integrated digital services network. Voyager's network has been
reconfigured to include redundant data circuits which will automatically route
customer traffic in the event of a failure. Voyager's network topology offers
high levels of performance and security. Through various relationships with
competitive local exchange carriers, Voyager has been able to reduce the overall
number of points of presence by consolidating several of them into "SuperPOPs"
with expanded calling areas. The SuperPOP allows Voyager to consolidate its
equipment into one large modem bank and eliminate various telecommunication
links from its points of presence back to the network operating center, thereby
creating enhanced network reliability and reducing telecommunication costs.
Voyager has worked with its providers to create additional SuperPOPs and Voyager
intends to explore opportunities to create additional SuperPOPs in the future.
Network Operation Centers. Voyager has two main network operation centers,
or hubs, in East Lansing, Michigan and New Berlin, Wisconsin. These two hubs
house all of its internal network equipment, including servers, routers, mail,
hosting and disk arrays, as well as its main routing equipment and connection to
the Internet. The two hubs have been interconnected to provide redundancy and to
ensure the highest quality network. The hubs are monitored on a 24 hours per
day, seven days per week basis in order to provide the highest level of network
performance.
Peering Relationships. Peering is the act of exchanging data across
networks, typically at specific, discrete locations. By allowing separate
networks to exchange data, users on a particular Internet service provider's
network are able to access information and communicate with users on another
provider's network. Many formal peering points exist where several dozen
Internet service providers and other providers exchange data, including network
access points. Internet service providers can also run connections to peer with
several different providers, known as multihoming. Multihoming allows an
Internet service provider to provide better service, as inbound and outbound
data can go over different routes if a particular network is overloaded. Voyager
has relationships at multiple points with several
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different organizations, including Verio, Inc. in Ann Arbor, Michigan, NAP.net
in Chicago, Illinois and MCI and Savvis in Kalamazoo, Michigan, thus building in
network redundancy that allows for better connectivity for its customers.
Integrating Acquired Networks. As Voyager continues to play a leading role
in consolidating the Internet service provider industry, one of its tasks is to
configure the acquired equipment and network into its regional Internet-based
network. Voyager has taken steps to gain scale economies by eliminating
redundant and expensive Internet connectivity and better utilizing Voyager's
current infrastructure. Its integration plan calls for connecting the acquired
points of presence directly to its network at the most cost effective point and
eliminating duplicate Internet telecommunication costs. Voyager typically
connects within three to six months after the acquisition so as to allow for a
prompt yet smooth integration of the acquired networks and to reduce service
disruptions.
INTELLECTUAL PROPERTY
Voyager has developed and acquired certain proprietary rights for which it
has sought and will continue to seek federal, state and local protection.
Voyager relies on a combination of copyright, trademark and trade secret laws to
protect its proprietary rights, particularly related to its names and logos.
"Voyager.net" and the associated logo are names and marks which belong to
Voyager. In addition, Voyager has registered VoyagerLink and several other
names, marks and logos, and has additional registrations pending for names and
marks, under which it does business at local levels within its region. An
integral part of its successful business strategy is its proprietary Web-based
customer care and billing system. Voyager is exploring whether to seek patent
protection with respect to this customer care system and will act accordingly.
Voyager has each of its employees enter into an inventions agreement under which
each agrees that any intellectual property rights developed while in Voyager's
employment belong to Voyager. Voyager cannot assure you that the steps taken by
it to protect its proprietary rights will be adequate to prevent
misappropriation of its technology or that third parties, including competitors,
will not independently develop technologies that are substantially equivalent or
superior to its proprietary technology.
In connection with the delivery of its access and other services, Voyager
relies on the use of products of software manufacturers that it bundles in its
software for users with personal computers operating on the Windows or Macintosh
platforms. While some of the applications included in its start-up kit for
access service subscribers are shareware that it has obtained permission to
distribute or that are otherwise in the public domain and freely distributable,
certain other applications included in the start-up kit have been licensed where
necessary. Voyager currently intends to maintain or negotiate renewals of all
existing software licenses and authorizations as necessary, although Voyager
cannot be certain that such renewals will be available to it on acceptable
terms, if at all. Voyager may also enter into licensing arrangements in the
future for other applications.
(c) ATX TELECOMMUNICATIONS SERVICES, INC.
We acquired ATX on September 29, 2000. The businesses of ATX are now
operated through our wholly owned subsidiaries. ATX offers its customers a full
range of high-speed communications services including long distance, local,
wireless and network services such as network data integration, Internet access
and Web consulting, development and hosting throughout the New York-Virginia
corridor. In addition, ATX offers Advanced Communications Solutions products
tailored to meet the needs of its business customers, such as conference
calling, travel services, pre-paid calling, enhanced fax and PC-based billing.
Customers are billed on a single, consolidated invoice, delivered by traditional
means or near real time Web-based billing that allows the customer to sort the
information to detail calling patterns.
The predecessors to ATX started operations in 1985. On February 9, 2000,
ATX Telecommunications Services, Ltd., its general partner A.T. Communications,
Inc., Global Telecom Services, Ltd. and its general partner Global
Telecommunications, Inc., merged with and into ATX Telecommunications Services,
Inc., a newly-formed Delaware corporation, which was the surviving corporation.
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BUSINESS STRATEGY
ATX intends to:
- PROVIDE INTEGRATED COMMUNICATIONS SERVICES AND TARGET HIGH GROWTH
SECTORS. ATX offers a full complement of high-speed data and
telecommunications services on a bundled and individual basis for which
it provides a single bill. ATX believes that providing one-stop
communications services, including local and long distance services as
well as data and Internet services, will help ATX to meet the needs of
its customers, penetrate its targeted markets, capture a larger portion
of its customers' communications expenditures and increase customer
retention. ATX is focusing on the following products in an effort to grow
its revenues: local service, network data integration, Web hosting/Web
development and Internet service.
- CONTINUE TO DEVELOP A SUPER-REGIONAL NETWORK IN COMMUNICATIONS INTENSIVE
MARKETS. ATX's goal is to expand its network reach in the Northeast
region.
- TARGET SMALL- AND MEDIUM-SIZED BUSINESSES. ATX will continue to target
small- and medium-sized businesses, as well as Fortune 1,000 companies,
in the New York-Virginia corridor. ATX believes that these customers are
typically under-served by incumbent local exchange carriers and that they
will value ATX's ability to provide an integrated suite of advanced
telecommunications and consulting services on one bill. ATX believes that
its 15-year operating history and strong presence in its region make it
well-positioned to exploit this attractive market.
- EXPAND ATX'S SALES FORCE TO INCREASE REVENUE, MARKET SHARE AND GEOGRAPHIC
REACH. With an experienced sales force in the New York-Virginia
corridor, in an effort to expand its revenues, ATX plans to expand its
sales force going forward with new offices in southern New England,
southern New Jersey and New York.
- CONTINUE TO PENETRATE ENHANCED VOICE AND DATA SERVICES INTO ITS EXISTING
CUSTOMER BASE. ATX cross-sells voice and data services to its existing
customer base. ATX's dedicated client care specialists focus on customer
service and opportunities to introduce new products to existing accounts.
Compared with generating new customers, this process is less
time-intensive due to existing customers' familiarity with ATX and has
the ability to provide higher revenue margins because it is likely there
will be lower additional sales expense. Moreover, ATX believes that
providing additional services significantly increases customer retention.
Since April 1998, when ATX entered the local service market, ATX has
delivered local services to approximately 29% of its long distance
customer base. ATX plans to focus on marketing to its existing customers
its data products, including network data integration, Web hosting/Web
development and Internet service.
- EXPAND SMART-BUILD NETWORK EXPANSION FOCUSED ON CLUSTERED CUSTOMER
FOOTPRINT. ATX operates a capital-efficient switch and facilities-based
network that utilizes highly advanced technology. From its inception, ATX
has used a "smart-build" network strategy, building and owning the
intelligent components of its network while leasing unbundled local loops
and inter-exchange transport facilities from other carriers. The purpose
of this strategy is to allow ATX to enter new markets rapidly,
selectively target customer clusters, provide low cost redundancy, and
generate cash flow quickly, while minimizing capital expenditures. As a
result, approximately 90% of total ATX traffic originates and
approximately 75% of ATX traffic terminates on its network.
PRODUCTS AND SERVICES
ATX offers its customers a full range of broadband communications services.
ATX's current product offerings include:
Long distance. ATX has offered switched and dedicated long distance
services since its inception in 1985. Long distance services include
inbound/outbound service, international, 800 or 888 service and calling card
telephone service. ATX currently provides intraLATA and interstate long distance
services nationwide and international termination worldwide. ATX also offers a
full line of Advanced Communications Solutions along with long distance,
Internet-based call management, Insight billing
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applications, traveling calling cards, fax broadcasting, voice mail, conference
calling and enhanced call routing services.
Local. ATX's local service was introduced in April 1998. Following its
smart-build strategy, ATX captures market share as a reseller of local service
and then migrates customers on-switch to provide services on an unbundled
network element basis. ATX is focusing on increasing local service penetration
into its existing commercial customer base, expanding its sales force and
broadening its network.
Network Services. ATX offers a complete high-speed network solution to its
customers. These services include network data integration for private line
services, Internet services, Web design, development, hosting and consulting
services.
Internet Services. ATX utilizes a state-of-the-art network to deliver
Internet access designed for business use, ensuring high-speed, stable
connectivity to a global resource of information. ATX customers are connected
via high-speed dedicated lines, from 56K up to DS3.
Web Services/E-Commerce. ATX is able to facilitate virtually every aspect
of establishing and maintaining an interactive global presence in Web services.
The various segments of Web services include Web design, hosting, electronic
commerce, Intranet development, database integration, Internet marketing and
Internet security.
Consulting Services, Local Area Network/Wide Area Network Data
Integration. ATX's network services and integration unit assists organizations
in the design, construction, implementation and management of practical local
and wide area networks. This business unit manages local area network/wide area
network data integration for private line services, Internet network and
integrated services digital network, as well as professional consulting services
and hardware/software sales. ATX executes efficient and high performance
solutions while educating clients on specific business applications and the
technology that make them possible. Consulting services include wide area
network architecture and implementation, router and CSU configuration, local
area network switching, electronic commerce, cabling and VLAN design and set-up.
Wireless. ATX offers portable tools that enable wireless contact
throughout the United States. ATX offers wireless services primarily as a
customer retention tool, consisting of both cellular and paging service. ATX
offers digital and analog cellular services as well as ESMR service, which is
two-way radio and digital cellular service, through Nextel.
New Products and Services. ATX believes that DSL, network managed services
and co-location server farm for electronic commerce platforms offer significant
potential for revenue growth. ATX intends to continue focusing its efforts on
advancing these new products and services.
SALES, MARKETING AND DISTRIBUTION
The ATX sales model is based on its consultative sales approach, its
proprietary marketing and training tools, the experience of its sales force, its
"farm-team" training and career development program, and its shared vision and
incentive structure to reward individual and team performance objectives.
Each ATX sales consultant provides value to the customer by tailoring
telecommunications products that meet the specific needs of the customer. Each
sale begins with an evaluative consultation that investigates the telecom needs
of the customer. The ATX sales consultant then designs a tailored, integrated
and cost-effective telecom platform that addresses the specific customer's
communications needs. The level of the sales consultant's telecom and customer
knowledge necessary to sell successfully can be achieved only through
significant training, mentoring and devotion of corporate resources.
ATX has an experienced and long-tenured sales force. Over 25% of ATX's
senior sales force professionals have been with ATX for more than 5 years, and
18 out of 22 members of the sales management team have been promoted from within
the ATX organization. ATX's 252 sales personnel are organized in ten teams,
including sales consultants at all levels.
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GEOGRAPHIC MONTHLY REVENUE DISTRIBUTION
<TABLE>
<CAPTION>
APPROXIMATE
PERCENTAGE
JURISDICTION OF REVENUE
------------ -----------
<S> <C>
Pennsylvania............................................ 59.5%
Maryland................................................ 7.1%
New Jersey.............................................. 23.1%
Virginia................................................ 3.8%
Delaware................................................ 2.8%
Washington D.C.......................................... 1.1%
Other................................................... 2.6%
-----
Total.............................................. 100.0%
</TABLE>
CUSTOMERS AND PROPRIETARY SYSTEMS
Customers. Approximately ninety percent of ATX's customers are located in
the New York-Virginia corridor. No single customer represents more than 2% of
total sales. These customers are typically under-served by the incumbent local
exchange carrier and value ATX's ability to provide an integrated complement of
advanced telecommunications and consulting services on one bill. All of ATX's
revenues are from end-users, with no wholesale, carrier or reciprocal
compensation revenues. In addition, a large portion of ATX's customers are in
industries, such as health services, insurance, legal services, banking and
transportation, that have a high demand for data intensive and comprehensive
telecommunication services.
Management Information Systems. ATX has invested in the construction of a
series of proprietary software applications and an extensive corporate Intranet
in its efforts to achieve a paperless work environment in which all job critical
information is readily available online. ATX's employees can use the corporate
Intranet to access detailed product and corporate information, industry research
and updates, competitive intelligence files, online training and certification,
calendars, a personnel directory, community activities, philanthropic
organizations, and other important content from the convenience of their
desktops. Online forms and sophisticated e-mail applications have further
increased productivity by enhancing communications at ATX.
ATX currently utilizes internally developed proprietary systems for
integrated order management and provisioning, as well as for customer relations
management. For billing, ATX uses a combination of an external service bureau
and proprietary software.
INTELLECTUAL PROPERTY
ATX has 18 registered service marks and has applied to register ten
additional service marks.
(d) OTHER MATTERS
COMPETITION
The telecommunications industry and all of its segments are highly
competitive and many of our existing and potential competitors have greater
financial, marketing, technical and other resources than we do. Please refer to
the section entitled "Risk Factors--We face heavy competition in the
telecommunications industry for all of the services we currently provide and
those we intend to provide in the future." Competition for our products and
services is based on price, quality, network reliability, service features and
responsiveness to customers' needs.
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COMPETITIVE LOCAL EXCHANGE CARRIER
In each of our markets, we face competition from incumbent local exchange
carriers, including Ameritech and Bell Atlantic, as well as other providers of
telecommunications services, such as GTE, other competitive local exchange
carriers and cable television companies. In the local exchange markets, our
principal competitor will be the incumbent local exchange carriers. We also face
competition or prospective competition from one or more competitive local
exchange carriers. For example the following companies have each begun to offer
local telecommunications services in major U.S. markets using their own
facilities or by resale of the incumbent local exchange carrier's services or
other providers' services: AT&T, MCI WorldCom, ICG, NEXTLINK and Sprint.
Some of our competitors, including AT&T, MCI WorldCom and Sprint, have
entered into interconnection agreements with Ameritech in states in which we
operate. These competitors either have begun or in the near future likely will
begin offering local exchange service in those states. In addition to these long
distance service providers and existing competitive local exchange carriers,
entities that currently offer or are potentially capable of offering switched
telecommunications services include:
- wireless telephone system operators;
- large customers who build private networks;
- cable television companies; and
- other utilities.
Competition in our competitive local exchange carrier business will
continue to intensify in the future due to the increase in the size, resources
and number of market participants. Many facilities-based competitive local
exchange carriers have committed substantial resources to building their
networks or to purchasing competitive local exchange carriers or inter-exchange
carriers with complementary facilities. By building or purchasing a network or
entering into interconnection agreements or resale agreements with incumbent
local exchange carriers, including regional Bell operating companies and
inter-exchange carriers, a provider can offer single source local and long
distance services similar to those offered by us. Such additional alternatives
may provide such competitors with greater flexibility and a lower cost structure
than ours. Some of these competitive local exchange carriers and other
facilities-based providers of local exchange service are acquiring or being
acquired by inter-exchange carriers. These combined entities may provide a
bundled package of telecommunications products, including local and long
distance telephony, that is in direct competition with the products offered or
planned to be offered by us.
INTERNET
The Internet services market is also extremely competitive. we compete
directly or indirectly with the following categories of companies:
- established online services, such as America Online, the Microsoft
Network and Prodigy;
- local, regional and national Internet service providers, such as
Earthlink/MindSpring and Internet America;
- national telecommunications companies, such as AT&T and MCI;
- providers of Web hosting, co-location and other Internet-based business
services, such as Verio, Inc.;
- computer hardware and software and other technology companies that
provide Internet connectivity with their products, including IBM and
Microsoft Corporation;
- national long distance carriers such as AT&T Corporation, MCI WorldCom
and Sprint Corporation;
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- regional Bell operating companies, such as Bell Atlantic, now Verizon,
and Ameritech, and local telephone companies;
- cable operators, including Tele-Communications, Inc. and Time Warner
Cable;
- nonprofit or educational Internet service providers; and
- online cable services, such as Excite@Home and Roadrunner.
We believe that the primary competitive factors determining success as an
Internet service provider are:
- accessibility and performance of service;
- quality customer support;
- price;
- access speed;
- brand awareness;
- ease of use; and
- scope of geographic coverage.
We believe that we have competed favorably based on these factors,
particularly due to:
- regionally focused operating strategy;
- focus on customer care and service;
- performance of our network facilities; and
- competitive, multi-tiered pricing policy.
Many of the major cable companies and some other Internet access providers
have begun to offer or are exploring the possibility of offering Internet
connectivity through the use of cable modems. Cable companies, however, are
faced with large-scale upgrades of their existing plant equipment and
infrastructure in order to support connections to the Internet backbone via
high-speed cable access devices. We believe that there is a trend toward
horizontal integration through acquisitions or joint ventures between cable
companies and telecommunications carriers. Other alternative service companies
have also announced plans to enter the Internet connectivity market with various
wireless terrestrial and satellite-based service technologies. In addition,
several competitive local exchange carriers and other Internet access providers
have launched national or regional digital subscriber line programs providing
high speed Internet access using the existing copper telephone infrastructure.
Several of these competitive local exchange carriers have announced strategic
alliances with local, regional and national Internet service providers to
provide broadband Internet access. Recently, several national access providers
have begun to offer Internet access for free or at substantial discounts to
prevailing rates, which may result in significant pricing pressure. We also
believe that manufacturers of computer hardware and software products, media and
telecommunications companies and others will continue to enter the Internet
services market, which will also intensify competition. Any of these
developments could materially and adversely affect our business, operating
results and financial condition.
Competition will increase as large diversified telecommunications and media
companies acquire Internet service providers and as Internet service providers
consolidate into larger, more competitive companies. Diversified competitors may
bundle other services and products with Internet connectivity services,
potentially placing us at a significant competitive disadvantage. As a result,
our businesses may suffer.
Our DSL service offering will also face competition from the traditional
telephone companies, cable modem service providers, competitive
telecommunications companies, traditional and new national long
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distance carriers, other Internet service providers, on-line service providers
and wireless and satellite service providers.
LOCAL MULTIPOINT DISTRIBUTION SERVICE
Depending on the services ultimately offered, our local multipoint
distribution service business could face the same competition as outlined above.
In addition, the extent it is used to deliver pay television, our local
multipoint distribution service business will compete with franchised cable
television systems and also may face competition from several other types of
Multichannel Video Programming Distributors (MVPDs) including:
- Multichannel Multipoint Distribution Systems;
- Satellite Master Antenna Television Systems;
- DBS and other television receive-only satellite dishes;
- video service from telephone companies; and
- open video system operators.
Multichannel video programming distributors face competition from other
sources of entertainment, such as movie theaters and computer on-line services.
Further, premium movie services offered by multichannel video programming
distributors have encountered significant competition from the home video
industry. In areas where off-air television broadcasts can be received without
the benefit of terrestrial distribution systems, multichannel video programming
distributors have experienced competition from such broadcasters. Online
services and Internet service providers also serve as a source of competition to
multichannel video programming distributors.
The Telecommunications Act relaxed the regulatory barriers to entry by
incumbent local exchange carriers into the provision of video programming in
their local telephone service areas, and it substantially reduces current and
future regulatory burdens on franchised cable television systems, thus
potentially resulting in significant additional competition to local multipoint
distribution service operators from local telephone companies and franchised
cable television systems.
CUSTOMER DEPENDENCE AND SEASONALITY
We do not depend upon any single customer for any significant portion of
our business. Neither our business nor the telecommunications industry are
generally characterized as having a material seasonal element, and we do not
expect our business or the industry to become seasonal in the foreseeable
future.
EMPLOYEES
As of September 30, 2000, we had an aggregate of approximately 2,100
employees. None of our employees are represented by any labor organization. We
believe that our relationship with our employees is excellent.
PROPERTIES
Some of our subsidiaries lease office space which we believe is adequate to
serve our present business operations and our needs for the foreseeable future.
Please refer to the notes to our consolidated financial statements, included
elsewhere in this Offering Memorandum, for information concerning these lease
commitments.
We lease the office locations of the business formerly operated by Voyager.
These leases currently include approximately 55,000 square feet of space of the
business formerly operated by Voyager. This includes two primary lease locations
which serve as the network operating centers: East Lansing, Michigan, which is
also the corporate headquarters of the business formerly operated by Voyager,
with approximately 17,000 square feet, which lease expires in 2007; and New
Berlin, Wisconsin, where we lease space at four
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locations covering in the aggregate approximately 25,000 square feet under
long-term leases. Voyager recently renegotiated its leases in East Lansing and
New Berlin to increase the square feet of space at these facilities to
approximately 32,000 square feet and 67,000 square feet, respectively. We also
lease space, typically less than 50 square feet per location, to house network
equipment at each of point of presence of the business formerly operated by
Voyager. We believe that the current facilities are suitable and adequate for
our business and, upon expiration of our leases, we do not anticipate any
significant difficulty in obtaining renewals or alternative space in the desired
markets of the business formerly operated by Voyager.
Properties and facilities of the business formerly operated by ATX are
listed in the table below:
<TABLE>
<CAPTION>
PROPERTY SIZE LOCATION
--------------------------------------------- --------------------------------- ----------------
<S> <C> <C>
Headquarters/Executive offices 50,000 sq. ft. Bala Cynwyd, PA
Network Operations Center 31,000 sq. ft. Philadelphia, PA
Sales Office 4,300 sq. ft. Vienna, VA
Sales Office 5,000 sq. ft. Towson, MD
Sales Office 4,000 sq. ft. Woodbridge, NJ
Sales Office 3,000 sq. ft. Allentown, PA
Sales Office 2,000 sq. ft. Newark, DE
Technical Operations Facility 1,700 sq. ft. Philadelphia, PA
Sales Office 21,000 sq. ft. Bala Cynwyd, PA
Sales Office 5,000 sq. ft. Mt. Laurel, NJ
Sales Office 3,000 sq. ft. Camp Hill, PA
</TABLE>
The headquarters/executive offices and primary technical operations
facility of the business formerly operated by ATX are leased from entities
controlled by Michael Karp, former Chief Executive Officer and principal
stockholder of ATX. We currently pay approximately $1.0 million per year in rent
for these facilities and approximately $450,000 per year in rent for the primary
technical operations facility. The lease for the former headquarters/executive
offices expires in January 2004, and we have an option to renew the lease for an
additional five years. The lease for the former primary technical operations
facility expires in December 2002. All of the sales offices and smaller
technical operations facility are leased for approximately $450,000 per year in
rent. These leases expire between August 2001 and March 2005. We have the option
to renew some of these leases. For more information regarding these leases
please read the section of this prospectus entitled "Certain Relationships and
Related Transactions."
LEGAL PROCEEDINGS
We are not involved in any legal disputes that are expected to have a
material adverse effect on our financial condition.
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GOVERNMENT REGULATION OF
THE TELECOMMUNICATIONS SERVICES BUSINESS
OVERVIEW
Many of the telecommunications services that we currently provide and will
provide in the future are regulated by federal, state and local government
agencies. The following summary does not purport to describe all current and
proposed regulations and laws affecting the telecommunications industry. Other
existing federal and state regulations and legislation are the subject of
judicial proceedings, legislative hearings and administrative proposals, which
could change in varying degrees the manner in which this industry operates.
Neither the outcome of these proceedings nor their impact on the
telecommunications industry or our business can be determined at this time.
Future federal or state regulations and legislation may be less favorable to us
than current regulation and legislation and therefore may have a material and
adverse impact on our business and financial prospects. In addition, we may
expend significant financial and managerial resources to participate in
proceedings setting rules at either the federal or state level, without
achieving a favorable result.
At the federal level, the FCC has jurisdiction over interstate and
international services. Interstate services are communications that originate in
one state and terminate in another. State public service commissions exercise
jurisdiction over intrastate services, which are communications that originate
and terminate in a single state. Municipalities and other local government
agencies may also regulate limited aspects of our business, such as the use of
government-owned rights-of-way and construction permits. Our networks also may
have to comply with numerous local regulations such as building codes, franchise
and right-of-way licensing requirements.
TELECOMMUNICATIONS ACT OF 1996
The Telecommunications Act of 1996 has resulted and will continue to result
in substantial changes in the marketplace for telecommunications services. These
changes include opening local exchange services to competition and a substantial
increase in the addressable services for us. Among its more significant
provisions, the Telecommunications Act:
- removes legal barriers to entry into all telecommunications markets,
including long distance and local exchange services;
- requires incumbent local exchange carriers, such as SBC or Bell South, to
"interconnect" with and provide telecommunications services for resale by
competitors;
- permits incumbent local exchange carriers, including Bell regional
operating companies in some circumstances to enter into new markets, such
as long distance and cable television;
- relaxes regulation of telecommunications services provided by incumbent
local exchange carriers and all other telecommunications service
providers; and
- directs the FCC to establish an explicit subsidy mechanism for the
preservation of universal service.
The FCC was also directed by Congress to revise and make explicit subsidies
inherent in the access charge paid by inter-exchange carriers for use of local
exchange carriers' services.
REMOVAL OF ENTRY BARRIERS
The provisions of the Telecommunications Act enable us to provide a full
range of telecommunications services in any state. Although we will be required
to obtain certification from state public service commissions in almost all
cases, the Telecommunications Act limits substantially the ability of a state
public service commission to deny a request for certification. The provisions of
the Telecommunications Act also reduce the barriers to entry by other potential
competitors and therefore increase the level of competition we will likely face
in all markets affected by the Telecommunications Act. Please refer to the
section of this prospectus entitled "Risk Factors -- Risk factors relating to
our business."
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INTERCONNECTION WITH LOCAL EXCHANGE CARRIER FACILITIES
A company cannot compete effectively with the incumbent local exchange
carriers in the switched local telephone services market unless it is able to
connect its facilities with the incumbent local exchange carriers' facilities
and obtain access to essential services and resources under reasonable rates,
terms and conditions. The Telecommunications Act places a number of access and
interconnection requirements on all local exchange providers, including
competitive local exchange carriers, with additional requirements placed on
incumbent local exchange carriers. These requirements are intended to provide
access to networks under reasonable rates, terms and conditions. Specifically,
incumbent local exchange carriers must provide the following:
Separation of Network Elements. Incumbent local exchange carriers
must offer access to various parts of their network on a separate basis.
This requirement allows new competitors such as us to purchase at
cost-based rates elements of an incumbent local exchange carrier's network
that may be necessary to provide service to our customers.
Dialing Parity. All local exchange carriers must provide dialing
parity, which means that a customer calling to or from a competitive local
exchange carrier network cannot be required to dial more digits than is
required for a comparable call originating and terminating on the incumbent
local exchange carriers' network.
Telephone Number Portability. Telephone number portability enables a
customer to keep the same telephone number when the customer switches local
exchange carriers.
Reciprocal Compensation. The duty to provide reciprocal compensation
means that local exchange carriers must terminate calls that originate on
competing networks in exchange for a cost based level of compensation and
that they are entitled to termination of calls that originate on their
network at the same level of compensation.
Resale. Local exchange carriers generally may not prohibit or place
unreasonable restrictions on the resale of their telecommunications
services. In addition, incumbent local exchange carriers must offer these
services to resellers at a wholesale rate that is less than the retail rate
charged to end users.
Collocation. Subject to space and equipment use limitations,
incumbent local exchange carriers must permit competitive local exchange
carriers to install and maintain certain types of their own network
equipment in incumbent local exchange carriers' central offices and remote
terminals. The rates, terms and conditions are subject to negotiation and,
failing agreement, to arbitration before state public utilities
commissions.
Access to Rights-of-Way. All incumbent local exchange carriers,
competitive local exchange carriers and certain other utilities must
provide access to their poles, ducts, conduits and rights-of-way on a
reasonable, nondiscriminatory basis.
Incumbent local exchange carriers are required to negotiate in good faith
with other carriers that request any or all of the arrangements discussed above.
If a requesting carrier is unable to reach agreement with the incumbent local
exchange carriers within a prescribed time, either carrier may request
arbitration by the applicable state commission.
The rates charged by incumbent local exchange carriers for interconnection
and separate network elements must be calculated using a forward-looking,
incremental cost methodology, but may still vary greatly from state to state.
These rates must be approved by state regulatory commissions, often following a
lengthy and expensive negotiation, arbitration, and review process. Recurring
and non-recurring charges for local loops and other separate network elements
may change based on the rates proposed by incumbent local exchange carriers and
approved by state regulatory commissions from time to time, which creates
uncertainty about how interconnection and separate element rates will be
determined in the future and which could have an adverse effect on our
operations. In January 1999, the United States Supreme Court upheld the FCC's
authority to adopt national pricing rules for interconnection services,
unbundled network
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elements, and resale by competitive local exchange carriers. The Supreme Court
left open, however, the question of the legality of the total element long-run
incremental pricing methodology adopted by the FCC. On July 18, 2000, the United
States Court of Appeals for the Eighth Circuit vacated and remanded several of
the FCC's pricing rules, which may require the FCC to implement a new pricing
methodology that may be less favorable to competitive local exchange carriers.
For example, the Eighth Circuit overturned the FCC's pricing rule that required
the total element long-run incremental cost of an element to be measured based
on the use of the "most efficient telecommunications technology currently
available and the lowest cost network configuration." The Eighth Circuit did,
however, find that the use of a forward-looking incremental cost methodology is
reasonable. Portions of the Eighth Circuit's July 2000 ruling have been appealed
to the Supreme Court. The Eighth Circuit stayed aspects of its decision pending
a final ruling from the Supreme Court.
While the Telecommunications Act generally requires incumbent local
exchange carriers to offer interconnection, separate network elements and resold
services to competitive local exchange carriers, incumbent local exchange
carriers-to-competitive local exchange carriers interconnection agreements may
have short terms, requiring the competitive local exchange carriers to
renegotiate the agreements. In addition, incumbent local exchange carriers may
not provide timely provisioning or adequate service quality, thereby impairing a
competitive local exchange carrier's reputation with customers who can easily
switch back to the incumbent local exchange carriers. In January 1999, the
United States Supreme Court upheld the FCC's authority to adopt national pricing
rules for interconnection services, separate network elements, and resale by
competitive local exchange carriers.
On remand from the Supreme Court's January 1999 decision, the FCC adopted
an order on September 15, 1999, which specified the separate elements that
incumbent local exchange carriers must make available to competitors. The FCC
reaffirmed that incumbents must provide separate access to six of the seven
network elements that were listed in the FCC's 1996 order. According to the FCC,
separate access to the seventh item, operator and directory assistance services,
is no longer necessary to facilitate competition. The FCC's order also added
additional separate elements to the list -- subloops, portions of loops and dark
fiber -- but declined, except in limited circumstances, to require incumbent
local exchange carriers to separate the facilities used exclusively to provide
high-speed Internet access and other data services. In addition, the FCC
initiated a further rulemaking proceeding to consider whether carriers should be
able to combine separate elements to provide special access services in
competition with those provided by the incumbent local exchange carriers.
Portions of the FCC's 1999 ruling have been appealed by several parties.
In February 1999, the FCC determined that calls to Internet service
providers are interstate in nature, thus falling under the FCC's jurisdiction
and outside the scope of the Telecommunications Act's reciprocal compensation
requirements. The FCC initiated a review of compensation arrangements for calls
to Internet service providers but stated that, in the meantime, parties may
voluntarily include reciprocal compensation provisions in their interconnection
agreements and that state commissions may order compensation for termination of
Internet service provider calls. Many states decided to leave intact existing
decisions in favor of reciprocal compensation for Internet service
provider-bound calls. On March 24, 2000, the U.S. Court of Appeals for the D.C.
Circuit overturned the FCC's decision that calls to Internet service providers
are not local. The court found that the FCC had failed to explain adequately its
determination that a call does not "terminate" at an Internet service provider
merely because the Internet service providers then originate further
telecommunications that extend beyond state boundaries. In response to this
court ruling, the FCC could restate its original jurisdictional conclusion, it
could determine that calls to Internet service providers are local, or it could
create a new classification for them. If it concludes that such calls are local,
competitive local exchange carriers could be entitled to reciprocal compensation
under the Telecommunications Act for terminating Internet service provider-bound
traffic, which could have a favorable impact on our revenues. Such a decision,
however, could also potentially lead to more state control over Internet-related
services, which could have a negative effect on our roll out of such services.
Legislation has been introduced in Congress that would declare Internet traffic
not to be subject to reciprocal compensation. Enactment of such a provision
could have an adverse effect on our revenues.
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Several incumbent local exchange carriers have filed petitions at the FCC
and have initiated legislative efforts to effect a waiver of the obligation to
unbundle and offer services for resale with regard to high-speed data or
"advanced" services. In addition, certain incumbent local exchange carriers are
seeking to provide these services on an interLATA (long distance) basis before
they have been granted approval by the FCC pursuant to Section 271 of the
Telecommunications Act to enter the long distance market. Permitting incumbent
local exchange carriers to provision data services through separate affiliates
with fewer regulatory requirements could have a material adverse impact on our
ability to compete in the data services sector. The FCC imposed conditions on
the merger of SBC with Ameritech in October 1999 and on the merger of Bell
Atlantic and GTE in June 2000 that permit the provisioning of advanced data
services via separate subsidiaries under various requirements, some of which
expire in the near term. We cannot predict whether these requirements are
enforceable, nor whether they will deter anticompetitive behavior if they are
enforceable. Bell Atlantic's, now Verizon's, application for long distance
service in New York and SBC's application for long distance service in Texas
have been approved subject to similar separate subsidiary provisions. These
areas of regulation are subject to change through additional proceedings at the
FCC or upon judicial review.
Although the FCC has held that incumbent local exchange carriers providing
advanced services continue to be required to comply with the resale and
unbundling obligations of the Telecommunications Act, it has started a
proceeding to determine whether incumbent local exchange carriers can create
separate affiliates for advanced services that would be free of these
obligations. In November 1999, the FCC ruled that quality discounts on tariffed
digital subscriber line services that incumbent local exchange carriers provide
to Internet service providers need not be resold to competitive
telecommunications providers at lower wholesale rates.
The FCC has adopted rules requiring incumbent local exchange carriers to
provide collocation to competitive local exchange carriers for the purpose of
interconnecting their competing networks. Under the rules adopted by the Local
Competition Orders, incumbent local exchange carriers are required to provide
either physical collocation or virtual collocation at their switching offices.
Recently, the FCC established new rules designed to make it easier and less
expensive for competitive local exchange carriers to obtain collocation at
incumbent local exchange carrier central offices by, among other things,
restricting the incumbent local exchange carriers' ability to prevent certain
types of equipment from being collocated and requiring incumbent local exchange
carriers to offer alternative collocation arrangements to competitive local
exchange carriers. On March 17, 2000, however, the U.S. Court of Appeals for the
D.C. Circuit overturned several of these collocation rules, finding that the FCC
had failed to make a determination about whether all the types of equipment
incumbent local exchange carriers are required to collocate is "necessary" for
interconnection or access to separate elements. According to the court, such a
determination is required under the Telecommunications Act. The court also
rejected other FCC rules that permit competitive local exchange carriers to
cross-connect their equipment with the equipment of other competitive local
exchange carriers and give competitive local exchange carriers the option of
collocating equipment in any unused space in an incumbent local exchange carrier
central office. While ultimately the FCC could provide reasoned explanations for
its current collocation requirements, the uncertainty created by this court
decision could provide incumbent local exchange carriers with a basis for
refusing to collocate multi-function equipment or provide collocation in a
timely and efficient manner. This could have a negative impact on our network
deployment plans.
In this March 17, 2000 order, the court also overturned the FCC's
determination that incumbent local exchange carriers must permit collocating
competitive local exchange carriers to cross-connect their facilities. The court
stated that the FCC failed to explain how cross-connects between competitive
local exchange carriers are necessary for interconnection with or access to the
separate elements of the incumbent local exchange carriers. In addition, the
court rejected some of the FCC's provisions regarding the implementation of
physical collocation, such as the requirement that incumbent local exchange
carriers give competitors the option of collocating equipment "in any unused
space." The immediate impact of these rulings is that incumbent local exchange
carriers may seek to hinder physical collocation, driving up collocation costs.
The FCC will have the opportunity to offer explanations for its decisions, but
these
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explanations may not be issued in the near future. The March 17, 2000 order did
uphold FCC rules regarding cost allocation and imposing the requirement that
incumbent local exchange carriers provide cageless and adjacent collocation.
On December 9, 1999, the FCC released an order that requires incumbent
local exchange carriers to offer line sharing as a separate network element by
June 6, 2000. Line sharing permits competitive local exchange carriers to use a
customer's existing line to provide DSL services while the incumbent local
exchange carrier continues to use the same line to provide voice service. Prices
for line sharing will be set by the states based on a cost methodology adopted
by the FCC. This decision has been appealed. In the meantime, a number of Bell
regional operating companies have reached agreements to provide line sharing at
no or at very low cost, subject to a true-up once the applicable state
commission sets a price. These cost-based line sharing charges may improve the
business outlook for our Internet-related products and services initiatives.
SBC, through its Project Pronto, is changing its network architecture.
These changes may have an impact on CoreComm's ability to interconnect and
collocate for the provision of DSL services. One of the changes is the
replacement of copper lines with fiber lines in certain parts of the SBC
network. Currently, many types of DSL services can be transmitted only over
copper lines. Another change involves a reduction in the size of remote terminal
facilities in SBC's network. This limits the space available for CoreComm and
other providers to place their DSL equipment in those remote terminal
facilities. SBC may also be deploying DSL-related equipment that is not
compatible for interconnection with competitors' DSL equipment.
In addition to requiring the incumbent local exchange carriers to open
their networks to competitors and reducing the level of regulation applicable to
competitive local exchange carriers, the Telecommunications Act also reduces the
level of regulation that applies to the incumbent local exchange carriers,
thereby increasing their ability to respond quickly in a competitive market. For
example, the FCC has applied "streamlined" tariff regulation of the incumbent
local exchange carriers, which shortens the requisite waiting period before
which tariff changes may take effect. These developments enable the incumbent
local exchange carriers to change rates more quickly in response to competitive
pressures. The FCC has also adopted heightened price flexibility for the
incumbent local exchange carriers, subject to specified caps. If exercised by
the incumbent local exchange carriers, this flexibility may decrease CoreComm's
ability to compete effectively with the incumbent local exchange carriers in its
markets.
The Telecommunications Act also gives the FCC authority to decide to
forebear from regulating carriers if it believes regulation would not serve the
public interest. The FCC is charged with reviewing its regulations for continued
relevance on a regular basis. As a result of this mandate, a number of
regulations that apply to competitive local exchange carriers have been, and
others may in the future be, eliminated. We cannot, however, guarantee that any
regulations that are now or will in the future be applicable to us will be
eliminated.
Congress is considering a number of bills that would deregulate the
provision of advanced services by incumbent local exchange carriers. These
regulatory or legislative outcomes could have an adverse effect on our ability
to obtain access to the network elements necessary for the provision of advanced
services to our customers or to compete with incumbent local exchange carriers
in the provision of such services.
LOCAL EXCHANGE CARRIER ENTRY INTO NEW MARKETS
Our principal competitor in each local exchange market we enter is the
incumbent local exchange carrier. Regional Bell operating companies are
currently permitted to provide long distance services to customers outside of
their local service areas and in conjunction with their mobile telephone service
offerings, but they are prohibited from providing long distance services that
originate in the states where they provide local telephone service, which is
referred to as in-region long distance service. Section 271 of the
Telecommunications Act established procedures under which regional Bell
operating companies can provide in-region long distance services in a state
after receiving approval from the FCC. To obtain approval, the regional Bell
operating companies must comply with a competitive checklist that
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incorporates, among other requirements, the interconnection requirements
discussed above. Please refer to the section entitled "Government Regulation of
the Telecommunications Services Business -- Interconnection with Local Exchange
Carrier Facilities."
Approval under Section 271 from the FCC will enable regional Bell operating
companies to provide customers with a full range of local and long distance
telecommunications services. The provision of long distance services by regional
Bell operating companies is expected to reduce the market share of the major
long distance carriers, which may be significant customers of our services.
Consequently, the entry of the regional Bell operating companies into the long
distance market may have adverse consequences on the ability of competitive
local exchange carriers such as us both to generate access revenues from the
inter-exchange carriers and to compete in offering a package of local and long
distance services. On December 22, 1999, the FCC approved an application filed
by Bell Atlantic, now Verizon, seeking authority to begin providing long
distance services to customers located in the State of New York. This action
represented the first Section 271 approval by the FCC, which on June 30, 2000,
also approved SBC's application for Section 271 authority in Texas. We
anticipate that Verizon, SBC and other regional Bell operating companies will
soon initiate similar proceedings to obtain long distance service authority in
other states in which we operate or plan to operate. For example, Verizon
already has begun the necessary regulatory review process in the Commonwealth of
Massachusetts.
COMPETITIVE LOCAL EXCHANGE CARRIER INTERSTATE ACCESS CHARGES
In addition to charging other carriers reciprocal compensation for
terminating local traffic, CoreComm also collects access charges from carriers
for originating and terminating interexchange traffic. Some interexchange
carriers, including AT&T and Sprint, have challenged the switched access rates
of certain competitive local exchange carriers, and have withheld some payments
for the switched access services that they continue to receive. Although no
formal complaints have been filed against us, AT&T and Sprint have filed
complaints against other competitive local exchange carriers asserting that such
competitive local exchange carriers' service charges for switched access
services are higher than those of the incumbent local exchange carriers serving
the same territory, and are therefore unjust and unreasonable. These
interexchange carriers have refused to pay competitive local exchange carriers
any originating access charges in excess of the corresponding incumbent rate.
Because our access charges are appreciably less than those of some competitive
local exchange carriers, and are lower than the access charges of smaller
incumbents having traffic volumes similar to ours, we do not expect the FCC to
require any appreciable reduction in our tariffed rates. In addition, in June
2000, the FCC denied the first complaint brought by Sprint against another
competitive local exchange carrier based solely on a comparison of the rates of
the competitive local exchange carrier to those of incumbent local exchange
carriers in the same territory.
RELAXATION OF REGULATION
Through a series of proceedings, the FCC has established different levels
of regulation for "dominant carriers" and "non-dominant carriers." As a
non-dominant carrier, we are subject to relatively limited regulation by the
FCC. However, at a minimum, we must offer interstate services at just and
reasonable rates in a manner that is not unreasonably discriminatory.
One goal of the Telecommunications Act is to increase competition for
telecommunications services and thus reduce the need for regulation of these
services. To this end, the Telecommunications Act requires the FCC to streamline
its regulation of incumbent local exchange carriers and permits the FCC to
forbear from regulating particular classes of telecommunications services or
providers. Since we are a non-dominant carrier and, therefore, are not heavily
regulated by the FCC, the potential for regulatory forbearance likely will be
more beneficial to the incumbent local exchange carriers than to us in the long
run.
The Telecommunications Act requires all common carriers, including us, to
charge just and reasonable rates for their services and to file schedules of
these rates with the FCC. These schedules are known as "tariffs" and they
represent a contract between a carrier and its customers. The
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Telecommunications Act permits the FCC to "forbear" from enforcing certain
provisions of the Telecommunications Act and the FCC has used this authority to
determine that it is in the public interest to prohibit non-dominant carriers
from filing tariffs for their interstate services. This decision of the FCC and
its "mandatory detariffing" was recently affirmed by the U.S. Court of Appeals
for the D.C. Circuit. Currently, the FCC is not permitting non-dominant carriers
to file new tariffs and will require existing tariffs to be withdrawn by 2001.
The FCC's preclusion of non-dominant interstate carriers from filing tariffs may
increase our exposure to litigation. Currently, tariffs contain provisions
limiting the liability of providers on a variety of issues. In the absence of
filed tariffs, carriers would have to rely on negotiated contracts with each
customer to provide these liability limitations.
Another FCC decision permits, but does not require, competitive local
exchange carriers to file tariffs for the charges that they levy on interstate
long distance carriers for completing calls to competitive local exchange
carriers' customers. Proposals are pending before the FCC to make detariffing of
access services mandatory for competitive local exchange providers. See
"Government Regulation of the Telecommunications Services Business -- Universal
Service and Access Charge Reform" below.
UNIVERSAL SERVICE AND ACCESS CHARGE REFORM
On May 8, 1997, the FCC issued an order implementing the provisions of the
Telecommunications Act relating to the preservation and advancement of universal
telephone service. This order requires all telecommunications carriers providing
interstate telecommunications services, including us, to contribute to universal
service support for schools, libraries and rural health care programs. Our
contribution to the federal support funds is calculated based on a percentage of
our gross end-user interstate and international telecommunications revenue.
Although we have already begun contributing to the federal universal service and
high cost funds, the amount of our required contribution changes each quarter.
Various states are also in the process of implementing their own universal
service programs. We are currently unable to quantify the amount of subsidy
payments that we will be required to make and the effect that these required
payments will have on our financial condition.
On July 30, 1999, the United States Court of Appeals for the Fifth Circuit
overturned some of the FCC's rules governing the collection and distribution of
those payments. In October 1999, the FCC released two orders in response to the
Fifth Circuit's decision. One order permits incumbent local exchange carriers to
continue to recover their universal service contributions from access charges or
to establish end-user charges. The second order changed the contribution basis
for school/library funding to eliminate calculations based upon intrastate
revenues. A number of parties have petitioned the Supreme Court to review the
Fifth Circuit's decision. The Supreme Court recently agreed to decide the
constitutionality of the FCC's methodology used to compute universal service
support payments.
In May 1999, the FCC adopted a framework for a new, forward-looking,
high-cost support mechanism that will provide support for non-rural
telecommunications carriers. The FCC stated that the support mechanism will be
used only to determine federal support and will not impose any obligation on a
state to impose intrastate surcharges. It is not possible to determine at this
time what effect this ruling will have on the level of contributions we are
required to make to either the federal or various state universal service
programs, or if it will become easier for us to become qualified as recipients
of universal service funds when we serve high-cost areas.
In a related proceeding, on May 16, 1997, the FCC issued an order
implementing reforms to its access charge rules. Access charges are charges
imposed by local exchange carriers on long distance providers for access to the
local exchange network, and are designed to compensate the local exchange
carrier for its investment in the local network. The FCC regulates interstate
access and the states regulate intrastate access. This order required incumbent
local exchange carriers to substantially decrease over time the prices they
charge for switched and special access and changed how access charges are
calculated. These changes are intended to reduce access charges and shift
certain usage-based charges to flat-rated, monthly per-line charges. To the
extent that these rules are effective in reducing access charges, our ability to
offer customers lower-cost access services might be impaired.
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On August 27, 1999, the FCC issued an order implementing further reforms to
its access charge rules. The FCC's order granted most local exchange carriers
greater pricing flexibility and instituted other access charge reforms designed
to increase competition and reduce access charges. These changes could impair
our ability to offer customers lower-cost access services. The FCC also issued a
notice of proposed rulemaking, proposing additional pricing flexibility. In
addition, the FCC has initiated a proceeding to consider whether to adopt rules
constraining competitive local exchange carrier access charges. To the extent
competitive local exchange carrier access charges are reduced, our revenue could
decrease.
On May 31, 2000, the FCC issued an order adopting an integrated interstate
access reform and universal service proposal put forth by a coalition of
incumbent local exchange carriers and inter-exchange carriers. These reforms are
aimed primarily at price cap (incumbent) local exchange carriers, but it is too
early to assess what impact, if any, they will have on CoreComm.
Some state public service commissions have adopted rules or are currently
considering actions to preserve universal services and promote the public
interest.
LOCAL GOVERNMENT AUTHORIZATIONS
Many jurisdictions where we may provide services require license or
franchise fees based on a percentage of certain revenues. Because the
Telecommunications Act specifically allows municipalities to charge fees for use
of the public rights-of-way, it is likely that jurisdictions that do not
currently impose fees will seek to impose fees in the future. However, the
amount and basis of these fees have been successfully challenged by several
telecommunications service providers. Federal courts have struck down municipal
ordinances that:
- do not relate the fees imposed under the ordinance to the extent of a
provider's use of the rights-of-way;
- do not relate the fees imposed under the ordinance to the costs incurred
by the local government in maintaining the rights-of-way; or
- seek to impose fees based on a concept of the "value" of the use to the
provider by relating the fees to provider revenues.
Additionally, because the Telecommunications Act requires jurisdictions to
charge non-discriminatory fees to all telecommunications providers,
telecommunications providers are challenging municipal fee structures that
excuse other companies, particularly the incumbent local exchange carriers, from
paying license or franchise fees, or allow them to pay fees that are materially
lower than those that are required from new competitors such as us. A number of
these decisions have been appealed and, in any event, it is uncertain how
quickly particular jurisdictions will respond to the court decisions without a
specific legal challenge initiated by us or another competitive local exchange
carrier to the fee structure at issue.
REGULATION OF RESELLERS
The FCC has defined resale as any activity in which a party, the reseller,
subscribes to the services or facilities of a facilities-based provider, or
another reseller, and then reoffers communications services to the public for
profit, with or without adding value. Resellers are common carriers generally
subject to all rules and regulations placed on providers of the underlying
services by either the FCC or the states in which they operate. The FCC has held
that prohibitions on the resale of common carrier services are unjust,
unreasonable, and unlawfully discriminatory in violation of the
Telecommunications Act. Accordingly, all common carriers must make their
services available for resale at rates, terms, and conditions that do not
unreasonably discriminate against resellers. The Telecommunications Act imposes
the additional duty upon incumbent local exchange carriers to make their
services available for resale at wholesale rates. The FCC adopted specific
requirements for determining these wholesale rates for local telecommunications
services. While the United States Supreme Court upheld the FCC's authority to
adopt these rules, the FCC's specific pricing rules remained subject to further
judicial review.
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<PAGE> 91
On July 18, 2000, the United States Court of Appeals for the Eighth Circuit
vacated the FCC's rule that required the incumbent local exchange carriers to
exclude all costs that reasonably can be avoided when an incumbent local
exchange carrier provides a telecommunications service for resale at wholesale
rates to a requesting carrier. The Eighth Circuit ruled that incumbent local
exchange carriers should only exclude those costs that an incumbent local
exchange carrier will actually avoid incurring in the future. To the extent that
the cost of resale services increases as a result of this Eighth Circuit
decision, our operating expenses could increase. This Eighth Circuit ruling may
be appealed to the Supreme Court.
As to other telecommunications service providers, such as competitive local
exchange carriers and wireless providers, there is no regulation that requires
them to give discounts to resellers below the rates offered to end users of the
same quantities of similar services. The FCC's requirement that wireless
providers offer resale services is currently set to expire on November 24, 2002.
LOCAL MULTIPOINT DISTRIBUTION SERVICE
The FCC has established a new wireless service referred to as local
multipoint distribution service. The FCC allocated two frequency blocks in each
of 493 Basic Trading Areas in the United States to local multipoint distribution
service: Block A with 1,150 MHz of spectrum in the 28 GHz and 31 GHz bands, and
Block B with 150 MHz in the 31 GHz band. Local multipoint distribution service
licenses are awarded for ten-year terms with renewal expectancies provided to
licensees that make a showing of substantial service in their licensed areas.
Local multipoint distribution service may be used to provide any kind of
communications service on a common carrier or non-common carrier basis. Radio
frequencies in the 28 and 31 GHz bands are generally capable of only
"line-of-sight" transmission and reception, may receive interference from
certain weather conditions, and do not lend themselves to mobile applications.
Local multipoint distribution service is expected to be used for the delivery of
various broadband services to homes and offices, including telecommunications,
Internet access and two-way video. At least seven other countries, including
Canada and Mexico, have licensed local multipoint distribution service on either
a permanent or experimental basis. Local multipoint distribution service
licensees are expected to be able to provide a wide array of services, two-way
capabilities and high capacity through the use of newer digital equipment and
transmission mechanisms. The FCC expects that Block-A local multipoint
distribution service licensees especially, by applying cellular-style frequency
re-use technology to an already large frequency bandwidth, have the potential to
become competitors to incumbent local exchange carriers and cable operators.
In the initial auction, we won 15 Block-A licenses for Basic Trading Areas
encompassing substantially all population centers in the state of Ohio, for a
total bid of $25,241,133. The FCC has since granted our 15 local multipoint
distribution service licenses with an effective date of June 8, 1998.
INTERNATIONAL OPERATIONS
We already provide international resale services and may ultimately expand
our operations to other countries. The FCC requires every carrier that
originates international telecommunications from within the U.S., either through
the use of its own facilities or on a resale basis, to secure in advance an
authorization from the FCC under Section 214 of the Telecommunications Act.
Additionally, these carriers must file with the FCC a tariff containing the
rates, terms, and conditions of their international service offerings. We hold a
Section 214 Authorization for both facilities-based and resale international
services and have filed a tariff for our international resale services.
INTERNET REGULATION
The FCC currently does not regulate the provision of Internet service,
although it does regulate common carriers that provide elements of the
"backbone" networks on which the Internet is based. Similarly, state public
utility commissions generally do not regulate Internet service, except in some
limited circumstances where incumbent local exchange carriers provide Internet
services. The FCC and some states, however, are reviewing the development of the
Internet and the types of services that are
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<PAGE> 92
provided through it. For example, if the FCC should determine that an Internet
service provider offers a service that is an exact substitute for long distance
telephone service with the sole distinction that it is based on a
packet-switched network rather than a circuit-switched network, the FCC may
determine that it should impose similar regulation on the new services.
STATE REGULATION GENERALLY
Most states require companies to be certified or authorized by the state's
public utility commission in order to provide common carrier services. These
certifications generally require a showing that the carrier has adequate
financial, managerial and technical resources to offer the proposed services in
a manner consistent with the public interest.
In addition to obtaining certification, in each state, we must negotiate
terms of interconnection with the incumbent local exchange carrier before we can
begin providing switched services. See "Government Regulation of the
Telecommunication Services Business -- Interconnection with Local Exchange
Carrier Facilities." State public utility commissions are required to approve
interconnection agreements before they become effective and must arbitrate
disputes among the parties upon request. We have already entered into
interconnection agreements with Ameritech, which is now a part of SBC,
Cincinnati Bell Telephone and Verizon. We have also initiated the process of
negotiations with SBC and Verizon for additional interconnection agreements.
Regulatory changes could require renegotiation of relevant portions of existing
interconnection agreements, or require additional court and regulatory
proceedings.
We are not presently subject to price regulation based on costs or
earnings. Most states require competitive local exchange carriers to file
tariffs setting forth the terms, conditions and prices for intrastate services.
Some states permit tariffs to list a rate range or set prices on an individual
case basis. Other state requirements may include filing of periodic reports, the
payment of regulatory fees and surcharges and compliance with service standards
and consumer protection rules.
Several states provide incumbent local exchange carriers with flexibility
for their rates, special contracts (selective discounting) and tariffs,
particularly for services that are considered to be competitive. This pricing
flexibility increases the ability of the incumbent local exchange carrier to
compete with us and constrains the rates we may charge for our services. States
may grant incumbent local exchange carriers additional pricing flexibility. At
the same time, some incumbent local exchange carriers may request increases in
local exchange rates to offset revenue losses due to competition.
Some states require prior approvals or notification for certain transfers
of assets, customers or ownership of a competitive local exchange carrier and
for issuance of bonds, notes or other evidence of indebtedness or securities of
any nature. Delays in receiving required regulatory approvals may occur.
RECIPROCAL COMPENSATION
Reciprocal compensation is the compensation paid by one carrier to complete
local calls placed by its customers to customers on another local exchange
carrier's network. Because Internet service providers receive many more calls
than they make, we expect that we will receive significantly more reciprocal
compensation than we will pay. However, as a result of uncertainties in the
current regulatory environment and several trends in the telecommunications
business, which are discussed below, it is not clear by how much our revenues
from reciprocal compensation will increase over the next few years.
Some incumbent local exchange carriers have refused to pay reciprocal
compensation charges that they claim are the result of Internet service provider
traffic because they believe that this type of traffic is outside the scope of
existing interconnection agreements. On February 26, 1999, the FCC issued a
declaratory ruling and Notice of Proposed Rulemaking concerning Internet service
provider traffic. The FCC concluded in that ruling that Internet service
provider traffic is jurisdictionally mixed and largely interstate in nature, and
thus within the FCC's jurisdiction. However, the FCC also determined that there
was no federal rule that governed reciprocal compensation for Internet service
provider traffic at the time that the then-existing interconnection agreements
were negotiated and concluded that it should permit
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<PAGE> 93
states to determine whether reciprocal compensation should be paid for calls to
Internet service providers under existing interconnection agreements. The FCC
requested comment as to what reciprocal compensation rules should govern this
traffic upon expiration of existing interconnection agreements.
In light of the FCC's order, state commissions which have previously
addressed this issue and required reciprocal compensation to be paid for
Internet service provider traffic may reconsider and may modify their prior
rulings. Some recent state regulatory commission decisions regarding reciprocal
compensation calls placed to Internet service providers could result in lower
revenues for competitive local exchange carriers, including us, in those states.
The issue remains undecided in various other states. Several incumbent local
exchange carriers, including SBC and Verizon, are seeking to overturn prior
orders that they claim are inconsistent with the FCC's February 26, 1999 order.
The relief they seek includes repayment of reciprocal compensation amounts they
previously paid. The great majority of the state commissions that have
considered the issue since the FCC's February 26, 1999 order have rejected the
incumbent local exchange carriers' arguments and required them to pay reciprocal
compensation for Internet service provider-bound traffic. Only a small minority
of the state commissions that have considered the issue are not requiring
reciprocal compensation for this traffic, at least pending negotiations and a
further FCC decision. A few states are not requiring current payment, but are
requiring a true-up if necessary at the time of the FCC's future decision. In
addition, all of the federal courts that have reviewed this issue on the merits
have upheld state decisions requiring that reciprocal compensation be paid for
internet service provider-bound traffic.
On March 24, 2000, the U.S. Court of Appeals for the District of Columbia
Circuit vacated the FCC's declaratory ruling that Internet-bound calls,
including Internet service provider calls, are jurisdictionally interstate and
therefore not local calls for which reciprocal compensation is owed. The Court
remanded the proceeding to the FCC for a further review of the nature of these
calls for purposes of reciprocal compensation. CoreComm cannot predict the
impact of the Court's ruling on pending or future proceedings at this time. In
May 2000, the Illinois Commerce Commission, in an interconnection arbitration,
reaffirmed its prior holding that Internet service provider calls are local and
subject to payment of reciprocal compensation. However, the Illinois Commerce
Commission at the same time opened a general proceeding to examine the issues
surrounding the explosion of Internet traffic and its effect on the issue of
reciprocal compensation. The U.S. Congress also is considering several bills
that would limit the compensation paid for Internet traffic. A finding that
reciprocal compensation is not payable for Internet service provider traffic in
Ohio, Illinois or New York would have an adverse effect on our future revenues
and business strategy.
As our existing interconnection agreements expire and as we enter new
markets, we must negotiate new reciprocal compensation rates and traffic scope
with each incumbent carrier. We expect that rates for Internet service provider
reciprocal compensation will be lower under new interconnection agreements than
under our existing agreements. A reduction in rates payable for Internet service
provider reciprocal compensation could have an adverse effect on our future
revenues and business strategy.
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MANAGEMENT AND EXECUTIVE COMPENSATION
DIRECTORS, EXECUTIVE OFFICERS AND OTHER KEY EMPLOYEES
The following table provides information about our directors and executive
officers:
<TABLE>
<CAPTION>
NAME AGE TITLE
---- --- -----
<S> <C> <C>
George S. Blumenthal................. 56 Chairman of the Board of Directors
Barclay Knapp........................ 43 President, Chief Executive Officer, Chief Financial
Officer and Director
Patty J. Flynt....................... 49 Senior Vice President -- Chief Operating Officer;
President of Operating Company
Richard J. Lubasch................... 54 Senior Vice President -- General Counsel and Secretary
Gregg N. Gorelick.................... 41 Vice President -- Controller and Treasurer
Michael A. Peterson.................. 30 Vice President -- Corporate Development
Ted H. McCourtney.................... 62 Director
Del Mintz............................ 73 Director
Alan J. Patricof..................... 65 Director
Warren Potash........................ 69 Director
</TABLE>
The CoreComm Limited Certificate of Incorporation provides for a classified
board of directors consisting of three classes as nearly equal in number as
possible with the directors in each class serving staggered three year terms.
The Class I directors will be Alan J. Patricof and Warren Potash, the Class II
directors will be Ted H. McCourtney and Del Mintz and the Class III directors
will be George S. Blumenthal and Barclay Knapp. The terms of the Class I, Class
II and Class III Directors will expire in 2001, 2002 and 2003, respectively. At
each annual meeting of the stockholders, the successors to the class of
directors whose term expires will be held in the third year following their
election.
The following is a brief description of the present and past business
experience of each of the persons who serve as our directors, executive officers
and other key employees (who are not executive officers):
George S. Blumenthal has been our Chairman since March 1998. Mr. Blumenthal
was Chairman, Treasurer and a director of Cellular Communications of Puerto
Rico, Inc. from February 1992 until its sale and was Chief Executive Officer
from March 1994 until March 1998. In addition, Mr. Blumenthal is Chairman,
Treasurer and a director of NTL Incorporated. Mr. Blumenthal was also Chairman,
Treasurer and a director of Cellular Communications International from its
organization until April 1994. Mr. Blumenthal was also Chairman, Treasurer and a
director of Cellular Communications, Inc. from its founding in 1981 until its
merger in 1996 into a subsidiary of AirTouch Communications, Inc.
Barclay Knapp has been our President, Chief Executive Officer, Chief
Financial Officer and director since March 1998. Mr. Knapp was appointed
President of Cellular Communications of Puerto Rico in March 1994 and Chief
Executive Officer in March 1998, and remained in those positions until the sale
of Cellular Communications of Puerto Rico. Mr. Knapp has been a director of
Cellular Communications of Puerto Rico since February 1992 and was Chief
Financial Officer from that date to 1997. Mr. Knapp was Executive Vice
President, Chief Operating Officer and a director of Cellular Communications
International from July 1991 until June 1998. He is President, Chief Executive
Officer and a director of NTL. Mr. Knapp is also a director of Bredbandsbolaget,
a Swedish company in which NTL holds a 25% interest. Mr. Knapp was also
Executive Vice President, Chief Operating Officer, Chief Financial Officer and a
director of Cellular Communications until its acquisition.
Patty J. Flynt has been our Senior Vice President and Chief Operating
Officer since 1998 and was OCOM Corporation's President from 1996 until 1998.
Previously she served as Group Managing Director -- Information Systems for NTL
and Vice President of Information Systems for CCI. Prior to joining OCOM
Corporation in 1996, Ms. Flynt was a Vice President of New Par, a joint venture
of CCI and AirTouch Communications, Inc. from 1989 until 1996.
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<PAGE> 95
Richard J. Lubasch has been our Senior Vice President -- General Counsel
and Secretary since March 1998. Additionally, Mr. Lubasch was Cellular
Communications of Puerto Rico's Senior Vice President -- General Counsel and
Secretary from February 1992 until its sale. He was also the Senior Vice
President -- General Counsel, Secretary and Treasurer of Cellular Communications
International from July 1991 until its sale, and was Executive Vice
President -- General Counsel and Secretary of NTL since 1999 and was Senior Vice
President since its formation. Mr. Lubasch was Vice President -- General Counsel
and Secretary of Cellular Communications from July 1987 until its sale.
Gregg N. Gorelick has been our Vice President -- Controller and Treasurer
since March 1998. Mr. Gorelick was Cellular Communications of Puerto Rico's Vice
President -- Controller from February 1992 until its sale, held that position at
Cellular Communications International from July 1991 until its sale and has held
that position at NTL since its formation. From 1981 to 1986 he was employed by
Ernst & Whinney (now known as Ernst & Young LLP). Mr. Gorelick is a certified
public accountant and was Vice President -- Controller of Cellular
Communications from 1986 until its sale.
Michael A. Peterson has served as our Vice President -- Corporate
Development since June 2000 and, until that time, had served as our
Director -- Corporate Development since our inception. He has worked for us and
our related historical affiliates since 1996. He is also Director -- Corporate
Development at NTL. Prior to joining NTL, he was in the investment banking
division at Donaldson, Lufkin & Jenrette, specializing in the communications
industry.
Ted H. McCourtney has been our director since March 1998. Mr. McCourtney
was a General Partner of Venrock Associates, a venture capital investment
partnership, a position he held from 1970 until his retirement in June 2000. Mr.
McCourtney also has been a director of NTL since its formation and serves as a
director of Care Mark, RX, Inc., Visual Networks, Inc. and several privately
owned companies.
Del Mintz has been our director since March 1998. Mr. Mintz is President of
Cleveland Mobile Tele Trak, Inc., Cleveland Mobile Radio Sales, Inc. and Ohio
Mobile Tele Trak, Inc., companies providing telephone answering and radio
communications services in Cleveland and Columbus, respectively. Mr. Mintz has
held similar positions with the predecessors of these companies since 1967. Mr.
Mintz is president of several other companies, and was President and a principal
stockholder of Cleveland Mobile Cellular Telephone, Inc. before that company was
acquired through a merger with Cellular Communications, Inc.'s predecessor in
1985. Mr. Mintz was also a director of Cellular Communications International
from July 1991 until its sale, and was a director of Cellular Communications of
Puerto Rico until its sale. Additionally, Mr. Mintz has been a director of NTL
since its formation and is a director of several privately owned companies.
Alan J. Patricof has been our director since March 1998. Mr. Patricof is
Chairman of Patricof & Co. Ventures, Inc., a venture capital firm he founded in
1969. Mr. Patricof was a director of Cellular Communications International from
July 1991 until its sale in March 1999 and was a director of Cellular
Communications of Puerto Rico from February 1992 until its sale. Additionally,
Mr. Patricof has been a director of NTL since its formation and is a director of
other privately owned companies.
Warren Potash has been our director since March 1998. Mr. Potash retired in
1991 as President and Chief Executive Officer of the Radio Advertising Bureau, a
trade association, a position he held since 1989. Prior to that time, and
beginning in 1986, he was President of New Age Communications, Inc., a
communications consultancy firm. Until his retirement in 1986, Mr. Potash was a
Vice President of Capital Cities/ABC Broadcasting, Inc., a position he held
since 1970. Mr. Potash was also a director of Cellular Communications
International from July 1991 until its sale, and was a director of Cellular
Communications of Puerto Rico from February 1992 until its sale and of NTL since
its formation.
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<PAGE> 96
EXECUTIVE COMPENSATION
General
The following table discloses compensation received by our Chief Executive
Officer and our four other most highly paid executive officers for the year
ended December 31, 1999 and for the period from March 16, 1998 (the date of
inception) to December 31, 1998.
SUMMARY COMPENSATION TABLE*
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
---------------------------------- COMMON
OTHER ANNUAL STOCK ALL OTHER
BONUS COMPENSATION UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY($) ($) ($) OPTIONS(#)(3) ($)
--------------------------- ---- --------- ------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Barclay Knapp................ 1999 51,667 -- -- --
President and Chief
Executive 1998 21,200 -- -- 1,842,190
and Financial Officer
George S. Blumenthal(1)...... 1999 51,667 -- -- --
Chairman 1998 20,600 -- -- 1,842,188
Richard J. Lubasch........... 1999 39,583 -- -- 30,000
Senior Vice President-- 1998 17,300 -- -- 385,313
General Counsel and
Secretary
Patty J. Flynt............... 1999 206,250 100,435 -- 450,001
Senior Vice President and 1998 183,600 131,400 -- 67,500
Chief Operating Officer
Gregg N. Gorelick............ 1999 27,417 -- 562,775(2) 22,501
Vice President, Controller 1998 10,000 -- 57,900(2) 56,250
and Treasurer
</TABLE>
---------------
* NTL provides management, financial, legal and technical services to
CoreComm. Amounts charged to CoreComm consist of salaries and direct costs
allocated to the Company. In 1999 and 1998, NTL charged CoreComm $2,268,000
and $313,000, respectively. It is not practicable to determine the amounts
of these expenses that would have been incurred had CoreComm operated as an
unaffiliated entity. However, in the opinion of management of CoreComm, the
allocation method is reasonable. The named executives, except Ms. Flynt,
receive salaries from NTL and spend portions of their time providing
executive management to CoreComm.
(1) Mr. Blumenthal resigned as Chief Executive Officer in March 1998, and Mr.
Knapp was appointed Chief Executive Officer in March 1998.
(2) Other annual compensation consists of relocation expenses of $562,775 and
$57,900 for 1999 and 1998, respectively.
(3) 1998 option grants do not include an aggregate of 508,246 options issued to
the named executives as a result of an adjustment to pre-existing options in
CCPR as a consequence of the spin-off. 1999 option grants do not include an
aggregate of 4,110,207 options issued to the named executives as replacement
options upon the exercise or cancellation of their respective warrants or
options, in accordance with the plan under which these warrants or options
were issued.
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<PAGE> 97
OPTION GRANTS TABLE
The following table provides information on stock option grants during 1999
to the named executive officers.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
POTENTIAL ----------------------
REALIZABLE VALUE AT ASSUMED
% OF TOTAL ANNUAL RATE OF
OPTIONS STOCK PRICE
NUMBER OF GRANTED APPRECIATION FOR
SECURITIES TO EXERCISE OPTION TERM(**)
UNDERLYING EMPLOYEES OR BASE ----------------------
OPTIONS IN FISCAL PRICE EXPIRATION 5%($) 10%($)
NAME GRANTED(*) YEAR ($/SHARE) DATE $36.38 $57.92
---- ---------- ---------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Barclay Knapp................... --(1) -- -- -- -- --
George S. Blumenthal............ --(2) -- -- -- -- --
Richard J. Lubasch.............. 30,000(3) 0.43 22.33 09/13/09 421,367 1,067,821
Patty J. Flynt.................. 450,001 6.43 22.33 09/13/09 6,320,521 16,017,345
Gregg N. Gorelick............... 22,501(4) 0.32 22.33 09/13/09 316,039 800,901
</TABLE>
---------------
* All options were granted on September 14, 1999; 20% were exercisable upon
issuance, 20% became exercisable on January 1, 2000 and an additional 20%
will become exercisable on each of January 1, 2001, 2002 and 2003. Upon a
change of control of CoreComm, all unvested options become fully vested and
exercisable.
** The amounts shown in these columns are the potential realizable value of
options granted at assumed rates of stock price appreciation (5% and 10%)
specified by the SEC, and have not been discounted to reflect the present
value of such amounts. The assumed rates of stock price appreciation are not
intended to forecast the future appreciation of the Common Stock.
(1) Does not include 1,842,190 options issued as a result of the exercise or
cancellation of an aggregate of 1,842,190 warrants.
(2) Does not include 1,842,188 options issued as a result of the exercise or
cancellation of an aggregate of 1,842,188 warrants.
(3) Does not include 385,313 options issued as a result of the exercise or
cancellation of an aggregate of 385,313 warrants.
(4) Does not include 46,516 options issued as a result of the exercise or
cancellation of an aggregate of 46,516 options.
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<PAGE> 98
OPTION EXERCISES AND YEAR-END VALUE TABLE
The following table provides information on stock option exercises during
1999 by the named executive officers and the value at December 31, 1999 of
unexercised in-the-money options held by each of the named executive officers of
CoreComm.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR-END AND FISCAL YEAR-END OPTION
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS OPTIONS AT
SHARES AT FY-END(#) FY-END($)*
ACQUIRED ON VALUE EXERCISABLE(E)/ EXERCISABLE(E)/
NAME EXERCISE(#) REALIZED($) UNEXERCISABLE(U) UNEXERCISABLE(U)
---- ----------- ----------- ---------------- ----------------
<S> <C> <C> <C> <C>
Barclay Knapp.................. 1,426,301 25,743,732 605,777(E) 16,753,423(E)
1,473,750(U) 29,177,487(U)
George S. Blumenthal........... 1,380,104 25,733,733 431,581(E) 9,328,391(E)
1,473,750(U) 27,379,512(U)
Richard J. Lubasch............. 293,694 4,978,686 151,545(E) 4,401,974(E)
332,250(U) 6,824,977(U)
Patty J. Flynt................. -- -- 131,063(E) 3,015,673(E)
400,502(U) 7,574,943(U)
Gregg N. Gorelick.............. 46,516 606,103 100,210(E) 3,317,804(E)
98,704(U) 2,742,290(U)
</TABLE>
---------------
* Based on the closing price on the Nasdaq on December 31, 1999 of $39.58.
Option Plans
In 1998, our board of directors adopted the CoreComm Limited 1998 Stock
Option Plan and in 1999, our board of directors adopted the CoreComm Limited
1999 Stock Option Plan, reserving under these plans shares for issuance to
employees and directors.
The purpose of our stock option plans is to encourage stock ownership by
its employees and non-employee directors, and the employees and non-employee
directors of our divisions, subsidiary corporations and other affiliates, so as
to encourage our employees to continue being employed by us and to put forth
maximum efforts for the success of our business. Under our stock option plans,
grants may be made of options to acquire shares of our common stock. The options
may be "incentive stock options" within the meaning of Section 422 of the
Internal Revenue Code. The terms of options granted under our stock option
plans, including provisions regarding vesting, exercisability, exercise price
and duration, are generally set by the compensation committee of our board of
directors. In general, options under our plans are 20% vested at grant and vest
20% each January 1 after they are granted, until they are fully vested.
In January 1999, CoreComm, Inc., one of our wholly-owned subsidiaries,
adopted a stock option plan. Options granted under that plan were not to be
become exercisable unless and until there was either a registered public
offering of CoreComm, Inc.'s common stock or a spin-off of CoreComm, Inc.
However, under the terms of the options granted under that plan, we reserved the
right to cancel the plan and issue new options in CoreComm Limited. In March
2000, the compensation and option committee of our board of directors approved
the cancellation of the CoreComm, Inc. plan and the issuance of options in
CoreComm Limited to eligible employees of CoreComm, which resulted in the
issuance of options to purchase approximately 2.7 million shares of CoreComm
Limited common stock. The strike prices of the new grants are approximately 30%
of the fair market value of our common stock on the date of the board approval,
$14.55. Eligibility for receiving the new grants was determined by, among other
things, continued employment with CoreComm.
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<PAGE> 99
In connection with our acquisition of Voyager in September 2000, our board
adopted the CoreComm Limited 2000 Special Voyager Stock Option Plan. Under the
Voyager stock option plan, each option to acquire a share of Voyager common
stock that was outstanding at the time of the Voyager merger was converted into
an option to acquire 0.733 of a share of our common stock. The maximum number of
shares that can be issued under the Voyager stock option plan is 2,311,259. Each
option granted under the Voyager stock option plan is fully vested and currently
exercisable. The options may be "incentive stock options" under Section 422 of
the Internal Revenue Code.
Also in September, 2000, our board adopted the CoreComm Limited 2000
Special ATX Stock Option Plan. The purpose of the ATX stock option plan is to
grant options as well as a small number of shares to some of our employees.
These options and shares are intended to fulfill an obligation to the holders of
"Phantom Units" granted to employees under a plan formerly in place at our
predecessor ATX Telecommunications Services, Inc. The maximum number of shares
issuable under this plan is 4,500,000. Options are fully vested when granted and
the strike price of these options is approximately 30% of the fair market value
of our common stock on the date of grant.
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<PAGE> 100
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table provides, as of October 16, 2000, information regarding
the beneficial ownership of our common stock by (a) each of our executive
officers and directors, (b) all those directors and executive officers as a
group and (c) each person known by us to be the beneficial owner of more than 5%
of any class of our voting securities as calculated in accordance with Rule
13d-3 of the Securities Exchange Act of 1934.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP
-----------------------------------------------------
PRESENTLY
EXERCISABLE
OPTIONS,
WARRANTS AND
EXECUTIVE OFFICERS, DIRECTORS COMPANY CONVERTIBLE
AND PRINCIPAL STOCKHOLDERS(1) STOCK NOTES(2) TOTAL PERCENT(3)
---------------------------------- --------- ------------ ---------- ----------
<S> <C> <C> <C> <C>
J. Barclay Knapp(4)............... 1,446,997 985,167 2,432,164 3.39%
George S. Blumenthal(5)........... 1,763,186 800,019 2,563,205 3.59%
Richard J. Lubasch(6)............. 301,081 264,607 565,688 *
Patty J. Flynt.................... 224,695 177,421 402,116 *
Gregg Gorelick.................... 125,639 172,141 297,780 *
Ted H. McCourtney(7).............. 142,485 110,642 253,127 *
Del Mintz(8)...................... 1,934,288 119,155 2,053,443 2.90%
Alan J. Patricof(9)............... 175,201 93,598 268,799 *
Michael A. Peterson............... 76,332 112,753 189,085 *
Warren Potash(10)................. 70,464 117,115 187,579 *
All directors and officers as a
group (10 in number)............ 6,260,388 2,952,618 9,212,986 12.51%
Total................... 16.68%
Michael Karp(11).................. 6,870,071 5,371,650 12,241,721 16.09%
c/o University City Housing
Company
1062 East Lancaster Avenue, Ste.
30B
Rosemont, PA 19010
Media/Communications Partners II
Limited Partnership(12)......... 8,449,403 8,449,403 11.95%
Media/Communications Investors
Limited Partnership(12)......... 261,721 261,721 0.37%
c/o Great Hill Partners, LLC
One Liberty Square
Boston, MA 02109
Ronald Baron(13).................. 6,090,177 740,052 6,830,229 9.56%
Baron Capital Group, Inc.(13).....
Bamco, Inc.(13)...................
Baron Capital Management,
Inc.(13)........................
Baron Asset Fund(13)..............
767 Fifth Avenue
New York, NY 10153
Prime 66 Partners L.P.(14)........ 3,923,000 0 3,923,000 5.55%
Composite 66, L.P. ............... 1,097,050 0 1,097,050 1.55%
H&S Partners I.................... 20,000 73,019 93,019 0.13%
201 Main Street, Suite 3200
Fort Worth, Texas 76102
</TABLE>
---------------
* Represents less than one percent
(1) Unless otherwise noted, the business address of each person is 110 East
59th Street, New York, NY 10022.
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(2) Includes shares of common stock purchased upon the exercise of options
which are exercisable or become so in the next 60 days (referred to as
presently exercisable options), warrants and shares of Common Stock
purchased upon the conversion of the convertible notes.
(3) Includes common stock, presently exercisable options, warrants and
convertible notes.
(4) Includes $300,000 of the convertible notes, convertible into 10,952 shares
of common stock.
(5) Includes 4,455 shares of common stock owned by trusts for the benefit of
Mr. Blumenthal's children. An additional 6,750 shares of common stock are
owned by Mr. Blumenthal's wife, as to which shares Mr. Blumenthal disclaims
beneficial ownership. Also includes 584,840 shares of common stock and
168,100 options held by grantor retained annuity trusts.
(6) Includes 234 shares of common stock owned by Mr. Lubasch as custodian for
his child, as to which shares Mr. Lubasch disclaims beneficial ownership.
(7) Includes 3,212 shares of common stock held by trusts for the benefit of Mr.
McCourtney's children, as to which shares Mr. McCourtney disclaims
beneficial ownership.
(8) Includes 57 shares of common stock owned by Mr. Mintz's wife, as to which
shares Mr. Mintz disclaims beneficial ownership. Also includes $700,000 of
the convertible notes, convertible into 25,557 shares of common stock.
(9) Includes 2,395 shares of common stock owned by Mr. Patricof's wife, as to
which shares Mr. Patricof disclaims beneficial ownership.
(10) Includes $250,000 of the convertible notes, convertible into 9,126 shares
of common stock.
(11) Based upon Schedule 13-G, dated October 6, 2000, fled by Michael Karp with
the SEC. Mr. Karp disclaims beneficial ownership of 495,933 shares of
common stock and 10,000 shares of Series B preferred stock, convertible
into 311,400 shares of common stock, owned by The Florence Karp Trust.
(12) Based upon Form 3s, filed with the SEC on October 20, 2000, by
Media/Communications Partners II Limited Partnership, Media/Communications
Investors Limited Partnership and MCP 11 Limited Partnership.
(13) Based upon Schedule 13-G (Amendment No. 1), dated February 11, 2000, filed
by Ronald Baron, Baron Capital Group, Inc., Bamco, Inc., Baron Capital
Management, Inc. and Baron Asset Fund with the SEC and $9,998,774 of the
convertible notes, convertible into 365,052 shares of common stock.
(14) Based solely upon Schedule 13-G (Amendment No. 1), dated May 24, 2000,
filed by Prime 66 Partners, L.P., Composite 66, L.P. and H&S Partners. Also
includes 73,019 shares obtainable on conversion of the convertible notes.
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SELLING SECURITYHOLDERS
CONVERTIBLE NOTES
The following table provides, as of October 30, 2000, the respective
principal amount of convertible notes beneficially owned and offered by each
selling securityholder and the number of shares of common stock underlying those
convertible notes. This information has been obtained from the selling
securityholders. This prospectus relates to the resale of up to $175,000,000
aggregate principal amount of convertible notes and shares of common stock
issuable upon conversion of the convertible notes. This table may be
supplemented from time to time to add holders of up to an additional $3,923,000
aggregate principal amount of convertible notes and shares of common stock
issuable upon conversion of such convertible notes.
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT OF UNDERLYING SHARES OF
CONVERTIBLE NOTES COMMON STOCK
BENEFICIALLY OWNED BENEFICIALLY OWNED AND
SELLING SECURITYHOLDERS AND OFFERED OFFERED(1)
----------------------- ------------------- ----------------------
<S> <C> <C>
Lipper Convertibles, L.P. ................................ $8,250,000 301,205
Lipper Convertibles Series II, L.P........................ $2,000,000 73,019
</TABLE>
---------------
(1) The number of shares of common stock underlying the convertible notes is
calculated based on a conversion price of $27.39 per share. One preferred
stock purchase right is attached to each share of common stock. Additional
shares of common stock and associated rights may be issued upon conversion
because of downward adjustments in the conversion price in accordance with
the terms of the convertible notes.
SERIES B PREFERRED STOCK AND COMMON STOCK
The following table provides, as of September 30, 2000, the respective
number of shares of Series B preferred stock beneficially owned and offered by
each selling securityholder, the number of shares of common stock issuable upon
conversion of those shares of Series B preferred stock and the number of other
shares of common stock beneficially owned by that securityholder. This
information has been provided to us by the selling securityholders.
<TABLE>
<CAPTION>
SHARES OF COMMON
SHARES OF SERIES B STOCK UNDERLYING THE OTHER SHARES OF
PREFERRED STOCK SERIES B PREFERRED COMMON STOCK
BENEFICIALLY OWNED STOCK BENEFICIALLY BENEFICIALLY OWNED
SELLING SECURITYHOLDER AND OFFERED OWNED AND OFFERED(1) AND OFFERED
---------------------- ------------------ -------------------- ------------------
<S> <C> <C> <C>
Michael Karp............................... 172,500(2)(3) 5,372,158(4)(3) 6,870,071(5)(3)
Debra Buruchian............................ 38,750 1,206,789 1,921,742
Thomas Gravina............................. 38,750 1,206,789 1,921,742
The Florence Karp Trust.................... 10,000 311,429 495,933
</TABLE>
---------------
(1) The number of shares of common stock underlying the shares of Series B
preferred stock is calculated based on a minimum conversion price of $32.11
per share. One preferred stock purchase right is attached to each share of
common stock. Additional shares of common stock and associated rights may be
issued upon conversion of the Series B preferred stock because of downward
adjustments in that conversion price in accordance with the terms of the
Series B preferred stock. Additional shares of common stock and associated
rights may be issued as dividends on the Series B preferred stock.
(2) Includes 10,000 shares of Series B preferred stock held by The Florence Karp
Trust.
(3) Mr. Karp disclaims beneficial ownership of all securities held by The
Florence Karp Trust.
(4) Includes 311,429 shares of common stock underlying the 10,000 the Series B
preferred stock held by The Florence Karp Trust.
(5) Includes 495,933 shares of common stock held by The Florence Karp Trust.
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<PAGE> 103
Generally, only selling securityholders identified in the foregoing tables
who beneficially own the offered securities set forth opposite their respective
names may sell offered securities under the registration statement, of which
this prospectus forms a part. We may from time to time include additional
selling securityholders in supplements to this prospectus.
Except as described below, none of the selling securityholders listed above
has, or within the past three years has had, any position, office or other
material relationship with us or any of our predecessors or affiliates. This
prospectus relates to the offer on a delayed or continuous basis as provided in
Rule 415 under the Securities Act of all of the securities listed in the tables
above. The selling securityholders may sell all, none or a part of the
securities listed above. Accordingly, no estimate can be given as to the amount
or percentage of the securities that will be held by the selling securityholders
after any given sale. In addition, the selling securityholders identified above
may have sold, transferred or otherwise disposed of all or a portion of such
securities since the date of this prospectus in transactions exempt from the
registration requirements of the Securities Act.
Del Mintz and Warren Potash have been our directors since March 1998. They
were also directors of CCPR from February 1992 until its sale in 1999. Bill W.
Mintz is the brother of Del Mintz. Mark Mintz and Gary L. Mintz are sons of Del
Mintz. Donaldson, Lufkin & Jenrette Securities Corporation was an initial
purchaser of the initial offering of the convertible notes, and has informed us
that it expects to make a market in the convertible notes. Please refer to the
section entitled "Risk Factors -- You may find it difficult to sell your
convertible notes." Baron Capital Partners, L.P., Baron Growth Fund Series of
Baron Asset Fund and Baron Small Cap Series of Baron Asset Fund are affiliates
of Ronald Baron, Baron Capital Group, Inc., Bamco, Inc., Baron Capital
Management, Inc. and Baron Asset Fund, which beneficially own 14.86% of our
common stock.
ATX changed its name to "CoreComm Limited" on September 29, 2000 in
connection with the closing of the merger transaction with our predecessor,
CoreComm Limited, a Bermuda corporation. Prior to the merger, Michael Karp was
the Chief Executive Officer, Chairman and Secretary of ATX and held 65.0% of its
outstanding capital stock. Prior to the merger, Debra Buruchian and Thomas
Gravina were each a Co-President, Co-Chief Operating Officer, Assistant
Secretary and Director of ATX, and each held 15.5% of ATX's outstanding capital
stock. The Florence Karp Trust is for the benefit of Michael Karp's children
and, prior to the merger, held 4.0% of ATX's outstanding capital stock. Mr. Karp
has no power to direct the voting of the shares held by The Florence Karp Trust
and disclaims beneficial ownership of those shares.
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<PAGE> 104
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CONFLICTS OF INTEREST
Many of our officers and directors are also officers and directors of other
companies in our industry and some are employed by our affiliates. Their duties
to these companies may require significant amounts of their attention and may
also present conflicts of interest, either of which may impede their ability to
make decisions for us. Please refer to the section entitled "Risk Factors."
SERVICES PROVIDED BY NTL INCORPORATED
NTL, an historical affiliate of ours shares some resources with us, such as
office space and employees. NTL provides us and our subsidiaries with
management, financial, legal and technical services, access to office space and
equipment and use of supplies. Amounts charged to us by NTL consist of salaries
and direct costs allocated to us 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 our board of directors and the board of directors
of NTL). It is not practicable to determine the amounts of these expenses that
would be incurred if we were to operate as an unaffiliated entity. In our
opinion, this allocation method is reasonable. For the six months ended June 30,
2000 and for year ended December 31, 1999 and for the period from April 1, 1998
(date operations commenced) to December 31, 1998, NTL charged us $649,000,
$2,330,000 and $313,000, respectively.
In 1998, the percentage of NTL's non-allocated overhead that was charged to
us was 30 percent. This percentage increased to 50% because two other companies
that had been sharing these expenses have been sold.
We provide NTL with access to office space and equipment and the use of
supplies. In the fourth quarter of 1999, we began charging NTL a percentage of
our office rent and supplies expense. It is not practicable to determine the
amounts of these expenses that would have been incurred had we operated as an
unaffiliated entity. In our opinion, this allocation method is reasonable. For
the six months ended June 30, 2000, and the year ended December 31, 1999, we
charged NTL $123,000 and $62,000, respectively, which reduced corporate
expenses.
OTHER SERVICES
Through our subsidiary, CoreComm Newco, Inc., we currently provide billing
and software development services to subsidiaries of NTL, and historically
provided such services to Cellular Communications of Puerto Rico, Inc., the
company from which we were spun-off in 1998. We believe that these transactions
are priced on an arm's length basis. General and administrative expenses were
reduced by $468,000, $800,000, $275,000, $138,000 and $217,000 for the six
months ended June 30, 2000, the year ended December 31, 1999, the period from
April 1, 1998 (date operations commenced) to December 31, 1998, the period from
January 1, 1998 to May 31, 1998, and the year ended December 31, 1997,
respectively, as a result of these charges.
PROPERTIES AND FACILITIES OF THE BUSINESS FORMERLY OPERATED BY ATX
The former ATX headquarters and executive offices and primary technical
operations facility are leased from entities controlled by Michael Karp, the
former Chief Executive Officer and principal stockholder of ATX. We currently
pay approximately $1.0 million per year in rent for these facilities and
approximately $450,000 per year in rent for the primary technical operations
facility. The lease for the former primary technical operations facility
currently expires in December 2002. In connection with the ATX merger, these
leases have been modified to reflect provisions found in arm's length
negotiations for such arrangements, including, without limitation:
- the landlord is required to give consent to a reasonable sublease, and is
entitled to all profits from that sublease;
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<PAGE> 105
- there is a standard recapture right;
- there is a standard non-disturbance clause;
- we are no longer obligated to share facilities, employees and/or supplies
with the landlord;
- provisions regarding the purchase of telecommunications services by
landlord or other tenants from ATX/CoreComm have been eliminated; and
- arrangements granting the landlord a percentage of ATX's/CoreComm's
revenues have been eliminated.
ATX 401(k) PLAN AND HEALTH BENEFIT PLANS
Prior to July 1, 2000 ATX's 401(k) plan and ATX's health benefit plans were
joint plans with University City Housing. As of July 1, 2000, ATX's 401(k) plan
was separated so that only ATX's employees participate in ATX's 401(k) plan.
ATX's health benefit plans are joint plans with University City Housing. It is
expected that these health benefits plans will be terminated in February 2001.
ATX LIABILITY INSURANCE PLANS
ATX's liability insurance plans were held jointly with University City
Housing. In connection with the ATX merger, each of ATX's liability insurance
plans were amended so that University City Housing is not be entitled to
participate in these plans.
ATX LETTERS OF CREDIT
Michael Karp has guaranteed or secured letters of credit issued by
financial institutions on behalf of ATX. As of March 2000, the aggregate amount
of these letters of credit is approximately $667,000. In connection with the ATX
merger, we replaced the letters of credit and relieved Mr. Karp of liability
under these letters of credit.
LOANS BY ATX TO THOMAS GRAVINA AND DEBRA BURUCHIAN
During 1999 and 2000, ATX's predecessor, two limited partnerships, made
loans to Thomas Gravina, the current Co-President and a stockholder of ATX, and
Debra Buruchian, the other current Co-President and also a stockholder of ATX,
in the aggregate principle amounts of $2,132,842.32 each. These loans have been
satisfied.
INDEBTEDNESS OF ATX TO MICHAEL KARP
The predecessor entities of ATX were indebted to Michael Karp in the
aggregate principle amount of $3.6 million. Approximately $1.45 million of this
amount was used to fund operating expenses of ATX. The remaining $2.15 million
was used to fund acquisitions of property, plant and equipment by ATX. These
loans have been retired.
PROVISION OF SERVICES TO ATX BY UNIVERSITY CITY HOUSING
University City Housing, an entity controlled by Michael Karp, provided
general accounting, cash management, tax return preparation, payroll and human
resources services to ATX. ATX paid UCH approximately 0.38% of its gross annual
receipts for providing these services. For the year ended December 31, 1999, ATX
paid UCH $501,000 for providing these services. For the six months ended June
30, 2000, ATX paid UCH $302,000 for these services. In connection with the ATX
merger, we have entered into a transition services agreement with UCH under
which UCH will continue to provide these services to us for a limited period of
time.
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DESCRIPTION OF CONVERTIBLE NOTES
GENERAL
The convertible notes were issued under an indenture, dated as of October
6, 1999, between our predecessor, CoreComm Limited, a Bermuda corporation, and
The Chase Manhattan Bank, as trustee. In connection with the merger among
CoreComm Bermuda, ATX and Voyager, we assumed all of CoreComm Bermuda's
obligations under the indenture pursuant to a supplemental indenture, dated
September 29, 2000, between us and The Chase Manhattan Bank, as trustee. The
following description is a summary of the material provisions of the indenture.
It does not restate this agreement in its entirety. We urge you to read the
indenture and registration rights agreement because they, and not this
description, define your rights as holders of these convertible notes. A copy of
the indenture is filed as an exhibit to the registration statement of which this
prospectus forms a part.
You can find the definitions of terms used in this description under the
subheading "Definitions."
The convertible notes are unsecured obligations, subordinated in right of
payment to all our existing and future Senior Debt as described under
"--Subordination of Convertible Notes" and convertible into our common stock as
described under "--Conversion." The indenture does not contain any financial
covenants or restrictions on the payment of dividends, the incurrence of Senior
Debt or issuance or repurchase of our securities. The indenture contains no
covenants or other provisions to afford protection to holders of the convertible
notes in the event of a highly leveraged transaction by us except to the extent
described under "--Repurchase at the Option of Holders." The convertible notes
are not guaranteed by any of our subsidiaries.
We conduct all of our operations through our subsidiaries. We depend upon
the cash flow of our subsidiaries to meet our obligations, including our
obligations under the convertible notes. As a result, the convertible notes are
effectively subordinated to all existing and future indebtedness and other
liabilities and commitments of our subsidiaries with respect to the cash flow
and assets of those subsidiaries.
PRINCIPAL, MATURITY AND INTEREST
The convertible notes are limited to $175,000,000 aggregate principal
amount. The convertible notes mature on October 1, 2006. Interest on the
convertible notes accrues at a rate of 6% per annum from the date of original
issuance, payable semiannually on April 1 and October 1, commencing on April 1,
2000. We will make each interest payment to the holders of record of the
convertible notes on the immediately preceding March 15 and September 15.
Interest is computed on the basis of a 360-day year comprised of twelve 30-day
months.
We are required to pay special interest on the convertible notes under
various circumstances, all as further described under the caption "Registration
Rights." All references in this section to interest on the convertible notes
include any special interest that may be payable and all references to a payment
of principal include any premium that may be payable.
The convertible notes are payable both as to principal and interest on
presentation of the convertible notes if in certificated form at the offices or
agencies we maintain for such purpose within the City and State of New York or,
at our option, payment of interest may be made by check mailed to the holders of
the convertible notes at their respective addresses set forth in the register of
holders of convertible notes or, if a holder who holds an aggregate principal
amount of at least $5.0 million of convertible notes so requests, by wire
transfer of immediately available funds to an account previously specified in
writing by such holder to us and the trustee. Until otherwise designated by us,
our office or agency in New York, will be the offices of the trustee maintained
for such purpose. The convertible notes are issued in registered form, without
coupons, and in denominations of $1,000 and integral multiples of $1,000.
CONVERSION
The holder of any convertible note has the right, exercisable at any time
after 90 days following the date of original issuance of the convertible note
and prior to its maturity, to convert the principal amount of the convertible
note (or any portion of it that is an integral multiple of $1,000) into shares
of our
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common stock at $27.39 (originally $41.09), subject to adjustment as described
below, which we refer to as the "Conversion Price," except that if a convertible
note is called for redemption, the conversion right will terminate at the close
of business on the business day immediately preceding the date fixed for
redemption. Upon conversion, no adjustment or payment will be made for interest,
but if any holder surrenders a convertible note for conversion after the close
of business on the record date for the payment of an installment of interest and
prior to the opening of business on the next interest payment date, then,
notwithstanding conversion, the interest payable on the interest payment date
will be paid to the registered holder of the convertible note on the record
date. In that event, convertible notes, when surrendered for conversion, need
not be accompanied by payment of an amount equal to the interest payable on the
interest payment on the portion converted. No fractional shares will be issued
upon conversion but a cash adjustment will be made for any fractional interest.
The Conversion Price is subject to adjustment upon the occurrence of
certain events, including:
(1) the issuance of shares of common stock as a dividend or distribution on
the common stock;
(2) the subdivision or combination of the outstanding common stock;
(3) the issuance to substantially all holders of common stock of rights or
warrants to subscribe for or purchase common stock (or securities
convertible into common stock) at a price per share less than the then
current market price per share, as defined;
(4) the distribution of shares of our capital stock (other than common
stock), evidences of indebtedness or other assets (excluding dividends
in cash, except as described in clause (5) below) to all holders of
common stock;
(5) the distribution, by dividend or otherwise, of cash to all holders of
common stock in an aggregate amount that, together with the aggregate
of any other distributions of cash that did not trigger a Conversion
Price adjustment to all holders of our common stock within the 12
months preceding the date fixed for determining the stockholders
entitled to such distribution and all Excess Payments in respect of
each tender offer or other negotiated transaction by us or any of our
Subsidiaries for common stock concluded within the preceding 12 months
not triggering a conversion price adjustment, exceeds 15% of the
product of the current market price per share (determined as set forth
below) on the date fixed for the determination of stockholders entitled
to receive such distribution times the number of shares of common stock
outstanding on such date;
(6) payment of an Excess Payment in respect of a tender offer or other
negotiated transaction by us or any of our subsidiaries for common
stock, if the aggregate amount if such Excess Payment, together with
the aggregate amount of cash distributions made within the preceding 12
months not triggering a conversion price adjustment and all Excess
Payments in respect of each tender offer or other negotiated
transaction by us or any of our subsidiaries for common stock concluded
within the preceding 12 months not triggering a conversion price
adjustment, exceeds 15% of the product of the current market price per
share on the expiration of the tender offer or the consummation of the
other negotiated transaction, as the case may be, times the number of
shares of common stock outstanding on that date; and
(7) the distribution to substantially all holders of common stock of rights
or warrants to subscribe for securities (other than those referred to
in clause (3) above). In the event of a distribution to substantially
all holders of common stock of rights to subscribe for additional
shares of our capital stock (other than those referred to in clause (3)
above), we may, instead of making any adjustment in the Conversion
Price, make proper provision so that each holder of a convertible note
who converts the convertible note after the record date for the
distribution and prior to the expiration or redemption of the rights
will be entitled to receive upon that conversion, in addition to shares
of common stock, an appropriate number of rights. No adjustment of the
Conversion Price will be made until cumulative adjustments amount to
one percent or more of the Conversion Price as last adjusted.
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If we reclassify or change our outstanding common stock, or consolidate
with or merge into or transfer or lease all or substantially all of our assets
to any person, or we are a party to a merger that reclassifies or changes our
outstanding common stock, the convertible notes will become convertible into the
kind and amount of securities, cash or other assets which the holders of the
convertible notes would have owned immediately after the transaction if the
holders had converted the convertible notes immediately before the effective
date of the transaction.
The indenture also provides that if rights, warrants or options expire
unexercised the Conversion Price shall be readjusted to take into account the
actual number of warrants, rights or options which were exercised.
In the indenture, the "current market price" per share of common stock on
any date is deemed to be the average of the daily market prices for the shorter
of (1) 10 consecutive business days ending on the last full trading day on the
exchange or market referred to in determining the Daily Market Prices prior to
the time of determination (as defined in the indenture) or (2) the period
commencing on the date next succeeding the first public announcement of the
issuance of rights or warrants or distribution through the last full trading day
prior to the time of determination.
We are permitted to make such reductions in the Conversion Price as we, in
our discretion, determine to be advisable in order that any stock dividend,
subdivision of shares, distribution or rights to purchase stock or securities or
distribution of securities convertible into or exchangeable for stock made by us
to our stockholders will not be taxable to the recipients.
SUBORDINATION OF CONVERTIBLE NOTES
The convertible notes are subordinate in right of payment to all of our
existing and future Senior Debt. The indenture does not restrict the amount of
Senior Debt or other Indebtedness of us or any Subsidiary of us. As of June 30,
2000, on a pro forma basis, after giving effect to the financing transactions we
completed in connection with the acquisitions of ATX and Voyager, the
convertible notes would have been subordinated to $75.0 million of outstanding
indebtedness under our $150.0 million senior secured credit facility and
approximately $108.7 million of senior unsecured notes.
As of June 30, 2000, on a pro forma basis, after giving effect to the
financing transactions we completed in connection with the acquisitions of ATX
and Voyager, the convertible notes would have been effectively subordinated to
$33.3 million of indebtedness, and $121.1 million of other liabilities of our
subsidiaries. In addition, our subsidiaries have guaranteed our repayment
obligations under the $150.0 million senior secured credit facility.
The payment of the principal of, interest on or any other amounts due on
the convertible notes is subordinated in right of payment to the prior payment
in full of all our Senior Debt. No payment on account of principal of,
redemption of, interest on or any other amounts due on the convertible notes,
including, without limitation, any payments on the Change of Control Offer, and
no redemption, purchase or other acquisition of the convertible notes may be
made unless
(1) full payment of amounts then due on all Senior Debt have been made or
duly provided for pursuant to the terms of the instrument governing
that Senior Debt, and
(2) at the time for, or immediately after giving effect to, any such
payment, redemption, purchase or other acquisition, there does not
exist under any Senior Debt or any agreement under which any Senior
Debt has been issued, any default that has not been cured or waived and
which has resulted in the full amount of the Senior Debt being declared
due and payable. In addition, the indenture provides that if any of the
holders of any issue of Senior Debt notify (the "Payment Blockage
Notice") us and the trustee that a default has occurred giving the
holders of the Senior Debt the right to accelerate the maturity of the
convertible notes, no payment on account of principal, redemption,
interest, special interest, if any, or any other amounts due on the
convertible notes and no purchase, redemption or other acquisition of
the convertible notes will
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<PAGE> 109
be made for the period (the "Payment Blockage Period") commencing on
the date notice is received and ending on the earlier of:
(A) the date on which the default was cured or waived, or
(B) 180 days from the date notice is received. Notwithstanding the
foregoing, only one Payment Blockage Notice with respect to the
same event of default or any other events of default existing and
unknown to the person giving notice at the time of notice on the
same issue of Senior Debt may be given during any period of 360
consecutive days unless the event of default or other events of
default have been cured or waived for a period of not less than 90
consecutive days. No new Payment Blockage Period may be commenced
by the holders of Senior Debt during any period of 360 consecutive
days unless all events of default which triggered the preceding
Payment Blockage Period have been cured or waived.
Upon any distribution of its assets in connection with any dissolution,
winding-up, liquidation or reorganization of us or acceleration of the principal
amount due on the convertible notes because of any Event of Default, all Senior
Debt must be paid in full before the holders of the convertible notes are
entitled to any payments whatsoever.
As a result of these subordination provisions, in the event of our
insolvency, holders of the convertible notes may recover ratably less than our
general creditors.
If the payment of the convertible notes is accelerated because of an Event
of Default, we or the trustee shall promptly notify the holders of Senior Debt
or the trustee(s) for the Senior Debt of the acceleration. We may not pay the
convertible notes until five days after the holders or trustee(s) of Senior Debt
receive notice of the acceleration and, after which we may pay the convertible
notes only if the subordination provisions of the indenture otherwise permit
payment at that time.
In the event that notwithstanding anything to the contrary contained in
this section, the trustee or any holder of convertible notes receives any
payment or distribution of our assets of any kind in contravention of any of the
terms of the indenture, whether in cash, property or securities, including,
without limitation by way of set-off or otherwise, in respect of the convertible
notes before all Senior Debt is paid in full, then the payment or distribution
will be held by the recipient in trust for the benefit of holders of Senior
Debt, and will be immediately paid over or delivered to the holders of Senior
Debt or their representative or representatives to the extent necessary to make
payment in full of all Senior Debt remaining unpaid, after giving effect to any
concurrent payment or distribution, or provision therefor, to or for the holder
of Senior Debt.
The convertible notes are our exclusive obligations. Since our operations
are conducted through our Subsidiaries, our cash flow and our consequent ability
to service debt, including the convertible notes, depends upon the earnings of
our Subsidiaries and the distribution of those earnings to, or under loans or
other payments of funds by those Subsidiaries to, us. The payment of dividends
and the making of loans and advances to us by our Subsidiaries may be subject to
statutory or contractual restrictions, depend upon the earnings of those
Subsidiaries and are subject to various business considerations.
Our right to receive assets of any of our Subsidiaries upon their
liquidation or reorganization (and the consequent right of the holders of the
convertible notes to participate in those assets) is effectively subordinated to
the claims of that Subsidiary's creditors (including trade creditors), except to
the extent that we are recognized as a creditor of that Subsidiary, in which
case our claims would still be subordinate to any security interests in the
assets of that Subsidiary and any indebtedness of that Subsidiary senior to that
held by us.
The indenture does not limit the amount of additional indebtedness,
including Senior Debt, which we can create, incur, assume or guarantee, nor will
the indenture limit the amount of indebtedness and other liabilities which any
Subsidiary can create, incur, assume or guarantee.
OPTIONAL REDEMPTION
Except as set forth under "--Optional Tax Redemption," the convertible
notes are not redeemable at our option prior to October 1, 2002. After that
date, the convertible notes are subject to redemption at our
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option, in whole or in part, after not less than 30 nor more than 60 days'
notice, at the redemption prices set forth below, expressed as percentages of
principal amount plus accrued and unpaid interest on those amounts, in each
case, to the applicable redemption date, if redeemed during the twelve-month
period beginning on October 1 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2002...................................................... 103.429%
2003...................................................... 102.571%
2004...................................................... 101.714%
2005...................................................... 100.857%
2006...................................................... 100.000%
</TABLE>
In each case of a redemption of any convertible notes referred to under
"-- Optional Tax Redemption," redemption of the convertible notes will be made
at their principal amount together with accrued and unpaid interest and special
interest, if any, to the applicable redemption date.
OPTIONAL TAX REDEMPTION
The provisions described in this section "Optional Tax Redemption" will
only apply should we ever cease to be organized under the laws of any state of
the United States.
The convertible notes may be redeemed at our option, in whole but not in
part, after not less than 30 nor more than 60 days' prior notice, at any time at
a redemption price equal to their principal amount together with accrued and
unpaid interest to the date fixed for redemption if there has occurred any
change in or amendment to the laws (or any regulations or official rulings) of
any Other Relevant Jurisdiction (as defined below), or any change in or
amendment to the official application or interpretation of those laws,
regulations or rulings (a "Change in Tax Law"), which become effective after the
Issuance Date, as a result of which we are or would be required on the next
succeeding Interest Payment Date to pay Additional Amounts with respect to the
convertible notes with respect to withholding taxes imposed by any Other
Relevant Jurisdiction, (or any political subdivision or taxing authority thereof
or therein) (a "Withholding Tax") and the Withholding Tax is imposed at a rate
that exceeds the rate (if any) at which Withholding Tax was imposed on the
Issuance Date; provided, however, that
(1) this paragraph does not apply to the extent that, at the Issuance Date
it was known or would have been known had professional advice of a
nationally recognized accounting firm in any Other Relevant
Jurisdiction, as the case may be, been sought, that a Change in Tax Law
in any Other Relevant Jurisdiction, was to occur after the Issuance
Date;
(2) no notice of redemption may be given earlier than 90 days prior to the
earliest date on which we would be obliged to pay the Additional
Amounts were a payment in respect of the convertible notes then due;
(3) at the time the notice of redemption is given, the obligation to pay
the Additional Amounts remains in effect; and
(4) the payment of the Additional Amounts cannot be avoided by the use of
any reasonable measures available to us.
The convertible notes may also be redeemed, in whole but not in part, at
any time at a redemption price equal to their principal amount plus accrued and
unpaid interest and special interest, if any, to the date fixed for redemption
if the person formed after the Issuance Date by a consolidation, amalgamation,
reorganization or reconstruction (or other similar arrangement) of us or the
person into which we are merged after the Issuance Date or to which we convey,
transfer or lease our properties and assets after the Issuance Date
substantially in entirety (collectively, a "Subsequent Consolidation") is
required, as consequence of the Subsequent Consolidation and as a consequence of
a Change in Tax Law in any Other Relevant Jurisdiction occurring after the date
of the Subsequent Consolidation to pay Additional Amounts with respect to
Withholding Tax on the convertible notes and the Withholding Tax is imposed at a
rate that exceeds the rate (if any) at which Withholding Tax was or would have
been imposed on the date of the Subsequent Consolidation; provided, however,
that this paragraph does not apply to the extent that, at
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the date of the Subsequent Consolidation it was known or would have been known
had professional advice of a nationally recognized accounting firm in any Other
Relevant Jurisdiction been sought, that a Change in Tax Law in any Other
Relevant Jurisdiction was to occur after that date. We will also pay, or make
available for payment, to holders on the redemption date any Additional Amounts
(as described, but subject to the exceptions referred to, under "Additional
Amounts") resulting from the payment of the redemption price.
MANDATORY REDEMPTION AND REPURCHASE
We are not required to make mandatory redemption or sinking fund payments
with respect to the convertible notes. We are required to make a Change of
Control Offer with respect to a repurchase of the convertible notes under the
circumstances described under the caption "Repurchase at the Option of Holders."
REPURCHASE AT THE OPTION OF HOLDERS
If a Change of Control occurs, each holder of convertible notes has the
right to require us to repurchase all or any part of the holder's convertible
notes equal to $1,000 or an integral multiple of $1,000, under the Change of
Control Offer at a purchase price equal to 101% of the principal amount, plus
accrued and unpaid interest, if any, as of the date of purchase. We refer to the
payment as the Change of Control Payment. Within 40 days following any Change of
Control, we will mail a notice to each holder, stating:
(1) that the Change of Control Offer is being made under the covenant
entitled "Change of Control" and that all convertible notes tendered
will be accepted for payment;
(2) the purchase price and the purchase date, which will be no earlier than
30 days nor later than 40 days from the date the notice is mailed. This
date is referred to as the Change of Control Payment Date;
(3) that interest will continue to accrue on any convertible notes not
tendered, as provided in the convertible notes;
(4) that, unless we default in the payment of the Change of Control
Payment, with respect to all convertible notes accepted for payment
under the Change of Control Offer, interest will cease to accrue after
the Change of Control Payment Date;
(5) that holders electing to have any convertible notes purchased under a
Change of Control Offer will be required to surrender the convertible
notes, with the form entitled Option of Holder to Elect Purchase on the
reverse of the convertible notes completed, to the paying agent at the
address specified in the notice prior to the close of business on the
third Business Day preceding the Change of Control Payment Date;
(6) that holders will be entitled to withdraw their election if the paying
agent receives, not later than the close of business on the second
Business Day preceding the Change of Control Payment Date, a telegram,
telex, facsimile transmission or letter setting forth the name of the
holder, the principal amount of convertible notes delivered for
purchase, and a statement that the holder is withdrawing his election
to have the convertible notes purchased; and
(7) that holders whose convertible notes are being purchased only in part
will be issued new convertible notes equal in principal amount to the
unpurchased portion of the convertible notes surrendered, which
unpurchased portion must be equal to $1,000 in principal amount.
We will comply with the requirements of Rules 13e-4 and 14e-1 under the
Exchange Act and any other securities laws and regulations to the extent those
laws and regulations are applicable in connection with the repurchase of the
convertible notes in connection with a Change of Control.
On the Change of Control Payment Date, we will, to the extent lawful,
(1) accept for payment convertible notes or portions of convertible notes
tendered under the Change of Control Offer,
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(2) deposit with the paying agent an amount equal to the Change of Control
Payment in respect of all convertible notes or portions of convertible
notes tendered and
(3) deliver or cause to be delivered to the trustee the convertible notes
accepted together with an Officers' Certificate stating the convertible
notes or portions of convertible notes tendered to us.
The paying agent will promptly mail to each holder of convertible notes
accepted, or, if the holder requests, wire transfer immediately available funds
to an account previously specified in writing by the holder to us and the paying
agent, payment in an amount equal to the purchase price for the convertible
notes. The trustee will promptly authenticate and mail to each holder a new
convertible note equal in principal amount to any unpurchased portion of the
convertible notes surrendered, if any; provided that each new convertible note
will be in a principal amount of $1,000 or an integral multiple of $1,000. We
will publicly announce the results of the Change of Control Offer on or as soon
as practicable after the Change of Control Payment Date.
Except as described above with respect to a Change of Control, the
indenture does not contain any other provision that permits the holders of the
convertible notes to require that we repurchase or redeem the convertible notes
in the event of a takeover, recapitalization or similar restructuring. The
Change of Control Offer requirement of the convertible notes may, in certain
circumstances, make more difficult or discourage a takeover of us, and, thus,
the removal of incumbent management. Management has not entered into any
agreement or plan involving a Change of Control, although it is possible that we
would decide to do so in the future. Subject to the limitations discussed below,
we could, in the future, enter into various transactions including acquisitions,
refinancings or other recapitalizations, that would not constitute a Change of
Control under the indenture, but that could increase the amount of indebtedness
outstanding at that time or otherwise affect our capital structure or credit
ratings.
Our ability to pay cash to the holders of convertible notes under a Change
of Control Offer may be limited by our then existing financial resources. See
"Risk Factors." Any future credit facilities or other agreements relating to our
or our subsidiaries' indebtedness may contain prohibitions or restrictions on
our ability to effect a Change of Control Payment. In the event a Change of
Control occurs at a time when such prohibitions or restrictions are in effect,
we could seek the consent of our lenders to the purchase of convertible notes
and other Indebtedness containing change of control provisions or could attempt
to refinance the borrowings that contain those prohibitions or restrictions. If
we do not obtain such consents or repay such borrowings, we will be effectively
prohibited from purchasing the convertible notes. In that case, our failure to
purchase tendered convertible notes would constitute an Event of Default under
the indenture. Moreover, the events that constitute a Change of Control under
the indenture may constitute events of default under our future debt instruments
or credit agreements of us or our subsidiaries. Those events of default may
permit the lenders under the debt instruments or credit agreements to accelerate
the debt and, if that debt is not paid or repurchased, to enforce their security
interests in what may be all or substantially all of the assets of our
Subsidiaries. Therefore, our ability to raise cash to repay or repurchase the
convertible notes may be limited.
We will not be required to make a Change of Control Offer in the event we
enter into a transaction with management or our affiliates who are Permitted
Holders. The definition of Change of Control includes a phrase relating to the
sale, lease, transfer, conveyance or other disposition of all or substantially
all of our assets. Although there is a developing body of case law interpreting
the phrase substantially all, there is no precise established definition of the
phrase under applicable law. Accordingly, the ability of a holder of convertible
notes to require us to repurchase those convertible notes as a result of a sale,
lease, transfer, conveyance or other disposition of less than all of the assets
of us and our Subsidiaries to another Person may be uncertain.
ADDITIONAL AMOUNTS
The provisions described in this section "Additional Amounts" will only
apply should we ever cease to be organized under the laws of any state of the
United States.
All payments made by us on the convertible notes will be made without
deduction or withholding, for or on account of, any and all present or future
taxes, duties, assessments, or governmental charges of
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whatever nature unless the deduction or withholding of the taxes, duties,
assessments or governmental charges is required by law. If any deduction or
withholding for or on account of any present or future taxes, assessments or
other governmental charges of any jurisdiction other than the United States in
which we or a successor corporation is organized (or any political subdivision
or taxing authority thereof or therein) ("Other Relevant Jurisdiction") is at
any time required in respect of any amounts to be paid by us under the
convertible notes, we will pay or cause to be paid the additional amounts
("Additional Amounts") as may be necessary in order that the net amounts
received by a holder of a convertible note after the deduction or withholding is
not less than the amounts specified in the convertible note to which the holder
is entitled; provided, however, that we are not required to make any payment of
Additional Amounts for or on account of:
(a) any tax, assessment or other governmental charge to the extent such
tax, assessment or other governmental charge would not have been
imposed but for (i) the existence of any present or former connection
between the holder (or between a fiduciary, settlor, beneficiary,
member or shareholder of, or possessor of a power over, the holder, if
the holder is an estate, nominee, trust, partnership or corporation),
other than the holding of a convertible note or the receipt of amounts
payable in respect of a convertible note and any Other Relevant
Jurisdiction or any political subdivision or taxing authority thereof
or therein, including, without limitation, the holder (or the
fiduciary, settlor, beneficiary, member, shareholder or possessor)
being or having been a citizen or resident thereof or being or having
been present or engaged in trade or business therein or having or
having had a permanent establishment therein or (ii) the presentation
of a convertible note (where presentation is required) for payment on
a date more than 30 days after the date on which the payment became
due and payable or the date on which payment thereof is duly provided
for, whichever occurs later, except to the extent that the holder
would have been entitled to Additional Amounts had the convertible
note been presented on the last day of that period of 30 days;
(b) any tax, assessment or other governmental charge that is imposed or
withheld by reason of the failure to comply by the holder of a
convertible note, or, if different, the beneficial owner of the
interest payable on a convertible note, with a timely request of us
addressed to the holder or beneficial owner to provide information,
documents or other evidence concerning the nationality, residence,
identity or connection with the taxing or jurisdiction of the holder
or beneficial owner which is required or imposed by a statute,
regulation or administrative practice of the taxing jurisdiction as a
precondition to exemption from all or part of that tax, assessment or
governmental charge;
(c) any estate, inheritance, gift, sales, transfer, personal property or
similar tax, assessment or other governmental charge;
(d) any tax, assessment or other governmental charge which is collectible
otherwise than by withholding from payments of principal amount at
maturity, redemption amount, Change of Control Payment, interest with
respect to a convertible note or withholding from the proceeds of a
sale or exchange of a convertible note;
(e) any tax, assessment or other governmental charge imposed on a holder
that is not the beneficial owner of a convertible note to the extent
that the beneficial owner would not have been entitled to the payment
of any Additional Amounts had the beneficial owner directly held the
convertible note;
(f) any tax, assessment or other governmental charge required to be
withheld by any paying agent from any payment of principal amount at
maturity, redemption amount, Change of Control Payment or interest
with respect to a convertible note, if the payment can be made, and is
in fact made, without the withholding by any other paying agent
located inside the United States; and
(g) any combination of items (a), (b), (c), (d), (e) and (f) above.
If any deduction or withholding for or on account of any present or future
taxes, assessments or other governmental charges are imposed by any taxing
jurisdiction but that deduction or withholding could be
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reduced or eliminated under a statute, regulation or administrative practice of
the taxing jurisdiction if certain information, document or other evidence is
provided by holders or beneficial owners of the convertible notes, we shall
provide a timely request addressed to the holders or beneficial owners to
provide that information, document or other evidence.
All references to interest on the convertible notes in the indenture or the
convertible notes include any Additional Amounts payable to us under this
paragraph.
SELECTION AND NOTICE
If less than all of the convertible notes are to be redeemed at any time,
selection of convertible notes for redemption will be made by the trustee in
compliance with the requirements of any securities exchange on which the
convertible notes are listed. In the absence of any requirements of any
securities exchange or if the convertible notes are not listed, selection of the
convertible note to be redeemed will be made on a pro rata basis, provided that
no convertible notes of $1,000 or less will be redeemed in part. Notice of
redemption will be mailed by first class mail at least 30 but not more than 60
days before the redemption date to each holder of convertible notes to be
redeemed at its registered address. If any convertible note is to be redeemed in
part only, the notice of redemption that relates to that convertible note will
state the portion of the principal amount to be redeemed. A new convertible note
in principal amount equal to the unredeemed portion will be issued in the name
of the holder upon cancellation of the original convertible note. On and after
the redemption date, interest ceases to accrue on convertible notes or portions
of them called for redemption.
COVENANTS
Sale of Assets
The indenture provides that we may not sell, assign, transfer, lease,
convey or otherwise dispose of all or substantially all of our properties or
assets in any one or more related transactions to another corporation, Person or
entity unless:
(1) The entity or Person to which that sale, assignment, transfer, lease,
conveyance or other disposition is made is a corporation organized or
existing under the laws of the United States, or any state, the
District of Columbia or the laws of the United Kingdom, the
Netherlands, the Netherlands Antilles, Bermuda or the Cayman Islands;
(2) The entity or Person to which that sale, assignment, transfer, lease,
conveyance or other disposition will have been made assumes all
Obligations pursuant to a supplemental indenture, in a form reasonably
satisfactory to the trustee, under the convertible notes and the
indenture; and
(3) Immediately after that transaction no Default or Event of Default
exists.
Limitation on Status as Investment Company
The indenture provides that we will not, and will not permit any Subsidiary
to, conduct its business in a fashion that would cause us to be required to
register as an "investment company" (as that term is defined in the Investment
Company Act of 1940.
Reports
Whether or not required by the rules and regulations of the SEC, so long as
any convertible notes are outstanding, we will file with the SEC and furnish to
the holders of convertible notes all quarterly and annual financial information
required to be contained in a filing with the SEC on Forms 10-Q and 10-K,
including a "Management's Discussion and Analysis of Results of Operations and
Financial Condition" and, with respect to the annual information only, a report
by our certified independent accountants, in each case, as required by the rules
and regulations of the SEC as in effect on the Issuance Date.
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EVENTS OF DEFAULT AND REMEDIES
The indenture provides that each of the following constitutes an Event of
Default:
(1) default for 30 days in the payment when due of interest on the
convertible notes;
(2) a default in the payment of principal of any convertible note when due
at its stated maturity, upon optional redemption, in connection with a
Repurchase Offer, upon declaration, or otherwise;
(3) the failure by us to comply for 30 days after notice with any of our
obligations under the covenants described under "Repurchase at the
Option of Holders" and "Sale of Assets" (in each case, other than a
failure to purchase convertible notes in connection with a Repurchase
Offer);
(4) failure by us for 60 days after notice to comply with certain other
covenants and agreements contained in the indenture or the convertible
notes;
(5) default under any mortgage, indenture or instrument under which there
may be issued or by which there may be secured or evidenced any
Indebtedness for money borrowed by us or any of our Subsidiaries that
is a Significant Subsidiary or any group of two or more Subsidiaries
that, taken as a whole, would constitute a Significant Subsidiary, or
the payment of which is guaranteed by us or any of our Subsidiaries
that is a Significant Subsidiary or any group of two or more
Subsidiaries that, taken as a whole, would constitute a Significant
Subsidiary, whether such Indebtedness or guarantee now exists, or is
created after the Issuance Date, which default
(a) is caused by a failure to pay when due principal or interest on that
Indebtedness within the grace period provided in that Indebtedness,
which payment default continues beyond any applicable grace period
or
(b) results in the acceleration of that Indebtedness prior to its
express maturity and, in each case, the principal amount of that
Indebtedness, together with the principal amount of any other
Indebtedness under which there has been a payment default or the
maturity of which has been so accelerated, aggregates $20.0 million
or more;
(6) failure by us or any Subsidiary of us that is a Significant Subsidiary
or any group of two or more Subsidiaries that, taken as a whole, would
constitute a Significant Subsidiary to pay final judgments for the
payment of money (other than any judgment as to which a reputable
insurance company has accepted liability subject to customary terms)
aggregating in excess of $10.0 million, which judgments are not paid,
wired, discharged or stayed within 60 days after their entry; and
(7) certain events of bankruptcy or insolvency with respect to us or any of
our Subsidiaries that is a Significant Subsidiary or any group of two
or more Subsidiaries that, taken as a whole, would constitute a
Significant Subsidiary.
(8) The approval by our shareholders of any merger, amalgamation or
consolidation by us (whether or not we are the surviving corporation)
and whether or not such merger, amalgamation or consolidation is in one
or more related transactions if:
- the successor corporation, Person or entity
(A) does not assume all the Obligations, under a supplemental
indenture in a form reasonably satisfactory to the trustee, under
the convertible notes and the indenture; and
(B) is not a corporation, Person or entity organized or existing
under the laws of the United States, any state, the District of
Columbia or the laws of the United Kingdom, the Netherlands, the
Netherlands Antilles, Bermuda or the Cayman Islands, or
- immediately after that transaction, any Default or Event of Default
exists.
If any Event of Default occurs and is continuing, the trustee or the
holders of at least 25% in principal amount of the then outstanding convertible
notes may declare all the convertible notes to be due and payable immediately,
subject to the provisions limiting payment described in "--Subordination."
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Notwithstanding the foregoing, in the case of an Event of Default arising from
(i) the events described in clause (8) above or (ii) certain events of
bankruptcy or insolvency, with respect to us or any Significant Subsidiary, all
outstanding convertible notes will become due and payable without further action
or notice. Holders of the convertible notes may not enforce the indenture or the
convertible notes except as provided in the indenture. Subject to certain
limitations, holders of a majority in principal amount of the then outstanding
convertible notes may direct the trustee in its exercise of any trust or power.
The trustee may withhold from holders of the convertible notes notice of any
continuing Default or Event of Default, except a Default or Event of Default
relating to the payment of principal or interest, if it determines that
withholding notice is in their interest.
In the event of a declaration of acceleration of the convertible notes
because an Event of Default has occurred and is continuing as a result of the
acceleration of any Indebtedness described in clause (5) above, the declaration
of acceleration of the convertible notes will be automatically annulled if:
(1) the holders of any Indebtedness described in such clause (5) have
rescinded the declaration of acceleration in respect of that
Indebtedness within 30 days after the date of the declaration,
(2) the annulment of the acceleration of the convertible notes would not
conflict with any judgment or decree of a court of competent
jurisdiction, and
(3) all existing Events of Default, except for nonpayment of principal of
or interest on the convertible notes that became due solely because of
the acceleration of the convertible notes, have been cured or waived.
The holders of a majority in aggregate principal amount of the then
outstanding convertible notes by notice to the trustee may on behalf of all of
the holders waive any existing Default or Event of Default and its consequences
under the indenture except a continuing Default or Event of Default in the
payment of interest on or the principal of the convertible notes.
We are required to deliver to the trustee annually a statement regarding
compliance with the indenture, and upon becoming aware of any Default or Event
of Default, to deliver to the trustee a statement specifying such Default or
Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND SHAREHOLDERS
None of our directors, officers, employees, incorporators or shareholders
has any liability for any of our Obligations under the convertible notes or the
indenture or for any claim based on, in respect of, or by reason of, such
Obligations or their creation. Each holder of the convertible notes by accepting
a convertible note waives and releases all such liability. The waiver and
release are part of the consideration for issuance of the convertible notes.
Such waiver may not be effective to waive liabilities under the federal
securities laws, and it is the view of the SEC that a waiver of such liabilities
is against public policy.
UNCLAIMED MONEY; PRESCRIPTION
If money deposited with the trustee or paying agent for the payment of
principal or interest remains unclaimed for two years, the trustee and the
paying agent shall pay the money back to us at our written request. After that,
holders of convertible notes entitled to the money must look to us for payment
unless an abandoned property law designates another person and all liability of
the trustee and the paying agent will cease. Other than as set forth in this
paragraph, the indenture does not provide for any prescription period for the
payment of interest and principal on the convertible notes.
BOOK-ENTRY, DELIVERY AND FORM
We will issue the convertible notes in fully registered form, without
coupons, in integral multiples of $1,000.
The convertible notes that were sold to qualified institutional buyers are
evidenced by global notes and were deposited with, or on behalf of, DTC and
registered in the name of Cede & Co. as DTC's nominee. Except as set forth
below, a global note may be transferred, in whole or in part, only to another
DTC nominee or to a successor of DTC or its nominee.
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Convertible notes that were sold to "accredited investors" (as defined in
Rule 501(a)(1), (2), (3), (4), (5), (6) and (7) under the Securities Act) were
initially issued in global form, but were promptly exchanged into registered,
certificated form without interest coupons.
After a sale of convertible notes under this shelf registration statement,
convertible notes that were held as global notes with DTC will remain as global
notes and convertible notes that were held in certificated form may either be
held as global notes with DTC or as notes in certificated form.
Persons may hold their interests in a global note directly through DTC if
they are participants in DTC, or indirectly through organizations that are
participants in DTC. Transfers between participants will be effected in
accordance with DTC rules and will be settled in clearing house funds.
Persons who are not DTC participants may own interests in global notes only
through DTC participants or certain banks, brokers, dealers, trust companies and
other parties that clear through or maintain a custodial relationship with a DTC
participant. So long as Cede & Co., as the nominee of DTC, is the registered
owner of a global note, we will consider Cede & Co. for all purposes to be the
sole holder of the global note. Except as provided in this section or as
described in "Exchange of Global Notes for Certificated Notes," owners of
beneficial interests in a global note will not have certificates registered in
their names, will not receive physical delivery of certificates in definitive
registered form, and will not be considered the holders of the convertible
notes.
We will pay interest on and the redemption price or repurchase price of a
global note to Cede & Co., as the registered owner, by wire transfer of
immediately available funds on each interest payment, redemption or repurchase
date. We and the trustee have no responsibility or liability for any aspect of
the records relating to or payments made on account of beneficial ownership
interests in a global note.
DTC has informed us that its practice is to credit participants' accounts
on the payment date with payments in amounts proportionate to their beneficial
interests in the global note, unless it has reason to believe that it will not
receive payment. Only the DTC participants are responsible for payments to
owners of beneficial interests held through them.
Because DTC can only act on behalf of participants, who in turn act on
behalf of indirect participants and certain banks, a person having a beneficial
interest in the principal amount represented by a global note may be unable to
pledge its interest to persons or entities that do not participate in the DTC
system, due to the lack of a physical certificate evidencing its interest.
We are not responsible for the performance by DTC or its participants or
indirect participants of their obligations. The trustee is also not responsible
for such performance. DTC has advised us that it will take any action permitted
to be taken by a holder of notes, only at the direction of one or more
participants with an interest in a global note, and only with respect to the
principal amount as to which the participants have given it a direction.
DTC has advised us that it is a limited purpose trust company organized
under the laws of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the Uniform Commercial Code and a "clearing
agency" registered under the provisions of Section 17A of the Exchange Act. DTC
was created to hold securities for its participants and to facilitate the
clearance and settlement of securities transactions between participants through
electronic book-entry changes to the accounts of its participants, thereby
eliminating the need for physical movement of certificates. Participants include
securities brokers and dealers, banks, trust companies and clearing corporations
and may include certain other organizations such as the initial purchasers of
the convertible notes. Certain participants (or their representatives), together
with other entities, own DTC. Indirect access to the DTC system is available to
others such as banks, brokers, dealers and trust companies that clear through,
or maintain a custodial relationship with, a participant, either directly or
indirectly.
Although DTC has agreed to the foregoing procedures to facilitate transfers
of interests in global notes among participants, it has no obligation to perform
or continue to perform these procedures. These procedures may be discontinued at
any time.
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EXCHANGE OF GLOBAL NOTES FOR CERTIFICATED NOTES
A global note is exchangeable for definitive convertible notes in
registered certificated form if:
(1) DTC (a) notifies us that it is unwilling or unable to continue as
depositary for the global notes and we fail to appoint a successor
depositary or (b) has ceased to be a clearing agency registered under
the Exchange Act;
(2) we, at our option, notify the trustee in writing that we elect to cause
the issuance of the certificated notes; or
(3) there shall have occurred and be continuing a Default or Event of
Default with respect to the convertible notes.
In addition, beneficial interests in a global note may be exchanged for
certificated notes upon prior written notice given to the trustee by or on
behalf of DTC in accordance with the indenture. In all cases, Certificated Notes
delivered in exchange for any global note or beneficial interests in global
notes will be registered in the names, and issued in any approved denominations,
requested by or on behalf of the depositary (in accordance with its customary
procedures).
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next succeeding paragraph, the indenture or the
convertible notes may be amended or supplemented with the consent of the holders
of at least a majority in aggregate principal amount of the outstanding
convertible notes, as applicable, including consents obtained in connection with
a tender offer or exchange offer for the convertible notes, and any existing
default or compliance with any provision of the indenture or the convertible
notes may be waived with the consent of the holders of a majority in aggregate
principal amount of then outstanding convertible notes, including consents
obtained in connection with a tender offer or exchange offer for the convertible
notes.
Without the consent of each holder affected, an amendment or waiver may
not:
(1) reduce the amount of convertible notes whose holders must consent to
an amendment, supplement or waiver,
(2) reduce the principal of or change the fixed maturity of any
convertible note or alter the provisions with respect to the
redemption of the convertible notes, except for repurchases of the
convertible notes under the covenant described above under the caption
"-- Repurchase at the Option of Holders,"
(3) reduce the rate of or change the time for payment or accrual of
interest on any convertible note,
(4) waive a default in the payment of principal of or interest on any
convertible notes, except a rescission of acceleration of the
convertible notes by the holders of at least a majority in aggregate
principal amount of the convertible notes and a waiver of the payment
default that resulted from such acceleration,
(5) make any convertible note payable in money other than that stated in
the convertible notes,
(6) make any change in the provisions of the indenture relating to waivers
of past Defaults or the rights of holders of convertible notes to
receive payments of principal of or interest on the convertible notes,
(7) waive a redemption payment with respect to any convertible note,
(8) impair the right to convert the convertible notes into common stock,
(9) modify the conversion or subordination provision of the indenture in a
manner adverse to the holders of the convertible notes, or
(10) make any change in the foregoing amendment and waiver provisions.
Notwithstanding the foregoing, without the consent of any holder of
convertible notes, CoreComm and the trustee may amend or supplement the
indenture or the convertible notes to cure any ambiguity, defect or
inconsistency, to provide for uncertificated convertible notes in addition to or
in place of
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certificated convertible notes, to provide for the assumption of CoreComm's
obligations to holders of the convertible notes in the case of a merger or
consolidation or certain transfers or leases, to make any change that would
provide any additional rights or benefits to the holders of the convertible
notes or that does not adversely affect the legal rights under the indenture of
any such holder, or to comply with requirements of the SEC in order to maintain
the qualification of the indenture under the Trust Indenture Act.
GOVERNING LAW AND JUDGMENTS
The convertible notes and the indenture will be governed exclusively by and
construed in accordance with the laws of the State of New York without giving
effect to applicable principles of conflicts of laws to the extent that the
application of the law of another jurisdiction would be required thereby.
CoreComm will submit to the jurisdiction of the United States federal and
New York state courts located in the Borough of Manhattan, City and State of New
York for purposes of all legal actions and proceedings instituted in connection
with the convertible notes and the indenture. CoreComm has appointed National
Registered Agents, Inc. as its authorized agent upon which process may be served
in any such action.
CONCERNING THE TRUSTEE
The indenture contains limitations on the rights of the trustee, should it
become a creditor of CoreComm, to obtain payment of claims in certain cases, or
to realize on certain property received in respect of any such claim as security
or otherwise. The trustee will be permitted to engage in other transactions;
however, if it acquires any conflicting interest it must eliminate such conflict
within 90 days, apply to the SEC for permission to continue or resign.
The holders of the majority in aggregate principal amount of the then
outstanding convertible notes will have the right to direct the time, method and
place of conducting any proceeding for exercising any remedy available to the
trustee under the indenture, subject to certain exceptions. The indenture
provides that if an Event of Default occurs, which is not cured or waived, the
trustee will be required, in the exercise of its power, to use the degree of
care of a prudent man in the conduct of his own affairs. Subject to these
provisions, the trustee will be under no obligation to exercise any of its
rights or powers under the indenture at the request of any holder of convertible
notes, unless such holder has offered to the trustee security and indemnity
satisfactory to it against any loss, liability or expense.
DEFINITIONS
Set forth below are selected defined terms used in the indenture. Reference
is made to the indenture for a full definition of all terms, as well as certain
other terms used in this description of the convertible notes for which no
definition is provided.
"Capital Stock" means any and all shares, interests, participations, rights
or other equivalents, however designated, of corporate stock, including, without
limitation, partnership interests.
"Change of Control" means
(1) the sale, lease or transfer of all or substantially all of the assets
of CoreComm to any "Person" or "group," within the meaning of Sections
13(d)(3) and 14(d)(2) of the Exchange Act or any successor provision to
either of the foregoing, including any group acting for the purpose of
acquiring, holding or disposing of securities within the meaning of
Rule 13D-5(b)(1) under the Exchange Act, other than any Permitted
Holder,
(2) the approval by the requisite stockholders of CoreComm of a plan of
liquidation or dissolution of CoreComm,
(3) any "Person" or "group," within the meaning of Sections 13(d) and
14(d)(2) of the Exchange Act or any successor provision to either of
the foregoing, including any group acting for the purpose of acquiring,
holding or disposing of securities within the meaning of Rule
13d-5(b)(1) under the Exchange Act, other than any Permitted Holder,
becomes the "beneficial owner", as
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defined in Rule 13d-3 under the Exchange Act, of more than 50% of the
total voting power of all classes of the voting stock of CoreComm
and/or warrants or options to acquire such voting stock, calculated on
a fully diluted basis, unless, as a result of such transaction, the
ultimate direct or indirect ownership of CoreComm is substantially the
same immediately after such transaction as it was immediately prior to
such transaction, or
(4) during any period of two consecutive years, individuals who at the
beginning of such period constituted CoreComm's board of directors,
together with any new directors whose election or appointment by such
board or whose nomination for election by the shareholders of CoreComm
was approved by a vote of a majority of the directors then still in
office who were either directors at the beginning of such period or
whose election or nomination for election was previously so approved,
cease for any reason to constitute a majority of CoreComm's board of
directors then in office.
"Default" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock, but excluding any Indebtedness that is
convertible into, or exchangeable for, Capital Stock.
"Excess Payment" means the excess of (A) the aggregate of the cash and
value of other consideration paid by CoreComm or any of its Subsidiaries with
respect to shares acquired in a tender offer or other negotiated transaction
over (B) the market value of such acquired shares after giving effect to the
completion of a tender offer or other negotiated transaction.
"Exchange Rate Contract" means, with respect to any Person, any currency
swap agreements, forward exchange rate agreements, foreign currency futures or
options, exchange rate collar agreements, exchange rate insurance and other
agreements or arrangements, or combination thereof, the principal purpose of
which is to provide protection against fluctuations in currency exchange rates.
An Exchange Rate Contract may also include an Interest Rate Agreement.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as approved by a significant segment of the accounting profession,
which are in effect on the Issuance Date and are applied on a consistent basis.
"Guarantee" means a guarantee, other than by endorsement of negotiable
instruments for collection in the ordinary course of business, direct or
indirect, in any manner, including, without limitation, letters of credit and
reimbursement agreements in respect thereof, of all or any part of any
Indebtedness.
"Indebtedness" means, with respect to any Person, any indebtedness of such
Person, whether or not contingent, in respect of borrowed money or evidenced by
bonds, notes, debentures or similar instruments or letters of credit, or
reimbursement agreements in respect thereof, or representing the balance
deferred and unpaid of the purchase price of any property (which purchase price
is due more than six months after the placing into service or delivery of such
property) including pursuant to capital leases and sale-and-leaseback
transactions, or representing any hedging obligations under an Exchange Rate
Contract or an Interest Rate Agreement, except any such balance that constitutes
an accrued expense or trade payable, if and to the extent any of the foregoing
indebtedness, other than obligations under an Exchange Rate Contract or an
Interest Rate Agreement, would appear as a liability upon a balance sheet of
such Person prepared in accordance with GAAP, and also includes, to the extent
not otherwise included, the Guarantee of items which would be included within
this definition. The amount of any Indebtedness outstanding as of any date shall
be the accreted value thereof, in the case of any Indebtedness issued with
original issue discount. Indebtedness shall not include liabilities for taxes of
any kind.
"Interest Rate Agreement" means, with respect to any Person, any interest
rate swap agreement, interest rate cap agreement, interest rate collar agreement
or other similar agreement the principal purpose of which is to protect the
party indicated therein against fluctuations in interest rates.
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"Issuance Date" means the date on which the convertible notes are first
authenticated and issued.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Permitted Designee" means
(1) a spouse or a child of a Permitted Holder,
(2) trusts for the benefit of a Permitted Holder or a spouse or child of a
Permitted Holder,
(3) in the event of the death or incompetence of a Permitted Holder, his
estate, heirs, executor, administrator, committee or other personal
representative or
(4) any Person so long as a Permitted Holder owns at least 50% of the
voting power of all classes of the voting stock of such Person.
"Permitted Holders" means George S. Blumenthal, J. Barclay Knapp and their
Permitted Designees.
"Repurchase Offer" means a Change of Control Offer.
"Senior Debt" means the principal of, interest on and other amounts due on
(1) our Indebtedness, whether outstanding on the date of the indenture or
thereafter created, incurred, assumed or guaranteed by us, for money
borrowed from banks or other financial institutions;
(2) our Indebtedness, whether outstanding on the date of the indenture or
thereafter created incurred, assumed or guaranteed by us; and
(3) our indebtedness under interest rate swaps, caps or similar hedging
agreements and foreign exchange contracts, currency swaps or similar
agreements: unless, in the instrument creating or evidencing or under
which Indebtedness under (1) or (2) is outstanding, it is expressly
provided that such Indebtedness is not senior in right of payment to
the convertible notes.
Senior Debt includes, with respect to the obligations described in clauses
(1) and (2) above, interest accruing, pursuant to the terms of such Senior Debt,
on or after the filing of any petition in bankruptcy or for reorganization
relating to us, whether or not post-filing interest is allowed in such
proceeding, at the rate specified in the instrument governing the relevant
obligation. Notwithstanding anything to the contrary in the foregoing, Senior
Debt shall not include: (a) Indebtedness of or amounts owed by us for
compensation to employees, or for goods or materials purchased in the ordinary
course of business, or for services; and (b) Indebtedness of CoreComm to a
Subsidiary of CoreComm.
"Significant Subsidiary" means any Subsidiary of CoreComm which is a
"significant subsidiary" as defined in Rule 1-02(v) of Regulation S-X under the
Securities Act and the Exchange Act, as such Regulation is in effect on the date
of the indenture.
"Subsidiary" means any corporation, association or other business entity of
which more than 50% of the total voting power of shares of Capital Stock
entitled, without regard to the occurrence of any contingency, to vote in the
election of directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by any Person or one or more of the other
Subsidiaries of that Person or a combination thereof.
REGISTRATION RIGHTS
The following summary of provisions of the registration rights agreement is
not complete and is subject to, and is qualified in its entirety by reference
to, all the provisions of the registration rights agreement, which is
incorporated by reference into the registration statement of which this
prospectus forms a part.
CoreComm Bermuda entered into the registration rights agreement under which
it agreed, at its expense, for the benefit of the holders of the offered
securities, to file with the SEC the registration statement covering resale of
the offered securities. CoreComm Bermuda filed a registration statement on Form
S-3 in connection with this obligation. The Form S-3 was declared effective on
November 22, 1999. In connection with the ATX merger and in accordance with the
registration rights agreement, we have
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suspended the use of the prospectus contained in the registration statement
until a new registration statement, of which this prospectus forms a part,
becomes effective. The new registration statement must be kept effective until
the earlier of
(1) the sale under the registration statement of all the offered securities
registered under the registration statement and
(2) subject to certain exceptions, the second anniversary of the issuance
of the original convertible notes.
We will be permitted to suspend the use of this prospectus under
circumstances relating to pending corporate developments, public filings with
the SEC and similar events. We have agreed to pay predetermined special interest
as described in this prospectus with respect to each 90-day period, to holders
of offered securities if the registration statement is not timely filed or made
effective or if this prospectus is unavailable for periods in excess of those
described in the registration rights agreement. Special interest will accrue
until the failure to file or become effective or unavailability is cured in
respect of any convertible note, at a rate per annum equal to 0.25% for the
first 90 day period after the occurrence of the event and with respect to each
subsequent 90-day period an amount equal to an increase in the annual interest
rate on the convertible notes of 0.25% until all registration defaults have been
cured up to a maximum increase in the annual rate of interest on the convertible
notes equal to 1.0%.
Selling securityholders must complete and deliver to us a notice and
questionnaire, the form of which was sent to all holders of record known to us,
at least three business days prior to any intended distribution of offered
securities under the registration statement. Holders of offered securities are
required to complete and deliver the questionnaire prior to the effectiveness of
the registration statement so that holders may be named as selling
securityholders in this prospectus at the time of effectiveness. Upon receipt of
a completed questionnaire, together with other information as may be reasonably
requested by us, from a selling securityholder following the effectiveness of
the registration statement, we will, as promptly as practicable but in any event
within five business days of receipt, file such amendments to the registration
statement or supplements to this prospectus as are necessary to permit selling
securityholders to deliver this prospectus, including any supplements, to
purchasers of offered securities (subject to our right to suspend the use of
this prospectus as described above). We have agreed to pay special interest in
the amount set forth above to holders of offered securities if we fail to make a
filing in the time required.
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DESCRIPTION OF CAPITAL STOCK
AUTHORIZED CAPITAL STOCK
Our authorized capital stock consists of 200,000,000 shares of common
stock, par value $0.01 per share, and 5,000,000 shares of preferred stock, par
value $0.01 per share. On September 30, 2000 there were approximately 72,024,560
shares of common stock issued, approximately 70,695,878 shares outstanding and
approximately 1,328,682 treasury shares. The currently outstanding shares of
preferred stock and common stock are validly issued, fully paid and
non-assessable. The following description is qualified in all respects by
reference to our certificate of incorporation and our by-laws.
COMMON STOCK
The holders of our common stock are entitled to one vote for each share
held of record on all matters submitted to a vote of our stockholders and do not
have cumulative voting rights in the election of directors. Holders of our
common stock are entitled to receive proportionately dividends as may from time
to time be declared by our board of directors out of funds legally available for
the payment of dividends. In the event of our liquidation, dissolution or
winding up, holders of our common stock would be entitled to share
proportionately in all of our assets available for distribution to holders of
our common stock remaining after payment of liabilities and liquidation
preference of any outstanding preferred stock. Holders of our common stock have
no preemptive rights and have no rights to convert our common stock into any
other securities, and there are no redemption provisions with respect to the
common stock.
PREFERRED STOCK
Our by-laws authorize the board of directors to issue one or more series of
preferred stock and determine, with respect to any series, the rights, if any,
and their qualifications, limitations or restrictions, as are stated in
resolutions adopted by the board of directors providing for the issue of the
series and as are permitted by the Delaware General Corporation Law.
The ability of the board of directors to issue one or more series of
preferred stock provides increased flexibility in structuring possible future
financings and acquisitions and in meeting other corporate needs which might
arise. The authorized shares of preferred stock, as well as shares of our common
stock, are available for issuance without further action by our stockholders,
unless such action is required by applicable law or the rules of any stock
exchange or automated quotation system on which our securities may be listed or
applicable rules of any self-regulatory organization. If the approval of our
stockholders is not required for the issuance of shares of preferred stock or
common stock, the board of directors does not intend to seek stockholder
approval. The board of directors will make any determination to issue the shares
based on its judgment as to our best interests and the best interests of our
stockholders. The board of directors, in so acting, could issue preferred stock
having terms that could discourage an acquisition attempt or other transaction
that some or a majority of the stockholders might believe to be in their best
interests or in which stockholders might receive a premium for their shares over
the then current market price of such shares.
8.5% SENIOR CONVERTIBLE PREFERRED STOCK, SERIES A
The following summary the terms of our Series A preferred stock is subject
to, and qualified in its entirety by reference to, the provisions of the
designated rights and preferences with respect to our Series A preferred stock
as set forth in our certificate of incorporation, a copy of which we will
provide upon request.
General. A total of 50,000 shares of Series A preferred stock are issued
and outstanding. The par value of the Series A preferred stock is $0.01 per
share, and the liquidation value is $1,000 per share. The Series A preferred
stock is, and any common stock issued upon the conversion or exchange of, or in
connection with the payment of any dividend on or upon redemption of the shares
of Series A preferred stock will be, fully paid and nonassessable. We act as our
own transfer agent for the shares of Series A preferred stock.
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Dividends and Ranking. Each share of Series A preferred stock entitles its
holders to receive dividends out of our funds legally available for the payment
of dividends prior to and in preference to any declaration or payment of any
dividend on any securities junior in dividend rights to the Series A preferred
stock, other than dividends payable in the form of junior securities or
securities convertible into junior securities, and on a parity with any
securities that are designated to be on a parity with the Series A preferred
stock. The shares of Series A preferred stock rank on a parity with the shares
of Series B preferred stock issued to the ATX stockholders as part of the
recapitalization of ATX. Dividends are payable when and as authorized and
declared by our board of directors out of funds legally available for dividend
payments. Dividends on each share of Series A preferred stock accrue at the
yearly rate of 8.5% of the liquidation value of $1,000 per share. Dividends on
the Series A preferred stock are cumulative and are payable quarterly in
arrears. Dividends accrue whether or not they have been declared and whether or
not there are profits, surplus or other funds legally available for the payment
of dividends.
At our option, dividends may be paid in shares of our common stock or in
additional shares of Series A preferred stock. If dividends are paid in shares
of our common stock, the amount of common stock to be paid will be calculated
assuming the common stock has a value equal to the volume weighted average sale
price during the prior 25 trading days immediately before the dividend payment
record date, and either the issuance of that common stock must be registered
under the Securities Act, or the resale of that common stock must be registered
under the Securities Act using a shelf registration statement.
We may not pay any dividends on any junior securities, other than dividends
payable in the form of those junior securities, unless all accrued and unpaid
dividends required to be paid on the Series A preferred stock and any parity
securities for all prior dividend periods have been paid in full and sufficient
funds have been set aside for the next scheduled dividend payment date.
Likewise, we may not redeem, acquire or repurchase any junior securities, except
as required to comply with an employee incentive or benefit plan, unless we are
current in our dividend payments on the Series A preferred stock and sufficient
funds have been set aside for the next scheduled dividend payment date.
Liquidation, Dissolution or Winding up. In the event of any voluntary or
involuntary liquidation, dissolution or winding up the holders of outstanding
shares of Series A preferred stock will be entitled to be paid out of the assets
available for distribution to our stockholders after payment of any liquidation
values of any securities senior in liquidation rights to the Series A preferred
stock and before any securities junior in liquidation rights to the Series A
preferred stock.
If, upon any liquidation, dissolution or winding up the remaining assets
available for distribution to our stockholders are insufficient to pay the
holders of Series A preferred stock and all other classes or series of stock
ranking equal to it with respect to liquidation the full amount to which they
are entitled, the holders of Series A preferred stock, together with holders of
the equally-ranked preferred stock, will share ratably (based on their relative
liquidation values) in any distribution of our remaining assets and funds.
Voting Rights. Except as otherwise provided below or as otherwise provided
by law, holders of Series A preferred stock are not entitled to vote on matters
brought before our stockholders.
We may not either alter, amend or repeal the preferences, special rights or
other powers or privileges of the Series A preferred stock, or create or
increase the size of any class or series of securities senior to the Series A
preferred stock, in either case, without the written consent or affirmative vote
of holders of at least 75% of the then outstanding shares of Series A preferred
stock. Any amendment that changes the dividend payable on the Series A preferred
stock, the conversion price for the shares or the liquidation rights of the
shares will require the written consent or affirmative vote of at least 90% of
the then outstanding shares of Series A preferred stock.
Mandatory Redemption. We must redeem the Series A preferred stock on the
tenth anniversary of the original date of issuance, to the extent there are
funds legally available for such payment. The redemption price will be $1,000
per share, together with accrued and unpaid dividends, payable either, at our
option, in cash or in shares of our common stock. If paid in shares of common
stock, the redemption
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price will be calculated assuming the common stock has a value equal to the
volume weighted average sale price of our common stock during the 25 trading
days immediately before the redemption date. Any payment of the redemption price
in cash also requires the consent of the holder of the shares being redeemed.
Optional Redemption. We may redeem the Series A preferred stock at a
redemption price of $1,000 per share, together with accrued and unpaid
dividends, payable either, at our option, in cash or in shares of common stock,
or a combination of cash and shares of common stock, during any of the periods
specified below if, at any time, during that period the 25-day volume weighted
average sale price of our common stock exceeds the amounts indicated:
<TABLE>
<CAPTION>
PERIOD STOCK PRICE
------ ----------------
<S> <C>
Second anniversary of original issue date until day before
third anniversary......................................... 150% of the
conversion price
Third anniversary of original issue date until day before
fourth anniversary........................................ 200% of the
conversion price
Fourth anniversary of original issue date until day before
fifth anniversary......................................... 250% of the
conversion price
</TABLE>
The conversion price is described in the section below entitled "Determination
of the Conversion Price."
In addition, the Series A preferred stock may be redeemed by us at any time
following the fifth anniversary of the original issue date at a redemption price
of $1,010 per share, together with accrued and unpaid dividends, payable either
in cash or in shares of our common stock, or a combination of cash and common
stock.
If we elect to pay all or any portion of the redemption price for shares of
Series A preferred stock in shares of common stock, the shares of common stock
will be valued based on the volume weighted average sale price of our common
stock during the 25 trading days immediately before the redemption date. Any
payment of the redemption price in cash also requires the consent of the holder
of the shares being redeemed.
Conversion Rights. At any time, the holders of Series A preferred stock
may convert the shares into the number of shares of our common stock determined
by dividing the liquidation value of the shares by a number equal to the
conversion price as of that time. Furthermore, in the event of a change of
control, the holders of the Series A preferred stock will have a one time option
to convert the Series A preferred stock into common stock at a special
conversion price determined by dividing the liquidation price by the greater of
(a) 7.98, and (b) the price per share of our common stock at which the change of
control is occurring.
Determination of the Conversion Price. The conversion price for a
conversion made in the absence of a change of control is as follows:
- The 50,000 shares of Series A preferred stock originally issued will have
an initial conversion price of $14.36.
- Any additional shares of Series A preferred stock issued in payment of
any dividend on the shares of Series A preferred stock will have an
initial conversion price equal to 120% of the volume weighted average
sale price of our common stock for the 25 trading day period ending
immediately prior to the dividend payment record date for the dividend in
respect of which those additional shares of Series A preferred stock were
issued.
Adjustments to Conversion Price. The conversion price is subject to
adjustments based on changes in capitalization of our common stock such as stock
splits, stock dividends, and the like. The conversion price will also be
adjusted if, among other things, we issue to substantially all holders of our
common stock any rights, options or warrants to subscribe for or purchase shares
of our common stock at a price below the then current conversion price.
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Registration Rights. The holders of the Series A preferred stock will be
entitled to shelf registration rights with respect to the Series A preferred
stock and its underlying common stock beginning on the twelve-month anniversary
of the date the Series A preferred stock is issued. The shelf registration is
required to remain effective for a maximum of five years. In the event that we
are not able to effect or maintain the effectiveness of the shelf registration,
the holders of the Series A preferred stock will be entitled to demand and
"piggy-back" registration rights.
SERIES B SENIOR CONVERTIBLE EXCHANGEABLE PREFERRED STOCK
The following summary of the terms of our Series B preferred stock is
subject to, and qualified in its entirety by reference to, the provisions of the
designated rights and preferences with respect to our Series B preferred stock
as set forth in our certificate of incorporation, a copy of which we will
provide upon request.
General. A total of 250,000 shares of Series B preferred stock are issued
and outstanding. These shares were originally issued on September 29, 2000 in
connection with a recapitalization and merger transaction that closed on that
day and that resulted in the merger of the businesses previously operated by
CoreComm and ATX Telecommunications Services, Inc. As part of that transaction,
we also issued to the persons who originally received the shares of Series B
preferred stock, shares of common stock and $108,668,636 aggregate principal
amount of our senior unsecured notes. Some calculations relating to the shares
of Series B preferred stock, including dividend rate adjustments described below
under the heading "Dividends" and a conversion price reset provision described
below under the heading "Conversion Rights," are determined by reference to
whether or not there are outstanding (and if outstanding, the principal amount
outstanding of) senior unsecured notes at specified times. For purposes of these
provisions, the principal amount of any notes delivered to us by the original
holders of the shares of Series B preferred stock in place of a reduction to the
principal amount of the senior unsecured notes will be subtracted from the
principal amount of the senior unsecured notes deemed to be outstanding on the
relevant date.
The par value of the Series B preferred stock is $0.01 per share, and the
liquidation value is $1,000 per share. The Series B preferred stock is, and any
common stock issued upon the conversion or exchange of, or in connection with
the payment of any dividend on or upon redemption of the shares of Series B
preferred stock will be, fully paid and nonassessable. We act as our own
transfer agent for the shares of Series B preferred stock.
Ranking. With respect to dividend distributions and distributions upon the
liquidation, winding-up and dissolution of our company, the Series B preferred
stock ranks:
- senior to all classes of our common stock and to each other class of
capital stock or series of preferred stock except for shares of our
Series A preferred stock, and any other shares of our capital stock or
series of preferred stock that may be created with terms that do not
expressly provide that the class or series ranks senior to or on equally
with the Series B preferred stock as to dividend distributions and
distributions upon the liquidation, winding-up and dissolution of our
company;
- equally with shares of our Series A preferred stock and each other class
of capital stock or series of preferred stock that may be created with
terms that expressly provide that the class or series rank equally with
the Series B preferred stock as to dividend distributions and
distributions upon the liquidation, winding-up and dissolution of our
company; and
- subject to conditions that include the affirmative vote or consent of the
holders of at least a majority of the outstanding Series B preferred
stock, junior to each class of capital stock or series of preferred stock
issued by us after September 29, 2000 with terms that expressly provide
that the class or series ranks senior to the Series B preferred stock as
to dividend distributions and distributions upon liquidation, winding-up
and dissolution of our company.
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Dividends. Holders of the Series B preferred stock will be entitled to
receive cumulative dividends at an initial annual rate of $30.00 per share,
payable quarterly in arrears out of assets legally available for payment of
dividends, on September 30, December 31, March 31 and June 30 each year
commencing December 31, 2000, when, if and as declared by our board of
directors. The annual dividend will increase to $50.00 per share on September
29, 2001 if, by that date, any of the senior unsecured notes issued by us to the
original holders of the Series B preferred stock remain unpaid and to $70.00 per
share on March 29, 2002 if, by that date, any of the senior unsecured notes
issued by us to the original holders of the Series B preferred stock remain
unpaid. At our discretion, we may pay dividends on the Series B preferred stock,
either in cash or in shares of our common stock. If we elect to pay shares in
the form of shares of common stock, those shares will be valued at 98% of the
volume weighted average sale price of the shares of our common stock during the
five trading day period ending on the last trading day before the dividend
payment date. In addition, if we decide to pay dividends in the form of shares
of our common stock to persons who are entitled to exercise rights under a
registration rights agreement that we entered into with the original holders of
the Series B preferred stock, we will be required to have either issued those
shares under an effective Securities Act registration statement, or we will be
required to have an effective Securities Act registration statement in place in
order to permit the resale of those shares of common stock.
Dividends on the Series B preferred stock will accumulate and be cumulative
from the issue date whether or not they are declared by our board of directors.
Dividends will be payable to holders of record as they appear on our stock
register on the applicable record dates fixed by our board of directors, which
record dates shall not be more than 45 days nor less than five days preceding
the payment dates thereof. Dividends payable on the Series B preferred stock for
each full dividend period will be computed by dividing the annual rate by four.
Dividends payable on the Series B preferred stock for any period less than a
full dividend period (based upon the number of days elapsed during the period)
will be computed on the basis of a 91 day quarter. The holders of shares of
Series B preferred stock will not be entitled to any dividends, whether payable
in cash, property or securities, in excess of the full cumulative dividends. No
interest, or sum of money in lieu of interest, will be payable in respect of any
dividend payment or payments which may be in arrears.
No dividends or distributions, other than a dividend or distribution with
respect to/on any of our stock ranking junior to or ratably with the Series B
preferred stock as to dividends and upon liquidation, dissolution or winding up
of our Company, may be declared, made or paid or set apart for payment upon any
of our stock ranking junior to or on parity with the Series B preferred stock as
to dividends or upon liquidation, nor may any stock ranking junior to or on
parity with the Series B preferred stock be redeemed, purchased or otherwise
acquired for any consideration (or any monies paid to or made available for a
sinking fund for the redemption of any shares of our stock) by us (except, in
general and in both cases, by conversion into or exchange for our stock ranking
junior to or on parity with the Series B preferred stock as to dividends and
upon liquidation) unless full cumulative dividends have been or
contemporaneously are paid or declared and a sum sufficient for payment of the
dividends is set apart for the payment on the Series B preferred stock for all
dividend payment periods terminating on or prior to the date of the declaration,
payment, redemption, purchase or acquisition.
Notwithstanding the foregoing, if full dividends have not been paid on the
Series B preferred stock and any other preferred stock ranking on parity with
the Series B preferred stock as to dividends, dividends may be declared and paid
on the Series B preferred stock and the other ratable preferred stock only so
long as the dividends are declared and paid pro rata, so that the amounts of
dividends declared per share on the Series B preferred stock and the other
parity preferred stock will in all cases bear to each other the same ratio that
accrued and unpaid dividends per share on the shares of the Series B preferred
stock and the other parity preferred stock bear to each other. Our ability to
declare and pay dividends may be limited by applicable law and the terms of the
documents governing our borrowings and other indebtedness.
Liquidation Preference. In the event of any voluntary or involuntary
dissolution, liquidation or winding up of our company, the holders of Series B
preferred stock will be entitled to receive and to be
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paid out of our assets available for distribution to our stockholders, before
any payment or distribution is made to holders of our common stock or any other
class or series of stock of our company ranking junior to the Series B preferred
stock upon liquidation, the stated liquidation preference per share of $1,000,
plus accumulated and unpaid dividends, if any, with respect to each share.
If upon any voluntary or involuntary dissolution, liquidation or winding up
of our company, the amounts payable with respect to the stated liquidation
preference and accumulated and unpaid dividends of the Series B preferred stock
and any other shares of our stock ranking as to any distribution on parity with
the Series B preferred stock are not paid in full, the holders of the Series B
preferred stock and of the other shares will share pro rata in proportion to the
respective liquidation preferences of the Series B Preferred Stock and the other
shares. After payment in full of amounts owing to the holders of Series B
preferred stock on liquidation, the holders of Series B preferred stock will
have no right or claim to any of our remaining assets. Neither the sale of all
or substantially all of our property or business, other than in connection with
the dissolution, liquidation or winding up of the business, nor our merger or
consolidation into or with any other corporation, will be deemed to be a
dissolution, liquidation or winding up, voluntary or involuntary, of our
company.
Conversion Rights. Each outstanding share of the Series B preferred stock
will be convertible at any time at the option of the holder into that number of
whole shares of our common stock as is equal to the stated liquidation
preference of $1,000, divided by the conversion price in effect at the time that
the share of Series B preferred stock is converted. The initial conversion price
of the Series B preferred stock is $32.11. On March 29, 2001, the conversion
price will be reset as shown in the following chart to reflect any reduction in
the principal due on the senior unsecured notes issued by us on September 29,
2000 to the original holders of the shares of Series B preferred stock.
<TABLE>
<CAPTION>
PERCENTAGE OF PRINCIPAL AMOUNT
OF SENIOR UNSECURED NOTES RESET
REMAINING OUTSTANDING ON THE CONVERSION
MARCH 29, 2001 PRICE
------------------------------ ----------
<S> <C>
100% $32.11
91% $32.47
77% $33.01
64% $33.44
59% $33.72
55% $33.90
50% $34.08
32% $34.80
23% $35.15
14% $35.51
9% $35.69
0% $36.05
</TABLE>
If the percentage of the principal amount of senior unsecured notes remaining
outstanding on March 29, 2001 is other than as indicated on the above chart, the
conversion price shall be ratably calculated by us based on the values set forth
above and will be rounded to the nearest $0.01.
No fractional shares of common stock or securities representing fractional
shares of our common stock will be issued upon conversion. Any fractional
interest in a share of our common stock resulting from conversion will be paid
in cash based on the last reported sale price of our common stock on the Nasdaq
National Market, or any national securities exchange or authorized quotation
system on which our common stock is then listed, or authorized for quotation, if
not so listed at the close of business on the last trading day before the date
of conversion.
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The conversion price is subject to further adjustment upon the occurrence
of specified events after September 29, 2000 in accordance with the provisions
of our certificate of incorporation, including:
- any payment of a dividend or other distribution payable in shares of our
capital stock to all holders of our common stock, other than a dividend
or distribution in which the holders of the Series B preferred stock
participate;
- any issuance to all holders of shares of our common stock of rights,
options or warrants entitling them for a period of up to 60 days to
subscribe for or purchase shares of our common stock or securities
convertible into or exchangeable for shares of our common stock at less
than the average "current market price" (as defined below) of our common
stock during the 10 trading day period ending on the last trading day
before the record date of the issuance; however, if the rights, options
or warrants are not issued, or expire or are unexercised after issuance,
then the conversion price will be readjusted as if the issuance had not
occurred with respect to the rights, option or warrants remaining
unexercised;
- any subdivision, combination or reclassification of our common stock;
- a distribution to all holders of our common stock consisting of evidences
of indebtedness, shares of capital stock or assets, including securities,
but excluding regular cash dividends or distributions declared in the
ordinary course by our board of directors and those dividends, rights,
options, warrants and distributions referred to above.
For purposes of the Series B preferred stock, our certificate of
incorporation defines "current market price" as of a particular day of our
common stock or any other class of our capital stock or other security issued by
us or any other issuer as follows:
- if the security is then listed or admitted to trading on a national
securities exchange in the United States, the last reported sale price,
regular way, for the security as reported in the consolidated transaction
or other reporting system for securities listed or traded on such
exchange, or
- if the security is quoted on the Nasdaq National Market, the last
reported sale price, regular way, for the security as reported on such
list, or
- if the security is not so admitted for trading on any national securities
exchange or the Nasdaq National Market, the average of the last reported
closing bid and ask prices reported by the Nasdaq National Market as
furnished by any member in good standing of the National Association of
Securities Dealers, Inc., selected by us from time to time for that
purpose or as quoted by the National Quotation Bureau Incorporated, and
if no such quotation is available for that day, then the average of the
quotations for the last five trading days for which a quotation is
available within the last 30 trading days prior to that day, and if five
quotations are not available within the 30-trading day period, then our
board of directors will determine the current market price on the basis
of these quotations as it reasonably and in good faith considers
appropriate.
No adjustment of the conversion price will be required to be made until the
cumulative adjustments, whether or not made, amount to 1.0% or more of the
conversion price as last adjusted.
Change of Control. In addition to the conversion provisions described
above, upon a change of control of our company, holders of Series B preferred
stock will have a one-time option to convert all of their outstanding shares of
Series B preferred stock into shares of our common stock at a special conversion
price equal to the greater of (1) $5.29 and (2) the "change of control price",
as defined below. This conversion option will be exercisable during a period
beginning 15 days before and ending 15 days after the change of control.
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Our certificate of incorporation defines "change of control" for purposes
of the Series B preferred stock as any of the following events:
- the sale, lease or transfer of all or substantially all of our assets to
any "person or group," as such terms are used in Section 13(d)(3) of the
Securities Exchange Act of 1934, other than to "permitted holders" (as
defined below);
- the acquisition, directly or indirectly, by any person or group, as such
terms are used in Section 13(d)(3) of the Exchange Act, other than
permitted holders, of beneficial ownership (as defined in Rule 13d-3
under the Exchange Act) of more than 35% of our total outstanding voting
stock, and/or of options or warrants to acquire that percentage of the
voting power of our stock, unless 35% or more of the direct or indirect
ownership of our corporation in place immediately before that transaction
remains in place immediately after that transaction; or
- during any period of two consecutive years, individuals who at the
beginning of that period constituted our board of directors, together
with any new directors whose election by the board of directors or whose
nomination for election by our shareholders was approved by a vote of a
majority of our directors then still in office who were either directors
at the beginning of that period or whose election or nomination for
election was previously so approved, cease for any reason to constitute a
majority of our board of directors then in office.
Our certificate of incorporation defines "change of control price" for
purposes of the Series B preferred stock as:
- the fair market value of the consideration received by a holder of common
stock for one share of common stock in a change of control transaction
from any successor, acquiror or other third party, or
- if holders of shares of our common stock do not receive any consideration
in a change of control transaction from any successor, acquiror or other
third party, the fair market value per share of common stock on the date
on which the change of control occurs, as adjusted for any subsequent
stock split, stock dividend, subdivision or reclassification affecting or
relating to the common stock.
Our certificate of incorporation defines "fair market value" for purposes
of the Series B preferred stock as:
- in the case of cash, the amount of such cash;
- in the case of stock, the current market price of such stock as of the
close of business on the first full trading day following the day on
which the transaction resulting in a change of control is first
announced; and
- in the case of property other than cash or stock, the fair market value
of such property on the date in question as determined in good faith by
our board of directors.
For purposes of the definition of change of control, the term "permitted
holders" means each of George S. Blumenthal and J. Barclay Knapp and each of
their spouses and children and any trusts established by or for the benefit of
any of them and the estate, heirs, executor, administrator, committee or
personal representative of any of the foregoing in the event of their death or
incompetence and any entity so long as at least 50% of the voting power of such
entity is owned by them.
The phrase "all or substantially all" of our assets is likely to be
interpreted by reference to applicable state law at the relevant time, and will
be dependent on the facts and circumstances existing at such time. As a result,
there may be a degree of uncertainty whether a sale or transfer is of "all or
substantially all" of our assets.
Exchange at CoreComm's Option. After September 29, 2002, we may exchange
the Series B preferred stock for shares of common stock at the then applicable
conversion price if during a 20 trading day period ending not earlier than 30
days before the day that we give notice of exchange, our common
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stock traded at a price equal to at least 125% of the then applicable conversion
price. In addition, after September 29, 2005, we may exchange the Series B
preferred stock for shares of common stock if the current market price is equal
to at least the conversion price for a period of 20 consecutive trading days
ending on the last day before the day on which we give notice of our intent to
exchange the shares of Series B preferred stock for shares of our common stock.
We may effect any exchange by delivering notice to the holders of the
Series B preferred stock not less than 10 nor more than 60 days prior to the
scheduled exchange date.
In the event that fewer than all the outstanding shares of the Series B
preferred stock are to be exchanged, the shares to be exchanged will be
determined pro rata.
Mandatory Redemption. The Series B preferred stock is not subject to any
sinking fund or other similar provision. However, on September 29, 2020, we will
be required to redeem any shares of Series B preferred stock that then remain
outstanding. The redemption price for each share of Series B preferred stock
will be $1,000 plus all accrued and unpaid dividends on the share. At our
discretion, we may pay the redemption price either in cash or in shares of our
common stock. If we elect to pay the redemption price in the form of shares of
common stock, those shares will be valued at 98% of the volume weighted average
sale price of the shares of our common stock during the five trading days ending
on the last trading day before the redemption date.
If we fail to redeem any outstanding shares of Series B preferred stock on
September 29, 2020, then, until we do redeem the outstanding shares of Series B
preferred stock, we will be prohibited from directly or indirectly redeeming,
purchasing, or otherwise acquiring any parity security or discharging any
mandatory or optional redemption, sinking fund or similar obligation in respect
of a parity security, except in connection with a redemption, sinking fund or
other obligation to be satisfied pro rata with the Series B preferred stock. In
addition, if we fail to redeem any outstanding shares of Series B preferred
stock on September 29, 2020, then, until we do redeem the outstanding shares of
Series B preferred stock, we will be prohibited from paying any dividends on, or
making any distributions, redemptions or purchases of, junior securities (other
than dividends and distributions payable in shares of, or options, warrants or
rights to subscribe for or purchase, shares of, junior securities).
We may effect a redemption of the shares of Series B preferred stock by
delivering notice to the holders of the Series B preferred stock not less than
30 nor more than 60 days prior to the scheduled redemption date.
Advance Notice of Specified Events. If at any time:
- there is any consolidation or merger to which we are a party and for
which approval of any of our stockholders is required; or
- there is a voluntary or involuntary dissolution, liquidation or winding
up of our company; or
- there is a sale, exchange or other conveyance (for cash, shares of stock,
securities or other consideration) of all or substantially all of our
property and assets except to one of our wholly-owned subsidiaries;
then we will send a notice to the holders of record of the outstanding Series B
preferred stock, not less than 10 nor more than 60 days prior to the applicable
record date, stating the date on which any reclassification, consolidation,
merger, sale, conveyance, dissolution, liquidation or winding up is expected to
become effective, if known, and the date as of which it is expected that holders
of common stock of record will be entitled to exchange their shares of common
stock for securities or other property deliverable upon the reclassification,
consolidation, merger sale, conveyance, dissolution, liquidation or winding up,
if known. The failure to give this required notice or the inadequacy in the
notice will not affect the status or validity of corporate action that was
required to be described in that notice.
Voting Rights. Except as described in our certificate of incorporation and
as required by applicable law, the holders of Series B preferred stock are not
entitled to vote on any matter, including the election of
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directors. Our certificate of incorporation provides that, as long as any shares
of Series B preferred stock are outstanding, we may not amend, alter or repeal
any provision of our certificate of incorporation so as to materially adversely
affect the preferences, special rights, powers or privileges of the shares of
Series B preferred stock, without the affirmative vote or written consent of the
holders of a majority of the number of shares of Series B preferred stock at the
time outstanding. In addition, our certificate of incorporation also provides
that, as long as any shares of Series B preferred stock are outstanding, we may
not create any class or series of our capital stock ranking senior to the shares
of Series B preferred stock with respect to rights to receive payment of
dividends or rights to receive distributions of assets upon our liquidation,
dissolution or winding up without the affirmative vote or written consent of the
holders of a majority of the number of shares of Series B preferred stock then
outstanding.
SERIES C JUNIOR PARTICIPATING PREFERRED STOCK
General. In connection with the adoption of our shareholder rights plan,
which is described below, our board of directors designated and reserved for
issuance the Series C preferred stock. A total of 1,000,000 shares of Series C
preferred stock are authorized. No shares are issued or outstanding. When issued
and paid for in accordance with the shareholder rights plan, the Series C
preferred stock will be fully paid and nonassessable. We will appoint a transfer
agent for the Series C preferred stock if any shares are issued.
Dividends and Ranking. Each share of Series C preferred stock entitles its
holders to receive dividends out of our funds legally available for the payment
of dividends. With respect to those dividends, the Series C preferred stock will
rank:
- senior to all classes of our common stock and to each other class of
capital stock or series of preferred stock that is designated to rank
junior to the Series C preferred stock;
- junior to all classes of preferred stock that is designated to rank
senior to the Series C preferred stock, including the Series A preferred
stock and the Series B preferred stock; and
- equal to all classes of preferred stock that is designated to rank
equally with the Series C preferred stock.
Dividends are payable quarterly in cash on the fifteenth day of March, June,
September and December of each year, in an amount per share equal to the greater
of:
- $0.01; and
- 100 times the aggregate per-share amount of all dividends declared on our
common stock since the immediately preceding dividend payment date,
subject to adjustment for subdivision or combination of our common stock.
Liquidation, Dissolution or Winding up. Upon any liquidation, dissolution
or winding up of our company, the holders of outstanding shares of Series C
preferred stock will be entitled to paid out of the assets available for
distribution to our stockholders after payment of any liquidation values of any
securities senior in liquidation rights to the Series C preferred stock,
including the Series A preferred stock and the Series B preferred stock.
After payment of the liquidation values of senior securities, the holders
of the Series C preferred stock will be entitled to receive $1.00 for each share
of Series C preferred stock they hold, plus any accrued and unpaid dividends or
distributions on those shares. If, upon any liquidation, dissolution or winding
up of our company, the remaining assets available for distribution are
insufficient to pay the holders of the Series C preferred stock and all other
securities ranking equally with the Series C preferred stock with respect to
liquidation the full amount to which they are entitled, the holders of Series C
preferred stock will share those remaining assets ratably, together with the
holders of the securities ranking equally with the Series C preferred stock.
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Following the initial payment with respect to each share of Series C
preferred stock, no additional distributions will be made to the holders of the
Series C preferred stock until the holders of shares of common stock have
received an amount per share equal to the amount distributed with respect to
each share of Series C preferred stock divided by 100, subject to adjustment for
splits and combinations of our common stock. After the payment with respect to
our common stock, the holders of the Series C preferred stock and the holders of
the common stock will share ratably in any remaining assets and funds, based on
one share of Series C preferred stock equaling 100 shares of common stock,
subject to adjustment for splits and combinations of our common stock.
Voting Rights. Subject to adjustments for splits and combinations of our
common stock, each share of Series C preferred stock will entitle the holder to
100 votes on all matters submitted to a vote of our stockholders. The holders of
the Series C preferred stock will vote as a single class with the holders of our
common stock.
If dividends on the Series C preferred stock are in arrears in an amount
equal to six quarterly dividends, all holders of our preferred stock whose
dividends are in arrears with respect to six quarterly periods will, voting as a
single class, be entitled to elect two new directors to our board of directors.
The directors will serve until successors to them have been elected or until
dividends on the Series C preferred stock are no longer in arrears.
Redemption. The Series C preferred stock is not redeemable.
Conversion. The Series C preferred stock is not convertible.
STOCKHOLDERS AGREEMENT OF THE FORMER ATX STOCKHOLDERS
In connection with the ATX merger, we and the former stockholders of ATX
executed a stockholders agreement, the terms of which provide that the
stockholders will:
- not acquire or agree to acquire ownership of any of our voting
securities, including any rights, warrants or options to acquire, or any
securities convertible or exchangeable into our voting securities, except
- through the exercise of conversion rights,
- by way of stock splits, reclassifications or stock dividends or other
distributions or offerings made to holders of voting securities,
- from another stockholder who is a party to the stockholder agreement
by bequest, gift, will, pledge or hypothecation,
- through a bequest or similar gift or transfer from another person,
- through a will or the laws of descent and distribution from another
person; or
- through the grant or exercise of stock options or the receipt of other
compensation or benefits involving voting securities, granted to any
party to the stockholders agreement;
- vote their shares of our capital stock in the same proportion as the
votes cast by all holders of voting securities other than the former ATX
stockholders and any former affiliate or associate of ATX, with respect
to this matter, or, in the event of a proposed change of control
transaction, in the manner recommended to the stockholders by our board
of directors;
- not deposit any of our voting securities in a voting trust or subject any
of our voting securities to any other voting arrangement or agreement;
- not solicit proxies or become a participant in a solicitation in
opposition to the recommendation of our board of directors with respect
to any matter;
- not initiate, propose or solicit stockholder approval of any stockholder
proposals or induce others to initiate a stockholder proposal;
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- not join or encourage the formation of a partnership, limited
partnership, syndicate or other group, or act in concert with any person
or entity, in order to control our company or acquire or dispose of our
voting securities;
- not offer, sell, assign, pledge, encumber or dispose of or transfer any
shares of our common stock prior to nine months after the date of closing
of the ATX merger, except that our common stock may be pledged in respect
of a margin loan or to a lending institution that agrees to be similarly
restricted, provided, however, that if less than 50% of aggregate
principal amount of the senior unsecured notes issued to the ATX
stockholders in connection with the ATX recapitalization have been repaid
by February 28, 2000, this restriction will terminate with respect to 25%
of the shares of our common stock received by each of the existing ATX
stockholders;
- not offer, sell, assign, pledge, encumber or dispose of or transfer any
of our voting securities if after that action, the holder of the voting
securities would own 5% or more of the aggregate voting power of all of
our outstanding voting securities on an as-converted basis;
- Generally offer, sell, assign, pledge, encumber, dispose or transfer our
voting securities only in the following ways:
- in a public offering with a broad public distribution;
- in unsolicited open market sales of less than 1% aggregate voting
power in accordance with Rule 144 of the Securities Act;
- in a tender offer recommended by our board of directors;
- in a privately-negotiated transaction with a person not already party
to the stockholders agreement and who will own shares having not more
than 5% of our aggregate voting power after giving effect to the
transaction;
- through a will or laws of descent and distribution;
- through a bequest or similar gift or transfer to a person not party to
the stockholder agreement; or
- as a result of a pledge or hypothecation to a financial institution as
security for a loan or guaranty or as a result of a related
foreclosure; and
- not propose, solicit or participate in any transaction relating to an
acquisition of, a business combination or similar transaction with, or
a change of control of, our company or make or solicit or encourage
any party to make a tender offer for our voting securities.
The stockholders agreement became effective at the closing of the ATX
merger on September 29, 2000 and terminates (a) in the case of Michael Karp and
The Florence Karp Trust, when they cease to own voting securities having, in the
aggregate, 5% or more of our total voting power, and (b) in the case of each of
Debra Buruchian and Thomas Gravina, when each owns less than 50% of the voting
securities issued to him or her in the ATX recapitalization.
SPECIAL CHARTER PROVISIONS
Our certificate of incorporation, which we refer to as the "charter,"
contains the provisions described below. Those charter provisions may have the
effect, alone or in combination with each other or with the existence of
authorized but unissued common stock and any series of preferred stock, of
precluding or rendering more difficult a hostile takeover, making it more
difficult to remove or change the composition of our incumbent board of
directors and our officers, being adverse to stockholders who desire to
anticipate in a tender offer and depriving stockholders of possible
opportunities to sell their shares at temporarily higher prices.
Classified board and filling of vacancies on the board of directors. The
charter provides that the directors shall be divided into three classes, each of
which shall serve a staggered three-year term, and that
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vacancies on our board of directors that may occur between annual meetings may
be filled by our board of directors. In addition, this provision specifies that
any director elected to fill a vacancy on our board of directors will serve for
the balance of the term of the replaced director.
Removal of directors. The charter provides that directors can be removed
only by the stockholders for cause and then only by the affirmative vote of the
holders of not less than two-thirds (66 2/3%) of the combined voting power of
the voting stock.
Voting requirement for some business combinations. The charter also
provides that, in addition to any affirmative vote required by law, the
affirmative vote of holders of two-thirds (66 2/3%) of the voting power of the
voting stock will be necessary to approve any "business combination," as defined
below, proposed by an "interested stockholder," as defined below. The additional
voting requirements will not apply, however, if:
- the business combination was approved by not less than a majority of the
continuing directors;
- a series of conditions are satisfied requiring, in summary, the
following:
(A) that the consideration to be paid to stockholders in the business
combination must be at least equal to the higher of:
(1) the highest per-share price paid by the interested stockholder in
acquiring any shares of common stock during the two years prior
to the announcement date of the business combination or in the
transaction in which it became an interested stockholder, this
date is referred to as the "determination date," whichever is
higher; or
(2) the fair market value per share of common stock on the
announcement date or determination date, whichever is higher, in
either case appropriately adjusted for any stock dividend, stock
split, combination of shares or similar event with non-cash
consideration treated similarly; and
(B) various "procedural" requirements are complied with, including the
consent solicitation of proxies according to the rules of the SEC
and no decrease in regular dividends, if any, after the interested
stockholder became an interested stockholder, except as approved by
a majority of the continuing directors.
An "interested stockholder" is defined as anyone who is the beneficial
owner of more than 15% of the voting power of the voting stock, other than
CoreComm and any employee stock plans sponsored by CoreComm, and includes any
person who is an assignee of or has succeeded to any shares of voting stock in a
transaction not involving a public offering that were at any time within the
prior two-year period beneficially owned by an interested stockholder. The term
"beneficial owner" includes persons directly and indirectly owning or having the
right to acquire or vote the stock. Interested stockholders participate fully in
all stockholder voting.
A "business combination" includes the following transactions:
- merger or consolidation of CoreComm or any subsidiary of CoreComm with an
interested stockholder or with any other corporation or entity which is,
or after the merger or consolidation would be, an affiliate of an
interested stockholder;
- the sale or other disposition by CoreComm or a subsidiary of CoreComm of
assets having a fair market value of $5,000,000 or more if an interested
stockholder, or an affiliate of an interested stockholder is a party to
the transaction;
- the adoption of any plan or proposal for CoreComm's liquidation or
dissolution proposed by or on behalf of an interested stockholder, or an
affiliate of an interested stockholder; or
- any reclassification of securities, recapitalization, merger with a
subsidiary, or other transaction which has the effect, directly or
indirectly, of increasing the proportionate share of any class of
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CoreComm's outstanding stock, or securities convertible in to stock, or a
subsidiary owned by an interested stockholder, or an affiliate of an
interested stockholder.
Determinations of the fair market value of non-cash consideration are made
by a majority of the continuing directors.
The term "continuing directors" means any member of our board of directors,
while that person is a member of our board of directors, who is not a affiliate
or associate or representative of the interested stockholder and was a member of
our board of directors prior to the time that the interested stockholder became
an interested stockholder, and any successor of a continuing director while that
successor is a member of our board of directors, who is not an affiliate or
associate or representative of the interested stockholder and is recommended or
elected to succeed the continuing director by a majority of continuing
directors.
Voting requirements for some amendments to the charter. The charter
provides that the provisions set forth in this section under the heading
"Special Charter Provisions" may not be repealed or amended in any respect,
unless that action is approved by the affirmative vote of the holders of not
less than two-thirds (66 2/3%) of the voting power of the voting stock. The
requirement of an increased stockholder vote is designed to prevent a
stockholder who controls a majority of the voting power of the voting stock from
avoiding the requirements of the provisions discussed above by simply amending
or repealing those provisions.
THE SHAREHOLDER RIGHTS PLAN
We adopted a shareholder rights plan on September 29, 2000. In connection
with the shareholder rights plan, our Board of Directors declared and paid a
dividend of one preferred share purchase right for each share of our common
stock outstanding on October 16, 2000. Each right entitles the holder, under
some circumstances, to purchase from us one one-hundredth of a share of our
Series C Junior Participating Preferred Stock, par value $0.01 per share, at an
exercise price of $50.00, subject to adjustment. There are 1,000,000 shares of
Series C preferred stock authorized for issuance under the plan.
Initially, the rights are attached to outstanding certificates representing
our common stock, and no separate certificates representing the rights are
distributed. The rights will separate from our common stock, be represented by
separate certificates and will become exercisable upon the earlier of:
- ten business days following a public announcement that a person or group
has acquired or has obtained the right to acquire 18% or more of our
outstanding common stock; or
- ten business days, or such later date as may be determined by the action
of the Board of Directors prior to such time as any person or group
becomes an acquiring person, after the commencement of, or announcement
of an intention to make, a tender offer or exchange offer for 18% or more
of our outstanding common stock.
If after the rights become exercisable we agree to merge into another
entity, another entity merges into us or we sell or transfer more than 50% of
our assets, each right will entitle the holder to purchase a number of shares of
common stock of the resulting entity at a discount.
If after someone has acquired 18% or more of our common stock or the Board
of Directors declares any person to be an adverse person upon a determination
that a person has become the beneficial owner of a substantial amount of our
common stock (which shall in no event be less than 10% of the outstanding common
stock), each holder of a right will be entitled to receive shares of our common
stock at a discount.
We may exchange the rights at a ratio of one share of common stock for each
right at any time after someone acquires 18% or more of our common stock but
before that person acquires 50% or more of our common stock. We may also redeem
the rights at our option at a price of $0.01 per right, subject to adjustment,
at any time before the tenth day following the announcement that someone has
acquired 18% or more of our common stock. The rights expire on the earliest of
October 16, 2010, an exchange or
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redemption of the rights as described above, or the completion of a merger as
described above. The rights distribution is not taxable to stockholders.
The shareholder rights plan is intended to encourage a potential acquiror
to negotiate directly with the Board of Directors, but may have anti-takeover
effects. The shareholder rights plan could significantly dilute the ownership
interests of an acquiror in CoreComm and therefore may have the effect of
delaying, deterring or preventing a change in control of CoreComm.
For further description, please refer to the shareholder rights plan, which
was filed with the Securities and Exchange Commission on September 29, 2000 as
Exhibit 4.3 to the Form 8-A of CoreComm Limited.
TRANSFER AGENT AND REGISTRAR
Our transfer agent and registrar for our common stock is Continental Stock
Transfer & Trust Company.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
Generally, Section 203 of the Delaware General Corporation Law prohibits a
publicly held Delaware corporation from engaging in any business combination
with an interested stockholder for a period of three years following the time
that a stockholder becomes an interested stockholder, unless:
- prior to that time either the business combination or the transaction
which resulted in the stockholder becoming an interested stockholder is
approved by the board of directors of the corporation;
- upon consummation of the transaction which resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding, for purposes of determining the
number of shares outstanding, those shares held by persons who are both
directors and officers and certain employee stock plans; or
- at or after that time the business combination is approved by the board
and authorized at an annual or special meeting of stockholders, and not
by written consent, by the affirmative vote of at least two-thirds of the
outstanding voting stock which is not owned by the interested
stockholder.
A business combination includes certain mergers, consolidations, asset
sales, transfers and other transactions resulting in a financial benefit to the
interested stockholder. An interested stockholder is a person who, together with
affiliates and associates, owns 15% or more of the corporation's voting stock.
INDEMNIFICATION PROVISIONS
Section 145 of the Delaware General Corporation Law authorizes a
corporation to indemnify its directors, officers, employees and agents against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement reasonably incurred, including liabilities under the Securities Act,
provided they act in good faith and in a manner reasonably believed to be in or
not opposed to the best interests of the corporation, although in the case of
proceedings brought by or on behalf of the corporation, such indemnification is
limited to expenses and is not permitted if the individual is adjudged liable to
the corporation (unless the court determines otherwise). The registrant's
Certificate of Incorporation and Bylaws require the registrant to indemnify its
officers and directors to the full extent permitted by Delaware law.
Section 102 of the Delaware General Corporation Law authorizes a
corporation to limit or eliminate its directors' liability to the corporation or
its stockholders for monetary damages for breaches of fiduciary duties, other
than for (i) breaches of the duty of loyalty, (ii) acts or omissions not in good
faith or that involve intentional misconduct or knowing violations of law, (iii)
unlawful payments of dividends, stock purchases or redemptions, or (iv)
transactions from which a director derives an improper personal benefit.
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The registrant's Certificate of Incorporation contains provisions limiting the
liability of the directors to the registrant and to its stockholders to the full
extent permitted by Delaware law.
Section 145 of the Delaware General Corporation Law authorizes a
corporation to purchase and maintain insurance on behalf of any person who is or
was a director, officer, employee or agent of the corporation against any
liability asserted against him or her and incurred by him or her in any such
capacity, or arising out of his or her status as such. The registrant's
Certificate of Incorporation and Bylaws provide that the registrant may, to the
full extent permitted by law, purchase and maintain insurance on behalf of any
director, officer, employee or agent of the registrant against any liability
that may be asserted against him or her and the registrant currently maintains
such insurance. The registrant will obtain liability insurance covering its
directors and officers for claims asserted against them or incurred by them in
such capacity, including claims brought under the Securities Act.
Insofar as indemnification for liabilities arising from the Securities Act
may be permitted to directors, officers or persons controlling the registrant
pursuant to the foregoing provisions, the registrant has been informed that in
the opinion of the SEC, such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
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DESCRIPTION OF OUR OTHER INDEBTEDNESS
VENDOR FINANCING
We are currently negotiating with equipment manufacturers, including Cisco
Systems, Inc., Lucent Technologies, Inc. and Nortel Networks Corporation, to
provide us with vendor financing. The vendors would provide financing to our
indirect, wholly-owned subsidiary, CoreComm Operating Company, Inc. or its
subsidiaries in connection with our purchase of equipment and services generally
utilized in the buildout of our voice data and networks. In the aggregate, these
financings are anticipated to be significant. We cannot assure you that we will
be successful in obtaining any vendor financing.
OTHER INDEBTEDNESS
Some of our other indirect subsidiaries have $33.3 million of indebtedness
and capital lease obligations outstanding as of June 30, 2000 on a pro forma
basis after giving effect to the acquisitions of ATX and Voyager. For more
information, see our historical financial statements and the related notes. In
addition, our subsidiaries may incur substantial indebtedness in the future.
SENIOR SECURED CREDIT FACILITY
On September 28, 2000, we entered into a senior secured credit facility
with The Chase Manhattan Bank as lender, administrative agent and collateral
agent. Our senior secured credit facility provides for both a term loan facility
and a revolving credit facility. Our term loan facility is for an initial
aggregate amount of $100.0 million and has a final maturity of September 22,
2008. At September 30, 2000, we had $50.0 million outstanding under our term
loan facility. Our revolving credit facility is for a total of $50.0 million and
has a termination date of September 22, 2008. At September 30, 2000, we had
$25.0 million outstanding under our revolving credit facility.
The interest rate on both our term loan facility and our revolving credit
facility is initially, at our option, either:
- 3.25% per annum plus the base rate, which is the higher of:
- the rate as publicly announced from time to time by The Chase
Manhattan Bank as its "prime rate", or
- the federal funds effective rate plus 0.50% per annum; or
- the reserve-adjusted London Interbank Offered Rate (Adjusted LIBOR) plus
4.25% per annum.
The applicable margin for our facilities will be subject to reductions
based on the ratio of our consolidated total debt to annualized EBITDA.
At September 30, 2000, the interest rate on our term loan facility was
11.04%. At September 30, 2000, the interest rate on our revolving credit
facility was 11.04%. We are able to repay and reborrow on our revolving credit
facility. Availability under our revolving credit facility is subject to a
commitment fee equal to 1.50%, subject to reduction to 1.00% per annum based
upon the rate of utilization of our facilities. This commitment fee is payable
quarterly in arrears until termination of the lender's commitment.
We pay a letter of credit fee for the pro rata account of each lender in an
amount equal to the dollar equivalent of the daily amount available to be drawn
or outstanding under letters of credit, if any are outstanding, at a per annum
rate equal to the interest rate applicable to the revolving credit facility. In
addition, we pay a per annum fronting fee equal to 0.25% of the daily amount
available to be drawn down under any letters of credit.
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The loans under our term loan facility are subject to quarterly
amortization payments over the life of the facility. In addition, we will have
to make partial repayments of our term loans, subject to exceptions for:
- net proceeds from a sale of assets;
- net proceeds from an issuance of debt;
- net proceeds from insurance following a casualty event; and
- excess cash flow.
Once the term loans have been repaid, the term loans will not be permitted
to be reborrowed.
We and all of our present and future direct and indirect subsidiaries
(other than subsidiaries that we may designate as unrestricted subsidiaries)
unconditionally guarantee payment under our senior secured credit facility.
These guarantees are secured by a pledge of and a perfected security interest in
all of the assets of these entities, including 100% of the stock of our
subsidiaries.
Our senior secured credit facility contains customary covenants and
restrictions on our ability and the ability of our subsidiaries to engage in
some activities, including, but not limited to:
- issuing new indebtedness;
- creating liens;
- incurring capital expenditures;
- making investments;
- declaring dividends, repurchasing or redeeming capital stock and
prepaying subordinated debt;
- entering into any merger, consolidation, acquisition, sale of assets or
lease; and
- entering into hedging transactions.
Our senior secured credit facility also requires us and our subsidiaries to
observe the following customary financial covenants:
- a minimum active access lines and minimum on-net access lines
requirement;
- a minimum consolidated services revenue requirement;
- a maximum consolidated total secured debt to total capital ratio and a
maximum consolidated total debt to total capital ratio;
- a positive EBITDA requirement;
- a maximum consolidated total secured debt to annualized EBITDA ratio and
a maximum consolidated total debt to annualized EBITDA ratio;
- a minimum consolidated EBITDA to consolidated cash interest expense;
- a minimum consolidated EBITDA to consolidated fixed charge ratio; and
- a maximum capital expenditures requirement.
Our senior secured credit facility contains customary events of default,
including payment defaults, breach of representations and warranties, covenant
defaults, cross-defaults on other indebtedness, events of bankruptcy and
insolvency, ERISA defaults, judgment defaults, failure of any guaranty or
security agreement supporting our senior secured credit facility to be in full
force and effect, and change in control of our Company.
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SENIOR UNSECURED CREDIT FACILITY
On September 9, 2000, we entered into a commitment letter with Chase
Securities Inc. and The Chase Manhattan Bank, under which The Chase Manhattan
Bank committed to provide us with a $50.0 million unsecured credit facility. Our
senior unsecured credit facility will be available on January 31, 2001 and will
have a final maturity on September 30, 2009. The interest rate on our senior
unsecured credit facility will be initially, at our option, either:
- the ten-year treasury rate plus 9.50%; or
- the reserve-adjusted London Interbank Offered Rate (Adjusted LIBOR) plus
8.50%.
The applicable margin for our facilities will increase quarterly by 0.50%
up to 17.0%.
We anticipate that the credit agreement for the senior unsecured credit
facility will contain substantially similar prepayment events, covenants and
events of default as those contained in our senior secured credit facility. To
date, no definitive agreement has been executed and no assurance can be given
that the senior unsecured credit facility will be executed on these terms or
entered into at all.
SENIOR UNSECURED NOTES
On September 29, 2000, we issued to the former stockholders of ATX
$108,668,636 aggregate principal amount of our senior unsecured notes. These
notes were issued in connection with the ATX recapitalization and merger
transaction and are governed by the terms of a Note Purchase Agreement dated
September 29, 2000 among our company and the former ATX stockholders. The
principal features of the senior unsecured notes are as follows:
- The senior unsecured notes mature on September 29, 2003.
- The senior unsecured notes bear interest at an annual rate of 6.47%.
Interest on the senior unsecured notes is payable either in cash or
common stock, at our election, on October 1 and April 1 of each year,
starting April 1, 2001. If we decide to pay interest in the form of
common stock, either the issuance of that common stock must be covered by
an effective registration statement under the Securities Act or a
registration statement under the Securities Act covering the resale of
that common stock must be effective as of the date of the interest
payment.
- We may prepay the senior unsecured notes at any time without penalty or
premium.
- The senior unsecured notes must generally be repaid out of the net
proceeds from any future financings that we undertake, excluding
specified contemplated financings and the refinancing of some of our
existing financing arrangements. Specifically, 50% of all of the net
proceeds from future financings must be applied to repay the senior
unsecured notes until $100 million in aggregate principal amount of the
senior unsecured notes is repaid. After $100 million in aggregate
principal amount of senior unsecured notes is repaid, 100% of the net
proceeds from future financings must be applied to repay the senior
unsecured notes.
- In addition, we are required to make the following mandatory repayments:
-- approximately $2,100,000 on January 1, 2001;
-- approximately $640,000 on March 29, 2001;
-- approximately $2,740,000 on January 1, 2002; and
-- approximately $2,740,000 on January 1, 2003.
If the principal amount of the senior unsecured notes issued has been
reduced, other than by payment of the above amounts, the required
repayments set forth above will be reduced proportionately and the excess
will be forgiven.
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- We will be entitled to satisfy in full all of our obligations under the
senior unsecured notes by paying less than the full outstanding principal
amount of the senior unsecured notes if:
-- on or before December 31, 2001, we pay an amount equal to the excess of
the outstanding aggregate principal amount of the senior unsecured
notes (plus any accrued interest) over $6.0 million; or
-- on or before December 31, 2002, post-merger we pay an amount equal to
the excess of the outstanding aggregate principal amount of the senior
unsecured notes (plus any accrued interest) over $3.0 million.
- The senior unsecured notes will rank senior to all subordinated
indebtedness and on parity with all of our other senior indebtedness. We
and our subsidiaries will not be permitted to incur secured indebtedness,
other than vendor financing and other identified financings, and any
refinancings of those identified financings, unless we secure the senior
unsecured notes equally, to the extent that the amount of secured
indebtedness is less than or equal to the amount repaid on the senior
unsecured notes; and to the extent that the amount of that secured
indebtedness is greater than the amount repaid on the senior unsecured
notes, the senior unsecured notes must be given a security interest that
is superior to that of the other secured indebtedness.
- The maturity of the senior unsecured notes may be accelerated upon the
occurrence of specified events of default, including:
-- Failure by us to make any principal payment when due or to pay any
interest or other payment required under the senior unsecured notes to
the noteholders within 5 days after its due date;
-- Breach by us of specified covenants and representations and warranties
contained in the purchase agreement for the senior unsecured notes and
in documents delivered by us in connection with the purchase agreement,
and our failure to remedy that breach (if capable of being remedied)
within 30 or 45 days (depending upon the breach) following notice from
the noteholders to us;
-- The existence of an event of default under some of our other loan and
credit arrangements that results in the acceleration of the maturity of
that indebtedness;
-- The existence of an unsatisfied judgment against us or our subsidiaries
in excess of $10.0 million that is not covered by insurance and that
has not been stayed or appealed by us within 30 days from the date on
which that judgment was entered; and
-- The occurrence of voluntary and involuntary bankruptcy events involving
us and our subsidiaries;
-- Upon the acquisition of ownership, directly or indirectly, beneficially
or of record, by any person or group of equity interests representing
more than 35% of the aggregate ordinary voting power of the issued and
outstanding equity interests in our company; and
-- When a majority of the seats (other than vacant seats) on our board of
directors are held by individuals who were neither (i) nominated by our
current board of directors nor (ii) appointed by directors so
nominated.
- The purchase agreement for the senior unsecured notes contains some
restrictions on our ability and the ability of our subsidiaries to engage
in some activities, including, but not limited to:
-- entering into any merger or consolidation, or liquidating or
dissolving;
-- entering into agreements that restrict the ability of any of our
subsidiaries to pay dividends or other distributions or payments to us
or to another subsidiary or that restrict our ability or the ability of
any of our subsidiaries to comply with obligations to the holders of
the senior unsecured notes and our lenders; and
-- entering into transactions with our affiliates.
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PLAN OF DISTRIBUTION
The offered securities are being registered to permit public secondary
trading of them by the holders of them from time to time after the date of this
prospectus. We will not receive any of the proceeds from the sale by the selling
securityholders of the offered securities. We will bear all fees and expenses
incident to our obligation to register the offered securities.
The selling securityholders or any decree or pledgee of them acting as
principals may sell all or a portion of the offered securities beneficially
owned by them and offered by this prospectus from time to time directly to
purchasers or through one or more underwriters, broker-dealers or agents. If the
offered securities are sold through underwriters or broker-dealers, the selling
securityholder will be responsible for underwriting discounts, concessions,
commissions or agent's commissions. Offered securities may be sold in one or
more transactions at fixed prices, at prevailing market prices at the time of
the sale, at prices related to the prevailing market prices, at varying prices
determined at the time of sale, or at negotiated prices. Sales may be effected
in transactions (which may involve crosses or block transactions)
(1) on any national securities exchange or quotation service on which the
offered securities may be listed or quoted at the time of sale
(including, without limitation, the Nasdaq National Market for the
common stock);
(2) in the over-the-counter market;
(3) otherwise than on those exchanges or services or in the
over-the-counter market;
(4) involving the lending of offered securities;
(5) through the writing of options (whether the options are listed on an
options exchange or otherwise) relating to the offered securities, the
short sale of offered securities;
(6) through the distribution of the offered securities by any selling
securityholder to its partners, members or shareholders;
(7) through gifting of the offered securities by any selling securityholder
to its family members; or
(8) through a combination of any of the above.
In connection with sales of the offered securities or otherwise, the
selling securityholder may enter into hedging transactions with broker-dealers
or other financial institutions, which may in turn engage in short sales of the
offered securities in the course of hedging in positions they assume. The
selling securityholder may also sell offered securities short and deliver
offered securities to close out short positions, or loan or pledge offered
securities to broker-dealers that in turn may sell the offered securities. If
the selling securityholders effect such transactions by selling offered
securities to or through underwriters, broker-dealers or agents, such
underwriters, brokers, dealers or agents may receive commissions in the form of
discounts, concessions or commissions from the selling securityholders or
commissions from purchasers of offered securities for whom they may act as agent
or to whom they may sell as principal (which discounts, concessions or
commissions as to particular underwriters, brokers-dealers or agents may be in
excess of those customary in the types of transactions involved).
The outstanding common stock is listed for trading on the Nasdaq National
Market under the symbol "COMM." We do not intend to apply for listing of the
convertible notes or the Series B preferred stock on any securities exchange or
for quotation through the National Association of Securities Dealers Automated
Quotation System. Accordingly, we cannot assure you about the development of
liquidity or any trading market for the convertible notes or the Series B
preferred stock. Please refer to the section entitled "Risk Factors."
The selling securityholders and any broker-dealer participating in the
distribution of the offered securities may be deemed to be "underwriters" within
the meaning of the Securities Act, and any commissions paid, or any discounts or
concessions allowed to any of the broker-dealers may be deemed to be
underwriting commissions or discounts under the Securities Act.
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Under the securities laws of certain states, the offered securities may be
sold in those states only through registered or licensed brokers or dealers. In
addition, in certain states the offered securities may not be sold unless the
offered securities have been registered or qualified for sale in the state or an
exemption from registration or qualification is available and is complied with.
We cannot assure you that any selling securityholder will sell any or all
of the convertible notes or offered securities registered under the shelf
registration statement, of which this prospectus forms a part. In addition, any
securities covered by this prospectus that qualify for sale under Rule 144 or
Rule 144A of the Securities Act may be sold under Rule 144 or Rule 144A rather
than under this prospectus.
The selling securityholders and any other person participating in the
distribution will be subject to applicable provisions of the Exchange Act and
the rules and regulations under the Exchange Act, including, without limitation,
Regulation M of the Exchange Act, which may limit the timing of purchases and
sales of any of the offered securities by the selling securityholders and any
other relevant person. Furthermore, Regulation M may restrict the ability of any
person engaged in the distribution of the offered securities to engage in
market-making activities with respect to the particular offered securities being
distributed. All of the above may affect the marketability of the offered
securities and the ability of any person or entity to engage in market-making
activities with respect to the offered securities.
All expenses of the registration of the convertible notes, the Series B
preferred stock and common stock under the registration rights agreement will be
paid by us, including, without limitation, SEC filing fees and expenses of
compliance with state securities or "blue sky" laws; provided, however, that the
selling securityholders will pay all underwriting discounts and selling
commissions, if any. The selling securityholders will be indemnified by us
against certain civil liabilities, including certain liabilities under the
Securities Act, or will be entitled to contribution in connection with those
liabilities. We will be indemnified by the selling securityholders against
certain civil liabilities, including certain liabilities under the Securities
Act, or will be entitled to contribution in connection with those liabilities.
Upon sale under the shelf registration statement, of which this prospectus
forms a part, the offered securities will be freely tradable in the hands of
persons other than our affiliates.
LEGAL MATTERS
The validity of the convertible notes, the Series B preferred stock and the
common stock, including the common stock that is issuable upon conversion of the
convertible notes or upon conversion of or dividends on the Series B preferred
stock and certain other legal matters relating to the offering will be passed
upon for us by Paul, Weiss, Rifkind, Wharton & Garrison, New York, New York.
EXPERTS
Ernst & Young LLP, independent auditors, have audited the consolidated
financial statements of our predecessor, CoreComm Limited, a Bermuda
corporation, at December 31, 1999 and 1998 and for the year ended December 31,
1999 and for the period from April 1, 1998 to December 31, 1998, as set forth in
their report. We have included CoreComm Limited's financial statements in this
prospectus in reliance on Ernst & Young LLP's report, given on their authority
as experts in accounting and auditing.
Ernst & Young LLP, independent auditors, have audited the consolidated
financial statements of our predecessor, OCOM Corporation Telecoms Division, for
the period from January 1, 1998 to May 31, 1998 and the year ended December 31,
1997, as set forth in their report. We have included these financial statements
in this prospectus in reliance on Ernst & Young LLP's report, given on their
authority as experts in accounting and auditing.
KPMG LLP, independent auditors, have audited the consolidated financial
statements of MegsINet Inc. as of December 31, 1998 and 1997 and for the year
ended December 31, 1998, as set forth in their report. We have included these
financial statements in this prospectus in reliance on KPMG LLP's report, given
on their authority as experts in accounting and auditing.
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Ernst & Young LLP, independent auditors, have audited the consolidated
financial statements of USN Communications, Inc. as of December 31, 1998 and for
the year then ended, as set forth in their report. We have included these
financial statements in this prospectus in reliance on Ernst & Young LLP's
report, given on their authority as experts in accounting and auditing.
The consolidated statements of operations, redeemable preferred stock,
common stockholders' deficit and cash flows of USN Communications, Inc. and
subsidiaries for the year ended December 31, 1997 have been audited by Deloitte
& Touche LLP, independent auditors, as stated in their report appearing in this
prospectus, and are included in reliance upon the report of such firm given on
their authority as experts in accounting and auditing.
BDO Seidman, LLP, independent auditors, have audited the combined financial
statements of ATX Telecommunications Services Group as of December 31, 1999,
1998 and 1997 and for each of the three years in the period ended December 31,
1999 as set forth in their report. ATX's financial statements have been included
in this prospectus in reliance on BDO Seidman, LLP's report, given on their
authority as experts in accounting and auditing.
PricewaterhouseCoopers LLP, independent auditors, have audited the
consolidated financial statements of Voyager.net, Inc. as of December 31, 1999,
1998, and for the years ended December 31, 1999, 1998 and 1997, as set forth in
their report. Voyager's financial statements have been included in this
prospectus in reliance on PricewaterhouseCoopers LLP's report, given on their
authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement on Form S-1 regarding the offering
with the Securities and Exchange Commission. We are currently subject to the
informational requirements of the Securities Exchange Act of 1934. This
prospectus, which is a part of the registration statement, does not contain all
of the information included in the registration statement, and you should refer
to the registration statement and its exhibits to read that information.
References in this prospectus to any of our contracts or other documents are not
necessarily complete, and you should refer to the exhibits attached to the
registration statement for copies of the actual contract or document. You may
read and copy the registration statement, the related exhibits and the other
materials we file with the SEC at the public reference facilities the SEC
maintains at:
Judiciary Plaza
Room 1024
450 Fifth Street, N.W.
Washington, D.C. 20549
Citicorp Center
500 West Madison Street
Suite 1400
Chicago, Illinois 60661
Seven World Trade Center
13th Floor
New York, New York 10048
Our common stock is listed on the Nasdaq National Market under the symbol
"COMM," and all reports, proxy statements and other information concerning us
may be inspected at:
The National Association of
Securities Dealers
1735 K Street, N.W.
Washington, D.C. 20006
142
<PAGE> 146
Copies of these materials can also be obtained by mail at prescribed rates
from the Public Reference Section of the SEC, 450 Fifth Street, N.W.,
Washington, D.C. 20549 or by calling the SEC at 1-800-SEC-0330. The SEC
maintains a website that contains reports, proxy statements and other
information regarding us. The address of the SEC website is http://www.sec.gov.
In addition, in the indenture for the convertible notes we have agreed
that, whether or not we are required to do so by the rules and regulations of
the SEC, for so long as any of the convertible notes remain outstanding, we will
furnish the trustee and will, if permitted, file with the SEC:
- all quarterly and annual financial information that would be required to
be contained in a filing with the SEC on Forms 10-Q and 10-K if we were
required to file such forms;
- with respect to our annual financial information only, a report on the
information by our certified independent accountants; and
- all reports that would be required to be filed with the SEC on Form 8-K
if we were required to file such reports.
143
<PAGE> 147
FINANCIAL STATEMENTS
CORECOMM LIMITED AND SUBSIDIARIES
<TABLE>
<CAPTION>
PAGE(S)
-------
<S> <C>
Condensed Consolidated Balance Sheets -- June 30, 2000...... F-4
Condensed Consolidated Statements of Operations -- Three and
six months ended June 30, 2000 and 1999................... F-5
Condensed Consolidated Statement of Shareholders'
Equity -- Six months ended June 30, 2000.................. F-6
Condensed Consolidated Statements of Cash Flows -- Six
months ended June 30, 2000 and 1999....................... F-7
Notes to Condensed Consolidated Financial Statements........ F-8
Report of Independent Auditors.............................. F-12
Consolidated Balance Sheets -- December 31, 1999 and 1998... F-14
Consolidated Statements of Operations -- Year Ended December
31, 1999, for the Period from April 1, 1998 (date
operations commenced) to December 31, 1998, for the Period
from January 1, 1998 to May 31, 1998 and for the Year
Ended December 31, 1997................................... F-15
Consolidated Statement of Shareholders' Equity -- Year Ended
December 31, 1999 and for the Period from April 1, 1998
(date operations commenced) to December 31, 1998.......... F-16
Statement of Parent's Investment (Deficiency) -- For the
Period from January 1, 1998 to May 31, 1998 and for the
Year Ended December 31, 1997.............................. F-17
Consolidated Statements of Cash Flows -- Year Ended December
31, 1999, for the Period from April 1, 1998 (date
operations commenced) to December 31, 1998, for the Period
from January 1, 1998 to May 31, 1998 and for the Year
Ended December 31, 1997................................... F-18
Notes to Consolidated Financial Statements.................. F-19
Schedule II -- Valuation and Qualifying Accounts............ F-34
</TABLE>
F-1
<PAGE> 148
<TABLE>
<CAPTION>
PAGE(S)
-------
<S> <C>
VOYAGER.NET, INC
Condensed Consolidated Balance Sheet -- June 30, 2000
(unaudited)............................................... F-35
Condensed Consolidated Statements of Operations -- Six
Months ended June 30, 1999 and 2000 (unaudited)........... F-36
Condensed Consolidated Statements of Stockholders'
Equity -- Six Months ended June 30, 2000 (unaudited)...... F-37
Condensed Consolidated Statements of Cash Flows -- Six
Months ended June 30, 1999 and 2000 (unaudited)........... F-38
Notes to Condensed Consolidated Financial Statements
(unaudited)............................................... F-39
Report of Independent Accountants........................... F-42
Consolidated Balance Sheets -- December 31, 1998 and 1999... F-43
Consolidated Statements of Operations -- Years ended
December 31, 1997, 1998 and 1999.......................... F-44
Consolidated Statements of Stockholders' Equity
(Deficit) -- Years ended December 31, 1997, 1998 and
1999...................................................... F-45
Consolidated Statements of Cash Flows -- Years ended
December 31, 1997, 1998 and 1999.......................... F-47
Notes to Consolidated Financial Statements.................. F-48
ATX TELECOMMUNICATIONS SERVICES GROUP
Financial statements
Balance sheet -- June 30, 2000............................ F-58
Statements of operations -- Six months ended June 30, 2000
and 1999............................................... F-59
Changes in equity/partners' capital -- Six months ended
June 30, 2000 and 1999................................. F-60
Statements of Cash flows -- Six months ended June 30, 2000
and 1999............................................... F-61
Notes to unaudited financial statements..................... F-62
Auditors' Report of Independent Certified Public
Accountants............................................... F-64
Combined financial statements
Balance sheets -- December 31, 1999, 1998 and 1997........ F-65
Statements of operations -- Years ended December 31, 1999,
1998 and 1997.......................................... F-66
Changes in partners' capital -- Years ended December 31,
1999, 1998 and 1997.................................... F-67
Statements of Cash flows -- Years ended December 31, 1999,
1998 and 1997.......................................... F-68
Notes to financial statements............................... F-69
</TABLE>
F-2
<PAGE> 149
<TABLE>
<CAPTION>
PAGE(S)
-------
<S> <C>
MEGSINET INC. AND SUBSIDIARY
Independent Auditors' Report................................ F-74
Consolidated Balance Sheets -- December 31, 1998 and 1997... F-75
Consolidated Statement of Operations -- Year Ended December
31, 1998.................................................. F-76
Consolidated Statement of Stockholders' Deficit -- Year
Ended December 31, 1998................................... F-77
Consolidated Statement of Cash Flows -- Year Ended December
31, 1998.................................................. F-78
Notes to Consolidated Financial Statements -- December 31,
1998 and 1997............................................. F-79
Consolidated Balance Sheet -- March 31, 1999 (unaudited).... F-85
Consolidated Statement of Operations -- Three Months Ended
March 31, 1999 and 1998 (unaudited)....................... F-86
Consolidated Statement of Stockholders' Deficit -- Three
Months Ended March 31, 1999 (unaudited)................... F-87
Consolidated Statement of Cash Flows -- Three Months Ended
March 31, 1999 and 1998 (unaudited)....................... F-88
Notes to Consolidated Financial Statements.................. F-89
USN COMMUNICATIONS INC. AND SUBSIDIARY
Report of Independent Auditors -- As of December 31, 1998... F-91
Report of Independent Auditors -- As of December 31, 1997... F-92
Consolidated Balance Sheets -- December 31, 1998............ F-93
Consolidated Statements of Operations -- Years Ended
December 31, 1998 and 1997................................ F-94
Consolidated Statements of Redeemable Preferred
Stock -- Years Ended December 31, 1998 and 1997........... F-95
Consolidated Statements of Common Shareholders'
Deficit -- Years Ended December 31, 1998 and 1997......... F-96
Consolidated Statements of Cash Flows -- Years Ended
December 31, 1998 and 1997................................ F-97
Notes to Consolidated Financial Statements.................. F-98
Debtor-in-Possession Condensed Consolidated Balance
Sheet -- March 31, 1999 (unaudited)....................... F-109
Debtor-in-Possession Condensed Consolidated Statements of
Operations -- Three Months Ended March 31, 1999 and 1998
(unaudited)............................................... F-110
Debtor-in-Possession Condensed Consolidated Statements of
Common Stockholders' Deficit -- December 31, 1998
(unaudited)............................................... F-111
Debtor-in-Possession Condensed Consolidated Statements of
Cash Flows -- Three Months Ended March 31, 1999 and 1998
(unaudited)............................................... F-112
Debtor-in-Possession Notes to Condensed Consolidated
Financial Statements (unaudited).......................... F-113
</TABLE>
F-3
<PAGE> 150
CORECOMM LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
2000
-------------
(UNAUDITED)
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 26,028,000
Marketable securities..................................... 58,192,000
Accounts receivable-trade, less allowance for doubtful
accounts of $2,280,000................................. 6,952,000
Due from NTL Incorporated................................. 1,421,000
Other..................................................... 9,421,000
-------------
Total current assets........................................ 102,014,000
Fixed assets, net........................................... 109,739,000
Goodwill, net of accumulated amortization of $12,040,000.... 53,110,000
LMDS license costs.......................................... 25,366,000
Other, net of accumulated amortization of $4,345,000........ 22,686,000
-------------
$ 312,915,000
=============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 4,126,000
Accrued expenses.......................................... 54,358,000
Equipment payable......................................... --
Current portion of notes payable and capital lease
obligations............................................ 17,726,000
Deferred revenue.......................................... 3,079,000
-------------
Total current liabilities................................... 79,289,000
Notes payable............................................... 176,853,000
Capital lease obligations................................... 8,402,000
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 shares....... 402,000
Additional paid-in capital.................................. 318,913,000
Deferred non-cash compensation.............................. (28,104,000)
(Deficit)................................................... (242,840,000)
-------------
48,371,000
-------------
$ 312,915,000
=============
</TABLE>
See accompanying notes.
F-4
<PAGE> 151
CORECOMM LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------- -----------------------------
2000 1999 2000 1999
------------ ------------ ------------- ------------
(UNAUDITED)
<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.
F-5
<PAGE> 152
CORECOMM LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL DEFERRED
--------------------- PAID-IN NON-CASH
SHARES PAR CAPITAL COMPENSATION (DEFICIT)
---------- -------- ------------ ------------ -------------
(UNAUDITED)
<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.
F-6
<PAGE> 153
CORECOMM LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
----------------------------
2000 1999
------------ ------------
(UNAUDITED)
<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.
F-7
<PAGE> 154
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 this
registration statement.
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>
<S> <C>
Total revenue............................................... $ 55,736,000
Net (loss).................................................. (57,511,000)
Basic and diluted net (loss) per share...................... (1.72)
</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 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.
F-8
<PAGE> 155
CORECOMM LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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,
2000
------------
(UNAUDITED)
<S> <C>
Operating equipment......................................... $ 66,993,000
Computer hardware and software.............................. 28,354,000
Other equipment............................................. 20,615,000
Construction-in-progress.................................... 16,821,000
------------
132,783,000
Accumulated depreciation.................................... (23,044,000)
------------
$109,739,000
============
</TABLE>
F-9
<PAGE> 156
CORECOMM LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5. ACCRUED EXPENSES
Accrued expenses consist of:
<TABLE>
<CAPTION>
JUNE 30,
2000
------------
(UNAUDITED)
<S> <C>
Payroll and related......................................... $ 2,966,000
Taxes, including income taxes............................... 6,270,000
Accrued equipment purchases................................. 20,370,000
Toll and interconnect....................................... 11,686,000
Other....................................................... 13,066,000
------------
$ 54,358,000
============
</TABLE>
NOTE 6. NOTES PAYABLE
Notes payable consist of:
<TABLE>
<CAPTION>
JUNE 30,
2000
------------
(UNAUDITED)
<S> <C>
6% Convertible Subordinated Notes........................... $175,000,000
Working capital promissory note, interest at 8.5%........... 2,303,000
Note payable for equipment, interest at 12.75%.............. 5,551,000
Other....................................................... 222,000
------------
183,076,000
Less current portion........................................ 6,223,000
------------
$176,853,000
============
</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 of 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
cost 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.
F-10
<PAGE> 157
CORECOMM LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
F-11
<PAGE> 158
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Directors
CoreComm Limited
We have audited the consolidated balance sheet of CoreComm Limited and
Subsidiaries as of December 31, 1999 and 1998, and the related consolidated
statements of operations, shareholders' equity and cash flows for the year ended
December 31, 1999 and for the period from April 1, 1998 (date operations
commenced) to December 31, 1998. Our audits also included the financial
statement schedule listed in the Index at Item 14(a) for the year ended December
31, 1999 and for the period from April 1, 1998 (date operations commenced) to
December 31, 1998. These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audits to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
CoreComm Limited and Subsidiaries at December 31, 1999 and 1998, and the
consolidated results of their operations and their cash flows for the year ended
December 31, 1999 and for the period from April 1, 1998 (date operations
commenced) to December 31, 1998 in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
ERNST & YOUNG LLP
New York, New York
March 3, 2000
F-12
<PAGE> 159
REPORT OF INDEPENDENT AUDITORS
Shareholder
OCOM Corporation Telecoms Division
We have audited the accompanying balance sheet of OCOM Corporation Telecoms
Division ("OCOM") as of December 31, 1997, and the related statements of
operations, parent's investment (deficiency) and cash flows for the period from
January 1, 1998 to May 31, 1998 and the years ended December 31, 1997 and 1996.
Our audit also included the financial statement schedule listed in the Index.
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of OCOM Corporation Telecoms
Division at December 31, 1997, and the results of its operations and its cash
flows for the period from January 1, 1998 to May 31, 1998 and the years ended
December 31, 1997 and 1996 in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
New York, New York
February 26, 1999
F-13
<PAGE> 160
CORECOMM LIMITED AND SUBSIDIARIES
AND ITS PREDECESSOR OCOM CORPORATION TELECOMS DIVISION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 86,685,000 $ 26,161,000
Marketable securities..................................... 92,041,000 110,718,000
Accounts receivable-trade, less allowance for doubtful
accounts of $3,949,000 (1999) and $742,000 (1998)...... 7,875,000 1,125,000
Due from affiliates....................................... 195,000 1,954,000
Other..................................................... 5,791,000 669,000
------------ ------------
Total current assets........................................ 192,587,000 140,627,000
Fixed assets, net........................................... 90,619,000 3,582,000
Goodwill, net of accumulated amortization of $7,262,000
(1999) and $230,000 (1998)................................ 57,888,000 4,028,000
LMDS license costs.......................................... 25,366,000 25,366,000
Other, net of accumulated amortization of $2,202,000 (1999)
and $1,000 (1998)......................................... 25,643,000 2,923,000
------------ ------------
$392,103,000 $176,526,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 13,851,000 $ 1,937,000
Accrued expenses.......................................... 32,215,000 4,247,000
Equipment payable......................................... 4,702,000 --
Current portion of notes payable and capital lease
obligations............................................ 19,127,000 133,000
Deferred revenue.......................................... 1,400,000 411,000
------------ ------------
Total current liabilities................................... 71,295,000 6,728,000
Notes payable............................................... 179,318,000 283,000
Capital lease obligations................................... 14,564,000 218,000
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 38,556,000 (1999) and
29,697,000 (1998) shares............................... 386,000 297,000
Additional paid-in capital................................ 246,319,000 185,255,000
(Deficit)................................................. (119,779,000) (16,255,000)
------------ ------------
126,926,000 169,297,000
------------ ------------
$392,103,000 $176,526,000
============ ============
</TABLE>
F-14
<PAGE> 161
CORECOMM LIMITED AND SUBSIDIARIES
AND ITS PREDECESSOR OCOM CORPORATION TELECOMS DIVISION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THE PREDECESSOR
FOR THE PERIOD (OCOM)
FROM APRIL 1, ------------------------------
1998 (DATE FOR THE PERIOD
OPERATIONS FROM JANUARY 1,
YEAR ENDED COMMENCED) TO 1998 TO YEAR ENDED
DECEMBER 31, DECEMBER 31, MAY 31, DECEMBER 31,
1999 1998 1998 1997
------------- -------------- --------------- ------------
<S> <C> <C> <C> <C>
REVENUES........................ $ 58,151,000 $ 6,713,000 $ 1,452,000 $ 3,579,000
COSTS AND EXPENSES
Operating....................... 58,561,000 5,584,000 772,000 1,581,000
Selling, general and
administrative................ 74,185,000 11,940,000 3,205,000 5,934,000
Corporate....................... 7,996,000 2,049,000 -- --
Non-cash compensation........... 1,056,000 4,586,000 -- --
Depreciation.................... 10,945,000 749,000 255,000 428,000
Amortization.................... 8,633,000 231,000 2,000 11,000
------------- ------------ ----------- -----------
161,376,000 25,139,000 4,234,000 7,954,000
------------- ------------ ----------- -----------
Operating (loss)................ (103,225,000) (18,426,000) (2,782,000) (4,375,000)
OTHER INCOME (EXPENSE)
Interest income and other,
net........................... 5,773,000 2,632,000 -- (4,000)
Interest expense................ (5,341,000) (21,000) -- --
------------- ------------ ----------- -----------
(Loss) before income tax
provision..................... (102,793,000) (15,815,000) (2,782,000) (4,379,000)
Income tax provision............ (731,000) (440,000) -- --
------------- ------------ ----------- -----------
Net (loss)...................... $(103,524,000) $(16,255,000) $(2,782,000) $(4,379,000)
============= ============ =========== ===========
Basic and diluted net (loss) per
share......................... $ (3.03) $ (.55) $ (.09) $ (.15)
============= ============ =========== ===========
Weighted average shares......... 34,189,000 29,678,000 29,664,000 29,419,000
============= ============ =========== ===========
</TABLE>
See accompanying notes.
F-15
<PAGE> 162
CORECOMM LIMITED AND SUBSIDIARIES
AND ITS PREDECESSOR OCOM CORPORATION TELECOMS DIVISION
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE PERIOD FROM APRIL 1, 1998 (DATE OPERATIONS COMMENCED)
TO DECEMBER 31, 1998 AND FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
---------------------- PAID-IN
SHARES PAR CAPITAL (DEFICIT)
---------- -------- ------------ -------------
<S> <C> <C> <C> <C>
Initial contribution.................. 2,700,000 $ 27,000 $ 22,158,000
Capital contributions................. 26,994,000 270,000 158,508,000
Issuance of stock options............. 4,586,000
Exercise of warrants.................. 3,000 3,000
Net (loss) for the period from April
1, 1998 (date operations commenced)
to December 31, 1998................ $ (16,255,000)
---------- -------- ------------ -------------
Balance, December 31, 1998............ 29,697,000 297,000 185,255,000 (16,255,000)
---------- -------- ------------ -------------
Exercise of stock options............. 804,000 8,000 5,232,000
Exercise of warrants.................. 4,810,000 48,000 10,857,000
Common stock issued for acquisition... 3,245,000 33,000 30,792,000
Stock options issued for
acquisition......................... 4,027,000
Warrants issued for acquisition....... 9,100,000
Stock option based compensation....... 1,056,000
Net (loss) for the year ended December
31, 1999............................ (103,524,000)
---------- -------- ------------ -------------
Balance, December 31, 1999............ 38,556,000 $386,000 $246,319,000 $(119,779,000)
========== ======== ============ =============
</TABLE>
The Consolidated Statement of Shareholders' Equity reflects on a retroactive
basis the 3-for-2 stock split by way of a stock dividend paid on September 2,
1999 and the 3-for-2 stock split by way of a stock dividend paid on February 2,
2000.
See accompanying notes.
F-16
<PAGE> 163
CORECOMM LIMITED AND SUBSIDIARIES
AND ITS PREDECESSOR OCOM CORPORATION TELECOMS DIVISION
STATEMENT OF PARENT'S INVESTMENT (DEFICIENCY)
OF OCOM CORPORATION TELECOMS DIVISION (THE PREDECESSOR)
FOR THE YEAR ENDED DECEMBER 31, 1997 AND
FOR THE PERIOD FROM JANUARY 1, 1998 TO MAY 31, 1998
<TABLE>
<S> <C>
Balance, December 31, 1996.................................. $ (208,000)
Capital contributions....................................... 4,908,000
Net (loss) for the year ended December 31, 1997............. (4,379,000)
-----------
Balance, December 31, 1997.................................. 321,000
Capital contributions....................................... 4,261,000
Net (loss) for the period ended May 31, 1998................ (2,782,000)
-----------
Balance, May 31, 1998....................................... $ 1,800,000
===========
</TABLE>
See accompanying notes.
F-17
<PAGE> 164
CORECOMM LIMITED AND SUBSIDIARIES
AND ITS PREDECESSOR OCOM CORPORATION TELECOMS DIVISION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THE PREDECESSOR
(OCOM)
FOR THE PERIOD ---------------------------
FROM APRIL 1, FOR THE
1998 (DATE PERIOD FROM
OPERATIONS JANUARY 1,
YEAR ENDED COMMENCED) TO 1998 TO YEAR ENDED
DECEMBER 31, DECEMBER 31, MAY 31, DECEMBER 31,
1999 1998 1998 1997
------------- ---------------- ----------- ------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net (loss)........................................... $(103,524,000) $(16,255,000) $(2,782,000) $(4,379,000)
Adjustments to reconcile net (loss) to net cash (used
in) operating activities:
Depreciation and amortization...................... 19,578,000 980,000 257,000 439,000
Stock option based compensation.................... 1,056,000 4,586,000 -- --
Provision for losses on accounts receivable........ 3,241,000 501,000 92,000 46,000
Accretion of interest on marketable securities..... (3,053,000) (639,000) -- --
Other.............................................. 239,000 (119,000) -- 82,000
Changes in operating assets and liabilities, net of
effect from business acquisitions:
Accounts receivable.............................. 3,115,000 (480,000) (262,000) 129,000
Due from affiliates.............................. 1,759,000 (1,954,000) -- --
Other current assets............................. (3,488,000) (287,000) (179,000) (79,000)
Other assets..................................... (2,783,000) (2,824,000) -- --
Accounts payable................................. 5,390,000 1,261,000 (311,000) 169,000
Accrued expenses................................. 6,114,000 2,814,000 (453,000) 116,000
Deferred revenue................................. (61,000) 94,000 -- --
------------- ------------ ----------- -----------
Net cash (used in) operating activities................ (72,417,000) (12,322,000) (3,638,000) (3,477,000)
INVESTING ACTIVITIES
Purchase of fixed assets............................... (20,575,000) (2,341,000) (623,000) (1,431,000)
Acquisitions, net of cash acquired..................... (47,056,000) -- -- --
Purchase of marketable securities...................... (142,922,000) (110,079,000) -- --
Proceeds from sale of marketable securities............ 164,652,000 -- -- --
------------- ------------ ----------- -----------
Net cash (used in) investing activities................ (45,901,000) (112,420,000) (623,000) (1,431,000)
FINANCING ACTIVITIES
Capital contributions.................................. -- 150,904,000 4,261,000 4,908,000
Proceeds from borrowing, net of financing costs........ 168,545,000 -- -- --
Proceeds from exercise of stock options and warrants... 16,145,000 3,000 -- --
Principal payments..................................... (3,469,000) -- -- --
Principal payments of capital lease obligations........ (2,379,000) (4,000) -- --
------------- ------------ ----------- -----------
Net cash provided by financing activities.............. 178,842,000 150,903,000 4,261,000 4,908,000
------------- ------------ ----------- -----------
Increase in cash and cash equivalents.................. 60,524,000 26,161,000 -- --
Cash and cash equivalents at beginning of period....... 26,161,000 -- -- --
------------- ------------ ----------- -----------
Cash and cash equivalents at end of period............. $ 86,685,000 $ 26,161,000 $ -- $ --
============= ============ =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest................................. $ 2,032,000 $ 4,000 $ -- $ --
Income taxes paid...................................... 1,421,000 -- -- --
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES
Capital contributions of noncash net assets............ $ -- $ 30,059,000 $ -- $ --
Liabilities incurred to acquire fixed assets........... 19,621,000 175,000 -- --
Common stock, stock options and warrants issued for
acquisitions......................................... 43,952,000 -- -- --
</TABLE>
See accompanying notes.
F-18
<PAGE> 165
CORECOMM LIMITED AND SUBSIDIARIES
AND ITS PREDECESSOR OCOM CORPORATION TELECOMS DIVISION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. 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. 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.
The Company's competitive local exchange carrier ("CLEC"), cellular long
distance, landline long distance and cellular resale businesses were formerly
owned and operated by OCOM Corporation Telecoms Division ("OCOM"). CCPR acquired
the operating assets and related liabilities of these businesses from OCOM on
June 1, 1998. OCOM is the predecessor business to the Company.
The Company seeks to become a leading provider of integrated telephone,
Internet and data services to business and residential customers in targeted
markets throughout the United States. As of December 31, 1999, the Company's
customers are located throughout the United States, although much of the
Company's business is conducted in Ohio and Illinois.
The Company's performance will be affected by, among other things, its
ability to implement expanded interconnection and collocation with the
facilities of incumbent local exchange carriers ("ILECs") and develop efficient
and effective working relationships with the ILECs and other carriers. The
Company has installed, and is currently in the process of installing, its own
switches and related equipment in certain of its markets. The Company will
continue to lease the unbundled local loop needed to connect its customers to
its switches. The Company purchases capacity from the ILECs on a wholesale basis
pursuant to contracts and sells it at retail rates to its customers. The Company
depends upon the ILECs to maintain the quality of their service to the Company's
customers. Also, except for CLEC customers who are connected to one of the
Company's switches and Internet services customers, the Company depends upon the
ILECs for accurate and prompt billing information in order for the Company to
bill its customers.
The Company's business is highly competitive which results in pricing
pressure and increasing customer acquisition costs. Expenses are expected to
exceed revenues in each location in which the Company offers service until a
sufficient customer base is established. It is anticipated that obtaining a
sufficient customer base will take a number of years, and positive cash flows
from operations are not expected in the near future.
F-19
<PAGE> 166
CORECOMM LIMITED AND SUBSIDIARIES
AND ITS PREDECESSOR OCOM CORPORATION TELECOMS DIVISION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is the revenues from external customers for each of the
Company's communication services:
<TABLE>
<CAPTION>
THE PREDECESSOR
FOR THE PERIOD (OCOM)
FROM APRIL 1, --------------------------
1998 (DATE FOR THE
OPERATIONS PERIOD FROM
COMMENCED) JANUARY 1,
YEAR ENDED TO 1998 TO YEAR ENDED
DECEMBER 31, DECEMBER 31, MAY 31, DECEMBER 31,
1999 1998 1998 1997
------------ -------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Telecommunications................... $47,456,000 $2,993,000 $ 217,000 $ 167,000
Internet and Data.................. 6,996,000 155,000 -- --
Other.............................. (a) 3,699,000 3,565,000 1,235,000 3,412,000
----------- ---------- ---------- ----------
$58,151,000 $6,713,000 $1,452,000 $3,579,000
=========== ========== ========== ==========
</TABLE>
---------------
(a) Other includes cellular long distance, wireless and paging revenue.
2. SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company,
its wholly-owned subsidiaries and those entities where the Company's interest is
greater than 50%. Significant intercompany accounts and transactions have been
eliminated in consolidation.
CASH EQUIVALENTS
Cash equivalents are short-term highly liquid investments purchased with a
maturity of three months or less. Cash equivalents were $71,564,000 and
$20,995,000 at December 31, 1999 and December 31, 1998, respectively, and
consisted of corporate commercial paper.
MARKETABLE SECURITIES
Marketable securities are classified as available-for-sale, which are
carried at fair value. Unrealized holding gains and losses on securities, net of
tax, are carried as a separate component of shareholders' equity. The amortized
cost of debt securities is adjusted for amortization of premiums and accretion
of discounts to maturity. Such amortization is included in interest income.
Realized gains and losses and declines in value judged to be other than
temporary will be included in interest income. The cost of securities sold or
matured is based on the specific identification method. Interest on securities
is included in interest income.
Marketable securities at December 31, 1999 consisted of corporate
commercial paper. Marketable securities at December 31, 1998 consisted of a
certificate of deposit and corporate commercial paper. During the year ended
December 31, 1999 and the period from April 1, 1998 (date operations commenced)
to December 31, 1998, there were no realized gains or losses on sales of
securities. All of the marketable securities as of December 31, 1999 and 1998
had a contractual maturity of less than one year.
F-20
<PAGE> 167
CORECOMM LIMITED AND SUBSIDIARIES
AND ITS PREDECESSOR OCOM CORPORATION TELECOMS DIVISION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company records an estimate of uncollectible accounts receivable based
on the current aging of its receivables and its prior collection experience.
FIXED ASSETS
Fixed assets are stated at cost. Depreciation is computed by the
straight-line method over the estimated useful lives of the assets. Estimated
useful lives are as follows: operating equipment -- 3 to 15 years, computer
hardware and software -- 3 or 5 years and other equipment -- 2 to 7 years,
except for leasehold improvements for which the estimated useful lives are the
term of the lease.
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. If the
sum of the expected future undiscounted cash flows is less than the carrying
amount of the asset, a loss is recognized for the difference between the fair
value and carrying value of the asset.
GOODWILL
Goodwill is the excess of the purchase price over the fair value of net
assets acquired in business combinations accounted for as purchases. Goodwill is
amortized on a straight-line basis over the period benefited, which is estimated
to be 5 to 10 years. The Company continually reviews the recoverability of the
carrying value of goodwill using the same methodology that it uses for the
evaluation of its other long-lived assets.
LMDS LICENSE COSTS
The costs incurred to acquire the Local Multipoint Distribution Service
("LMDS") licenses from the Federal Communications Commission (the "FCC") were
deferred and will be amortized on a straight-line basis over the term of the
licenses upon the commencement of operations. The Company continually reviews
the recoverability of the carrying value of LMDS licenses using the same
methodology that it uses for the evaluation of its other long-lived assets.
OTHER ASSETS
Other assets include customer lists, deferred financing costs and
noncompetition agreements. Customer lists represent a portion of the excess of
the purchase price over the fair value of net assets acquired in business
combinations accounted for as purchases and are amortized on a straight-line
basis over 2 to 7 years. Deferred financing costs were incurred in connection
with the issuance of debt and are charged to interest expense over the term of
the related debt. Noncompetition agreements obtained in connection with an
acquisition were valued at $100,000 and are being charged to expense on a
straight-line basis over the noncompetition period of 5 years. The Company
continually reviews the recoverability of the carrying value of these assets
using the same methodology that it uses for the evaluation of its other long-
lived assets.
NET (LOSS) PER SHARE
The Company reports its net (loss) per share in accordance with Financial
Accounting Standards Board ("FASB") Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings Per Share". The weighted average shares used for the
computation of net (loss) per share prior to September 1998 are equivalent to
CCPR's historical weighted average shares (since CCPR shareholders received one
share of the Company for each CCPR share owned). 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.
F-21
<PAGE> 168
CORECOMM LIMITED AND SUBSIDIARIES
AND ITS PREDECESSOR OCOM CORPORATION TELECOMS DIVISION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In 1999 and 1998, the Company had 18.0 million and 9.8 million shares,
respectively, issuable upon the exercise of stock options, warrants and
convertible securities that have been excluded from the calculation of net
(loss) per share as their effect would be antidilutive. In 1997, CCPR had 5.3
million shares issuable upon the exercise of stock options that have been
excluded from the calculation of net loss per share as their effect would be
antidilutive.
REVENUE RECOGNITION
Revenue is recognized at the time service is provided to the customer.
Charges for services that are billed in advance are deferred and recognized when
earned.
ADVERTISING EXPENSE
The Company charges the cost of advertising to expense as incurred.
Advertising expense for the year ended December 31, 1999, for the period from
April 1, 1998 (date operations commenced) to December 31, 1998, for the period
from January 1, 1998 to May 31, 1998 and for the year ended December 31, 1997
was $4,407,000, $812,000, $79,000 and $127,000, respectively.
STOCK-BASED COMPENSATION
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." The Company applies APB Opinion No.
25, "Accounting for Stock Issued to Employees" and related interpretations in
accounting for its stock option plans.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the 1999
presentation.
3. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB 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 new standard will have a significant effect on the results of
operations, financial condition or cash flows of the Company.
In 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income"
and SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information", both of which had no effect on the consolidated financial
statements. The Company operates in a single business segment.
4. 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 3.2 million shares of the Company's
common stock. In addition, the Company exchanged MegsINet stock options for
options to purchase 444,000 shares of the Company's common stock, repaid $2.0
million of MegsINet debt and incurred acquisition related costs of $1.2 million.
The common stock portion of the consideration was valued at $30.8 million, the
fair value on the date prior to the announcement. The stock options were valued
at $4.0 million using the Black-Scholes option pricing model.
Also in May 1999, the Company acquired the wireline assets of USN
Communications, Inc., which was a CLEC that operated on a resale basis, for a
cash payment of $26.4 million, warrants to purchase
F-22
<PAGE> 169
CORECOMM LIMITED AND SUBSIDIARIES
AND ITS PREDECESSOR OCOM CORPORATION TELECOMS DIVISION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
563,000 shares of the Company's common stock at a price of $13.33 per share and
225,000 shares at a price of $22.22 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 Company does not expect the actual payment in July 2000 to be
significant. The warrants were valued at $9.1 million, the fair value on 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 $91.3 million exceeded the fair value of the net
tangible assets acquired by $75.6 million, which was allocated as follows: $13.3
million to customer lists, $1.5 million to other intangibles and $60.8 million
to goodwill.
In April and June 1998, CCPR acquired the stock of Digicom, Inc. and
certain operating assets and related liabilities of Jeff Rand 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. The aggregate purchase price of $5.2 million exceeded the fair
value of net tangible assets acquired by $4.4 million, which was allocated as
follows: $100,000 to noncompetition agreements and $4.3 million to goodwill.
The pro forma unaudited consolidated results of operations for the years
ended December 31, 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 basic and diluted 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>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Total revenue............................................... $ 97,855,000 $ 148,174,000
Net (loss).................................................. (138,458,000) (233,267,000)
Basic and diluted net (loss) per share...................... (3.74) (6.23)
</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 these operations, and have been
successful in many areas. However, we did not actively sell additional lines in
these markets in 1999 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.
F-23
<PAGE> 170
CORECOMM LIMITED AND SUBSIDIARIES
AND ITS PREDECESSOR OCOM CORPORATION TELECOMS DIVISION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. LMDS LICENSE COSTS
Cortelyou Communications Corp. ("Cortelyou"), a wholly-owned subsidiary of
the Company, was the successful bidder for 15 Block A LMDS licenses in Ohio. The
LMDS licenses were acquired for an aggregate of $25,366,000, which includes
costs incurred of $125,000. LMDS frequencies are expected to be used for the
provision of voice, data, video and Internet services to businesses and homes in
competition with ILECs and/or cable television operators. The FCC has allocated
two blocks of frequencies to be licensed in each of the 493 Basic Trading Areas
in the United States and its territories based on an auction that ended in March
1998.
6. FIXED ASSETS
Fixed assets consist of:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1999 1998
------------ ----------
<S> <C> <C>
Operating equipment....................................... $ 50,290,000 $ 720,000
Computer hardware and software.......................... 17,455,000 2,450,000
Other equipment......................................... 9,300,000 987,000
Construction-in-progress................................ 24,681,000 5,000
------------ ----------
101,726,000 4,162,000
Accumulated depreciation................................ (11,107,000) (580,000)
------------ ----------
$ 90,619,000 $3,582,000
============ ==========
</TABLE>
7. ACCRUED EXPENSES
Accrued expenses consist of:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1999 1998
----------- ----------
<S> <C> <C>
Payroll and related........................................ $ 2,903,000 $1,263,000
Professional fees........................................ 2,161,000 527,000
Taxes, including income taxes............................ 6,089,000 1,246,000
Accrued equipment purchases.............................. 13,455,000 --
Other.................................................... 7,607,000 1,211,000
----------- ----------
$32,215,000 $4,247,000
=========== ==========
</TABLE>
F-24
<PAGE> 171
CORECOMM LIMITED AND SUBSIDIARIES
AND ITS PREDECESSOR OCOM CORPORATION TELECOMS DIVISION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1999 1998
------------ --------
<S> <C> <C>
6% Convertible Subordinated Notes.......................... $175,000,000 $ --
Working capital promissory note, interest at 8.5%........ 3,077,000 --
Note payable for equipment, interest at 12.75%........... 6,238,000 --
Other.................................................... 283,000 363,000
------------ --------
184,598,000 363,000
Less current portion..................................... 5,280,000 80,000
------------ --------
$179,318,000 $283,000
============ ========
</TABLE>
In October 1999, the Company issued $175,000,000 principal amount of 6%
Convertible Subordinated Notes due 2006 (the "Convertible Notes"). Interest on
the Convertible Notes is payable semiannually on April 1 and October 1 of each
year, commencing April 1, 2000. The Convertible Notes are unsecured obligations
convertible into common stock prior to maturity at a conversion price of $27.39
per share, subject to adjustment. There are approximately 6.4 million shares of
common stock reserved for issuance upon conversion of the Convertible Notes. The
Convertible Notes are redeemable, in whole or in part, at the option of the
Company, at any time on or after October 1, 2002, at a redemption price of
103.429% that declines annually to 100% in 2006, in each case together with
accrued and unpaid interest to the redemption date. The Company incurred
$6,935,000 in fees and expenses in connection with the issuance of the
Convertible Notes, which is included in deferred financing costs.
MegsINet originally borrowed $4,000,000 from Ascend Communications, Inc.
("Ascend") under a working capital promissory note dated August 1998. MegsINet
is required to make monthly principal and interest payments of $148,000 through
January 2002. The Company issued a warrant to Ascend to purchase approximately
29,000 shares of the Company's common stock at $13.75 per share in connection
with the promissory note.
In 1998, MegsINet entered into an agreement with Cisco Systems Capital
Corporation ("Cisco"), whereby MegsINet can purchase operating equipment under a
promissory note. Monthly payments of principal and interest commenced in 1999,
MegsINet paid an aggregate of $3,164,000. MegsINet is required to make monthly
principal and interest payments that decline each month from $366,000 beginning
in January 2000 through September 2001. The Company has guaranteed the
obligations of MegsINet under the promissory note.
The Company issued a note payable in the amount of $362,000 in connection
with the Stratos acquisition. Interest on the note accrues at 5.542% per annum.
The note is payable in twelve consecutive quarterly payments of principal and
interest of $33,000 which commenced in May 1999 and is collateralized by the
assets acquired from Stratos.
F-25
<PAGE> 172
CORECOMM LIMITED AND SUBSIDIARIES
AND ITS PREDECESSOR OCOM CORPORATION TELECOMS DIVISION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The aggregate principal amounts of notes payable scheduled for repayment
are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
<S> <C>
2000.................................. $ 5,280,000
2001.................................. 4,229,000
2002.................................. 89,000
2003.................................. --
2004.................................. --
Thereafter.............................. 175,000,000
------------
$184,598,000
============
</TABLE>
9. FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the
consolidated balance sheets approximate fair value.
Notes payable: The fair value of the Company's convertible notes is based
on the quoted market price. The fair value of the Company's other notes payable
are estimated using discounted cash flow analyses, based on the Company's
current incremental borrowing rates for similar types of borrowing arrangements.
The carrying amounts and fair values of the Company's financial instruments
are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
-------------------- -------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash and cash equivalents................. $ 86,685 $ 86,685 $26,161 $26,161
Notes payable
Convertible notes....................... 175,000 273,000 -- --
Ascend note............................. 3,077 2,721 -- --
Cisco note.............................. 6,238 5,561 -- --
Other................................... 283 248 363 301
</TABLE>
10. LEASES
The Company has capital leases for certain of its operating equipment.
Leased property included in operating equipment consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1999 1998
----------- --------
<S> <C> <C>
Operating equipment......................................... $33,941,000 $258,000
Accumulated depreciation.................................... 5,901,000 7,000
----------- --------
$28,040,000 $251,000
=========== ========
</TABLE>
F-26
<PAGE> 173
CORECOMM LIMITED AND SUBSIDIARIES
AND ITS PREDECESSOR OCOM CORPORATION TELECOMS DIVISION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum annual payments under these leases at December 31, 1999 are
as follows:
<TABLE>
<S> <C>
2000........................................................ $16,092,000
2001........................................................ 13,053,000
2002........................................................ 2,477,000
2003........................................................ 19,000
-----------
Total minimum lease payments................................ 31,641,000
Less amount representing interest (at rates ranging from
8.5% to 26.44%)........................................... 3,230,000
-----------
Present value of net minimum obligations.................... 28,411,000
Current portion............................................. 13,847,000
-----------
$14,564,000
===========
</TABLE>
As of December 31, 1999, the Company had leases for office space and
equipment which extend through 2013. Total rent expense for the year ended
December 31, 1999, for the period from April 1, 1998 (date operations commenced)
to December 31, 1998, for the period from January 1, 1998 to May 31, 1998 and
for the year ended December 31, 1997 under operating leases was $5,151,000,
$354,000, $98,000 and $131,000, respectively.
Future minimum annual lease payments under noncancellable operating leases
at December 31, 1999 are as follows: $7,967,000 (2000); $6,682,000 (2001);
$5,832,000 (2002); $5,384,000 (2003); $5,005,000 (2004) and $19,481,000
thereafter.
11. NON-CASH COMPENSATION
The non-cash compensation charge of $1,056,000 in 1999 is recorded in
accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees,"
related to a change in employee stock option agreements.
The non-cash compensation charge of $4,586,000 in 1998 is a recorded in
accordance with APB Opinion No. 25, as a one time charge related to the issuance
of the Company's warrants and stock options to holders of CCPR's stock options
in connection with the Company's distribution to CCPR's shareholders.
12. 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). NTL's charges to the Company commenced in October 1998. It is not
practicable to determine the amounts of these expenses that would have been
incurred had the Company operated as an unaffiliated entity. In the opinion of
management, this allocation method is reasonable. In 1999 and 1998, NTL charged
the Company $2,330,000 and $313,000, 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. In 1999, the Company charged
NTL $62,000, which reduced corporate expenses.
F-27
<PAGE> 174
CORECOMM LIMITED AND SUBSIDIARIES
AND ITS PREDECESSOR OCOM CORPORATION TELECOMS DIVISION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 $800,000, $275,000, $138,000, and $217,000 for the year ended
December 31, 1999, the period from April 1, 1998 (date operations commenced) to
December 31, 1998, the period from January 1, 1998 to May 31, 1998 and the year
ended December 31, 1997, respectively, as a result of these charges.
At December 31, 1999, due from affiliates was comprised of $195,000 due
from NTL. At December 31, 1998, due from affiliates included $128,000 due from
CCPR and $1,826,000 due from NTL.
13. 401(k) PLAN
The Company sponsors a 401(k) Plan in which all full-time employees who
have completed 90 days of employment and are 21 years of age may participate.
The Company's matching contribution is determined annually by the Board of
Directors. Participants may make salary deferral contributions of 1% to 15% of
their compensation not to exceed the maximum allowed by law. The expense for the
year ended December 31, 1999, the period from April 1, 1998 (date operations
commenced) to December 31, 1998, the period from January 1, 1998 to May 31, 1998
and the year ended December 31, 1997 was $350,000, $103,000, $29,000 and
$126,000, respectively.
14. SHAREHOLDERS' EQUITY
STOCK SPLITS
In August 1999, the Company declared a 3-for-2 stock split by way of a
stock dividend, which was paid on September 2, 1999. 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 consolidated financial statements and the notes
thereto give retroactive effect to the stock splits.
SHAREHOLDER RIGHTS PLAN
The Rights Agreement provides that .44 of a Right will be issued with each
share of common stock issued on or after the date of distribution. The Rights
become exercisable upon the occurrence of certain potential takeover events and
will expire in December 2010 unless previously redeemed by the Company. When
exercisable, each Right entitles the owner to purchase from the Company 1/100 of
a share of Series A Junior Participating Preferred Stock ("Series A Preferred
Stock") at a purchase price of $100.
The Series A Preferred Stock will be entitled to a minimum preferential
quarterly dividend payment of $.01 per share and will be entitled to an
aggregate dividend of 225 times the dividend, if any, declared per share of
common stock. In the event of liquidation, the holders of Series A Preferred
Stock will be entitled to a minimum preferential liquidation payment of $100 per
share and will be entitled to an aggregate payment of 225 times the payment made
per share of the common stock. Each share of Series A Preferred Stock will have
225 votes and will vote together with the common stock. In the event of any
merger, consolidation or other transaction in which shares of common stock are
changed or exchanged, each share of Series A Preferred Stock will be entitled to
receive 225 times the amount received per share of common stock. The rights are
protected by customary antidilution provisions.
The 1,000,000 authorized shares of Series Preferred Stock are designated
Series A Preferred Stock. No shares of Series A Preferred Stock are issued or
outstanding.
F-28
<PAGE> 175
CORECOMM LIMITED AND SUBSIDIARIES
AND ITS PREDECESSOR OCOM CORPORATION TELECOMS DIVISION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
WARRANTS
The Company had the following warrants outstanding as of December 31, 1999:
(1) warrants to purchase an aggregate of 29,000 shares of common stock at $13.75
per share issued in 1999 that expire in August 2008, (2) warrants to purchase an
aggregate of 225,000 shares of common stock at $22.22 per share issued in 1999
that expire in May 2004 and (3) warrants to purchase an aggregate of 563,000
shares of common stock at $13.33 per share issued in 1999 that expire in May
2002. None of these warrants were exercised in 1999.
DISTRIBUTION WARRANTS AND STOCK OPTIONS
In connection with the distribution of the Company to CCPR's shareholders,
the Company issued warrants to purchase shares of common stock to holders of
CCPR stock options who elected to receive warrants as follows: (1) warrants to
purchase an aggregate of 4,303,000 shares of common stock at an exercise price
of $5.86 per share which expire in 2005, (2) warrants to purchase an aggregate
of 8,000 shares of common stock at an exercise price of $5.86 per share which
expire in 2003 and (3) warrants to purchase an aggregate of 1,842,000 shares of
common stock at an exercise price of $7.03 which expire in 2005. As of December
31, 1999, warrants to purchase an aggregate of 47,000 shares of common stock at
an exercise price of $5.86 per share which expire in 2005 remain outstanding.
There are 13,500,000 shares of common stock authorized for issuance under
the 1998 CoreCom Limited Stock Option Plan and 5,625,000 shares of common stock
authorized for issuance under the 1999 CoreCom Limited Stock Option Plan
(together the "Plans"). The Plans provide that incentive stock options be
granted at the fair market value of the Company's common stock on the date of
grant, and nonqualified stock options be granted at a price determined by the
Compensation and Option Committee. Options are generally exercisable as to 20%
of the shares subject thereto on the date of grant and become exercisable as to
an additional 20% of the shares subject thereto on each January 1 thereafter,
while the optionee remains an employee of the Company. Options generally expire
ten years after the date of the grant.
In connection with the distribution of the Company to CCPR's shareholders,
the Company issued approximately 1,877,000 options to purchase shares of the
Company's common stock to holders of CCPR stock options who elected to receive
options.
Pro forma information regarding net loss and net loss per share is required
by SFAS No. 123, and has been determined as if the Company had accounted for its
employee warrants and stock options under the fair value method of that
Statement. The fair value for these warrants and options was estimated at the
date of grant using the Black-Scholes option pricing model with the following
weighted-average assumptions for 1999 and 1998: risk-free interest rate of 6.81%
and 5.02%, respectively, dividend yield of 0%, volatility factor of the expected
market price of the Company's common stock of .465 and .810, respectively, and a
weighted-average expected life of the warrants and options of 10 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's distribution warrants and stock options have
characteristics significantly different from those of traded options and because
changes in the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its distribution warrants
and stock options.
F-29
<PAGE> 176
CORECOMM LIMITED AND SUBSIDIARIES
AND ITS PREDECESSOR OCOM CORPORATION TELECOMS DIVISION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the
distribution warrants and options is amortized to expense over the options'
vesting periods. Following is the Company's pro forma information:
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM APRIL 1, 1998
(DATE OPERATIONS
COMMENCED) TO
YEAR ENDED DECEMBER 31,
DECEMBER 31, 1999 1998
----------------- ------------------
<S> <C> <C>
Pro forma net (loss)............................. $(128,795,000) $(48,015,000)
Pro forma net (loss) per share -- basic and
diluted........................................ $ (3.77) $ (1.62)
</TABLE>
A summary of the Company's distribution warrants and stock option activity
and related information for the year ended December 31, 1999 and for the period
from April 1, 1998 (date operations commenced) to December 31, 1998 follows:
<TABLE>
<CAPTION>
1999 1998
------------------------------ -----------------------------
NUMBER OF WEIGHTED- NUMBER OF WEIGHTED-
WARRANTS AND AVERAGE WARRANTS AVERAGE
OPTIONS EXERCISE PRICE AND OPTIONS EXERCISE PRICE
------------ -------------- ----------- --------------
<S> <C> <C> <C> <C>
Outstanding -- beginning of
period.................... 9,765,000 $ 5.51 -- $ --
Granted..................... 7,925,000 19.56 9,767,000 5.51
Exercised................... 5,606,000 6.27 2,000 5.86
Forfeited................... 1,330,000 6.27 -- --
---------- ------ --------- -----
Outstanding -- end of
period.................... 10,754,000 $15.37 9,765,000 $5.51
========== ====== ========= =====
Exercisable at end of
period.................... 3,438,000 $10.11 7,747,000 $5.42
========== ====== ========= =====
</TABLE>
Weighted-average fair value of distribution warrants and options,
calculated using the Black-Scholes option pricing model, granted during 1999 and
1998 is $14.28 and $4.33, respectively.
The following table summarizes the status of the distribution warrants and
stock options outstanding and exercisable at December 31, 1999:
<TABLE>
<CAPTION>
STOCK OPTIONS OUTSTANDING STOCK OPTIONS EXERCISABLE
---------------------------------------------- --------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
RANGE OF NUMBER OF REMAINING AVERAGE NUMBER OF AVERAGE
EXERCISE PRICES OPTIONS CONTRACTUAL LIFE EXERCISE PRICE OPTIONS EXERCISE PRICE
--------------- ---------- ---------------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C>
$0.02 to $3.03 1,235,000 7.6 Years $ 0.635 1,136,000 $ 0.505
$5.28 to $7.33 2,310,000 8.3 Years $ 5.858 922,000 $ 5.853
$14.78 to $18.45 193,000 9.4 Years $18.442 39,000 $18.442
$18.67 to $22.45 6,768,000 9.4 Years $20.714 1,291,000 $20.627
$24.92 to $26.25 169,000 9.7 Years $24.921 34,000 $24.921
$38.75 79,000 10.0 Years $38.750 16,000 $38.750
---------- ---------
10,754,000 3,438,000
========== =========
</TABLE>
F-30
<PAGE> 177
CORECOMM LIMITED AND SUBSIDIARIES
AND ITS PREDECESSOR OCOM CORPORATION TELECOMS DIVISION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM APRIL 1, 1998
(DATE OPERATIONS
YEAR ENDED COMMENCED) TO
DECEMBER 31, DECEMBER 31,
1999 1998
------------ ------------------
<S> <C> <C>
Current:
Federal............................................ $106,000 $ --
State and local.................................... 625,000 440,000
-------- --------
Total current........................................ 731,000 440,000
-------- --------
Deferred:
Federal............................................ -- --
State and local.................................... -- --
-------- --------
Total deferred....................................... -- --
-------- --------
$731,000 $440,000
======== ========
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1999 1998
------------ -----------
<S> <C> <C>
Deferred tax assets:
Depreciation........................................... $ 887,000 $ (58,000)
Net operating losses................................... 35,444,000 5,419,000
Allowance for doubtful accounts........................ 1,599,000 301,000
Amortization of goodwill............................... 653,000 24,000
Accrued expenses....................................... 10,359,000 --
Other.................................................. 200,000 --
------------ -----------
49,142,000 5,686,000
Valuation allowance for deferred tax assets.............. (49,142,000) (5,686,000)
------------ -----------
Net deferred tax assets.................................. $ -- $ --
============ ===========
</TABLE>
At December 31, 1999, the Company had net operating loss carryforwards of
approximately $88,000,000 for federal income tax purposes that begin to expire
in 2018. The Company became eligible to file a consolidated federal income tax
return in July 1999. Losses incurred prior to July 1999 may only be utilized by
the subsidiary that generated the loss. The deferred tax assets have been fully
offset by a valuation allowance due to the uncertainty of realizing such tax
benefit.
F-31
<PAGE> 178
CORECOMM LIMITED AND SUBSIDIARIES
AND ITS PREDECESSOR OCOM CORPORATION TELECOMS DIVISION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The reconciliation of income taxes computed at U.S. federal statutory rates
to income tax expense is as follows:
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM APRIL 1,
1998 (DATE
OPERATIONS
YEAR ENDED COMMENCED) TO
DECEMBER 31, DECEMBER 31,
1999 1998
------------ --------------
<S> <C> <C>
Benefit at federal statutory rate (35%)..................... $(35,978,000) $(5,535,000)
State and local income taxes................................ 625,000 440,000
Expenses not deductible for tax purposes.................... 2,160,000 1,623,000
Foreign income not subject to U.S. tax...................... (399,000) (846,000)
U.S. losses with no benefit................................. 34,323,000 4,758,000
------------ -----------
$ 731,000 $ 440,000
============ ===========
</TABLE>
16. COMMITMENTS AND CONTINGENT LIABILITIES
As of December 31, 1999, the Company had purchase commitments of
approximately $41,000,000 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.
17. SUBSEQUENT EVENTS (UNAUDITED)
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 total consideration consisting of
(a) approximately 12.4 million shares of the Company's common stock, (b) $250
million of Series B 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 Series B 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
Series B 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 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,
F-32
<PAGE> 179
CORECOMM LIMITED AND SUBSIDIARIES
AND ITS PREDECESSOR OCOM CORPORATION TELECOMS DIVISION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
In March 2000, the Compensation and Option Committee of the Board of
Directors approved the issuance of options in the Company to various employees
to acquire 2.7 million shares of the Company's common stock at an exercise price
of 30% of 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," the Company will record a non-cash compensation expense of
approximately $44.8 million in March 2000 and a non-cash deferred expense of
approximately $48.5 million. The Company will charge the deferred expense to
non-cash compensation expense on a straight-line basis over the vesting period
of the stock options as follows: $15 million in 2000, $20 million in 2001, $11.6
million in 2002, $1.8 million in 2003 and $0.1 million in 2004.
F-33
<PAGE> 180
CORECOMM LIMITED AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E
----------------------------------- ---------- ----------------------- ----------- -------------
ADDITIONS
-----------------------
(1) (2)
---------- ----------
CHARGED TO
BALANCE AT CHARGED TO OTHER
BEGINNING COSTS AND ACCOUNTS- DEDUCTIONS- BALANCE AT
DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE END OF PERIOD
----------------------------------- ---------- ---------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
For the year ended December 31,
1999:
Allowance for doubtful
accounts...................... $742,000 $3,241,000 $-- $(34,000)(a) $3,949,000
For the period from April 1, 1998
(date operations commenced) to
December 31, 1998:
Allowance for doubtful
accounts...................... $ -- $ 501,000 -- $241,000(b) $ 742,000
</TABLE>
---------------
(a) Uncollectible accounts written off, net of recoveries, of $24,688,000 offset
by $24,654,000 allowance for doubtful accounts as of acquisition date from
business combinations.
(b) Uncollectible accounts written off, net of recoveries, of $117,0000 offset
by $358,000 allowance for doubtful accounts as of acquisition date from
business combinations.
OCOM CORPORATION TELECOMS DIVISION
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E
--------------------------------- ---------- ------------------------ ----------- -------------
ADDITIONS
------------------------
(1) (2)
---------- ----------
CHARGED TO
BALANCE AT CHARGED TO OTHER
BEGINNING COSTS AND ACCOUNTS- DEDUCTIONS- BALANCE AT
DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE END OF PERIOD
--------------------------------- ---------- ---------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
For the period from January 1,
1998 to May 31, 1998:
Allowance for doubtful
accounts.................... $46,000 $ 92,000 -- $60,000(a) $78,000
For the year ended December 31,
1997:
Allowance for doubtful
accounts.................... $ -- $ 46,000 $-- $ -- $46,000
</TABLE>
---------------
(a) Uncollectible accounts written-off, net of recoveries.
F-34
<PAGE> 181
VOYAGER.NET, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
2000
------------
(UNAUDITED)
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 12,329,741
Accounts receivable, less allowance....................... 7,837,616
Prepaid and other assets.................................. 1,729,869
------------
Total current assets.............................. 21,897,226
Property and equipment, net................................. 25,524,813
Intangible assets, net...................................... 56,665,195
------------
Total assets...................................... $104,087,234
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of obligations under capital leases....... $ 3,157,610
Accounts payable.......................................... 805,961
Other liabilities......................................... 2,898,448
Deferred revenue.......................................... 12,269,517
------------
Total current liabilities......................... 19,131,536
Commitments and contingencies............................... --
Obligations under capital leases............................ 2,116,236
Long-term debt.............................................. 23,750,000
Stockholders' equity:
Preferred stock, 8% cumulative, non-voting, $.01 par
value, $100 redemption value: 5,000,000 shares
authorized, none outstanding
Common stock, $.0001 par value; authorized 50,000,000
shares in 1999 and 2000; issued and outstanding
31,650,108 and 31,654,758 in 1999 and 2000,
respectively........................................... 2,712
Additional paid-in capital................................ 112,151,544
Receivables for preferred and common stock................ (6,441,935)
Notes and interest receivable, stockholder................ (5,768,418)
Deferred compensation..................................... 161,420
Accumulated deficit....................................... (41,015,861)
------------
Total stockholders' equity........................ 59,089,462
------------
Total liabilities and stockholders' equity........ $104,087,234
============
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
F-35
<PAGE> 182
VOYAGER.NET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- --------------------------
2000 1999 2000 1999
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Revenue:
Internet access service.................. $18,444,717 $10,537,560 $ 36,484,158 $18,942,762
Other.................................... 173,064 176,339 245,901 290,363
----------- ----------- ------------ -----------
Total revenue.................... 18,617,781 10,713,899 36,730,059 19,233,125
----------- ----------- ------------ -----------
Operating expenses:
Internet access service.................. 7,398,439 3,602,005 14,628,026 6,391,681
Sales and marketing...................... 2,221,192 1,229,038 4,358,192 2,198,069
General and administrative............... 5,931,172 3,081,402 11,912,961 5,544,602
Depreciation and amortization............ 10,166,904 5,004,953 18,377,773 8,531,777
Compensation charge for issuance of
common stock and stock options........ 25,000 1,044,000 50,000 2,509,000
----------- ----------- ------------ -----------
Total operating expenses......... 25,742,707 13,961,398 49,326,952 25,175,129
----------- ----------- ------------ -----------
Loss from operations before other income
(expense)................................ (7,124,926) (3,247,499) (12,596,893) (5,942,004)
----------- ----------- ------------ -----------
Other income (expense):
Interest income.......................... 266,077 4,822 515,076 31,594
Interest expense......................... (839,873) (1,047,378) (1,453,949) (1,845,663)
Other.................................... (218,262) -- (258,969) --
----------- ----------- ------------ -----------
Total other expense.............. (792,058) (1,042,556) (1,197,842) (1,814,069)
----------- ----------- ------------ -----------
Net loss................................... (7,916,984) (4,290,055) (13,794,735) (7,756,073)
Preferred stock dividends.................. -- (165,496) -- (330,992)
----------- ----------- ------------ -----------
Net loss applicable to common
stockholders................... $(7,916,984) $(4,455,551) $(13,794,735) $(8,087,065)
----------- ----------- ------------ -----------
Per share data:
Basic and diluted net loss per share
applicable to common stockholders..... $ (0.25) $ (0.19) $ (0.44) $ (0.35)
=========== =========== ============ ===========
Weighted average common shares
outstanding:
Basic and diluted..................... 31,654,758 23,766,309 31,653,466 23,163,442
=========== =========== ============ ===========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
F-36
<PAGE> 183
VOYAGER.NET, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
RECEIVABLES
FOR
PREFERRED
COMMON STOCK ADDITIONAL AND NOTES AND
-------------------- PAID-IN COMMON INTEREST DEFERRED ACCUMULATED
SHARES AMOUNT CAPITAL STOCK RECEIVABLE COMPENSATION DEFICIT
---------- ------ ------------ ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance January 1,
2000............... 31,650,108 $2,712 $112,129,038 $(6,291,935) $(5,630,418) $111,420 $(27,221,126)
Interest on
receivables........ -- -- -- (150,000) (138,000) -- --
Exercise of stock
options............ 4,650 -- 22,506 -- -- -- --
Deferred
compensation....... -- -- -- -- -- 50,000 --
Net loss............. -- -- -- -- -- -- (13,794,735)
---------- ------ ------------ ----------- ----------- -------- ------------
Balance June 30,
2000............... 31,654,758 $2,712 $112,151,544 $(6,441,935) $(5,768,418) $161,420 $(41,015,861)
========== ====== ============ =========== =========== ======== ============
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
-------------
<S> <C>
Balance January 1,
2000............... $73,099,691
Interest on
receivables........ (288,000)
Exercise of stock
options............ 22,506
Deferred
compensation....... 50,000
Net loss............. (13,794,735)
-----------
Balance June 30,
2000............... $59,089,462
===========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
F-37
<PAGE> 184
VOYAGER.NET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------------
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(13,794,735) $(7,756,073)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization............................. 18,377,773 8,531,777
Loss on disposal/sale of equipment........................ 124,878 4,572
Compensation charge for issuance of common stock and stock
options................................................ 50,000 2,509,000
Changes in assets and liabilities excluding effects of
business combinations, net............................. (3,105,198) 1,272,295
------------ ------------
Net cash provided by operating activities............ 1,652,718 4,561,571
Cash flows used in investing activities:
Business acquisition costs, net of cash acquired.......... (5,290,361) (23,577,768)
Purchase of property and equipment........................ (4,793,294) (2,658,104)
------------ ------------
Net cash used in investing activities................ (10,083,655) (26,235,872)
Cash flows provided by financing activities:
Payments on capital leases................................ (1,424,224) (262,767)
Loan/payments to related party............................ -- (500,000)
Payment of bank financing fees............................ -- (1,124,770)
Proceeds from issuance of debt............................ 4,100,000 25,200,000
Proceeds from common stock issuance....................... 22,506 248
Proceeds from preferred stock............................. -- 666,700
------------ ------------
Net cash provided by financing activities............ 2,698,282 23,979,411
------------ ------------
Net (decrease) increase in cash and cash equivalents........ (5,732,655) 2,305,110
Cash and cash equivalents at beginning of period............ 18,062,396 2,350,292
------------ ------------
Cash and cash equivalents at end of period.................. $ 12,329,741 $ 4,655,402
============ ============
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
F-38
<PAGE> 185
VOYAGER.NET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION:
These condensed consolidated financial statements of Voyager.net, Inc. and
its subsidiaries (the "Company") for the three and six months ended June 30,
2000 and 1999 and the related footnote information are unaudited and have been
prepared by the Company pursuant to the rules and regulations of the Securities
and Exchange Commission. These financial statements included herein should be
read in conjunction with the Company's audited consolidated financial statements
and the related notes to the consolidated financial statements as of and for the
year ended December 31, 1999, which are included in the Company's Form 10-K
filed with the Securities and Exchange Commission and dated March 31, 2000. In
management's opinion, the accompanying unaudited financial statements contain
all adjustments (consisting of normal, recurring adjustments) which management
considers necessary to present the consolidated financial position of the
Company at June 30, 2000 and the results of its operations and cash flows for
the three and six months ended June 30, 2000 and 1999. Certain information and
footnote disclosures normally included in the financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. The results of operations for
the three and six months ended June 30, 2000 are not necessarily indicative of
the results of operations expected for the year ended December 31, 2000.
2. BUSINESS COMBINATIONS:
During the six months ended June 30, 2000, the Company acquired certain
assets used in connection with the Internet access service business of two
entities as described below:
February 11, 2000, the Company purchased assets of Valley Business
Equipment, Inc. for approximately $4,050,000. Approximately $3,910,000 was
allocated to the acquired customer base cost as a result of this transaction.
March 12, 2000, the Company purchased assets of Livingston On-Line for
approximately $325,000. Approximately $310,000 was allocated to the acquired
customer base cost as a result of this transaction.
The unaudited pro forma combined historical results, as if the entities
listed above had been acquired at the beginning of the six months ended June 30,
2000 and 1999, respectively, and if all entities acquired in 1999 had been
acquired at the beginning of 1999 are included in the table below.
<TABLE>
<CAPTION>
(IN THOUSANDS EXCEPT
PER SHARE DATA)
SIX MONTHS ENDED
JUNE 30,
--------------------
2000 1999
-------- --------
<S> <C> <C>
Revenues.................................................... $ 37,060 $ 31,223
Net loss.................................................... (13,900) (15,925)
Basic and diluted loss per share............................ (0.44) (0.70)
</TABLE>
The pro forma results above include amortization of intangibles and
interest expense on debt assumed issued to finance the acquisitions. The pro
forma results are not necessarily indicative of what actually would have
occurred if the acquisitions had been completed as of the beginning of each of
the fiscal periods presented, nor are they necessarily indicative of future
consolidated results.
3. DEBT:
The Company has a revolving available credit facility with a bank group in
the amount of $60 million, with the option to extend to $70 million, on similar
terms and conditions. The credit facility matures on June 30, 2005. The
revolving credit facility agreement allows the Company to elect an interest rate
as of
F-39
<PAGE> 186
VOYAGER.NET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
any borrowing date based on either the (1) prime rate, or (2) LIBOR, plus a
margin ranging from 0.5% to 2.75% depending on the ratio of funded debt to
EBITDA. The elected rate as of June 30, 2000 is approximately 8.70%. Automatic
and permanent reductions of the maximum commitments begin June 30, 2001 and
continue until maturity.
4. EARNINGS PER SHARE:
The impact of dilutive shares is not significant. Net loss per share is
computed using the weighted average number of common shares outstanding during
the period. Inclusion of common share equivalents of 3,983,847 would be
antidilutive and have been excluded from per share calculations.
5. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
The following is the supplemental cash flow information for all periods
presented:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------------
2000 1999
----------- ------------
<S> <C> <C>
Cash paid during the period for interest................. $ 1,731,501 $ 1,359,051
Noncash financing and investing activities:
In conjunction with the acquisitions described in Note
2, liabilities were assumed as follows:
Fair value of assets acquired....................... 5,848,698 27,343,972
Business acquisition costs, net of cash acquired.... (5,290,361) (23,577,768)
----------- ------------
Liabilities assumed...................................... $ 558,337 $ 3,766,204
=========== ============
Acquisition of equipment through capital lease........... $ 2,455,598 $ 1,478,600
Issuance of compensatory common stock and options........ $ 50,000 $ 1,044,000
</TABLE>
6. STOCK-BASED COMPENSATION PLAN:
During the six months ended June 30, 2000, the Company granted 545,381
options to purchase common stock to certain members of management, employees and
non-employees. At the grant date, all of the options granted vest in four equal
annual installments beginning January 6, 2001. The exercise price for these
options was not less than the fair market value of the Company's common stock on
the grant date. Therefore, no additional compensation expense has been
recognized in the six months ended June 30, 2000 for these options.
During the six months ended June 30, 2000, the Company recognized
compensation expense of $50,000 relating to options granted prior to January 1,
2000.
7. RECENT ACCOUNTING INTERPRETATION:
On December 3, 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin 101 ("SAB 101"), Revenue Recognition in Financial
Statements. SAB 101 summarizes some of the SEC's interpretations of the
application of generally accepted accounting principles to revenue recognition.
Revenue recognition under SAB 101 was initially effective for the Company's
first quarter 2000 financial statements. However, SAB 101B, which was released
June 26, 2000, delayed adoption of SAB 101 until no later than the fourth fiscal
quarter 2000. Changes resulting from SAB 101 require that a cumulative effect of
such changes for 1999 and prior years be recorded as an adjustment to net income
on January 1, 2000 plus adjust the statement of operations for the three months
ended in the quarter of adoption.
F-40
<PAGE> 187
VOYAGER.NET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Although the Company is still in the process of reviewing SAB 101, it
believes that its revenue recognition practices are in substantial compliance
with SAB 101 for the year ending December 31, 2000 or that adoption of its
provisions would not be material to its annual or quarterly results of
operations.
8. MERGER AGREEMENT:
On March 12, 2000, the Company entered into an agreement to merge with
CoreComm Limited in a stock and cash transaction. The transaction is subject to
stockholder approval, certain regulatory approvals and other conditions.
F-41
<PAGE> 188
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and the Stockholders of
Voyager.net, Inc.:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, stockholders' equity (deficit)
and cash flows, present fairly, in all material respects, the financial position
of Voyager.net, Inc. and its subsidiaries (the "Company") at December 31, 1999
and 1998, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion expressed above.
PricewaterhouseCoopers LLP
Grand Rapids, Michigan
February 10, 2000, except for Note 18,
for which the date is March 12, 2000
F-42
<PAGE> 189
VOYAGER.NET, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1998 1999
------------ ------------
<S> <C> <C>
ASSETS
Currents assets:
Cash and cash equivalents................................. $ 2,350,292 $ 18,062,396
Accounts receivable, less allowance for doubtful accounts
of $99,000 and $500,000 in 1998 and 1999............... 950,381 4,994,026
Prepaid and other assets.................................. 154,059 1,460,356
------------ ------------
Total current assets.............................. 3,454,732 24,516,778
Property and equipment, net................................. 9,528,372 21,298,456
Intangible assets, net...................................... 28,741,650 66,638,733
------------ ------------
Total assets...................................... $ 41,724,754 $112,453,967
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of obligations under capital leases....... $ 303,562 $ 2,049,878
Notes payable, related party.............................. 2,252,713 --
Accounts payable.......................................... 659,351 520,326
Other liabilities......................................... 855,727 3,696,845
Deferred revenue.......................................... 5,625,627 11,244,633
------------ ------------
Total current liabilities......................... 9,696,980 17,511,682
Commitments and contingencies...............................
Obligations under capital leases............................ 751,613 2,192,594
Long-term debt.............................................. 30,000,000 19,650,000
Stockholders' equity:
Preferred stock, 8% cumulative, non-voting, $.01 par
value, $100 redemption value: 100,000 shares
authorized, issued and outstanding in 1998 (includes
6,667 shares in 1998 subject to purchase), authorized
5,000,000 shares in 1999, none outstanding............. 8,274,819 --
Common stock, $.0001 par value, authorized 25,000,000
shares in 1998 and 50,000,000 shares in 1999; issued
and outstanding, 22,216,308 shares in 1998 and
31,650,108 shares in 1999.............................. 1,792 2,712
Additional paid-in capital................................ 3,214,748 112,129,038
Receivable and interest for preferred and common stock.... (666,700) (6,291,935)
Notes and interest receivable, stockholder................ -- (5,630,418)
Deferred compensation..................................... 1,008,420 111,420
Accumulated deficit....................................... (10,556,918) (27,221,126)
------------ ------------
Total stockholders' equity........................ 1,276,161 73,099,691
------------ ------------
Total liabilities and stockholders' equity........ $ 41,724,754 $112,453,967
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-43
<PAGE> 190
VOYAGER.NET, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1997 1998 1999
---------- ----------- ------------
<S> <C> <C> <C>
Revenue:
Internet access service........................... $3,440,212 $10,588,963 $ 47,423,462
Other............................................. 14,063 133,199 1,074,173
---------- ----------- ------------
Total revenue............................. 3,454,275 10,722,162 48,497,635
---------- ----------- ------------
Operating expenses:
Internet access service........................... 1,318,163 3,607,665 15,933,377
Sales and marketing............................... 1,038,459 1,987,113 6,401,810
General and administrative........................ 1,461,720 3,405,870 14,150,924
Depreciation and amortization..................... 394,385 3,862,041 23,836,385
Compensation charge for issuance of common stock
and stock options.............................. -- 4,218,407 2,563,311
---------- ----------- ------------
Total operating expenses.................. 4,212,727 17,081,096 62,885,807
---------- ----------- ------------
Loss from operations before other income
(expenses)........................................ (758,452) (6,358,934) (14,388,172)
Other income (expense):
Interest income................................... 11,312 30,987 905,080
Interest expense.................................. (72,932) (942,766) (2,645,857)
---------- ----------- ------------
Total other expense....................... (61,620) (911,779) (1,740,777)
---------- ----------- ------------
Net loss............................................ (820,072) (7,270,713) (16,128,949)
Preferred stock dividends........................... (73,456) (348,494) (367,265)
---------- ----------- ------------
Net loss applicable to common
stockholders............................ $ (893,528) $(7,619,207) $(16,496,214)
========== =========== ============
Per Share Data:
Basic and diluted net loss per share applicable to
common stockholders............................... $ (.10) $ (.43) $ (.61)
========== =========== ============
Weighted average common shares outstanding:
Basic and diluted................................... 8,878,498 17,655,484 27,238,084
========== =========== ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-44
<PAGE> 191
VOYAGER.NET, INC
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
-------------------- ------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
------- ---------- ---------- ------ ------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1997.............. 20,000 $2,000,000 5,351,840 $ 432 $ 44,374
Redemption of common stock.............. -- -- (2,341,120) (189) (44,374)
Issuance of common stock................ -- -- 11,862,235 957 3,292
Issuance of preferred stock............. 5,000 500,000 -- -- --
Net loss................................ -- -- -- -- --
------- ---------- ---------- ------ ------------
Balance at December 31, 1997............ 25,000 2,500,000 14,872,955 1,200 3,292
Conversion of notes payable to preferred
stock and issuance of preferred and
common stock.......................... 40,324 4,032,419 446,400 36 144
Issuance of preferred and common
stock................................. 15,000 1,500,000 4,664,953 376 1,505
Conversion of preferred dividends to
preferred stock....................... 2,424 242,400 -- -- --
Issuance of common stock and options.... -- -- 2,232,000 180 3,209,807
Deferred compensation................... -- -- -- -- --
Net loss................................ -- -- -- -- --
------- ---------- ---------- ------ ------------
Balance at December 31, 1998............ 82,748 8,274,819 22,216,308 1,792 3,214,748
Issuance of common stock................ -- -- 1,240,000 100 7,354,900
Issuance of notes to stockholders....... -- -- -- -- --
Proceeds from initial public offering... -- -- 7,425,000 743 99,454,156
Proceeds from preferred stock........... -- -- -- -- --
Redemption of preferred stock........... (82,748) (8,274,819) -- -- --
Payment of preferred stock dividends.... -- -- -- -- --
Exercise of stock options and vesting of
restricted stock...................... -- -- 768,800 77 2,105,234
Deferred compensation................... -- -- -- -- --
Net loss................................ -- -- -- -- --
------- ---------- ---------- ------ ------------
Balance at December 31, 1999............ -- $ -- 31,650,108 $2,712 $112,129,038
======= ========== ========== ====== ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-45
<PAGE> 192
VOYAGER.NET, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) -- (CONTINUED)
<TABLE>
<CAPTION>
RECEIVABLE
FOR
PREFERRED TOTAL
AND NOTES AND STOCKHOLDERS'
COMMON INTEREST DEFERRED ACCUMULATED EQUITY
STOCK RECEIVABLE COMPENSATION DEFICIT (DEFICIT)
----------- ----------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1997... $ -- $ -- $ -- $ (2,193,296) $ (148,490)
Redemption of common stock... -- -- -- (30,437) (75,000)
Issuance of common stock..... -- -- -- -- 4,249
Issuance of preferred
stock...................... -- -- -- -- 500,000
Net loss..................... -- -- -- (820,072) (820,072)
----------- ----------- ----------- ------------ ------------
Balance at December 31,
1997....................... -- -- -- (3,043,805) (539,313)
Conversion of notes payable
to preferred stock and
issuance of preferred and
common stock............... (666,700) -- -- -- 3,365,899
Issuance of preferred and
common stock............... -- -- -- -- 1,501,881
Conversion of preferred
dividends to preferred
stock...................... -- -- -- (242,400) --
Issuance of common stock and
options.................... -- -- -- -- 3,209,987
Deferred compensation........ -- -- 1,008,420 -- 1,008,420
Net loss..................... -- -- -- (7,270,713) (7,270,713)
----------- ----------- ----------- ------------ ------------
Balance at December 31,
1998....................... (666,700) -- 1,008,420 (10,556,918) 1,276,161
Issuance of common stock..... (6,291,935) -- -- -- 1,063,065
Issuance of notes to
stockholders............... -- (5,630,418) -- -- (5,630,418)
Proceeds from initial public
offering................... -- -- -- -- 99,454,899
Proceeds from preferred
stock...................... 666,700 -- -- -- 666,700
Redemption of preferred
stock...................... -- -- -- -- (8,274,819)
Payment of preferred stock
dividends.................. -- -- -- (535,259) (535,259)
Exercise of stock options and
vesting of restricted
stock...................... -- -- (1,090,000) -- 1,015,311
Deferred compensation........ -- -- 193,000 -- 193,000
Net loss..................... -- -- -- (16,128,949) (16,128,949)
----------- ----------- ----------- ------------ ------------
Balance at December 31,
1999....................... $(6,291,935) $(5,630,418) $ 111,420 $(27,221,126) $ 73,099,691
=========== =========== =========== ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-46
<PAGE> 193
VOYAGER.NET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------
1997 1998 1999
---------- ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss......................................... $ (820,072) $ (7,270,713) $(16,128,949)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization................. 394,385 3,862,041 23,836,385
Interest on stockholder notes and
receivable.................................. -- -- (422,353)
(Gain) loss on sale of equipment.............. (7,071) 5,952 --
Compensation charge for issuance of common
stock and stock options..................... -- 4,218,407 2,563,311
Changes in assets and liabilities excluding
effects of business combinations:
Accounts receivable......................... (28,199) (513,909) (3,292,112)
Prepaids and other assets................... (24,251) (104,990) (1,939,885)
Accounts payable............................ (237,551) 512,591 (329,443)
Accrued expenses............................ 137,486 831,577 2,708,626
Deferred revenue............................ 187,203 1,160,698 (468,851)
---------- ------------ ------------
Net cash provided by (used in) operating
activities............................. (398,070) 2,701,654 6,526,729
Cash flows used in investing activities:
Business acquisition costs, net of cash
acquired...................................... -- (32,850,289) (55,630,048)
Purchase of property and equipment............... (661,312) (1,514,323) (5,032,682)
Proceeds from the sale of equipment.............. 87,282 28,248 --
---------- ------------ ------------
Net cash used in investing activities.... (574,030) (34,336,364) (60,662,730)
Cash flows provided by financing activities:
Payments on capital leases....................... (54,216) (54,565) (2,122,110)
Proceeds from notes payable...................... -- 2,800,000 --
Proceeds from common stock....................... 4,249 2,061 311
Proceeds from preferred stock.................... 500,000 2,065,719 666,700
Redemption of common stock....................... (75,000) -- --
Advances from related party...................... 1,127,777 4,047 --
Payments to related party........................ (15,000) (25,521) --
Issuance of loan to stockholder.................. -- -- (5,500,000)
Payment of bank financing fees................... -- (1,325,530) (1,474,770)
Proceeds from issuance of debt................... -- 30,000,000 49,850,000
Payment of preferred stock dividends............. -- -- (535,259)
Payment of debt.................................. -- -- (60,200,000)
Proceeds from initial public offering............ -- -- 101,925,743
Payment of initial public offering expenses...... -- -- (2,470,844)
Redemption of preferred stock.................... -- -- (8,274,819)
Payment of note payable.......................... -- -- (2,016,847)
---------- ------------ ------------
Net cash provided by financing
activities............................. 1,487,810 33,466,211 69,848,105
---------- ------------ ------------
Net increase in cash............................... 515,710 1,831,501 15,712,104
Cash and cash equivalents at beginning of year..... 3,081 518,791 2,350,292
---------- ------------ ------------
Cash and cash equivalents at end of year........... $ 518,791 $ 2,350,292 $ 18,062,396
========== ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-47
<PAGE> 194
VOYAGER.NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and basis of presentation
Voyager.net, Inc. (the "Company ") owns 100% of Voyager Information
Networks, Inc., which was incorporated in the State of Michigan in 1994.
Voyager.net was incorporated in 1998 in the State of Delaware under the name
Voyager Holdings, Inc. The Company's name was changed to Voyager.net, Inc. on
April 29, 1999. The Company provides full service access to the Internet for
corporate and residential users in Michigan, Illinois, Indiana, Minnesota, Ohio
and Wisconsin.
Revenue recognition
The Company recognizes revenue for dial-up Internet access services,
dedicated Internet access services and value-added Web services when the
services are provided. Dial-up and dedicated Internet access service plans range
from one month to one year. Value-added Web services are sold on a monthly
basis. Advance collections relating to future access services are recorded as
deferred revenue and recognized as revenue when earned.
Cash equivalents
The Company considers all highly liquid investments purchased with an
initial maturity of three months or less to be cash equivalents.
Property and equipment
Property and equipment are stated at cost and depreciated over their
estimated useful lives using the straight-line method. Equipment acquired under
capital leases is depreciated over the related lease terms or the estimated
productive useful lives, depending on the criteria met in determining the
qualification as a capital lease. Costs of repair and maintenance are charged to
expense as incurred.
Intangible assets
Intangible assets consist primarily of the cost of the acquired customer
base. The acquired customer base is amortized using the straight-line method
over 3 years based on the estimated customer churn rate. Bank financing fees,
included in intangible assets, are being amortized on a straight-line basis over
the term of the related debt. Other intangible assets are amortized over a 10
year period. Impairments, if any, are measured based upon discounted cash flow
analyses and are recognized in operating results in the period in which the
impairment in value is determined.
Advertising costs
Advertising costs are expensed as incurred. Advertising expense of
approximately $372,000, $185,000 and $1,174,000 was charged to operations in
1997, 1998 and 1999, respectively.
Financial instruments
The Company's financial instruments, as defined by Statement of Financial
Accounting Standards ("SFAS") No. 107 "Disclosures About Fair Value of Financial
Instruments," consist of cash, notes payable and long-term debt. The Company's
estimate of the fair value of these financial instruments approximates their
carrying amounts at December 31, 1998 and 1999.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-48
<PAGE> 195
VOYAGER.NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Income taxes
A current tax liability or asset is recognized for the estimated taxes
payable or refundable on tax returns for the year. Deferred tax liabilities or
assets are recognized for the estimated future tax effects of temporary
differences between financial and tax accounting.
2. BUSINESS COMBINATIONS
In 1998 and 1999, the Company acquired certain assets used in connection
with the Internet access service business as follows:
<TABLE>
<CAPTION>
PURCHASE
ACQUISITION DATE ACQUIRED ASSETS PRICE
---------------- ------------------------------------------------------------ -----------
<S> <C> <C>
1998:
July 1 CDL Corp.................................................... $ 69,000
July 1 Internet-Michigan, Inc. .................................... 215,000
July 31 Freeway, Inc. .............................................. 3,991,000
September 23 EXEC-PC, Inc. .............................................. 24,815,000
October 2 Netimation, Inc. ........................................... 318,000
October 2 NetLink Systems, L.L.C. .................................... 3,428,000
November 20 Add, Inc. .................................................. 14,000
-----------
$32,850,000
===========
1999:
January 15 Hoosier On-Line Systems, Inc. .............................. $ 2,347,000
February 24 Infinite Systems, Ltd. ..................................... 3,100,000
March 10 Exchange Network Services, Inc. ............................ 3,531,000
April 23 StarNet, Inc. .............................................. 2,013,000
May 7 GDR Enterprises, Inc. ...................................... 9,125,000
June 4 Edgeware, Inc. d/b/a PCLink.com............................. 1,922,000
June 17 Core Digital Communications, Inc. .......................... 1,320,000
June 25 American Information Services, Inc. ........................ 1,206,000
September 2 Data Management Consultants, Inc. .......................... 2,073,000
September 8 Net Direct.................................................. 4,519,000
September 14 Raex........................................................ 4,370,000
September 21 Internet Connection Services, LLC........................... 708,000
September 22 MichWeb, Inc. .............................................. 521,000
October 4 ComNet, LLC................................................. 8,886,000
October 7 TDI Internet Services, Inc. ................................ 1,831,000
October 7 Choice Dot Net, LLC......................................... 1,765,000
November 9 Internet Illinois........................................... 1,811,000
December 10 Wholesale ISP............................................... 4,693,000
-----------
$55,741,000
===========
</TABLE>
The aforementioned acquisitions were accounted for using the purchase
method of accounting. The operations of the entities are included in the income
statement of Voyager.net from the acquisition date forward. For each
acquisition, the excess of cost of the acquired assets less liabilities assumed
resulted in a substantial portion of the purchase price being allocated to the
acquired customer base (see Note 4).
F-49
<PAGE> 196
VOYAGER.NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The unaudited pro forma combined historical results for the year of
acquisition and the preceding year, as if the entities listed above had been
acquired at the beginning of the year ended December 31, 1997, 1998 or 1999,
respectively, are included in the table below. The pro forma combined historical
results for CDL Corp., Internet-Michigan, Inc., Netimation, Inc., Add, Inc.,
StarNet, Inc., American Information Services, Inc. and Internet Connection
Services, LLC were not deemed to be material and are not included for the year
ended December 31, 1997, 1998 and 1999.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Revenue............................................ $ 14,120 $ 43,296 $ 62,858
Net Loss........................................... (12,590) (37,656) (24,918)
Basic and diluted net loss per share............... (1.43) (2.13) (0.91)
</TABLE>
The pro forma results above include amortization of intangibles and
interest expense on debt assumed issued to finance the acquisitions. The pro
forma results are not necessarily indicative of what actually would have
occurred if the acquisition had been completed as of the beginning of each of
the fiscal periods presented, nor are they necessarily indicative of future
consolidated results.
3. PROPERTY AND EQUIPMENT
Cost of property and equipment and depreciable lives are summarized as
follows:
<TABLE>
<CAPTION>
DEPRECIABLE
1998 1999 LIFE-YEARS
----------- ----------- -----------
<S> <C> <C> <C>
Computer equipment........................... $ 8,461,789 $18,649,572 5
Office equipment............................. 230,009 1,293,331 7
Furniture and fixtures....................... 96,559 776,886 5-7
Software..................................... 389,863 862,403 3-5
Equipment acquired under capital lease....... 1,178,525 5,365,475 5
Vehicles..................................... 32,807 32,807 5
Building improvements........................ 860,526 1,386,534 7-10
----------- -----------
11,250,078 28,367,008
Less accumulated depreciation................ (1,721,706) (7,068,552)
----------- -----------
Property and equipment, net.................. $ 9,528,372 $21,298,456
=========== ===========
</TABLE>
Depreciation expense of approximately $393,000, $842,000 and $4,992,000 was
charged to operations in 1997, 1998 and 1999, respectively.
4. INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
1998 1999
----------- ------------
<S> <C> <C>
Acquired customer base........................... $30,127,837 $ 85,311,158
Bank financing fees.............................. 1,348,182 2,625,563
Other............................................ 237,658 299,864
----------- ------------
31,713,677 88,236,585
Less accumulated amortization.................... (2,972,027) (21,597,852)
----------- ------------
Intangible assets, net........................... $28,741,650 $ 66,638,733
=========== ============
</TABLE>
F-50
<PAGE> 197
VOYAGER.NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. CAPITAL LEASES
The Company leases computer equipment under capital leases expiring in
various years through the year 2002. The assets under capital leases are
recorded at the lower of the present value of the minimum lease payments or the
fair value of the asset. The net book value of these assets as of December 31,
1998 and 1999 was $982,222 and $4,319,370, respectively. Depreciation of assets
under capital leases is included in depreciation expense.
Future minimum lease payments under capital leases as of December 31, 1999
are as follows:
<TABLE>
<S> <C>
2000........................................................ $ 2,355,280
2001........................................................ 2,015,212
2002........................................................ 341,263
-----------
Total minimum lease payments................................ 4,711,755
Less amount representing interest........................... (469,283)
-----------
Present value of net minimum lease payments................. $ 4,242,472
Less current portion........................................ (2,049,878)
-----------
Long-term portion of obligations under capital leases....... $ 2,192,594
===========
</TABLE>
6. RELATED PARTY TRANSACTIONS
The notes payable, related party, represent principal and interest payable
on demand to Horizon Cable I Limited Partnership, an entity under common
management. Interest on the notes was at rates of 10.5 percent in 1997, 8.0 and
8.5 percent in 1998 and in 1999. Concurrent with the Company's initial public
offering, these notes, including accumulated interest, were paid in the amount
of $2,336,174.
On July 31, 1998, the Company issued to a majority stockholder $2,800,000
in notes payable at interest of 8 percent per annum. These notes, along with
$32,526 of accrued interest and cash in the amount of $533,333, were converted
into 33,657 shares of preferred stock for $100 per share and 446,400 shares of
common stock for $1,881.
7. OTHER LIABILITIES
Other liabilities consist of the following:
<TABLE>
<CAPTION>
1998 1999
-------- ----------
<S> <C> <C>
Accrued payroll and related expenses................. $272,654 $ 983,197
Accrued expenses..................................... 465,732 2,697,350
Other................................................ 117,341 16,298
-------- ----------
$855,727 $3,696,845
======== ==========
</TABLE>
8. DEBT
In July 1999, the Company re-negotiated its revolving available credit
facility with its bank group concurrent with its initial public offering (see
Note 11) for a $60 million line of credit, with the option to extend to $70
million on similar terms and conditions. The credit facility matures on
September 30, 2005. At December 31, 1999, $19,650,000 was outstanding under the
credit facility. Interest is payable quarterly through maturity. The revolving
credit facility agreement allows the Company to elect an interest rate as of any
borrowing date based on either the (1) prime rate, or (2) LIBOR, plus a margin
ranging from 1.0% to 2.75% depending on the ratio of funded debt to EBITDA. The
elected rate as of December 31,
F-51
<PAGE> 198
VOYAGER.NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1999 is approximately 9.0% with an effective weighted average rate of
approximately 8.6% and 8.4% at December 31, 1998 and 1999, respectively.
Commitment fees on the unused credit facility are 0.5%. Automatic and permanent
reductions of the maximum commitments begin April 2001 and continue until
maturity. Based on the balance as of December 31, 1999, the scheduled permanent
reductions of long-term debt are as follows:
<TABLE>
<CAPTION>
YEAR
----
<S> <C>
2000 $ --
2001.................................................... 982,500
2002.................................................... 2,456,250
2003.................................................... 4,421,250
2004.................................................... 6,263,438
Thereafter.............................................. 5,526,562
-----------
$19,650,000
===========
</TABLE>
The revolving credit facility is collateralized by all of the Company's
tangible and intangible personal property and fixtures as well as substantially
all of the issued and outstanding equity securities of the Company.
The revolving credit facility is subject to an agreement that contains,
among other provisions, certain financial covenants. These financial covenants
include maintenance of a minimum fixed charges ratio, a total interest coverage
ratio, and a leverage ratio.
9. INCOME TAXES
The Company's effective tax rate varies from the statutory rate as follows:
<TABLE>
<CAPTION>
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
Statutory rate.............................................. 35.0% 35.0% 35.0%
Effect of graduated tax rate................................ (1.0) (1.0) (1.0)
Change in valuation allowance............................... (34.0) (34.0) (34.0)
----- ----- -----
0.0% 0.0% 0.0%
===== ===== =====
</TABLE>
Based on the Company's current financial status, realization of the
Company's deferred tax assets does not meet the "more likely than not" criteria
under SFAS No. 109 and accordingly a valuation allowance for the entire deferred
tax asset amount has been recorded. The components of the net deferred tax asset
(liability) and the related valuation allowance are as follows:
<TABLE>
<CAPTION>
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Net operating loss carryforward............. $ 1,055,000 $ 2,750,000 $ 1,700,000
Intangible assets........................... -- 755,000 5,900,000
Fixed assets................................ 18,000 13,000 (800,000)
----------- ----------- -----------
Deferred tax assets......................... 1,073,000 3,518,000 6,800,000
Valuation allowance......................... (1,073,000) (3,518,000) (6,800,000)
----------- ----------- -----------
Net deferred tax assets..................... $ -- $ -- $ --
=========== =========== ===========
</TABLE>
Net operating loss ("NOL") carryforwards expire in years 2013 through 2018.
NOLs totaled $3,102,000, $5,500,000 and $5,000,000 at December 31, 1997, 1998
and 1999, respectively.
F-52
<PAGE> 199
VOYAGER.NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. RETIREMENT SAVINGS PLAN
In 1997, the Company established a retirement savings 401(k) plan for all
employees. The Company can make discretionary matching contributions to the
plan. Contributions to the plan totaled approximately $7,300, $15,000 and
$53,000 in 1997, 1998 and 1999, respectively.
11. EQUITY TRANSACTIONS
On July 21, 1999, the Company completed its initial public offering in
which it sold 7,425,000 shares of common stock at $15.00 per share resulting in
net proceeds of $99,454,899. In addition, a total of 1,575,000 shares were
offered for sale by the stockholders. Upon the closing of the offering,
$60,622,173 of senior bank debt and accrued interest and fees were repaid,
$8,810,078 of preferred stock and cumulative dividends were redeemed, and
$2,336,174 of subordinated notes and accrued interest were repaid. The remainder
of the proceeds were used for general corporate purposes, including acquisitions
and capital expenditures.
On January 11, 1999, the Company issued to a member of management and the
Chairman of the Board, an aggregate 1,240,000 shares of common stock at $4.84
per share in exchange for promissory notes receivable in the aggregate amount of
$6,000,000 which are due January 11, 2003 and have an interest rate of 5% per
annum compounded annually. The notes are collateralized by a pledge of the
related shares of common stock and are a recourse obligation to these
individuals in the amount of 25% of the outstanding principal and 100% of the
accrued interest.
In April 1999, the Company loaned a member of senior management $500,000.
It is payable in three years and accrues interest at 5% per year. The loan is
uncollateralized and the Company has full recourse against the borrower.
Additionally, in July 1999, the Company loaned $5 million to the same
individual. It is due in 2003 and accrues interest at 5% per year. The loan is
collateralized by a pledge of 416,667 shares of common stock and is a recourse
obligation of the borrower in the amount of 25% of the outstanding principal and
100% of the accrued interest on the loan.
In May 1999, the Company sold an aggregate 6,667 shares of series A
preferred stock to certain shareholders pursuant to the exercise of an option to
purchase shares of series A preferred stock in the stock purchase agreement, for
an aggregate purchase price of $666,700.
On September 23, 1998, the Company issued 33,657 shares of preferred stock
at $100 per share and 446,400 shares of common stock in exchange for $2,800,000
notes payable to its majority stockholders along with $32,566 in accrued
interest and $533,513 in cash. Also on September 23, 1998, the Company converted
accumulated preferred stock dividends in the amount of $242,400 through
September 23, 1998 into 2,424 shares of preferred stock at $100 per share.
On June 24, 1999, July 6, 1998 and August 22, 1997, the Board of Directors
declared a stock split of 1.24 for 1, a 20 for 1 and a 100 for 1, respectively.
All references to the number of common shares and per share amounts in the
consolidated financial statements and related footnotes have been restated to
reflect the effect of these stock splits for all periods presented.
12. STOCK-BASED COMPENSATION PLAN
In 1998, a Stock Option and Incentive Plan (the "Plan") was established.
The Plan provides for the ability to issue Stock Options (either Incentive Stock
Options or Non-Qualified Stock Options), Stock Appreciation Rights, Restricted
Stock Awards, Deferred Stock Awards, Unrestricted Stock Awards, Performance
Share Awards and Dividend Equivalent Rights. As of December 31, 1999, there were
4,816,160 options to purchase common stock authorized with 1,626,658 options
available for issuance.
F-53
<PAGE> 200
VOYAGER.NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Plan provides for the granting of options to officers, employees,
consultants, members of the Board of Directors and other key persons for
purchase of the Company's common shares. The Plan is administered by the Board
of Directors. No option can be for a term of more than ten years from the grant
date. The option price and the vesting provisions are determined by the Board of
Directors at the time of the grant.
Stock option activity under the Plan during the year ended December 31,
1998 and 1999 (there were no stock options granted during 1997) are as follows:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER AVERAGE
OF EXERCISE
OPTIONS PRICE
--------- --------
<S> <C> <C>
Outstanding at January 1, 1998.............................. -- --
Granted..................................................... 768,800 $ .0004
Exercised, forfeited and expired............................ -- --
--------- --------
Outstanding at December 31, 1998............................ 768,800 .0004
--------- --------
Granted..................................................... 3,297,980 13.431
Exercised................................................... 768,800 .0004
Forfeited................................................... -- --
Expired..................................................... 101,894 14.6609
--------- --------
Outstanding at December 31, 1999............................ 3,196,086 $13.3992
========= ========
Exercisable at December 31, 1999............................ 558,000 $ 15.00
========= ========
</TABLE>
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations, in accounting for
its stock and stock options issued to employees. During 1998, the Company
granted 768,800 options to purchase common stock to certain members of
management of which 582,800 options were fully vested and the remaining 186,000
options became fully vested in January 1999. During 1999, the Company granted
3,297,980 options to purchase common stock; 3,130,580 were granted at market
prices and 167,400 were granted at $4.84 per share which was less than market
price. The weighted-average remaining contractual life of the options
outstanding at December 31, 1999 is in approximately 10 years. During 1998, the
Company issued 2,232,000 shares of restricted common stock to certain members of
management for a nominal amount; 496,000 of which were subject to certain
vesting provisions at December 31, 1998 through October 2002. During 1999, the
Company issued an aggregate of 1,240,000 shares of restricted common stock at
$4.84 per share to a member of management and the Chairman of the Board. Certain
of these shares were subject to vesting through 2003. Prior to the Company's
initial public offering, all shares of the unvested restricted common stock were
accelerated and became 100% fully vested. The weighted average fair value at
issuance for the restricted common stock and options were $1.77 and $6.16 per
share at December 31, 1998 and 1999, respectively. Accordingly, the Company
recorded compensation expense of $4,218,407 and $2,563,311 for the years ended
December 31, 1998 and 1999, respectively.
F-54
<PAGE> 201
VOYAGER.NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Under SFAS No. 123, "Accounting for Stock-Based Compensation" (SFAS 123),
compensation cost is measured at the grant date based on the value of the award
and is recognized over the service (or vesting) period. Under SFAS 123, the
Company's net loss and loss per share for the years ended December 31, 1998 and
1999 would have been adjusted to the pro forma amounts indicated in the
following table:
<TABLE>
<CAPTION>
1998 1999
----------- ------------
<S> <C> <C>
Net loss applicable to common stockholders:
As reported............................................ $(7,619,207) $(16,496,215)
Pro forma.............................................. $(8,737,394) $(26,346,231)
Loss per share:
As reported:
Basic and diluted................................... $ (.43) $ (.61)
Pro forma:
Basic and diluted................................... $ (.49) $ (.97)
</TABLE>
The fair value of each option granted was estimated on the date of grant
using the Black-Scholes option pricing model with the following assumptions:
<TABLE>
<CAPTION>
1998 1999
------- -------
<S> <C> <C>
Risk free rate.............................................. 5.7% 4.6%
Expected dividends.......................................... -- --
Expected life............................................... 5 years 4 years
Volatility assumption....................................... 76% 75%
</TABLE>
13. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
----------------------------------------
1997 1998 1999
--------- ----------- ------------
<S> <C> <C> <C>
Net loss.................................... $(820,072) $(7,270,713) $(16,128,949)
Less preferred stock dividends.............. (73,456) (348,494) (367,265)
--------- ----------- ------------
Net loss applicable to common
stockholders.............................. $(893,528) $(7,619,207) $(16,496,214)
--------- ----------- ------------
Basic and diluted weighted average common
shares outstanding........................ 8,878,498 17,655,484 27,238,084
========= =========== ============
Basic and diluted net loss per share
applicable to common stockholders......... $ (.10) $ (.43) $ (.61)
========= =========== ============
</TABLE>
Net loss per share is computed using the weighted average number of common
shares outstanding during the period. Inclusion of common share equivalents
would be anti-dilutive and have been excluded from the per share calculations
for 1999. The impact of dilutive shares was not significant for 1997 and 1998.
F-55
<PAGE> 202
VOYAGER.NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
The following is the supplemental cash flow information for all periods
presented:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
--------------------------------------
1997 1998 1999
-------- ------------ ------------
<S> <C> <C> <C>
Cash paid during the year for interest.......... $ 7,604 $ 632,027 $ 2,718,404
Noncash financing and investing activities:
In connection with the acquisitions described
in Note 2, liabilities were assumed as
follows:
Fair value of assets acquired.............. -- 37,890,628 60,721,084
Business acquisition costs, net of cash
acquired................................. -- (32,850,289) (55,630,048)
-------- ------------ ------------
Liabilities assumed............................. -- $ 5,040,339 $ 5,091,036
======== ============ ============
Acquisition of equipment through capital
lease......................................... $159,974 $ 951,117 $ 4,861,250
Conversion of note payable and accumulated
dividends to preferred stock.................. $ -- $ 3,042,400 $ --
Issuance of compensatory common stock and
options....................................... $ -- $ 4,218,407 $ 2,563,311
Issuance of common stock in exchange for
promissory notes.............................. $ -- $ -- $ --
</TABLE>
15. COMMITMENTS AND CONTINGENCIES
The Company leases office facilities, point of presence locations, certain
network equipment and vehicles under operating lease agreements that expire in
the years 2000, 2001, 2002, 2003, 2004 and 2007. The following is a schedule of
future minimum rental payments under these leases:
<TABLE>
<CAPTION>
YEAR
----
<S> <C>
2000..................................................... $1,004,738
2001..................................................... 813,663
2002..................................................... 768,092
2003..................................................... 673,190
2004..................................................... 380,748
Thereafter............................................... 922,703
----------
$4,563,134
==========
</TABLE>
In addition to these leases, the Company also leases point of presence
locations under lease terms of less than one year.
Rent expense under all operating leases of approximately $103,000, $190,000
and $760,000 was charged to operations in 1997, 1998 and 1999, respectively.
16. SEGMENT REPORTING
The Company has a single operating segment, Internet access services. The
Company has no organizational structure dictated by product lines, geography or
customer type. Sales are substantially derived from one service line, Internet
access service, and are residential and business customers in the Midwestern
United States. The Company evaluates performance based on profit or loss from
operations before interest, income taxes, depreciation and amortization and
non-recurring, non-cash compensation charges.
F-56
<PAGE> 203
VOYAGER.NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
17. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
-----------------------------------------------------
1999
-----------------------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Total revenue............................... $ 8,519,226 $10,713,899 $12,904,996 $16,359,514
Loss from operations before other income
(expense)................................. (2,694,505) (3,247,499) (3,169,243) (5,276,925)
Net loss.................................... (3,466,018) (4,290,055) (3,357,604) (5,015,272)
Basic and diluted net loss per share
applicable to common stockholders......... $ (.16) $ (.19) $ (.11) $ (.16)
Weighted average common shares outstanding,
basic and diluted......................... 22,987,865 23,776,309 30,084,336 31,650,108
</TABLE>
<TABLE>
<CAPTION>
1998
-----------------------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Total revenue............................... $ 1,135,244 $ 1,222,266 $ 2,045,296 $ 6,319,356
Income (loss) from operations before other
income (expense).......................... 102,866 (39,587) (944,947) (5,477,266)
Net income (loss)........................... 63,825 (77,981) (1,040,681) (6,215,876)
Basic and diluted net loss per share
applicable to common stockholders......... $ -- $ (.01) $ (.06) $ (.29)
Weighted average common shares outstanding,
basic and diluted......................... 14,998,673 15,021,831 18,255,050 22,210,920
</TABLE>
18. SUBSEQUENT EVENTS (UNAUDITED)
On February 11, 2000, the Company purchased assets from Valley Business
Equipment, Inc. for approximately $4,100,000 of which approximately $3,700,000
was remitted to Valley Business Equipment, Inc. and the remainder was deposited
in an escrow account. Approximately $4,000,000 was allocated to the acquired
customer base cost as a result of this transaction.
On March 12, 2000, the Company entered into an agreement to merge with
CoreComm Limited in a stock and cash transaction. The transaction is subject to
stockholder approval, certain regulatory approvals and other conditions.
F-57
<PAGE> 204
ATX TELECOMMUNICATIONS SERVICES, INC.
BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30,
2000
-----------
<S> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................. $ 3,530,871
Accounts receivable, net of allowances for doubtful
accounts and credits of $2,108,000 and $1,811,000,
respectively........................................... 25,669,479
Other current assets...................................... 744,860
-----------
TOTAL CURRENT ASSETS........................................ 29,945,210
PROPERTY AND EQUIPMENT, net................................. 13,310,781
INTANGIBLE ASSETS, net...................................... 638,210
OTHER ASSETS................................................ 261,864
-----------
TOTAL ASSETS...................................... $44,156,065
===========
LIABILITIES AND EQUITY/PARTNERS' CAPITAL
CURRENT LIABILITIES
Accounts payable.......................................... $28,465,971
Accrued expenses.......................................... 1,069,050
Accrued payroll and related expenses...................... 4,886,165
Sales and excise taxes payable............................ 2,023,133
Payables, related parties................................. 1,445,168
-----------
TOTAL CURRENT LIABILITIES................................... 37,889,487
-----------
TOTAL LIABILITIES........................................... 37,889,487
-----------
CONTINGENCIES
PHANTOM UNIT COMPENSATION................................... 1,200,000
EQUITY/PARTNERS' CAPITAL.................................... 5,066,578
-----------
TOTAL LIABILITIES AND EQUITY/PARTNERS' CAPITAL.... $44,156,065
===========
</TABLE>
See accompanying notes to unaudited financial statements.
F-58
<PAGE> 205
ATX TELECOMMUNICATIONS SERVICES, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, 2000 JUNE 30, 1999 JUNE 30, 2000 JUNE 30, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUES.......................... $40,303,265 $33,465,119 $76,566,416 $64,398,923
----------- ----------- ----------- -----------
EXPENSES
Cost of revenues................ 29,586,139 20,914,123 51,337,853 39,949,002
Selling, general and
administrative............... 15,927,345 12,912,934 32,175,309 24,459,164
----------- ----------- ----------- -----------
TOTAL EXPENSES.................... 45,513,484 33,827,057 83,513,162 64,408,166
----------- ----------- ----------- -----------
LOSS FROM OPERATIONS.............. (5,210,219) (361,938) (6,946,746) (9,243)
----------- ----------- ----------- -----------
INTEREST INCOME, NET.............. 16,136 19,899 50,327 24,317
----------- ----------- ----------- -----------
NET (LOSS) INCOME................. $(5,194,083) $ (342,039) $(6,896,419) $ 15,074
=========== =========== =========== ===========
</TABLE>
See accompanying notes to unaudited financial statements.
F-59
<PAGE> 206
ATX TELECOMMUNICATIONS SERVICES, INC.
STATEMENTS OF CHANGES IN EQUITY/PARTNERS' CAPITAL
(UNAUDITED)
<TABLE>
<S> <C>
BALANCE, December 31, 1999.................................. $12,164,122
Net loss for the Six Months ended June 30, 2000............. (6,896,419)
Capital contributions....................................... 4,064,560
Partners' distributions..................................... (4,265,685)
-----------
BALANCE, June 30, 2000...................................... $ 5,066,578
===========
</TABLE>
See accompanying notes to unaudited financial statements.
F-60
<PAGE> 207
ATX TELECOMMUNICATIONS SERVICES, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 2000 JUNE 30, 1999
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income......................................... $(6,896,419) 15,074
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities
Depreciation and amortization.......................... 1,445,010 962,703
Provision for allowances............................... 199,500 98,000
Phantom unit compensation.............................. (200,000) (200,000)
Changes in assets and liabilities
(Increase) decrease in assets
Accounts receivable............................... (5,229,893) (1,733,868)
Other current assets.............................. (643,684) 250,576
Increase (decrease) in liabilities
Accounts payable.................................. 16,125,512 512,443
Accrued payroll and related expenses.............. 185,283 (321,030)
Accrued expenses.................................. 2,870 110,956
Sales and excise taxes payable.................... (233,383) (528,691)
----------- -----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES......... 4,754,796 (833,837)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment........................ (6,306,632) (1,361,048)
Increase (decrease) in receivables and payable, related
parties................................................ (305,668) 197,733
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES....................... (6,612,300) (1,163,315)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Payment of long term debt................................. -- (275,000)
Capital Distributions..................................... (691,190)
Capital contributions..................................... 2,200,000 --
----------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES......... 2,200,000 (966,190)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 342,496 (2,963,342)
BEGINNING CASH AND CASH EQUIVALENTS......................... 3,188,375 5,067,315
----------- -----------
ENDING CASH AND CASH EQUIVALENTS............................ $ 3,530,871 2,103,973
=========== ===========
</TABLE>
See accompanying notes to unaudited financial statements.
F-61
<PAGE> 208
ATX TELECOMMUNICATIONS SERVICES, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS
ATX Telecommunication Services, Inc. ("ATX, Inc." or "the Company") was
organized in the state of Delaware on February 9, 2000 upon the consent of the
former partners of ATX Telecommunications LP ("ATX") and Global Telecom LP
("Global"). The financial position of the Company as of June 30, 2000 included
the net assets contributed by the former partnerships of ATX and Global to ATX,
Inc. on February 9, 2000 at their historical costs basis. For financial
reporting purposes, the results of operations for the Six Months ended June 30,
2000 include the results of operations of the former partnerships of ATX and
Global. These partnerships were terminated on February 9, 2000 upon their merger
into ATX, Inc. ATX, Inc. was capitalized with 10,000 shares of common stock at
$.01 par value. Upon the merger, 1,000 shares of common stock was issued to the
former partners of ATX and Global.
Upon the merger into ATX, Inc., distributions were made to certain former
partners of ATX to satisfy their loans and advances.
The Company is a single-source provider of voice and data services offering
a full range of telecommunications services, including long distance, local,
data, private line, cellular, PC-based billing, prepaid calling, paging,
Internet access and World Wide Web consulting, development and hosting.
The ATX Shareholders Agreement and former Partnership Agreements provided
for bonuses to certain executives totaling $8,000,000 per year. The Company has
recorded $4,000,000 of compensation expense for these bonuses included in
selling, general and administrative expenses for the Six Months ended June 30,
2000 and June 30, 1999. These bonuses will be eliminated upon the merger
agreement as discussed on Note 2.
2. PLAN OF RECAPITALIZATION AND MERGER
On April 9, 2000, ATX, Inc. and its stockholders ("ATX Stockholders")
entered into a plan of recapitalization and merger ("Merger Agreement") with
CoreComm Limited ("CoreComm"). Under the terms of the merger agreement, as
amended, the ATX stockholders will exchange their issued and outstanding common
stock for the following aggregate consideration: (i) approximately 12.4 million
shares of CoreComm common stock; (ii) $250 million of CoreComm's Series B
preferred stock and (iii) $150 million in cash from CoreComm. Such amounts may
be subject to adjustments as defined in the merger agreement. In the event
CoreComm has not completed a debt or equity financing prior to the closing date,
CoreComm may elect to issue short term notes of $119.0 million and reduce the
cash consideration by such amount. The Merger Agreement is subject to regulatory
and CoreComm shareholder approval, amongst other conditions.
3. BASIS OF PRESENTATION
In the opinion of management, all adjustments which have been made are
necessary to present fairly the financial position of the Company as of June 30,
2000 and 1999 and the results of operations for the six month periods ended June
30, 2000 and 1999. The results of operations for the six month period ending
June 30, 2000 are not necessarily indicative of the results to be experienced
for the fiscal year ending December 31, 2000.
The Statements and related notes herein have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission. Accordingly,
certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted pursuant to such rules and regulations. The accompanying notes
should therefore be read in conjunction with the Company's December 31, 1999
financial statements included elsewhere herein.
F-62
<PAGE> 209
ATX TELECOMMUNICATIONS SERVICES, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS -- (CONTINUED)
INCOME TAXES
Upon the incorporation of ATX, Inc as of February 9, 2000, ATX is subject
to federal and state income taxation. ATX did not provide for an income tax
benefit for the Six Months ended June 30, 2000 based on the uncertainty of
future earnings and profits.
Prior to the incorporation of ATX, Inc., the partners were required to
report their respective share of the Company's profits and losses in their
individual income tax returns. Accordingly, no provision for federal, state and
local income taxes is reflected in these statements for periods prior to
February 9, 2000.
4. PHANTOM UNIT PLAN
The Phantom Unit Plan ("the Plan") provides for the issuance of a total of
5,000,000 phantom units. The phantom units shall become payable on the earlier
of termination or a change of control. Upon the termination of employment, such
phantom unit holders shall be entitled to compensation. Such compensation shall
be payable over a 36-month period beginning in the thirteenth month after
termination. Compensation is determined by the Phantom Unit Plan's formula and
is based on average net income as defined in the Plan for the three years prior
to termination.
Upon a change in control as defined in the Plan, the Company will record a
compensation charge equal to the fair market value of the phantom units. Such
event would be the consummation of the Merger Agreement above resulting in a
charge of approximately 5% of the fair market value of the aggregate
consideration as described in Note 2.
5. SUPPLEMENTAL CASH FLOW INFORMATION
Prior to the merger into ATX, Inc. distributions were made to the former
partners of ATX of approximately $4.3 million to satisfy their loan balances.
Additionally, loans to an officer of the Company were forgiven of approximately
$1.9 million and shown as a contribution to equity.
F-63
<PAGE> 210
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
ATX Telecommunications Services Group
Bala Cynwyd, Pennsylvania
We have audited the accompanying combined balance sheets of ATX
Telecommunications Services Group as of December 31, 1999, 1998 and 1997, and
the related combined statements of operations, changes in partners' capital, and
cash flows for the years then ended. These financial statements are the
responsibility of the management of ATX Telecommunications Services Group. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of ATX
Telecommunications Services Group as of December 31, 1999, 1998 and 1997, and
the results of their operations and their cash flows for the three years then
ended in conformity with generally accepted accounting principles.
BDO Seidman, LLP
Philadelphia, Pennsylvania
March 10, 2000
F-64
<PAGE> 211
ATX TELECOMMUNICATIONS SERVICES GROUP
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents......................... $ 3,188,375 $ 5,067,315 $ 3,231,366
Accounts receivable, net of allowances for
doubtful accounts and credits of $1,909,000,
$1,713,000 and $1,412,000, respectively........ 20,639,086 16,857,357 12,987,283
Other current assets.............................. 101,176 1,267,796 924,227
Receivables, related parties...................... -- -- 2,924,430
----------- ----------- -----------
TOTAL CURRENT ASSETS................................ 23,928,637 23,192,468 20,067,306
PROPERTY AND EQUIPMENT, net......................... 8,359,873 6,304,365 3,275,769
INTANGIBLE ASSETS, net.............................. 727,496 906,067 1,084,638
OTHER ASSETS........................................ 261,864 -- --
RECEIVABLES, partners............................... 4,265,685 2,037,620 570,442
----------- ----------- -----------
TOTAL ASSETS........................................ $37,543,555 $32,440,520 $24,998,155
=========== =========== ===========
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES
Accounts payable.................................. $12,340,460 $ 9,709,815 $ 6,536,352
Accrued expenses.................................. 1,066,180 1,072,655 931,500
Accrued payroll and related expenses.............. 4,700,882 4,518,969 475,547
Accrued partners' distributions................... -- 1,350,000 --
Sales and excise taxes payable.................... 2,256,516 1,908,584 2,528,878
Current portion of long-term debt................. -- 562,500 275,000
Payables, related parties......................... 1,750,835 678,793 --
----------- ----------- -----------
TOTAL CURRENT LIABILITIES........................... 22,114,873 19,801,316 10,747,277
LONG-TERM DEBT...................................... -- -- 562,500
PAYABLES, related parties........................... 1,864,560 1,864,560 170,885
----------- ----------- -----------
TOTAL LIABILITIES................................... 23,979,433 21,665,876 11,480,662
COMMITMENTS AND CONTINGENCIES
PHANTOM UNIT COMPENSATION........................... 1,400,000 1,800,000 --
PARTNERS' CAPITAL................................... 12,164,122 8,974,644 13,517,493
----------- ----------- -----------
TOTAL LIABILITIES AND PARTNERS' CAPITAL............. $37,543,555 $32,440,520 $24,998,155
=========== =========== ===========
</TABLE>
See accompanying notes to combined financial statements.
F-65
<PAGE> 212
ATX TELECOMMUNICATIONS SERVICES GROUP
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1999 1998 1997
------------ ------------ -----------
<S> <C> <C> <C>
REVENUES.......................................... $135,020,849 $113,654,155 $92,594,419
------------ ------------ -----------
EXPENSES
Cost of revenues................................ 85,477,119 68,435,883 52,769,825
Selling, general and administrative............. 51,213,416 43,280,185 26,406,902
------------ ------------ -----------
TOTAL EXPENSES.................................... 136,690,535 111,716,068 79,176,727
------------ ------------ -----------
(LOSS) INCOME FROM OPERATIONS..................... (1,669,686) 1,938,087 13,417,692
INTEREST INCOME, NET.............................. 71,844 115,042 179,215
------------ ------------ -----------
NET (LOSS) INCOME................................. $ (1,597,842) $ 2,053,129 $13,596,907
============ ============ ===========
</TABLE>
See accompanying notes to combined financial statements.
F-66
<PAGE> 213
ATX TELECOMMUNICATIONS SERVICES GROUP
COMBINED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
<TABLE>
<S> <C>
BALANCE, December 31, 1996.................................. $ 11,313,825
Net income for the year ended December 31, 1997............. 13,596,907
Partners' contributions..................................... 412,500
Partners' distributions..................................... (11,805,739)
------------
BALANCE, December 31, 1997.................................. 13,517,493
Net income for the year ended December 31, 1998............. 2,053,129
Partners' contributions..................................... 2,000,000
Partners' distributions..................................... (8,595,978)
------------
BALANCE, December 31, 1998.................................. 8,974,644
Net loss for the year ended December 31, 1999............... (1,597,842)
Partners' contributions..................................... 4,847,739
Partners' distributions..................................... (60,419)
------------
BALANCE, December 31, 1999.................................. $ 12,164,122
============
</TABLE>
See accompanying notes to combined financial statements.
F-67
<PAGE> 214
ATX TELECOMMUNICATIONS SERVICES GROUP
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1999 1998 1997
----------- ----------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income..................................... $(1,597,842) $ 2,053,129 $ 13,596,907
Adjustments to reconcile net (loss) income to net cash
provided by operating activities
Depreciation and amortization.................... 1,820,453 1,947,830 1,830,449
Provision for allowances......................... 196,000 301,000 112,000
Loss on sale of equipment........................ -- 5,380 --
Phantom unit compensation........................ (400,000) 1,800,000 --
Changes in assets and liabilities
(Increase) decrease in assets
Accounts receivable........................... (3,977,729) (4,171,074) (1,892,732)
Other current assets.......................... 1,166,620 (343,569) 41,083
Other assets.................................. (261,864) -- --
Increase (decrease) in liabilities
Accounts payable.............................. 2,630,645 3,173,463 1,179,702
Accrued expenses.............................. (6,475) 141,155 280,701
Accrued payroll and related expenses.......... 181,913 4,043,422 98,822
Sales and excise taxes payable................ 347,932 (620,294) 38,146
----------- ----------- ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES............... 99,653 8,330,442 15,285,078
----------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from the sale of property and equipment...... -- 11,000 --
Purchase of property and equipment.................... (3,697,390) (4,814,235) (1,214,911)
Purchase of intangible assets......................... -- -- (412,500)
Decrease (increase) in receivables and payable,
related parties.................................... 1,072,042 5,296,898 (1,924,745)
Increase in loans to partners......................... (2,228,065) (117,178) (324,765)
----------- ----------- ------------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES..... (4,853,413) 376,485 (3,876,921)
----------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Payment of long-term debt............................. (562,500) (275,000) --
Partners' contributions............................... 4,847,739 2,000,000 412,500
Partners' distributions............................... (1,410,419) (8,595,978) (11,805,739)
----------- ----------- ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES..... 2,874,820 (6,870,978) (11,393,239)
----------- ----------- ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS.... (1,878,940) 1,835,949 14,918
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.......... 5,067,315 3,231,366 3,216,448
----------- ----------- ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR................ $ 3,188,375 $ 5,067,315 $ 3,231,366
=========== =========== ============
</TABLE>
See accompanying notes to combined financial statements.
F-68
<PAGE> 215
ATX TELECOMMUNICATIONS SERVICES GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS
The combined financial statements of ATX Telecommunications Services Group
("the Company") include the accounts of ATX Telecommunications Services Ltd.
("ATX") and Global Telecom Services, Ltd. ("Global") which were under common
control and ownership by the same partners/family members. ATX and Global were
limited partnerships organized under the laws of the Commonwealth of
Pennsylvania. ATX and Global are single-source providers of voice and data
services offering a full range of telecommunications services, including long
distance, local, data, private line, cellular, PC-based billing, prepaid
calling, paging, Internet access and World Wide Web consulting, development and
hosting.
These partnerships were terminated on February 9, 2000 upon their merger
into ATX Telecommunication Services, Inc. ("ATX, Inc."). ATX, Inc. was
incorporated on the above date in the state of Delaware upon the consent of the
Company's partners. ATX, Inc. was capitalized with 10,000 shares of common stock
at $.01 par value. Upon the merger, 1,000 shares of common stock was issued to
the former partners of ATX and Global. On such date, the Company contributed its
assets and its liabilities were assumed by ATX, Inc. at their historical cost
basis.
The partnership agreement provides for the allocation of profits and losses
on an annual basis. Profits and losses are allocated among partners based on the
partnership agreement.
Distributions, other than liquidating distributions, shall be made to all
partners in proportion to their percentage interests except as otherwise
stipulated in the partnership agreement.
The partnership agreement required that during 1999 certain partners
receive distributions totaling $1,350,000 for prior years. This agreement also
provides for bonuses to these partners totaling $8,000,000 per year for the
years 1998 through 2002. The Company has recorded compensation expenses for
these bonuses included in selling, general and administrative expenses for the
years ended December 31, 1999 and 1998, respectively.
If a sale or public offering of the Company does not occur before January
31, 2003, certain minority partners have an option to put their respective
interests to the Company at fair value, as defined within the partnership
agreement. The total amount to be paid to these partners for their respective
interests will be paid over a seven and one-half year period.
2. PLAN OF RECAPITALIZATION AND MERGER
On March 9, 2000, ATX, Inc. and its stockholders ("ATX Stockholders")
entered into a plan of recapitalization and merger ("Merger Agreement") with
CoreComm Limited ("CoreComm"). Under the terms of the merger agreement, ATX will
be recapitalized such that the ATX Stockholders will receive the following
aggregate consideration: (i) approximately 12.4 million shares of CoreComm
common stock; (ii) $250 million of CoreComm's 3% senior preferred stock and
(iii) $150 million in cash from CoreComm. Such amounts may be subject to
adjustments as defined in the merger agreement. In the event CoreComm has not
completed a debt or equity financing prior to the closing date, CoreComm may
elect to issue short term notes of $70 million and reduce the cash consideration
by such amount. The Merger Agreement is subject to regulatory and CoreComm
shareholder approval, among other conditions.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
The Company recognizes revenue based on the customers' usage of services.
Revenues are presented net of estimated discounts. Additionally, the Company
accrues for unbilled telecommunication revenue as a result of its billing cycle
and such amounts are included in accounts receivable.
F-69
<PAGE> 216
ATX TELECOMMUNICATIONS SERVICES GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Cost of Revenues
Cost of revenues includes network costs which consist of access, transport,
and termination costs. Such costs are recognized when incurred in connection
with the provision of telecommunication services.
Cash Equivalents
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization
are provided by the straight-line method over the estimated useful lives of the
respective assets. Property and equipment are depreciated over useful lives
ranging from five to seven years and leasehold improvements are amortized over
the terms of the lease.
Intangible Assets
Intangible assets represent acquired customer lists which are being
amortized using the straight line method over a 7-year period. Intangible assets
are presented net of accumulated amortization of $522,504, $343,933 and $165,362
as of December 31, 1999, 1998 and 1997, respectively.
Impairment of Assets
The Company's long-lived assets and identifiable intangibles are reviewed
for impairment whenever events or changes in circumstances indicate that the net
carrying amount may not be recoverable. When such events occur, the Company
measures impairment by comparing the carrying value of the long-lived asset to
the estimated undiscounted future cash flows expected to result from the use of
the assets and their eventual disposition. The Company determined that, as of
December 31, 1999, there had been no impairment in the carrying value of the
long-lived and intangible assets.
Advertising and Marketing Costs
All costs related to advertising and marketing the Company's products and
services are expensed in the period incurred.
Income Taxes
The partners are required to report their respective share of the Company's
profits and losses in their individual income tax returns. Accordingly, no
provision for federal, state and local income taxes is reflected in the
financial statements.
Concentrations of Credit Risk
The Company maintains its cash deposits and temporary cash investments with
high-quality institutions at levels which may exceed federally insured limits.
The Company has not experienced any losses on cash deposits or temporary cash
investments maintained in this manner.
The Company sells its telecommunications services and products to customers
operating primarily in the Northeastern region of the United States. The Company
performs ongoing credit evaluation of its customers, and it generally does not
require collateral from those customers.
F-70
<PAGE> 217
ATX TELECOMMUNICATIONS SERVICES GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Fair Value of Financial Instruments
The carrying value of all financial instruments approximates their fair
value due to the short maturity of the respective instruments.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
4. PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Computer and switching equipment............ $19,964,627 $16,801,263 $12,314,302
Furniture and fixtures...................... 1,150,108 711,471 592,556
Automobiles................................. 352,113 279,533 107,147
Leasehold improvements...................... 79,492 56,683 56,683
----------- ----------- -----------
21,546,340 17,848,950 13,070,688
Less accumulated depreciation and
amortization.............................. 13,186,467 11,544,585 9,794,919
----------- ----------- -----------
$ 8,359,873 $ 6,304,365 $ 3,275,769
=========== =========== ===========
</TABLE>
5. LONG-TERM DEBT
In connection with an acquisition of customer lists during 1997 for
$1,250,000, Global issued a note for $837,500. The note provided for payments of
$275,000 and $562,500 with interest at 5.5% in 1998 and 1999, respectively.
During 1999, the note was repaid in full. Global recorded interest expense of
$47,238 and $39,724 for the years ended 1999 and 1998.
6. LEASE COMMITMENTS
The Company leases various facilities classified as operating leases. Under
terms of these leases, the Company is required to pay its proportionate share of
real estate taxes, operating expenses and other related costs. Rent expense for
the years ended December 31, 1999, 1998 and 1997 was $1,619,083, $1,444,456 and
$1,295,971, respectively.
Additionally, the Company leases its principal office and equipment space
from various partnerships in which the general partner was also a partner of the
Company. The Company recorded rent included in the above amounts aggregating
$1,227,010, $1,182,515 and $1,179,358 to these partnerships for the years ended
December 31, 1999, 1998 and 1997, respectively.
F-71
<PAGE> 218
ATX TELECOMMUNICATIONS SERVICES GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum rental payments, including those due to related parties, are
summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
------------------------ ----------
<S> <C>
2000..................................................... $1,902,000
2001..................................................... 1,927,000
2002..................................................... 1,954,000
2003..................................................... 1,565,000
2004..................................................... 537,000
Thereafter............................................... 105,000
----------
$7,990,000
==========
</TABLE>
7. RELATED PARTY TRANSACTIONS
There are various transactions with a partner of the Company relating to
certain professional services approximating $1,000,000 for each of the years
1999, 1998 and 1997. These transactions resulted in intercompany balances shown
as payables to related parties, with the related costs reflected in general and
administrative expenses. Additionally, companies affiliated with this partner
advanced funds to the Company for their operations and purchases of certain
telecommunication equipment. These amounts have no formal repayment terms or
interest rates and are shown as payables, related party.
Additionally, the Company advanced funds to certain partners. These amounts
are included in receivables, partners and had no formal repayment terms or
interest rates. Subsequent to December 31, 1999, prior to the partnerships'
merger into ATX, Inc., a distribution of approximately $4.3 million was declared
and satisfied by the above mentioned receivables, partners.
8. CONTINGENCIES
The Company is a defendant in various lawsuits relative to its business
operations. Management believes that the outcome of these pending lawsuits will
not materially effect the financial position, results of operations or cash
flows of the Company.
9. EMPLOYEE BENEFITS
The Company and affiliated business entities controlled by a partner of the
Company maintain a self-insured health plan for their employees and partners.
The Company is responsible for participant claims, stop loss premiums and
administrative fees. Such plan does not provide for post retirement benefits.
10. RETIREMENT PLAN
The Company's employees participate in a defined contribution profit
sharing plan established under Section 401(k) of the Internal Revenue Code. The
plan allows employees to defer up to 15% of their income through contributions
to the plan on a pretax basis, subject to a statutory dollar limitation. In
accordance with the provisions of the plan, the employer may match employees'
contributions. In addition, the employer may make optional contributions to the
plan. The Company and other business entities controlled by a partner of the
Company participate in this plan. The Company made matching contributions to the
plan for the years ended December 31, 1999, 1998 and 1997 of $176,166, $127,670
and $58,047, respectively.
F-72
<PAGE> 219
ATX TELECOMMUNICATIONS SERVICES GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
11. PHANTOM UNIT PLAN
During 1998, ATX adopted the 1998 Phantom Unit Plan (the "Plan"). The Plan
provides for the issuance of a total of 5,000,000 phantom units representing a
phantom 5% equity interest in ATX. Eligible employees may receive phantom units
or equivalent consideration as determined by a committee appointed by ATX to
administer the Plan. The committee has the authority at its sole discretion to
designate the employees eligible to participate in the Plan. In addition, the
committee may terminate or amend the Plan at its discretion. Termination or
amendment of the Plan shall not affect phantom awards previously granted.
Typically, the awards vest over a seven-year period from the date of grant;
however, an employee may receive credit for employment time prior to the date of
the award at the discretion of the committee. The Plan is unfunded.
The phantom units become payable to a participant on the earlier of his
termination of employment or a change of control. Upon termination of
employment, a participant is entitled to compensation under the Plan. Such
compensation is payable over a 36-month period beginning in the thirteenth month
after termination. The participant's compensation is determined by his
proportionate ownership of units and the Plan's formula for determining value,
which is 10 times average net cash income as defined in the Plan for the prior
three fiscal years.
The Company has recorded a noncash (benefit) charge of ($400,000) and
$1,800,000 for the years ended December 31, 1999 and 1998, respectively, related
to the issuance of the phantom units.
Upon a change in control as defined in the Plan, the participants will
become entitled to receive compensation based upon the exchange or transaction
value of ATX's equity. ATX, Inc. will record a compensation charge equal to the
fair market value of the consideration payable to the Plan participants less
amounts previously recorded. The consummation of the Merger Agreement, described
in Note 2 above, would result in a non-cash charge of approximately $44 million.
The following table contains information on phantom units for units granted
under the Plan from the date of adoption of the Plan through December 31, 1999:
<TABLE>
<CAPTION>
NUMBER OF
PHANTOM UNITS
-------------
<S> <C>
Outstanding at January 1, 1998........................ --
Granted............................................... 3,350,000
Cancelled............................................. (75,000)
---------
Outstanding at December 31, 1998...................... 3,275,000
Granted............................................... 1,725,000
Cancelled............................................. --
---------
Outstanding at December 31, 1999...................... 5,000,000
=========
</TABLE>
12. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Global financed $837,500 in 1997 related to the purchase of customer lists
and paid interest of $47,238 and $39,724 in 1999 and 1998, respectively, in
connection with this note.
F-73
<PAGE> 220
INDEPENDENT AUDITORS' REPORT
The Board of Directors
MegsINet Inc.:
We have audited the accompanying consolidated balance sheets of MegsINet
Inc. and subsidiary as of December 31, 1998 and 1997 and the related
consolidated statements of operations, stockholders' deficit, and cash flows for
the year ended December 31, 1998. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit of financial statements includes examining, on a test
basis, evidence supporting the amounts and disclosures in those financial
statements. An audit of financial statements also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of MegsINet
Inc. and subsidiary as of December 31, 1998 and 1997 and the results of their
operations and their cash flows for the year ended December 31, 1998 in
conformity with generally accepted accounting principles.
KPMG LLP
St. Louis, Missouri
February 15, 1999
F-74
<PAGE> 221
MEGSINET INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
ASSETS
Cash........................................................ $ 1,071,584 $ 284,041
Prepaid expenses and other current assets................... 544,112 53,623
----------- ----------
Total current assets.............................. 1,615,696 337,664
Property and equipment, net................................. 26,802,413 1,501,692
----------- ----------
Total assets...................................... $28,418,109 $1,839,356
=========== ==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Equipment payable........................................... $ 9,964,881 $ --
Current portion of notes payable............................ 3,757,164 --
Current portion of capital lease obligations................ 2,096,865 356,871
Note payable to stockholder................................. 156,158 172,477
Accounts payable............................................ 1,465,367 171,482
Accrued liabilities......................................... 383,376 51,000
Deferred revenue............................................ 641,985 202,851
----------- ----------
Total current liabilities......................... 18,465,796 954,681
----------- ----------
Notes payable, less current portion......................... 6,956,178 --
Capital lease obligations, less current portion............. 5,084,112 1,013,160
Commitments and contingencies
Stockholders' deficit:
Preferred stock, no par value, 3,000,000 and no shares
authorized and 1,200 and no shares issued at December
31, 1998 and 1997, respectively........................ -- --
Common stock, no par value, 30,000,000 shares authorized
and 10,141,442 and 7,121,386 shares issued at December
31, 1998 and 1997, respectively........................ -- --
Paid-in capital........................................... 4,005,988 790,541
Retained deficit.......................................... (6,093,965) (919,026)
----------- ----------
Total stockholders' deficit....................... (2,087,977) (128,485)
----------- ----------
Total liabilities and stockholders' deficit....... $28,418,109 $1,839,356
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-75
<PAGE> 222
MEGSINET INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<S> <C>
Revenues.................................................... $ 4,172,072
Cost of sales............................................... 4,866,702
-----------
Costs in excess of revenues............................... (694,630)
-----------
Operating expenses:
Salaries and compensation................................. 1,734,675
Other operating expense................................... 2,086,804
-----------
Total operating expenses.......................... 3,821,479
-----------
Loss from operations...................................... (4,516,109)
Interest expense............................................ 658,830
-----------
Net loss.................................................. $(5,174,939)
===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-76
<PAGE> 223
MEGSINET INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
TOTAL
PREFERRED COMMON PAID-IN RETAINED STOCKHOLDERS'
STOCK STOCK CAPITAL DEFICIT DEFICIT
--------- ------- --------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1997.............. $ -- -- 790,541 (919,026) (128,485)
Issuance of preferred stock, 1,200
shares.................................. -- -- 1,500,000 -- 1,500,000
Issuance of common stock, 2,527,199
shares, net of $63,110 issue costs...... -- -- 1,439,447 -- 1,439,447
Issuance of common stock, 492,857 shares,
in lieu of compensation................. -- -- 276,000 -- 276,000
Net loss.................................. -- -- -- (5,174,939) (5,174,939)
------- ------- --------- ---------- ----------
Balance at December 31, 1998.............. $ -- -- 4,005,988 (6,093,965) (2,087,977)
======= ======= ========= ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-77
<PAGE> 224
MEGSINET INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss.................................................. $(5,174,939)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.......................... 1,082,032
Compensation paid through issuance of stock............ 276,000
Changes in operating working capital:
Prepaid expenses and other current assets............ (490,489)
Accounts payable..................................... 1,293,885
Accrued liabilities.................................. 332,376
Deferred revenue..................................... 439,134
-----------
Net cash used in operating activities............. (2,242,001)
-----------
Cash flows from investing activities -- capital
expenditures.............................................. (9,858,130)
-----------
Cash flows from financing activities:
Proceeds from notes payable............................... 10,713,342
Payments on note payable to stockholder................... (16,319)
Payments on capital lease obligations..................... (748,796)
Issuance of stock......................................... 2,939,447
-----------
Net cash provided by financing activities......... 12,887,674
-----------
Net increase in cash.............................. 787,543
Cash, beginning of year..................................... 284,041
-----------
Cash, end of year........................................... $ 1,071,584
===========
Supplemental disclosure of cash flow information -- cash
paid for interest......................................... $ 667,287
===========
Supplemental disclosure of non cash investing and financing
activities:
Capital lease obligations of $6,559,742 were incurred in
1998 when the Company entered into equipment leases.
Equipment payable of $9,964,881 was incurred in 1998 when
the Company purchased equipment.
The Company paid $19,817 of commissions through issuance
of common stock.
</TABLE>
See accompanying notes to consolidated financial statements.
F-78
<PAGE> 225
MEGSINET INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(1) DESCRIPTION OF THE BUSINESS
MegsINet Inc. was formed to develop and operate a national packet based
data network and to provide a broad range of telecommunications services. At
December 31, 1998, the Company had constructed a network that served 50 markets
in the United States. From inception through the end of 1998, the Company
provided a variety of Internet connection and web hosting services to its
customer base.
During 1998, MegsINet formed a wholly owned subsidiary called
Megsinet-CLEC, Inc. (Megsinet-CLEC). This subsidiary will provide local exchange
telephone service and long distance telephone service in competition with
incumbent and competitive local exchange telephone companies and long distance
providers. Megsinet-CLEC has received authority to provide local telephone
service in seven states and has filed applications in two additional states as
of December 31, 1998. Megsinet-CLEC has received authority to provide long
distance service in 36 states and has filed applications in eight additional
states as of December 31, 1998.
MegsINet is an Illinois Corporation formed in 1995.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The presentation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual results can differ from those estimates.
All significant intercompany balances and transactions have been eliminated
in consolidation.
Property and Equipment
Property and equipment consist primarily of network communications
equipment, computer equipment, furniture and fixtures, and equipment being built
for use by Megsinet-CLEC, all of which are stated at cost. Property and
equipment under capital leases are stated at the present value of minimum lease
payments.
Depreciation on property and equipment is computed using the straight-line
method over estimated service lives of three to five years.
Equipment Payable
Equipment payable represents amounts due for equipment which has been
received by MegsINet, but which has not yet been installed. Upon installation,
MegsINet will enter into a capital lease under an arrangement with Ascend
Communications, Inc. (Ascend) as discussed in note 5. As no lease agreement has
been signed at December 31, 1998, the entire balance has been classified as
current.
Revenue Recognition and Deferred Revenue
MegsINet's customers generally pay for service in advance. Revenue is
recognized ratably over the service period. Deferred revenue represents the
unearned portion of customer payments.
F-79
<PAGE> 226
MEGSINET INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating losses and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Stock-Based Compensation
MegsINet applies the intrinsic value-based method of accounting prescribed
by Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock
Issued to Employees", and related interpretations, in accounting for its fixed
plan stock options. Pro forma information regarding net income as calculated
under the provisions of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," is disclosed in note 9.
(3) PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
Telecommunications equipment............................... $24,766,423 $1,496,862
Computer equipment......................................... 482,151 183,401
Telephone equipment........................................ 147,357 2,285
Furniture and fixtures..................................... 42,514 16,119
Leasehold improvements..................................... 127,213 15,563
Construction in progress................................... 2,531,325 --
----------- ----------
28,096,983 1,714,230
Less accumulated depreciation and amortization............. 1,294,570 212,538
----------- ----------
Net property and equipment............................... $26,802,413 $1,501,692
=========== ==========
</TABLE>
(4) LEASES
MegsINet is obligated under various capital leases for telecommunications
equipment that expires at various dates during the next five years. At December
31, 1998 and 1997, the gross amount of equipment and related accumulated
amortization recorded under capital leases was as follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Telecommunications equipment................................ $8,110,081 $1,496,862
Less accumulated amortization............................... 933,428 135,028
---------- ----------
$7,176,653 $1,361,834
========== ==========
</TABLE>
MegsINet also has several noncancelable operating leases for
telecommunications equipment that expire over the next three years. MegsINet is
required to pay all executory costs such as maintenance and insurance. Rental
expense for operating leases during 1998 totaled approximately $304,000.
F-80
<PAGE> 227
MEGSINET INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Future minimum lease payments under noncancelable operating leases (with
initial or remaining lease terms in excess of one year) and future minimum
capital lease payments as of December 31, 1998 are:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
---------- ----------
<S> <C> <C>
Year ending December 31:
1999...................................................... $2,864,659 $ 481,831
2000...................................................... 3,292,654 372,508
2001...................................................... 2,267,504 265,688
2002...................................................... 102,006 --
2003...................................................... 973 --
---------- ----------
Total minimum lease payments...................... 8,527,796 $1,120,027
==========
Less amount representing interest (at rates ranging from
8.5% to 26.44%)........................................... 1,346,819
----------
Present value of net minimum capital lease payments.... 7,180,977
Less current installments of obligations under capital
leases.................................................... 2,096,865
----------
Obligations under capital leases, excluding current
installments......................................... $5,084,112
==========
</TABLE>
(5) NOTES PAYABLE
Notes payable at December 31, 1998 consist of the following:
<TABLE>
<S> <C>
Borrowings under Ascend working capital promissory note,
interest at 8.5%.......................................... $2,000,000
Borrowings under Cisco working capital promissory note,
interest at 13.5%......................................... 2,021,885
Note payable to Cisco for equipment, interest at 12.75%..... 6,691,457
----------
Total notes payable............................... 10,713,342
Less current installments................................... 3,757,164
----------
Notes payable, less current installments.................... $6,956,178
==========
</TABLE>
In 1998, MegsINet entered into an agreement with Ascend to lease up to $16
million in telecommunications equipment under a capital lease agreement. In
addition, Ascend agreed to loan MegsINet up to $4.0 million in working capital
(the Ascend Note), limited by a ratio of $1 in working capital for each $4 in
equipment purchased or leased. At December 31, 1998, MegsINet was obligated
under capital leases with Ascend related to this agreement totaling
approximately $4.4 million and had received approximately $10.0 million in
equipment for which no formal lease agreement had been signed (see note 2). The
obligation related to this equipment is classified as equipment payable. As of
December 31, 1998, MegsINet had borrowed $2.0 million under the Ascend Note.
The terms of the Ascend Note require MegsINet to make monthly principal
payments beginning six months after a minimum draw of $500,000 is made. Interest
payments start in the month following the borrowing. Based on the timing of
borrowings on the Ascend Note, MegsINet will begin to make payments of $37,118
in April 1999, increasing to $74,236 in June 1999. The amount outstanding at
December 31, 1998 is scheduled to be repaid in November 2001.
The Ascend Note is secured by warrants to purchase MegsINet stock at $6.50
per share. The number of warrants held by Ascend at December 31, 1998 is
approximately 355,000. The terms of the warrants restrict Ascend's ability to
exercise the warrants unless the Company is in default. If MegsINet repays the
Ascend Note without default, 90% of these warrants expire.
F-81
<PAGE> 228
MEGSINET INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In 1998, MegsINet also entered into an agreement with Cisco Systems Capital
Corporations (Cisco) whereby MegsINet can purchase up to $16 million in
telecommunications equipment under a promissory note (the Cisco Equipment Note).
In addition, Cisco has agreed to loan MegsINet up to $4.0 million in working
capital (the Cisco Note) limited by a ratio of $1 in working capital for each $4
in equipment purchases; however, the first $2.0 million in working capital is
subject to only a 1 to 2 ratio. At December 31, 1998, MegsINet was obligated
under the Cisco Equipment Note totaling $6,691,457 and had borrowed
approximately $2.0 million under the Cisco Note.
The terms of the Cisco Equipment Note require MegsINet to make monthly
principal and interest payments beginning in April 1999. MegsINet will make
payments of $261,655. The amount outstanding at December 31, 1998 is scheduled
to be repaid in September 2001. The Cisco Equipment Note is secured by the
telecommunications equipment being purchased.
The terms of the Cisco Note require MegsINet to make monthly principal and
interest payments beginning in April 1999. MegsINet will make payments of
$179,350. The amount outstanding at December 31, 1998 is scheduled to be repaid
in March 2000. The Cisco Note is secured by common stock held by the president
of MegsINet and a life insurance policy on the president equal to the
outstanding balance of the note. The Cisco Note also carries conversion rights.
These conversion rights allow Cisco to convert all or part of the Cisco Note
obligation to common stock at the market value determined on the date of
conversion.
The aggregate maturities of notes payable subsequent to December 31, 1998
are as follows: 1999, $3,757,164; 2000, $4,007,670; and 2001, $2,948,508.
The Company did not have any notes payable obligations outstanding at
December 31, 1997.
(6) RELATED-PARTY TRANSACTIONS
At December 31, 1998 and 1997, MegsINet had an unsecured note payable to a
stockholder in the amount of $156,158 and $172,477, respectively. The note
carries an interest rate of 8.5% and is due upon demand.
(7) CHANGES IN CAPITAL STRUCTURE
In July 1997, MegsINet's Board of Directors authorized a 477-to-1 split for
each share of common stock. All share data presented has been revised to reflect
this transaction.
In June 1998, MegsINet increased the authorized common shares to 30
million.
During 1998, MegsINet authorized 3 million shares of preferred stock, of
which 1,200 shares were issued as 1998 Series Convertible Preferred Stock. Such
stock has a liquidation value of $1,250 per share and is entitled to dividends
of $100 per share per year. As of December 31, 1998, MegsINet had not declared
the 1998 dividends, therefore no amount has been accrued. Unpaid dividends
totaled $60,000 at December 31, 1998.
F-82
<PAGE> 229
MEGSINET INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(8) INCOME TAXES
No income tax benefit was recorded during 1998. The actual income tax
benefit for 1998 differs from the expected income tax benefit computed by
applying the U.S. federal corporate tax rate of 34% to loss before income taxes
as follows:
<TABLE>
<S> <C>
Computed "expected" income tax benefit...................... $(1,759,480)
State income taxes.......................................... (206,996)
Non-utilization of net operating loss....................... 1,966,476
-----------
Tax benefit....................................... $ --
===========
</TABLE>
The tax effects of temporary differences that give rise to deferred tax
assets at December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
----------- ---------
<S> <C> <C>
Net operating loss carryforwards........................... $ 2,008,196 $ 165,959
Start-up costs............................................. 124,239 --
Difference in depreciation on property, plant, and
equipment................................................ 89,606 89,606
----------- ---------
Gross deferred tax assets............................. 2,222,041 255,565
Less valuation allowance................................... (2,222,041) (255,565)
----------- ---------
Net deferred tax assets............................... $ -- $ --
=========== =========
</TABLE>
The valuation allowance for deferred tax assets as of December 31, 1998 and
1997 was $2,222,041 and $255,565, respectively. The net change in the valuation
allowance for the year ended December 31, 1998 was an increase of $1,966,476.
(9) STOCK-BASED COMPENSATION
In 1998, MegsINet adopted a stock option plan (the Plan) pursuant to which
the Company's Board of Directors may grant stock options to MegsINet employees.
The Plan authorizes grants of options to purchase up to 2,000,000 shares of
authorized but unissued common stock. Stock options are granted with an exercise
price equal to the stock's fair market value at the date of grant. All stock
options under this plan have five-year terms and vest 25% per year from the date
of grant. During the year ended December 31, 1998, 191,960 options were issued
under this plan.
MegsINet also has the right to issue options to officers and directors of
MegsINet. During 1998, the Company issued options to purchase 650,000 shares of
MegsINet's common stock to officers and directors with exercise prices ranging
from $.56 to $1.38 per share. These options vest at different rates over the
next three years.
The per share weighted-average fair value of stock options granted during
1998 was $0.36 on the date of grant using the Black-Scholes option-pricing model
(excluding a volatility assumption) with the following weighted-average
assumptions: no expected dividend yield, risk-free interest rate of 6.0%, and an
expected life equal to the term of the respective option.
MegsINet applies APB Opinion No. 25 in accounting for its stock options.
MegsINet has issued options which qualify for fixed plan treatment and,
accordingly, no compensation cost has been recognized for its stock options in
the consolidated financial statements. Had MegsINet determined compensation cost
based on the fair value at the grant date for its stock options under SFAS No.
123, MegsINet's 1998 net loss would have been increased to the pro forma amount
of approximately $5,266,000.
F-83
<PAGE> 230
MEGSINET INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Stock option activity during 1998 is as follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
<S> <C> <C>
Balance at December 31, 1997............................. 250,000 $0.36
Granted.................................................. 841,960 0.90
--------- -----
Balance at December 31, 1998............................. 1,091,960 0.78
========= =====
</TABLE>
At December 31, 1998, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was as follows:
<TABLE>
<CAPTION>
NUMBER WEIGHTED-AVERAGE WEIGHTED-AVERAGE SHARES WEIGHTED-AVERAGE
OF SHARES EXERCISE PRICE CONTRACTUAL LIFE EXERCISABLE EXERCISE PRICE
--------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C>
150,000 $0.22 4.3 years 150,000 $0.22
550,000 0.56 5.5 63,000 0.56
241,960 1.25 5.0 28,430 1.25
150,000 1.38 5.0 -- --
</TABLE>
During 1997, MegsINet issued options to purchase 150,000 shares of
MegsINet's common stock to an officer with an exercise price of $.22 per share.
The agreement states that the options are 100% vested upon grant. At December
31, 1997, all options were still outstanding.
During 1997, MegsINet also issued options to purchase 100,000 shares of
MegsINet's common stock to a director of MegsINet with an exercise price of
$.56, which was equal to the market value of the stock at the date of issue. The
options, which were 100% vested upon grant, remained outstanding at December 31,
1997.
During 1998 and 1997, MegsINet issued 492,857 and 984,800 shares,
respectively, of common stock to employees in lieu of compensation.
(10) COMMITMENTS AND CONTINGENCIES
MegsINet is involved in certain litigation which occurs in the normal
course of business. In the opinion of management, the ultimate results of these
matters will not have a material impact on the financial position of MegsINet.
(11) CONTINUED OPERATIONS
In February 1999, the Company sold 2,000,000 shares of 1999A Series 10%
Senior Convertible Preferred Stock (the Preferred Stock Transaction) in the
amount of $5,000,000, less cost of issuance.
Also in February 1999, MegsINet entered into a definitive agreement whereby
all of MegsINet's outstanding stock will be acquired, and MegsINet will be
merged into the acquiring company (the Merger Transaction). At the close of the
Merger Transaction, MegsINet will cease to exist as a separate entity. This
agreement is subject to shareholder approval. At the close of the Merger
Transaction, the acquiring company will assume the obligations and liabilities
of MegsINet and be responsible for funding future operations. Management
believes the Preferred Stock Transaction will provide MegsINet adequate funding
through the close of the Merger Transaction.
(12) SUBSEQUENT EVENT (UNAUDITED)
On May 3, 1999, MegsINet entered into a revised agreement that changes
certain terms of the Merger Transaction (see note 11). The primary change in the
new agreement results in the survival of MegINet as a wholly-owned subsidiary of
the acquiring enterprise.
F-84
<PAGE> 231
MEGSINET INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
MARCH 31, 1999
(UNAUDITED)
<TABLE>
<S> <C>
ASSETS
Cash........................................................ $ 3,381,580
Prepaid expenses and other current assets................... 1,594,341
-----------
Total current assets.............................. 4,975,921
Property and equipment, net................................. 45,518,521
-----------
Total assets...................................... $50,494,442
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Equipment payable........................................... $25,757,434
Current portion of notes payable............................ 6,043,139
Current portion of capital lease obligations................ 2,702,925
Accounts payable............................................ 2,152,894
Accrued liabilities......................................... 997,190
Deferred revenue............................................ 935,378
-----------
Total current liabilities......................... 38,588,960
Notes payable, less current portion......................... 7,885,422
Capital lease obligations, less current portion............. 4,691,112
Commitments and contingencies
Stockholders' deficit:
Preferred stock, no par value, 3,000,000 shares authorized
and 2,001,200 shares issued............................ --
Common stock, no par value, 30,000,000 shares authorized
and 10,200,632 shares issued........................... --
Paid-in capital........................................... 8,955,745
Retained deficit.......................................... (9,626,797)
-----------
Total stockholders' deficit....................... (671,052)
-----------
Total liabilities and stockholders' deficit....... $50,494,442
===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-85
<PAGE> 232
MEGSINET INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
1999 1998
----------- --------
<S> <C> <C>
Revenues.................................................... $ 1,602,729 $996,919
Cost of sales............................................... 2,675,431 476,368
----------- --------
Costs in excess of revenues............................... (1,072,702) 520,551
----------- --------
Operating expenses:
Salaries and compensation................................. 1,001,112 203,753
Other operating expense................................... 899,202 244,761
----------- --------
Total operating expenses.......................... 1,900,314 448,514
----------- --------
Income (loss) from operations.......................... (2,973,016) 72,037
Interest expense............................................ 559,816 85,642
----------- --------
Net (loss)............................................. $(3,532,832) $(13,605)
=========== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-86
<PAGE> 233
MEGSINET INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
THREE MONTHS ENDED MARCH 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
TOTAL
PREFERRED COMMON PAID-IN RETAINED STOCKHOLDERS'
STOCK STOCK CAPITAL DEFICIT DEFICIT
--------- ------ --------- ---------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1998........... $-- -- 4,005,988 (6,093,965) (2,087,977)
Issuance of common stock, 59,160
shares............................... -- -- 66,287 -- 66,287
Issuance of preferred stock, 2,000,000
shares............................... -- -- 5,000,000 -- 5,000,000
Commission paid........................ -- -- (75,000) -- (75,000)
Merger related fees.................... -- -- (41,530) (41,530)
Net loss............................... -- -- -- (3,532,832) (3,532,832)
-- -- --------- ---------- ----------
BALANCE AT MARCH 31, 1999.............. $-- -- 8,955,745 (9,626,797) (671,052)
== == ========= ========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-87
<PAGE> 234
MEGSINET INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------
1999 1998
-------------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $ (3,532,832) $ (13,605)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.......................... 726,917 111,909
Changes in operating working capital:
Prepaid expenses and other current assets............ (1,050,229) (15,895)
Accounts payable..................................... 687,526 (171,482)
Accrued liabilities.................................. 613,814 69,860
Deferred revenue..................................... 293,393 (202,851)
------------ ---------
Net cash used in operating activities............. (2,261,411) (222,064)
------------ ---------
Cash flows from investing activities -- capital
expenditures.............................................. (18,976,005) (130,905)
------------ ---------
Cash flows from financing activities:
Proceeds from notes payable............................... 19,007,783 --
Payments on note payable to stockholder................... (156,158) (4,120)
Payments on capital lease obligations..................... (253,963) (114,903)
Issuance of stock......................................... 4,949,750 362,366
------------ ---------
Net cash provided by financing activities......... 23,547,412 243,343
------------ ---------
Net increase (decrease) in cash................... 2,309,996 (109,626)
Cash, beginning of period................................... 1,071,584 284,041
------------ ---------
Cash, end of period......................................... $ 3,381,580 $ 174,415
============ =========
Supplemental disclosure of cash flow information -- cash
paid for interest......................................... $ 566,747 $ 85,642
============ =========
</TABLE>
Supplemental disclosure of non cash investing and financing activities:
Capital lease obligations of $467,020 and $1,108,213 were incurred in the
three months ended March 31, 1999 and 1998, respectively, when the Company
entered into equipment leases.
Equipment payable of $15,792,553 and zero were incurred in the three months
ended March 31, 1999 and 1998, respectively, when the Company purchased
equipment.
The Company paid $75,000 and zero of commissions through issuance of common
stock in the three months ended March 31, 1999 and 1998, respectively.
See accompanying notes to condensed consolidated financial statements.
F-88
<PAGE> 235
MEGSINET INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three months ended March 31, 1999 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1999. For further information, refer to the consolidated
financial statements and footnotes thereto for the year ended December 31, 1998.
NOTE 2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
MARCH 31, 1999
(UNAUDITED)
--------------
<S> <C>
Telecommunications equipment................................ $42,305,441
Computer equipment.......................................... 643,492
Telephone equipment......................................... 178,096
Furniture and fixtures...................................... 61,245
Leasehold improvements...................................... 179,325
Construction in progress.................................... 4,172,407
-----------
47,540,006
Less accumulated depreciation and amortization.............. 2,021,485
-----------
Net property and equipment........................ $45,518,521
===========
</TABLE>
NOTE 3. NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<CAPTION>
MARCH 31, 1999
(UNAUDITED)
--------------
<S> <C>
Borrowings under Ascend working capital promissory note,
interest at 8.5%.......................................... $ 4,000,000
Borrowings under Cisco working capital promissory note,
interest at 13.5%......................................... 2,021,885
Note payable to Cisco for equipment, interest at 12.75%..... 7,906,676
-----------
Total notes payable............................... 13,928,561
Less current installments................................... 6,043,139
-----------
Notes payable, less current installments.................... $ 7,885,422
===========
</TABLE>
NOTE 4. RELATED-PARTY TRANSACTIONS
At March 31, 1999 and 1998, MegsINet had an unsecured note payable to a
stockholder in the amount of zero and $156,158, respectively. The note had an
interest rate of 8.5% and was due upon demand.
F-89
<PAGE> 236
MEGSINET INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS--(CONTINUED)
NOTE 5. CHANGES IN CAPITAL STRUCTURE
During 1999, the Company issued 2,000,000 shares of 1999A Series
Convertible Preferred Stock. Such stock had a liquidation value of $2.50 per
share and was entitled to dividends of $0.25 per share per year. As of March 31,
1999, the Company had not declared the 1999 dividends; therefore, no amount had
been accrued. Unpaid dividends totaled $125,000 at March 31, 1999.
NOTE 6. COMMITMENTS AND CONTINGENCIES
MegsINet is involved in certain litigation which occurs in the normal
course of business. In the opinion of management, the ultimate results of these
matters will not have a material impact on the financial position, results of
operations or cash flows of MegsINet.
NOTE 7. MERGER TRANSACTION
In May 1999, all of the outstanding stock of MegsINet was purchased by
CoreComm Limited for total consideration of approximately $16.8 million in cash
and 1.4 million shares of CoreComm Limited common stock. In addition, CoreComm
Limited repaid $2.5 million of MegsINet debt.
F-90
<PAGE> 237
REPORT OF INDEPENDENT AUDITORS
Board of Directors
USN Communications, Inc.
We have audited the accompanying consolidated balance sheet of USN
Communications, Inc. and subsidiaries (the "Company") as of December 31, 1998,
and the related consolidated statements of operations, redeemable preferred
stock, common stockholders' deficit and cash flows for the year then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
an assessment of the accounting principles used and significant estimates made
by management, as well as an evaluation of the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
report.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of USN
Communications, Inc. and subsidiaries at December 31, 1998, and the consolidated
results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As more fully described in Note 1 of
the Notes to Consolidated Financial Statements, on February 18, 1999, the
Company filed voluntary petitions for reorganization under Chapter 11 of title
11 of the United States Code. This matter raises substantial doubt about the
Company's ability to continue as a going concern. The financial statements do
not include any adjustments to reflect the future effects on the recoverability
and classification of assets or the amounts and classification of liabilities
that may result from the outcome of this uncertainty.
ERNST & YOUNG LLP
Chicago, Illinois
April 13, 1999
F-91
<PAGE> 238
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
USN Communications, Inc.
Chicago, Illinois
We have audited the accompanying consolidated statements of operations,
redeemable preferred stock, common stockholders' deficit and cash flows of USN
Communications, Inc. and subsidiaries (the "Company") for the year ended
December 31, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of the Company's
operations and its cash flows for the year ended December 31, 1997 in conformity
with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Chicago, Illinois
March 9, 1998
F-92
<PAGE> 239
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1998
------------
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 3,767
Marketable equity securities.............................. --
Accounts receivable, net.................................. 24,902
Net assets of discontinued operations held for sale....... 19,250
Other current assets...................................... 2,270
---------
Total current assets.............................. 50,189
Property and equipment, net................................. 14,985
Other assets................................................ 34,162
---------
Total assets...................................... $ 99,336
=========
LIABILITIES AND COMMON STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable.......................................... $ 53,145
Accrued expenses and other current liabilities............ 12,981
17% Senior Secured Note................................... 10,000
Capital lease obligations and notes payable............... 607
---------
Total current liabilities......................... 76,733
14 5/8% Senior Discount Notes............................... 140,504
14% Senior Discount Notes................................... 13,877
9% Convertible Subordinated Discount Notes.................. 32,966
9% Consent Convertible Notes................................ 10,450
Accrued interest............................................ 9,385
Capital lease obligations and notes payable................. 628
---------
Total liabilities................................. 284,543
Commitments and contingent liabilities
COMMON STOCKHOLDERS' DEFICIT:
Common stock, $.01 par value, 100,000,000 and 30,000,000
shares authorized at December 31, 1998 and 1997,
respectively; 23,585,741 and 7,282,511 shares issued at
December 31, 1998 and 1997, respectively............... 235
Additional paid-in capital................................ 260,227
Treasury stock, 10,000 shares............................. (1)
Accumulated other comprehensive income.................... --
Accumulated deficit....................................... (445,668)
---------
Total common stockholders' deficit................ (185,207)
---------
Total liabilities and common stockholders' deficit.......... $ 99,336
=========
</TABLE>
See Notes to Consolidated Financial Statements.
F-93
<PAGE> 240
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------
1998 1997
----------- ----------
<S> <C> <C>
Net Service Revenue......................................... $ 132,503 $ 47,200
Cost of Services............................................ 117,957 41,272
----------- ----------
Gross profit.............................................. 14,546 5,928
EXPENSES:
Sales and marketing....................................... 82,134 62,375
General and administrative................................ 110,635 41,538
Non-recurring charges..................................... 28,987 --
----------- ----------
Operating Loss.............................................. (207,210) (97,985)
OTHER INCOME (EXPENSE):
Interest income........................................... 3,570 3,420
Interest expense.......................................... (30,099) (15,333)
Realized gain on sale of marketable securities............ 11,714 --
Other income (expense).................................... (311) 6
----------- ----------
Other income (expense) -- net............................. (15,126) (11,907)
----------- ----------
Net Loss from Continuing Operations......................... (222,336) (109,892)
DISCONTINUED OPERATIONS:
Loss from operations of discontinued division............. (4,919) --
Provision for estimated loss on disposal of discontinued
operations (including estimated operating loss of $6.2
million during phase out period)....................... (47,939) --
----------- ----------
Total loss from discontinued operations........... (52,858) --
----------- ----------
Net Loss.................................................... $ (275,194) $ (109,892)
=========== ==========
Preferred Dividends......................................... 579 2,211
=========== ==========
Net Loss to Common Shareholders -- Basic and Diluted........ $ (275,773) $ (112,103)
=========== ==========
Loss per Common Share -- Basic and Diluted
Net loss from continuing operations....................... $ (10.51) $ (15.55)
Discontinued operations................................... (2.49) --
----------- ----------
Net loss.................................................. $ (13.00) $ (15.55)
=========== ==========
Weighted Average Common Shares Outstanding -- Basic and
Diluted................................................... 21,203,771 7,206,886
=========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
F-94
<PAGE> 241
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK
YEARS ENDED DECEMBER 31, 1998 AND 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SERIES A
9% PIK 9% PIK ACCUMULATED ADDITIONAL
PREFERRED PREFERRED UNPAID PAID-IN
STOCK STOCK DIVIDENDS CAPITAL TOTAL
--------- --------- ----------- ---------- --------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1997.................................... $ 10 -- $ 225 $ 9,810 $ 10,045
Issuance of 920 shares of 9% PIK Preferred Stock as payment
of dividends.............................................. 1 (920) 919 --
Issuance of 45,209 shares of Series A 9% PIK Preferred
Stock..................................................... $ 45 45,164 45,209
Costs incurred related to issuance of Series A 9% PIK
Preferred Stock........................................... (188) (188)
Accumulated dividends on 9% PIK Preferred Stock............. 941 941
Accumulated dividends on Series A 9% PIK Preferred Stock.... 1,270 1,270
---- ---- ------- -------- --------
BALANCE, DECEMBER 31, 1997.................................. 11 45 1,516 55,705 57,277
---- ---- ------- -------- --------
Accumulated dividends on 9% PIK Preferred Stock............. 114 114
Accumulated dividends on Series A 9% PIK Preferred Stock.... 465 465
Conversion of 9% PIK and Series A 9% PIK Preferred Stock to
Common Stock.............................................. (11) (45) (2,095) (55,705) (57,856)
---- ---- ------- -------- --------
BALANCE, DECEMBER 31, 1998.................................. $ -- $ -- $ -- $ -- $ --
==== ==== ======= ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-95
<PAGE> 242
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' DEFICIT
YEARS ENDED DECEMBER 31, 1998 AND 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL COMMON STOCK OTHER
COMMON PAID-IN HELD IN COMPREHENSIVE ACCUMULATED
STOCK CAPITAL TREASURY INCOME DEFICIT TOTAL
------ ---------- ------------ ------------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1997.................... $ 72 $ 54,115 $(1) -- $ (57,791) $ (3,606)
Issuance of 97,251 shares of common stock... 1 531 532
Compensation expense on stock options....... 644 644
Issuance of stock warrants.................. 19,352 19,352
Accumulated dividends on 9% PIK Preferred
Stock..................................... (941) (941)
Accumulated dividends on Series A 9% PIK
Preferred Stock........................... (1,271) (1,271)
Comprehensive income (loss):
Net loss.................................. (109,892) (109,892)
Unrealized gain of available-for-sale
securities.............................. $ 8,181 8,181
Comprehensive loss........................ (101,711)
---- -------- --- -------- --------- ---------
BALANCE, DECEMBER 31, 1997.................. 73 74,642 (1) 8,181 (169,895) (87,000)
---- -------- --- -------- --------- ---------
Issuance of 8,628,861 shares of common
stock..................................... 86 137,984 138,070
Costs incurred related to issuance of
stock..................................... (10,764) (10,764)
Accumulated dividends on 9% PIK Preferred
Stock..................................... (114) (114)
Accumulated dividends on Series A 9% PIK
Preferred Stock........................... (465) (465)
Conversion of 9% PIK and Series A 9% PIK to
6,130,175 shares of common stock.......... 61 57,795 57,856
Issuance of 1,544,194 shares of common stock
upon exercise of warrants and options..... 15 16 31
Compensation expense on stock options....... 554 554
Comprehensive income (loss):
Net loss.................................. (275,194) (275,194)
Unrealized gain on available-for-sale
securities.............................. 3,533 3,533
Realized gain on sale of marketable
securities.............................. (11,714) (11,714)
---------
Comprehensive loss........................ (283,375)
---- -------- --- -------- --------- ---------
BALANCE, DECEMBER 31, 1998.................. $235 $260,227 $(1) $ -- $(445,668) $(185,207)
==== ======== === ======== ========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
F-96
<PAGE> 243
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------
1998 1997
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................... $(275,194) $(109,892)
Adjustments to reconcile net loss to net cash flows from
operating activities:
Depreciation.............................................. 9,317 2,834
Amortization.............................................. 252 738
Non-cash interest on debt obligations..................... 29,726 15,179
Provision for losses on accounts receivable............... 33,964 4,314
Stock compensation award expense.......................... 554 645
Gain on sale of marketable securities..................... (11,714) --
(Gain)loss on disposal of property and equipment.......... 298 --
Non-recurring charges..................................... 25,980 --
Loss on discontinued operations........................... 52,858 --
Changes in:
Accounts receivable.................................... (34,949) (25,227)
Other assets........................................... (492) (1,179)
Accounts payable....................................... 32,597 12,577
Accrued expenses....................................... 2,643 4,002
--------- ---------
Net cash flows from operating activities.......... (134,160) (96,009)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment.......................... (29,910) (15,200)
Proceeds from sale of marketable securities................. 11,714 --
Purchase of subsidiary, net of cash acquired................ (72,108) --
Deposits.................................................... (6,280) (959)
Proceeds from sale of property and equipment................ 441 --
Purchase of licensing agreement............................. -- (900)
--------- ---------
Net cash flows from investing activities.......... (96,143) (17,059)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock.................................... 138,101 532
Issuance of preferred stock................................. -- 45,209
Costs incurred related to issuance of stock................. (10,764) (485)
Proceeds from Consent Convertible Notes..................... 10,000 --
Proceeds from Senior Notes.................................. 10,000 100,002
Debt acquisition costs...................................... -- (4,715)
Repayment of capital lease obligations and notes payable.... (721) (839)
--------- ---------
Net cash flows from financing activities.......... 146,616 139,704
--------- ---------
Net (Decrease) Increase in Cash............................. (83,687) 26,636
Cash and Cash Equivalents -- Beginning of period............ 87,454 60,818
--------- ---------
Cash and Cash Equivalents -- End of period.................. $ 3,767 $ 87,454
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Conversion of preferred stock to common stock............... $ 57,856 --
========= =========
Declared dividends.......................................... $ 579 --
========= =========
Capital lease obligations incurred.......................... $ 841 $ 928
========= =========
Issuance of stock warrants.................................. -- $ 19,352
========= =========
Dividends paid in kind...................................... -- $ 920
========= =========
Cash paid for interest...................................... $ 173 $ 138
========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
F-97
<PAGE> 244
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUBSEQUENT EVENT
On February 18, 1999, (the "Petition Date") USN Communications, Inc. (the
"Company") and certain of its subsidiaries filed voluntary petitions for
reorganization (the "Filing") under Chapter 11 ("Chapter 11") of Title 11 of the
United States Code ("Bankruptcy Code") in the United States Bankruptcy Court for
the District of Delaware (the "Bankruptcy Court"). In Chapter 11, the Company
will continue to manage its affairs and operate its business as a debtor in
possession while it develops a plan of reorganization. As a debtor in possession
in Chapter 11, the Company may not engage in transactions outside of the
ordinary course of business without approval, after notice and hearing, of the
Bankruptcy Court.
As a result of the Filing, the Company is currently in default under all of
its debt agreements in effect prior to the Petition Date. As a result, all
unpaid principal of, and accrued prepetition interest on, such debt became
immediately due and payable. The payment of such debt and accrued but unpaid
prepetition interest is prohibited during the pendency of the Company's Chapter
11 case without the approval of the Bankruptcy Court. The Bankruptcy Court has
authorized the payment, by the Company, of the Company's $15 million aggregate
principal amount of prepetition senior secured notes with a $20 million
debtor-in-possession financing facility.
In accordance with the Bankruptcy Code, the Company can seek court approval
for the rejection of executory contracts, including real property leases. Any
such rejection may give rise to a prepetition unsecured claim for breach of
contract. In connection with the Company's Chapter 11 case, a review is being
undertaken of all the Company's obligations under its executory contracts,
including real property leases.
On April 2, 1999, the Bankruptcy Court authorized the Company to (1) sell
substantially all of the Company's assets, excluding USN Wireless, Inc., to
CoreComm Limited for approximately $27 million in cash, warrants to purchase
350,000 shares of CoreComm Limited common stock and a contingent payment based
on future operating results that caps the total consideration at $85 million,
and (2) sell the capital stock of USN Wireless, Inc. to Unified Signal
Corporation.
The accompanying consolidated financial statements have been prepared on a
going concern basis of accounting and do not reflect any adjustments that might
result should the Company be unable to continue as a going concern. The
Company's recurring losses from operations and the related Chapter 11 filing
raise substantial doubt about its ability to continue as a going concern.
Because the Company has agreed to sell assets and as a result of the
Chapter 11 case, the Company may liquidate or settle liabilities for amounts
other than those reflected in the financial statements. Further, a plan of
reorganization could materially change the amounts currently recorded in the
financial statements. The financial statements do not give effect to any
adjustments to the carrying value of assets, or amounts and classification of
liabilities that might be necessary as a consequence of these matters.
2. ORGANIZATION
USN Communications, Inc. ("USN"), was incorporated under the laws of the
State of Delaware on April 20, 1994 and completed an initial public offering in
February 1998. USN holds controlling investments in several other companies, of
which the active companies include: US Network Corporation, USN Communications
Northeast, Inc. ("USNCN"), USN Communications Midwest, Inc and USN Solutions,
Inc. Its continuing subsidiaries operate in a single business segment, primarily
as a reseller of a broad range of telecommunication services in various cities
in the Midwest and the Northeast regions of the United States.
F-98
<PAGE> 245
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. SUMMARY OF ACCOUNTING POLICIES
A summary of the significant accounting policies applied in the preparation
of the accompanying consolidated financial statements follows:
Use of Estimates--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements, and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from
those estimates.
Principles of Consolidation--The accompanying consolidated financial
statements include the accounts of USN Communications, Inc. and its
subsidiaries. Significant intercompany balances and transactions have been
eliminated in consolidation.
Revenue Recognition--The Company recognizes revenues in the period in which
telephone services are provided. For the services provided in which the
Company has operated as a commission agent only, commission revenues are
recorded at the net commissions earned.
Cash and Cash Equivalents--Cash and cash equivalents are defined as cash in
banks, time deposits and highly liquid short-term investments with initial
maturities from dates of acquisition of three months or less.
Fair Value of Financial Instruments--The carrying values of financial
instruments included in current assets and liabilities approximate fair
values due to the short-term maturities of these instruments. At December
31, 1998, the fair value of long-term liabilities was approximately $77.5
million.
Marketable Equity Securities--All marketable securities are classified as
available-for-sale and are available to support current operations or to
take advantage of other investment opportunities. These securities are
stated at estimated fair value based upon market quotes. Unrealized gains
and losses are computed on the basis of specific identification and are
included in Common Stockholders' Deficit as a component of Comprehensive
Income.
Concentration of Credit Risk--Financial instruments which potentially
subject the Company to concentration of credit risk consist principally of
trade receivables. The Company's customers are concentrated in two specific
geographic regions, the Midwest and the Northeast. No single customer
accounted for a significant amount of the Company's sales in 1998 or 1997
and there were no significant accounts receivable from a single customer at
December 31, 1998. The Company reviews a customer's credit history before
extending credit. The Company establishes an allowance for doubtful
accounts based upon factors surrounding the credit risk of specific
customers, historical trends and other information.
Property and Equipment--Purchases of property and equipment are carried at
cost. Depreciation is provided on the straight-line basis. Furniture and
equipment are depreciated over five to ten years. Computer hardware and
software are depreciated over three to five years. Leasehold improvements
and assets leased under capital leases are amortized over the shorter of
the related lease term or the estimated useful life of the asset.
Intangible Assets and Deferred Charges--Debt acquisition costs are
amortized over the life of the related debt. The value of the warrants
issued with the Senior Notes is amortized over the life of those notes. The
cost of a licensing agreement for billing services is being amortized over
three years.
Impairment of Long-Lived Assets--Management reviews long-lived assets and
the related intangible assets for impairment of value whenever events or
changes in circumstances indicate the carrying amount of such assets may
not be recoverable. If the Company determines it is unable to recover the
carrying value of the assets, the assets will be written down using an
appropriate method. During 1998, management determined that its property
and equipment was impaired based on undiscounted future cash flows.
Accordingly, the Company adjusted property and equipment to fair value
resulting in an impairment loss of approximately $9.2 million, which has
been included in Non-recurring Charges.
F-99
<PAGE> 246
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock-Based Compensation--During 1996, the Company implemented Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). In accordance with the provisions of SFAS
No. 123, the Company has elected to recognize compensation under the
"intrinsic value" method prescribed by Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees," which requires the
proforma disclosure of net income and earnings per share as if the fair
value method had been applied.
Earnings per Share Calculations--On December 31, 1997, the Company adopted
Statement of Financial Accounting Standards No. 128, "Earnings Per Share",
which requires the disclosure of two earnings per common share
computations; basic and diluted. Earnings per common share ("EPS") is
computed by dividing net income or loss by the weighted average number of
shares of common stock (basic) plus common stock equivalents (diluted)
outstanding during the year. As all of the Company's warrants and options
are antidilutive, they have been excluded from the calculation of diluted
EPS. Accordingly, basic EPS is equal to diluted EPS.
Comprehensive Income--On January 1, 1998, the Company adopted Statement of
Financial Accounting Standards No. 130 "Reporting Comprehensive Income",
which establishes standards for reporting and display of comprehensive
income and its components. Other comprehensive income consists solely of
unrealized gains on available-for-sale securities. The Company has chosen
to disclose comprehensive income in the Statements of Stockholders' Equity
for all periods presented.
Business Segments--On January 1, 1998, the Company adopted SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information",
which requires reporting segment information consistent with the way
management internally utilizes information to assess performance and
allocate resources. The Company's continuing operations consist of one
business segment: competitive local exchange telecommunication services.
Reclassifications--Certain prior year amounts have been reclassified to
conform to the current year presentation.
4. ACQUISITION AND DISCONTINUED OPERATIONS
On February 20, 1998, the Company used a portion of the net proceeds from
its initial public offering to acquire all of the outstanding capital stock of
Hatten Communications Holding Company, Inc., a Connecticut corporation ("Hatten
Communications" now known as USN Wireless, Inc.), pursuant to a Stock Purchase
Agreement dated January 7, 1998, for approximately $69.1 million, net of cash
acquired, including the repayment of approximately $14.0 million of existing
indebtedness and the payment of certain fees and expenses. The Company made
additional investments of $3 million in Hatten Communications during 1998.
In November 1998, the Company's Board of Directors approved the hiring of
an investment banking firm to solicit bids for the sale of USN Wireless, Inc.
The USN Wireless, Inc. business has been classified as discontinued operations
in the accompanying financial statements. On April 2, 1999, the Bankruptcy Court
approved the asset sale of USN Wireless, Inc. for approximately $19.25 million,
net of expected disposition costs.
F-100
<PAGE> 247
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The net assets and estimated loss on disposal of discontinued operations at
December 31, 1998 are summarized as follows (in thousands):
<TABLE>
<S> <C>
Current assets.............................................. $ 9,558
Fixed assets................................................ 1,634
Goodwill and other intangibles, net of amortization......... 61,484
Current liabilities......................................... (11,682)
Provision for estimated loss on sale of discontinued
operations................................................ (41,744)
--------
Net assets of discontinued operations....................... $ 19,250
========
Estimated loss on sale of discontinued operations........... $ 41,744
Operating losses from measurement date to December 31,
1998...................................................... 2,195
Estimated operating losses from January 1, 1999 to
anticipated disposal date................................. 4,000
--------
Estimated loss on disposal of discontinued operations....... $ 47,939
========
</TABLE>
The loss from discontinued operations through the measurement date is
summarized as follows (in thousands):
<TABLE>
<S> <C>
Revenues.................................................... $33,054
Cost of service............................................. 21,880
Selling, general and administrative......................... 16,077
-------
Operating loss.............................................. (4,903)
Other....................................................... (16)
-------
Net loss.................................................... $(4,919)
=======
</TABLE>
5. RESTRUCTURING
During 1998, the Company completed its restructuring plan to reduce its
headcount by 910 employees. The headcount reduction represented approximately
56% of its workforce. As a result, the Company eliminated its customer
acquisition sales force and consolidated its operations into 11 main facilities
located in cities serving over 80% of the Company's current customers. In
addition, the Company discontinued its telemarketing efforts. In connection with
these headcount reduction programs, a charge of approximately $19.8 million has
been recorded in Non-recurring Charges, comprised of $2.8 million for severance
and $17.0 million for facility closing costs and related fixed asset disposals
and reserves. A restructuring reserve of approximately $3.2 million remains at
December 31, 1998 for costs primarily associated with lease termination.
6. ACCOUNTS RECEIVABLE
Accounts receivable at December 31, 1998 consists of the following (in
thousands):
<TABLE>
<S> <C>
Billed...................................................... $ 29,369
Unbilled.................................................... 13,735
--------
Gross accounts receivable................................... 43,104
Allowance for doubtful accounts............................. (18,202)
--------
Net accounts receivable..................................... $ 24,902
========
</TABLE>
Unbilled accounts receivable comprises access charges, features and usage
for revenue earned but not yet billed to customers. A majority of the unbilled
accounts receivable at December 31, 1998 were billed within 30 days after year
end.
F-101
<PAGE> 248
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1998 consist of the following (in
thousands):
<TABLE>
<S> <C>
Furniture and equipment..................................... $ 9,365
Computer hardware........................................... 13,172
Computer software........................................... 8,848
Leasehold improvements...................................... 5,378
--------
36,763
Less accumulated depreciation............................... (12,587)
Less impairment reserve..................................... (9,191)
--------
Total............................................. $ 14,985
========
</TABLE>
8. OTHER ASSETS
Other assets at December 31, 1998 consist of the following (in thousands):
<TABLE>
<S> <C>
Debt acquisition costs (net of accumulated amortization:
$7,539.................................................... $25,448
Deposits.................................................... 8,283
Licensing agreement (net of accumulated amortization:
$178...................................................... 222
Other....................................................... 209
-------
Total............................................. $34,162
=======
</TABLE>
9. ACCRUED EXPENSES
Accrued expenses at December 31, 1998 consist of the following (in
thousands):
<TABLE>
<S> <C>
Excise taxes................................................ $ 3,340
Restructuring reserves...................................... 3,159
Payroll and benefits........................................ 3,151
Payroll and benefits........................................ 3,151
Professional services....................................... 1,524
Other....................................................... 1,807
-------
Total............................................. $12,981
=======
</TABLE>
F-102
<PAGE> 249
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. OPERATING LEASES
The Company leases certain office space and equipment under operating
leases. Future minimum lease commitments under noncancelable operating leases as
of December 31, 1998 are approximately as follows (amounts in thousands):
<TABLE>
<S> <C>
1999........................................................ $ 9,106
2000........................................................ 8,645
2001........................................................ 7,622
2002........................................................ 6,140
2003........................................................ 5,282
Thereafter.................................................. 6,240
-------
Total............................................. $43,035
=======
</TABLE>
Rent expense for the years ended December 31, 1998 and 1997 was
approximately $9.5 million and $3.9 million, respectively.
11. PRIVATE PLACEMENT OFFERINGS
14% Senior Notes and 9% Convertible Notes--In September 1996, the Company
received approximately $55 million in cash, net of commissions paid, in exchange
for 48,500 units consisting of $48.5 million aggregate principal amount at
maturity of 14% Senior Discount Notes ("14% Senior Notes") due 2003 and warrants
to purchase 790,780 shares of Common Stock, and 36,000 units consisting of $36
million aggregate principal amount at maturity of 9% Convertible Subordinated
Notes ("Convertible Notes") due 2004.
The 14% Senior Notes were sold at a unit price, before commissions, of
$622.75 per $1,000 face amount. These notes accrete interest at an annual rate
of 14% from September 30, 1996 to March 31, 2000. Thereafter, the notes bear
interest at an annual rate of 14%, semiannually in arrears in cash.
The Convertible Notes were sold at a unit price, before commissions, of
$767.90 per $1,000 face amount and are convertible into Common Stock at a
conversion price of $10.436 per share. These notes will accrete interest at an
annual rate of 9% from September 30, 1996 to September 30, 1999. Thereafter, the
notes will bear interest at an annual rate of 9%, and will be paid semiannually
in arrears in cash.
14 5/8% Senior Notes--In August 1997, the Company received approximately
$96.5 million in cash, net of commissions paid, in exchange for 152,725 units
consisting of $152.7 million aggregate principal amount at maturity of 14 5/8%
Senior Discount Notes due 2004 ("14 5/8% Senior Notes") and warrants to purchase
2,053,900 shares of Common Stock. In connection with this offering, the Company
paid a consent fee to the holders of the outstanding 14% Senior Notes and
Convertible Notes consisting of warrants to purchase 145,160 shares of Common
Stock at an exercise price of $.01 per share. The Company also granted those
holders an option, which was exercised in October 1997, to purchase up to $10.0
million in aggregate proceeds to the Company of convertible notes of the Company
("Consent Convertible Notes") on terms substantially similar to the existing
Convertible Notes. Additionally, the Company granted to holders of the 14%
Senior Notes an option, for a specified period of time, to exchange all of the
14% Senior Notes for 14 5/8% Senior Notes having an accreted value equal to the
accreted value of such 14% Senior Notes at the time of such exchange. A portion
of this option was exercised in March 1998.
The 14 5/8% Senior Notes were sold at a unit price, before commissions, of
$654.78 per $1,000 face amount. These convertible notes accrete interest at an
annual rate of 14 5/8% from August 18, 1997 to August 15, 2000. Thereafter, the
convertible notes bear interest at an annual rate of 14 5/8% payable
semiannually in arrears in cash.
F-103
<PAGE> 250
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In March 1998, the holders of the 14% Senior Notes exchanged $31.5 million
aggregate principal amount at maturity of the Company's 14% Senior Notes for
$33.6 million aggregate principal amount at maturity of the Company's 14 5/8%
Senior Discount Notes due 2004 (the "14 5/8% Senior Notes").
9% Consent Convertible Notes--In August 1997, in connection with the 1997
private placement offering, the Company issued an option to the holders of the
14% Senior Notes to purchase $13.0 million aggregate principal amount at
maturity of the Company's 9% Consent Convertible Subordinated Discount Notes due
2006 ("Consent Notes") for an aggregate purchase price of $10 million and
convertible into common stock at a conversion price of $10.121 per share based
on accreted value at the time of conversion. Pursuant to the option, which was
exercised by the holders in October 1997, the Consent Notes were sold in January
1998 at a price of $767.90 per $1,000 face amount. These convertible notes
accrete interest at an annual rate of 9%, compounded semiannually, until January
13, 2001. Thereafter interest will bear interest at an annual rate of 9% payable
semiannually in arrears in cash.
17% Senior Secured Note--On November 18, 1998, the Company received
approximately $10 million in cash in exchange for the issuance and sale of a $10
million 17% Senior Secured Note ("17% Note") due January 15, 1999. Interest is
payable upon the maturity of the 17% Note. The 17% Note is secured by a first
priority lien on substantially all assets of the Company, including the
Company's accounts receivable and the stock of the Company's directly owned
subsidiaries.
On January 20, 1999, the 17% Note was cancelled in exchange for a
replacement $10.0 million 17% Senior Secured Note due February 15, 1999, and the
Company received an additional $2.5 million in cash in exchange for a new $2.5
million 17% Senior Secured Note due February 15, 1999 (collectively the "New 17%
Notes"). Interest on the New 17% Notes is payable in cash upon maturity. As was
the case with the 17% Note, the New 17% Notes are secured by a first priority
lien on substantially all assets of the Company, including the Company's
accounts receivable and the stock of the Company's directly owned subsidiaries.
On February 8, 1999, the Company received an additional $2.5 million in
cash under the provisions of the New 17% Notes, bringing the total amount due
under the New 17% Notes to $15 million. Also on February 8, 1999, the maturity
date for the New 17% Notes was changed from February 15, 1999 to February 16,
1999.
On February 23, 1999, the New 17% Notes, including accrued interest, were
exchanged for a replacement $16.3 million 14% Class B Senior Secured Note due
June 30, 1999 (the "Class B Notes"). On February 25, 1999, the Company received
$2.0 million in cash in exchange for the issuance and sale of a $2 million 14%
Class A Senior Secured Notes due June 30, 1999 (the "Class A Notes"). Interest
on the Class A Notes and Class B Notes is payable upon maturity. The Class A
Notes and Class B Notes are secured by a first priority lien on substantially
all assets of the Company, including the Company's accounts receivable and the
stock of the Company's directly owned subsidiaries.
12. REDEEMABLE PREFERRED STOCK
In August 1997, the Board of Directors authorized the issuance of up to
150,000 shares of $1 par value preferred stock designated as 9% Cumulative
Convertible Pay-In-Kind Preferred Stock, Series A ("Series A 9% Preferred
Stock"). In connection with the private placement offering in August 1997,
described in Note 11, the Company issued 30,209 shares of its Series A 9%
Preferred Stock to certain of its existing stockholders and their affiliates for
an aggregate purchase price of $30.2 million.
In October 1997, the Company issued an additional 15,000 shares of its
Series A 9% Preferred Stock for an aggregate purchase price of $15.0 million.
In February 1998, in conjunction with the initial public offering, all of
the Company's outstanding 9% Preferred Stock and Series A Preferred Stock,
including dividends accrued through the conversion date, were converted to
6,130,175 shares of Common Stock.
F-104
<PAGE> 251
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. COMMON STOCK
In February 1998, the Company issued and sold 8,600,000 shares of Common
Stock (of which 600,000 shares were sold pursuant to the exercise of the
underwriters' over-allotment option) in its initial public offering for net
proceeds of approximately $127.0 million. In March 1998, the Company issued and
sold 28,861 additional shares pursuant to the exercise of the underwriters'
over-allotment option for net proceeds of $0.4 million.
In August 1998, the Company adopted a Stockholder Rights Plan pursuant to
which rights were distributed as a dividend at a rate of one Right for each
share of Common Stock held by stockholders of record on August 24, 1998. The
Rights are exercisable 10 days after certain events involving the acquisition of
15% or more of the Company's outstanding common stock or the commencement of a
tender or exchange offer for at least 15% of the common stock, subject to
certain exceptions. Upon the occurrence of such an event, each Right, unless
redeemed by the Company, entitles the holder to receive, upon exercise and
payment of the exercise price, common stock equal to twice the exercise price of
the Right. The initial exercise price of a Right is $50, subject to adjustment.
There are 1,000,000 shares of preferred stock reserved for issuance upon
exercise of the Rights.
14. STOCK WARRANTS
Pursuant to the 14% Senior Notes discussed in Note 11, the Company has
48,450 warrants outstanding at December 31, 1998. Each warrant can be exercised
for 12.69 shares of the Company's Common Stock at an exercise price of $0.01 per
share, expiring September 30, 2003. An additional 14,516 warrants outstanding at
December 31, 1998 can be exercised for 10 shares of the Company's Common Stock
at an exercise price of $0.01 per share, expiring August 15, 2004.
Pursuant to the 14 5/8% Senior Notes discussed in Note 11, the Company has
472,440 warrants outstanding at December 31, 1998. Each warrant can be exercised
for 1.34 shares of the Company's Common Stock at an exercise price of $0.01 per
share. The warrants expire August 15, 2004.
15. STOCK OPTION PLAN
The Company has granted options to acquire shares of Common Stock to
certain officers and other employees under the 1994 Stock Option Plan. These
options generally become exercisable at a rate of 25% every six months over a
period of two years after the date of grant, although with respect to certain
grants no vesting occurs until twelve months after the grant date.
In connection with the financing described in Note 11 and the issuance of
the 9% Preferred Stock described in Note 12, the Company granted options to
purchase 319,610 shares of Common Stock at an exercise price of $0.15 per share.
These options were not issued under the 1994 Stock Option Plan, but rather, were
issued pursuant to separate stock option agreements between the Company and the
holders. Upon the conversion of the 9% Preferred Stock to Common Stock in 1998,
253,240 options became exercisable.
In 1998 and 1997, the Board of Directors authorized the grant of options to
purchase 1,248,900 and 993,400 shares, respectively, of Common Stock to
substantially all non-executive officer employees of the Company and 807,500 and
1,137,000 shares, respectively, of Common Stock to the Company's executive
officers and directors. These options have an exercise price ranging from $3.56
to $11.56. Options granted to directors vested 100% on the grant date. One third
of all other options vested on February 9, 1998 or a year after the employee's
hire date, whichever is later, with an additional one-third of the options
vesting on each of the two anniversaries following the initial vesting date.
F-105
<PAGE> 252
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock option transactions are summarized as follows:
<TABLE>
<CAPTION>
PRICE PRICE
PER PER
1998 SHARE 1997 SHARE
---------- ------------- --------- ------------
<S> <C> <C> <C> <C>
Outstanding at January 1.................................... 3,245,540 $ 0.11 - 8.80 1,108,990 $0.11 - 8.80
Granted..................................................... 1,056,400 3.56 - 11.56 2,355,400 0.15 - 8.80
Exercised................................................... (115,970) 0.15 (37,250) 0.11
Canceled.................................................... (1,753,650) 0.15 - 8.80 (181,600) 8.80
---------- ------------- --------- ------------
Outstanding at December 31.................................. 2,432,320 0.11 - 11.56 3,245,540 0.11 - 8.80
---------- ------------- --------- ------------
Options exercisable at December 31.......................... 1,452,288 0.11 - 11.56 557,190 0.11 - 8.80
========== ============= ========= ============
</TABLE>
The following table summarizes information about options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
WTD.
AVG. WTD. WTD.
REMAINING AVG. AVG.
RANGE OF NUMBER LIFE OF EXERCISE NUMBER EXERCISE
EXERCISE PRICE OUTSTANDING CONTRACT PRICE EXERCISABLE PRICE
-------------- ----------- --------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.11 to $4.80 819,520 7.64 yrs $ 0.15 809,520 $ 0.15
$4.81 to $8.80 1,575,300 5.96 yrs 8.78 605,268 8.80
$8.80 to $11.56 37,500 6.41 yrs 11.56 37,500 11.56
--------- ---------
2,432,320 1,452,288
========= =========
</TABLE>
For proforma information regarding net loss and loss per share, the fair
value for the options awarded in 1998 and 1997 was estimated as of the date of
the grant using the minimum value valuation model with the following weighted
average assumptions for 1998 and 1997, respectively: risk-free interest rates of
5.34% and 6.15%; dividend yields of 0%; and an expected life of the option of
ten years. The weighted average fair value per share of options granted in 1998
and 1997 was $2.12 and $3.64, respectively.
For purposes of proforma disclosures, the estimated fair value of the
options is amortized over the options' vesting period. Therefore, in the year of
adoption and subsequently affected years, the effect of applying SFAS No. 123
for providing proforma loss and loss per share are not likely to be
representative of the effects on reported income or loss in future years.
Had compensation cost for these plans been determined based on the fair
value at the grant dates for awards as prescribed by SFAS No. 123, proforma net
loss to common shareholders (in thousands) and loss per common share for the
years ended December 31, 1998 and 1997 would have been:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Proforma net loss to common stockholders.................... $(278,572) $(114,609)
Proforma net loss per common share -- basic and diluted..... $ (13.14) $ (15.90)
</TABLE>
16. EMPLOYEE BENEFIT PLAN
On January 1, 1995, the Company adopted a qualified 401(k) plan covering
all eligible employees in which the Company contributions are discretionary.
Employees are permitted to make annual contributions through salary deductions
up to 15% of their annual salary. The plan can be amended or terminated at any
time by the Board of Directors. The Company made contributions to the plan of
approximately $414,000 in 1998 and made no contributions to the plan in 1997.
F-106
<PAGE> 253
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
17. INCOME TAXES
The Company incurred net losses of $275.2 million and $109.9 million in
1998 and 1997, respectively. Accordingly, no provision for current federal or
state income taxes has been made to the financial statements.
The Company's deferred tax asset components at December 31, 1998 comprise
(in thousands):
<TABLE>
<S> <C>
Net operating loss carry-forwards........................... $ 129,947
Accrued liabilities and asset valuation reserves............ 15,349
Amortization of intangibles................................. 74
Subtotal.................................................... 145,370
Valuation allowance......................................... (145,370)
---------
Total............................................. $ --
=========
</TABLE>
As of December 31, 1998, the Company had not recognized deferred income tax
assets related to deductible temporary differences and cumulative net operating
losses. The ability of the Company to fully realize deferred tax assets in
future years is contingent upon its success in generating sufficient levels of
taxable income before the statutory expiration periods for utilizing such net
operating losses lapse. After an assessment of all available evidence, including
historical and projected operating trends, the Company was unable to conclude
that realization of such deferred tax assets in the near future was more likely
than not. Accordingly, a valuation allowance was recorded to offset the full
amount of such assets.
At December 31, 1998, the Company had net operating loss carry-forwards for
income tax purposes of approximately $351.2 million. The ability of the Company
or the Company's subsidiaries, as the case may be, to utilize their net
operating loss carry-forwards to offset future taxable income may be subject to
certain limitations contained in the Internal Revenue Code of 1986, as amended
(the "Code"). These operating losses begin to expire in 2009 for Federal income
tax purposes. Of the net operating loss carry-forwards remaining at December 31,
1998, $26.3 million can be applied only against future taxable income of the
Company's subsidiary, USNCN.
18. COMMITMENTS
In 1995 and 1996, the Company entered into agreements with two
non-affiliated telecommunications companies ("TelCos") to allow the Company to
resell the TelCos' local telephone service in various regional markets. The
agreements have terms of up to ten years and contain minimum purchase
commitments of local access lines, ranging from zero to 150,000 lines. These
commitments are measured by the number of lines in place on the last day of each
12-month period. The agreements allow for ramp-up periods and carryover pools
for shortfalls or excesses before any commitment levels are required to be met.
So long as the Company maintains cumulative net shortfalls lower than
established caps, no payments will be due to the TelCos other than for normal
usage, access and related charges. Even if no lines were sold by the Company,
the earliest required payment for any shortfall amount is in 2000.
In July 1996, the Company entered into an agreement with a third
telecommunications company to allow the Company to resell long-distance
telephone service. The agreement is for a term of 33 months and contains an
annual purchase commitment of $12 million, with a minimum monthly commitment of
$600,000 to qualify for the contract rates. This agreement was amended in 1998
to extend the term to 35 months, increase the revenue commitment for the last 12
months to $24 million and increase the minimum monthly commitment to $1.2
million to qualify for the contract rates. The agreement allows for a ramp-up
period before commitment levels are required to be met.
In 1994, USNCN executed an exclusive agreement with a non-affiliated
telecommunications company ("TelCo One"), whereby TelCo One allows USNCN to
establish a local private network on its infrastructure in
F-107
<PAGE> 254
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
which to provide service to customers. Under this agreement, TelCo One provides
network maintenance and access to telephone switches. The initial term of the
agreement expires in 2004.
Although no measurement date for the purchase commitments has been reached,
the Company would not have met the minimum purchase levels at December 31, 1998.
No provisions have been made for potential losses which may be incurred due to
the Company's inability to fulfill any purchase commitments.
19. LEGAL MATTERS
The Company is defendant in a class action lawsuit alleging the violation
of state and federal securities laws in connection with the Company's initial
public offering and subsequent events. In addition, the Company is a defendant
in various lawsuits arising out of the ordinary course of business, as well as
various collection lawsuits in the period preceding the Filing. All of these
lawsuits have been stayed as a result of applicable provisions of the Bankruptcy
Code by virtue of the Filing.
20. YEAR 2000 (UNAUDITED)
Although the Company is not aware of any material operational issues or
costs associated with preparing its internal systems for the Year 2000, there
can be no assurance that the Company will not experience serious unanticipated
negative consequences and/or material costs caused by undetected errors or
defects in the technology used in its internal systems, which include third
party software and hardware technology.
F-108
<PAGE> 255
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
DEBTOR-IN-POSSESSION
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31,
1999
---------
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 6,887
Accounts receivable, net.................................. 15,905
Net assets of discontinued operations held for sale....... 19,259
Other current assets...................................... 2,163
---------
Total current assets.............................. 44,214
Property and equipment, net................................. 10,640
Other assets................................................ 8,606
---------
Total assets...................................... $ 63,460
=========
LIABILITIES AND COMMON STOCKHOLDERS' DEFICIT
LIABILITIES NOT SUBJECT TO COMPROMISE
CURRENT LIABILITIES:
Accounts payable.......................................... $ 4,261
Accrued expenses and other current liabilities............ 1,257
Senior Secured Note....................................... 18,330
---------
Total current liabilities......................... 23,848
LIABILITIES SUBJECT TO COMPROMISE
Accounts payable and accrued expenses..................... 62,275
Capital lease obligations and notes payable............... 211,857
---------
Total liabilities subject to compromise........... 274,132
COMMON STOCKHOLDERS' DEFICIT:
Common stock, $.01 par value, 100,000,000 shares
authorized, 23,585,741 shares issued................... 235
Additional paid-in capital................................ 260,253
Treasury stock, 10,000 shares............................. (1)
Accumulated deficit....................................... (495,007)
---------
Total common stockholders' deficit................ (234,520)
---------
Total liabilities and common stockholders' deficit.......... $ 63,460
=========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
F-109
<PAGE> 256
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
DEBTOR-IN-POSSESSION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Net Service Revenue......................................... $ 24,496 $ 32,421
Cost of Services............................................ 22,458 26,637
----------- -----------
Gross profit.............................................. 2,038 5,784
EXPENSES:
Sales and marketing....................................... 3,347 24,425
General and administrative................................ 15,822 20,088
----------- -----------
Operating Loss.............................................. (17,131) (38,729)
OTHER INCOME (EXPENSE):
Interest income........................................... -- 1,568
Interest expense.......................................... (5,389) (7,062)
Other income (expense).................................... (547) 3
----------- -----------
Other income (expense)-- net.............................. (5,936) (5,491)
----------- -----------
Net Loss Before Reorganization Items........................ $ (23,067) $ (44,220)
=========== ===========
REORGANIZATION ITEMS:
Interest income........................................... $ 141 --
Professional fees......................................... (1,607) --
Write-off of debt acquisition costs....................... (24,806) --
----------- -----------
Total reorganization expense...................... (26,272) --
----------- -----------
Net Loss.................................................... $ (49,339) $ (44,220)
=========== ===========
Preferred Dividends......................................... -- $ 579
=========== ===========
Net Loss to Common Shareholders -- Basic and Diluted........ $ (49,339) $ (44,799)
=========== ===========
Net Loss Per Common Share -- Basic and Diluted.............. $ (2.09) $ (3.12)
=========== ===========
Weighted Average Common Shares Outstanding -- Basic and
Diluted................................................... 23,585,741 14,366,749
=========== ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
F-110
<PAGE> 257
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
DEBTOR-IN-POSSESSION
CONDENSED CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' DEFICIT
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON
ADDITIONAL STOCK HELD
COMMON PAID-IN IN ACCUMULATED
STOCK CAPITAL TREASURY DEFICIT TOTAL
------ ---------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1998......... $235 $260,227 $(1) $(445,668) $(185,207)
Compensation expense on stock
options.......................... 26 26
Net loss........................... (49,339) (49,339)
---- -------- --- --------- ---------
Balance, March 31, 1999............ $235 $260,253 $(1) $(495,007) $(234,520)
==== ======== === ========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
F-111
<PAGE> 258
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
DEBTOR-IN-POSSESSION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1999 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................... $(49,339) $(44,220)
Adjustments to reconcile net loss to net cash flows from
operating activities:
Depreciation.............................................. 2,880 2,152
Amortization.............................................. 50 63
Non-cash interest on debt obligations..................... 5,352 7,017
Provision for losses on accounts receivable............... 1,330 2,442
Stock compensation award expense.......................... 26 173
Loss on disposal of property and equipment................ 547 --
Changes in operating assets and liabilities:
Accounts receivable.................................... 7,667 (19,559)
Other assets........................................... 214 (269)
Accounts payable....................................... 3,640 2,868
Accrued expenses....................................... (858) 9,089
Changes in reorganization items:
Reorganization expense................................. 26,272 --
Payments of reorganization costs....................... (1,607) --
-------- --------
Net cash flows from operating activities.......... (3,826) (40,244)
CASH FLOWS FROM INVESTING ACTIVITIES:
Deposits.................................................... 92 (1,390)
Purchase of property and equipment.......................... -- (5,763)
Purchase of subsidiary, net of cash acquired................ -- (69,054)
-------- --------
Net cash flows from investing activities.......... 92 (76,207)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Senior Notes.................................. 7,000 --
Issuance of common stock.................................... -- 138,068
Costs incurred related to issuance of stock................. -- (10,764)
Proceeds from Consent Convertible Notes..................... -- 10,000
Repayment of capital lease obligations and notes payable.... (146) (144)
-------- --------
Net cash flows from financing activities.......... 6,854 137,160
-------- --------
Net Increase in Cash........................................ 3,120 20,709
Cash and Cash Equivalents -- Beginning of Period............ 3,767 87,454
-------- --------
Cash and Cash Equivalents -- End of Period.................. $ 6,887 $108,163
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Conversion of preferred stock to common stock............... -- $ 57,856
======== ========
Dividends paid in kind...................................... -- $ 2,095
======== ========
Declared dividends.......................................... -- $ 579
======== ========
Capital lease obligations incurred.......................... -- $ 288
======== ========
Cash paid for interest...................................... $ 33 $ 45
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
F-112
<PAGE> 259
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
DEBTOR-IN-POSSESSION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The unaudited, condensed consolidated financial statements of USN
Communications, Inc. (the "Company") included herein have been prepared in
accordance with generally accepted accounting principles for interim financial
information. The interim financial statements reflect all adjustments,
consisting only of normal recurring adjustments, which are, in the opinion of
management, necessary for a fair presentation of the results for the interim
periods presented. The condensed consolidated financial statements should be
read in conjunction with the audited consolidated financial statements at
December 31, 1998 and the notes thereto. The results of operations for the
interim periods should not be considered indicative of results to be expected
for the full year.
2. CHAPTER 11 PROCEEDINGS
On February 18, 1999, (the "Petition Date") the Company and certain of its
subsidiaries filed voluntary petitions for reorganization (the "Filing") under
Chapter 11 ("Chapter 11") of Title 11 of the United States Code ("Bankruptcy
Code") in the United States Bankruptcy Court for the District of Delaware (the
"Bankruptcy Court"). In Chapter 11, the Company has continued to manage its
affairs and operate its business as a debtor in possession while it develops a
plan of reorganization. As a debtor in possession in Chapter 11, the Company may
not engage in transactions outside of the ordinary course of business without
approval, after notices and hearing, of the Bankruptcy Court.
On April 2, 1999, the Bankruptcy Court authorized the Company to (1) sell
substantially all of the Company's assets, excluding USN Wireless, Inc. to
CoreComm Limited for approximately $27 million in cash, warrants to purchase
350,000 shares of CoreComm Limited common stock and a contingent payment based
on future operating results that caps the total consideration at $85 million,
and (2) sell the capital stock of USN Wireless, Inc. The closing of the sale of
assets to CoreComm Limited occurred on May 26, 1999. The Company continues to
own the capital stock of USN Wireless, Inc.
As a result of the Filing, the Company is currently in default under of all
of its debt agreements in effect prior to the Petition Date. As a result, all
unpaid principal of, and accrued prepetition interest on, such debt became
immediately due and payable. The payment of such debt and accrued but unpaid
prepetition interest is prohibited during the pendency of the Company's Chapter
11 case without the approval of the Bankruptcy Court. The Bankruptcy Court has
authorized the payment, by the Company, of the Company's $15 million aggregate
principal amount of prepetition senior secured notes with a $20 million
debtor-in-possession financing facility. The debtor-in-possession financing
facility was discharged with a portion of the proceeds from the sale of assets
to CoreComm Limited.
The accompanying condensed consolidated financial statements have been
prepared on a going concern basis of accounting and do not reflect any
adjustments that might result should the Company be unable to continue as a
going concern, other than the discontinuation of interest expense subsequent to
the filing date of approximately $3.8 million. The Company's recurring losses
from operations and the related Chapter 11 filing raise substantial doubt about
its ability to continue as a going concern.
Because the Company sold assets and may sell additional assets, and as a
result of the Chapter 11 case, the Company may liquidate or settle liabilities
for amounts other than those reflected in the financial statements. Further, a
plan of reorganization could materially change the amounts currently recorded in
the financial statements. The financial statements do not give effect to any
adjustments to the carrying value of assets, or amounts and classification of
liabilities that might be necessary as a consequence of these matters.
F-113
<PAGE> 260
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
DEBTOR-IN-POSSESSION
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
3. FINANCIAL REPORTING FOR BANKRUPTCY PROCEEDINGS
The American Institute of Certified Public Accountants Statement of
Position 90-7, "Financial Reporting by Entities in Reorganization Under the
Bankruptcy code" ("SOP 90-7"), provides guidance for financial reporting by
entities that have filed petitions with the Bankruptcy Court and expect to
reorganize under Chapter 11 of the Bankruptcy Code.
Under SOP 90-7, the financial statements of an entity in a Chapter 11
reorganization proceeding should distinguish transactions and events that are
directly associated with the reorganization from those of the operations of the
ongoing business as it evolves. Accordingly, SOP 90-7 requires the following
financial reporting/accounting treatments in respect of each of the financial
statements.
Consolidated Balance Sheet
The balance sheet separately classifies pre-petition liabilities subject to
compromise (generally unsecured and undersecured claims) and post-petition
liabilities not subject to compromise (fully secured claims). The Senior Secured
Notes, of which $15.3 million is pre-petition, have been presented as not
subject to compromise (see Note 2). Pre-petition liabilities are reported on the
basis of the expected amount of such allowed claims, as opposed to the amounts
for which those allowed claims may be settled. Under an approved final plan of
reorganization, those claims may be settled at amounts substantially less than
their allowed amounts.
When a liability subject to settlement becomes an allowed claim and that
claim differs from the net carrying amount of the liability, the net carrying
amount is adjusted to the amount of the allowed claim. The resulting gain or
loss is classified as a reorganization item in the Consolidated Statement of
Operations.
Consolidated Statements of Operations
Pursuant to SOP 90-7, revenues and expenses, realized gains and losses, and
provisions for losses resulting from the reorganization of the business are
reported in the Consolidated Statement of Operations separately as
reorganization items. Professional fees are expensed as incurred. Interest
expense is reported only to the extent that it will be paid during the
proceeding or that it is probable that it will be an allowed claim.
Consolidated Statements of Cash Flows
Reorganization items are reported separately within the operating,
investing and financing categories of the Consolidated Statement of Cash Flows.
F-114
<PAGE> 261
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
DEBTOR-IN-POSSESSION
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
4. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
1999
(UNAUDITED)
-----------
<S> <C>
Billed...................................................... $25,041
Unbilled.................................................... 8,768
-------
Gross accounts receivable................................... 33,809
Allowance for doubtful accounts............................. (17,904)
-------
Net accounts receivable..................................... $15,905
=======
</TABLE>
Unbilled accounts receivable comprises access charges, features and usage
for revenue earned but not yet billed to customers. A majority of the unbilled
accounts receivable were billed within 30 days after the March 31, 1999.
5. NET ASSETS OF DISCONTINUED OPERATIONS
The USN Wireless, Inc. business has been classified as discontinued
operations in the accompanying financial statements. On April 2, 1999, the
Bankruptcy Court approved the asset sale of USN Wireless, Inc.
The net assets of discontinued operations are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
MARCH 31, 1999
(UNAUDITED)
--------------
<S> <C>
Current assets.............................................. $ 9,223
Fixed assets................................................ 1,521
Goodwill and other intangibles, net of amortization......... 59,681
Current liabilities......................................... (9,422)
Provision for estimated loss on sale of discontinued
operations................................................ (41,744)
--------
Net assets of discontinued operations....................... $ 19,259
========
</TABLE>
6. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31, 1999
(UNAUDITED)
---------------
<S> <C>
Furniture and equipment..................................... $ 9,221
Computer hardware........................................... 11,476
Computer software........................................... 8,504
Leasehold improvements...................................... 5,755
--------
34,956
Less accumulated depreciation............................... (15,125)
Less impairment reserve..................................... (9,191)
--------
Total............................................. $ 10,640
========
</TABLE>
F-115
<PAGE> 262
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
DEBTOR-IN-POSSESSION
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
7. OTHER ASSETS
Other assets consist of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31, 1999
(UNAUDITED)
--------------
<S> <C>
Deposits.................................................... $8,191
Licensing agreement, net of accumulated amortization $211... 189
Other....................................................... 226
------
Total............................................. $8,606
======
</TABLE>
8. NOTES PAYABLE
On November 18, 1998, the Company received approximately $10 million in
cash in exchange for the issuance and sale of a $10 million 17% Senior Secured
Note ("17% Note") due January 15, 1999. Interest was payable upon the maturity
of the 17% Note. The 17% Note was secured by a first priority lien on
substantially all assets of the Company, including the Company's accounts
receivable and the stock of the Company's directly owned subsidiaries.
On January 20, 1999, the 17% Note was cancelled in exchange for a
replacement $10.0 million 17% Senior Secured Note due February 15, 1999, and the
Company received an additional $2.5 million in cash in exchange for a new $2.5
million 17% Senior Secured Note due February 15, 1999 (collectively the "New 17%
Notes"). Interest on the New 17% Notes was payable in cash upon maturity. As was
the case with the 17% Note, the New 17% Notes were secured by a first priority
lien on substantially all assets of the Company, including the Company's
accounts receivable and the stock of the Company's directly owned subsidiaries.
On February 8, 1999, the Company received an additional $2.5 million in
cash under the provisions of the New 17% Notes, bringing the total amount due
under the New 17% Notes to $15 million. Also on February 8, 1999, the maturity
date for the New 17% Notes was changed from February 15, 1999 to February 16,
1999.
On February 23, 1999, the New 17% Notes, including accrued interest, were
exchanged for a replacement $16.3 million 14% Class B Senior Secured Note due
June 30, 1999 (the "Class B Notes"). On February 25, 1999, the Company received
$2.0 million in cash in exchange for the issuance and sale of a $2 million 14%
Class A Senior Secured Notes due June 30, 1999 (the "Class A Notes"). Interest
on the Class A Notes and Class B Notes is payable upon maturity. The Class A
Notes and Class B Notes are secured by a first priority lien on substantially
all assets of the Company, including the Company's accounts receivable and the
stock of the Company's directly owned subsidiaries.
9. LEGAL MATTERS
The Company is defendant in a class action lawsuit alleging the violation
of state and federal securities laws in connection with the Company's initial
public offering and subsequent events. In addition, the Company is a defendant
in various lawsuits arising out of the ordinary course of business, as well as
various collection lawsuits in the period preceding the Filing. All of these
lawsuits have been stayed as a result of applicable provisions of the Bankruptcy
Code by virtue of the Filing.
F-116
<PAGE> 263
------------------------------------------------------
------------------------------------------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR THAT WE
HAVE REFERRED YOU TO. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH ANY
OTHER INFORMATION. THIS PROSPECTUS MAY BE DELIVERED TO YOU AFTER THE DATE OF
THIS PROSPECTUS. HOWEVER, YOU SHOULD REALIZE THAT THE AFFAIRS OF CORECOMM
LIMITED MAY HAVE CHANGED SINCE THE DATE OF THIS PROSPECTUS. THIS PROSPECTUS WILL
NOT REFLECT SUCH CHANGES. YOU SHOULD NOT CONSIDER THIS PROSPECTUS TO BE AN OFFER
OR SOLICITATION RELATING TO THE NOTES IN ANY JURISDICTION IN WHICH SUCH AN OFFER
OR SOLICITATION IS NOT AUTHORIZED. FURTHERMORE, YOU SHOULD NOT CONSIDER THIS
PROSPECTUS TO BE AN OFFER OR SOLICITATION RELATING TO THE NOTES IF THE PERSON
MAKING THE OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR IF IT IS UNLAWFUL
FOR YOU TO RECEIVE SUCH AN OFFER OR SOLICITATION.
-------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................. 1
Risk Factors........................ 11
Use of Proceeds..................... 27
Price Range of Common Stock......... 27
Dividend Policy..................... 27
Capitalization...................... 28
Unaudited Pro Forma Financial
Data.............................. 30
Selected Historical Financial
Data.............................. 39
Management's Discussion and Analysis
of Financial Condition and Results
of Operations..................... 42
Business............................ 50
Government Regulation of the
Telecommunications Services
Business.......................... 80
Management and Executive
Compensation...................... 91
Security Ownership of Certain
Beneficial Owners and
Management........................ 97
Selling Securityholders............. 99
Certain Relationships and Related
Transactions...................... 101
Description of Convertible Notes.... 103
Description of Capital Stock........ 120
Description of Our Other
Indebtedness...................... 136
Plan of Distribution................ 140
Legal Matters....................... 141
Experts............................. 141
Where You Can Find More
Information....................... 142
Index to Financial Statements....... F-1
</TABLE>
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
6% CONVERTIBLE
SUBORDINATED
NOTES DUE 2006,
SHARES OF SERIES B SENIOR
CONVERTIBLE EXCHANGEABLE
PREFERRED STOCK
AND SHARES OF
COMMON STOCK
CORECOMM LIMITED
--------------------
PROSPECTUS
--------------------
NOVEMBER 1, 2000
------------------------------------------------------
------------------------------------------------------
<PAGE> 264
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following is an itemization of all expenses, subject to future
contingencies, payable by the registrant in connection with the sale of the
convertible notes being registered, the Series B preferred stock being
registered and the common stock being registered, including common stock that
will be issued upon conversion of the convertible notes or upon conversion of or
as dividends on, the Series B preferred stock or as payment of interest on the
senior unsecured notes due 2003. All amounts are estimates except the SEC
registration fee and the Nasdaq National Market additional listing fee.
<TABLE>
<S> <C>
SEC registration fee........................................ $132,017.25
Nasdaq National Market listing fee.......................... $ --
Legal fees and expenses..................................... $ 225,000
Accounting fees and expenses................................ $ 50,000
Printing and engraving fees................................. $ 250,000
Miscellaneous expenses...................................... $ 25,000
-----------
Total............................................. $682,017.25
===========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law authorizes a
corporation to indemnify its directors, officers, employees and agents against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement reasonably incurred, including liabilities under the Securities Act,
provided they act in good faith and in a manner reasonably believed to be in or
not opposed to the best interests of the corporation, although in the case of
proceedings brought by or on behalf of the corporation, such indemnification is
limited to expenses and is not permitted if the individual is adjudged liable to
the corporation (unless the court determines otherwise). The registrant's
Certificate of Incorporation and Bylaws require the registrant to indemnify its
officers and directors to the full extent permitted by Delaware law.
Section 102 of the Delaware General Corporation Law authorizes a
corporation to limit or eliminate its directors' liability to the corporation or
its stockholders for monetary damages for breaches of fiduciary duties, other
than for (i) breaches of the duty of loyalty, (ii) acts or omissions not in good
faith or that involve intentional misconduct or knowing violations of law, (iii)
unlawful payments of dividends, stock purchases or redemptions, or (iv)
transactions from which a director derives an improper personal benefit. The
registrant's Certificate of Incorporation contains provisions limiting the
liability of the directors to the registrant and to its stockholders to the full
extent permitted by Delaware law.
Section 145 of the Delaware General Corporation Law authorizes a
corporation to purchase and maintain insurance on behalf of any person who is or
was a director, officer, employee or agent of the corporation against any
liability asserted against him or her and incurred by him or her in any such
capacity, or arising out of his or her status as such. The registrant's
Certificate of Incorporation and Bylaws provide that the registrant may, to the
full extent permitted by law, purchase and maintain insurance on behalf of any
director, officer, employee or agent of the registrant against any liability
that may be asserted against him or her and the registrant currently maintains
such insurance. The registrant will obtain liability insurance covering its
directors and officers for claims asserted against them or incurred by them in
such capacity, including claims brought under the Securities Act.
II-1
<PAGE> 265
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since February 9, 2000, the date on which the registrant was formed, the
registrant has issued securities in the following transactions not registered
under the Securities Act:
1. On February 9, 2000, in connection with the reorganization of ATX
Telecommunications Services, Ltd. and Global Telecom Services, Ltd. as a single
corporation, ATX Telecommunications Services, Inc. issued 1,000 shares of its
common stock to Michael Karp (650 shares), Debra Buruchian (155 shares), Thomas
Gravina (155 shares) and The Florence Karp Trust (40 shares), who were all of
the holders of partnership interests in ATX Telecommunications Services, Ltd.
and Global Telecom Services, Ltd. Michael Karp, Debra Buruchian and Thomas
Gravina were, at the time, executive officers of ATX, ATX Telecommunications
Services, Ltd. and Global Telecom Services, Ltd. The Florence Karp Trust is for
the benefit of Michael Karp's children. Mr. Karp has no power to direct the
voting of the shares held by The Florence Karp Trust and disclaims beneficial
ownership of those shares.
2. On September 29, 2000, in connection with the merger transactions with
CoreComm Limited, a Bermuda corporation, as provided in the Recapitalization
Agreement and Plan of Merger dated as of March 9, 2000 (and subsequently
amended), the registrant issued 250,000 shares of its Series B preferred stock,
approximately $108.7 million of its senior unsecured notes due 2003 and
approximately 12.4 million shares of its common stock to Michael Karp, Debra
Buruchian, Thomas Gravina and The Florence Karp Trust, who were the principal
stockholders of ATX prior to the merger. Prior to the merger, Michael Karp,
Debra Buruchian and Thomas Gravina were executive officers of ATX.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The Exhibit Index is hereby incorporated by reference.
(b) The financial statement schedule is included as Exhibit 27.1 to this
registration statement and is incorporated by reference thereto.
ITEM 17. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of a prospectus pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more than a 20
percent change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration
statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if
the registration statement is on Form S-3, Form S-8 or Form F-3, and the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed with or furnished to the
Commission by the Registrant pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in the registration
statement.
II-2
<PAGE> 266
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offering therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of
the registrant's annual report pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
II-3
<PAGE> 267
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York City, State of
New York on November 1, 2000.
CORECOMM LIMITED
By: /s/ RICHARD J. LUBASCH
------------------------------------
Richard J. Lubasch
Senior Vice President,
General Counsel and Secretary
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ------------------------------------ -----------------
<S> <C> <C>
* Chairman of the Board of Directors November 1, 2000
------------------------------------------
George S. Blumenthal
* President, Chief Executive Officer, November 1, 2000
------------------------------------------ Chief Financial Officer and Director
J. Barclay Knapp (Principal Executive and Financial
Officer)
* Vice President -- Controller and November 1, 2000
------------------------------------------ Treasurer
Gregg N. Gorelick
* Director November 1, 2000
------------------------------------------
Ted H. McCourtney
* Director November 1, 2000
------------------------------------------
Del Mintz
* Director November 1, 2000
------------------------------------------
Alan J. Patricof
* Director November 1, 2000
------------------------------------------
Warren Potash
* By /s/ RICHARD J. LUBASCH
-----------------------------------------
Richard J. Lubasch
Attorney-in-fact
</TABLE>
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<PAGE> 268
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION
-------- -----------
<C> <S>
2.1* Agreement and Plan of Merger among CoreComm Limited,
CoreComm Group Sub I, Inc. and Voyager.net, Inc. dated as of
March 12, 2000 (incorporated by reference to Exhibit 2.1 to
the registrant's registration statement on Form S-4, file
no. 333-44028.)
2.2* Amendment No. 1 to Agreement and Plan of Merger among
CoreComm Limited, CoreComm Group Sub I, Inc. and
Voyager.net, Inc. dated as of August 10, 2000 (incorporated
by reference to Exhibit 2.2 to the registrant's registration
statement on Form S-4, file no. 333-44028.)
2.3* Recapitalization Agreement and Plan of Merger by and among
ATX Telecommunications Services, Inc., Thomas Gravina, Debra
Buruchian, Michael Karp, The Florence Karp Trust and
CoreComm Limited dated as of March 9, 2000 (incorporated by
reference to Exhibit 2.3 to the registrant's registration
statement on Form S-4, file no. 333-44028.)
2.4* Amendment No. 1 to Recapitalization Agreement and Plan of
Merger by and among ATX Telecommunications Services, Inc.,
Thomas Gravina, Debra Buruchian, Michael Karp, The Florence
Karp Trust, CoreComm Limited, ATX Merger Sub, Inc. and
CoreComm Merger Sub, Inc. dated as of April 10, 2000
(incorporated by reference to Exhibit 2.4 to the
registrant's registration statement on Form S-4, file no.
333-44028.)
2.5* Amendment No. 2 to Recapitalization Agreement and Plan of
Merger by and among ATX Telecommunications Services, Inc.,
Thomas Gravina, Debra Buruchian, Michael Karp, The Florence
Karp Trust, CoreComm Limited, ATX Merger Sub, Inc. and
CoreComm Merger Sub, Inc. dated as of July 10, 2000
(incorporated by reference to Exhibit 2.5 to the
registrant's registration statement on Form S-4, file no.
333-44028.)
2.6* Amendment No. 3 to Recapitalization Agreement and Plan of
Merger by and among ATX Telecommunications Services, Inc.,
Thomas Gravina, Debra Buruchian, Michael Karp, The Florence
Karp Trust, CoreComm Limited, ATX Merger Sub, Inc. and
CoreComm Merger Sub, Inc. dated as of July 31, 2000
(incorporated by reference to Exhibit 2.6 to the
registrant's registration statement on Form S-4, file no.
333-44028.)
2.7* Agreement and Plan of Merger, dated as of February 17, 1999,
by and among CoreComm Limited, CoreComm Acquisition Sub,
Inc., and MegsINet Inc. (incorporated by reference to
Exhibit 2.4 to CoreComm Limited's annual report on Form 10-K
for the year ended December 31, 1999.)
2.8* First Amendment to Agreement and Plan of Merger, dated as of
May 3, 1999, by and among CoreComm Limited, CoreComm
Acquisition Sub, Inc., and MegsINet Inc. (incorporated by
reference to Exhibit 2.5 to CoreComm Limited's annual report
on Form 10-K for the year ended December 31, 1999.)
2.9* Asset Purchase Agreement, dated as of February 19, 1999, by
and between CoreComm Limited, USN Communications, Inc. and
several subsidiaries of USN Communications, Inc.
(incorporated by reference to Exhibit 2.6 to CoreComm
Limited's annual report on Form 10-K for the year ended
December 31, 1999.)
2.10* Stock Exchange Agreement dated as of September 23, 1998, by
and among Voyager and the parties named therein
(incorporated by reference to Exhibit 2.1 to Voyager.net,
Inc.'s registration statement on Form S-1, file no.
333-77917.)
2.11* Stock Purchase Agreement dated as of September 23, 1998 by
and among Voyager and the investors identified therein
(incorporated by reference to Exhibit 2.2 to Voyager.net,
Inc.'s registration statement on Form S-1, file no.
333-77917.)
3.1* Restated Certificate of Incorporation of CoreComm Limited
(incorporated by reference to Exhibit 4.1 to the
registrant's registration statement on Form 8-A, filed on
September 29, 2000.)
3.2+ By-laws of CoreComm Limited
4.1+ Specimen common stock certificate
4.2+ Specimen Series B preferred stock certificate
4.3+ Specimen Series C preferred stock certificate
4.4+ Certificate of designation of the Series C preferred stock
4.5+ Registration Rights Agreement, dated as of September 29,
2000, by and among the registrant, Michael Karp, Debra
Buruchian, Thomas Gravina and The Florence Karp Trust
</TABLE>
<PAGE> 269
<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION
-------- -----------
<C> <S>
4.6* Indenture, dated as of October 6, 1999, by and between the
registrant and The Chase Manhattan Bank, as Trustee, with
respect to the 6% convertible subordinated notes due 2006
(incorporated by reference to Exhibit 4.6 to CoreComm's
Limited's annual report on Form 10-K for the year ended
December 31, 1999)
4.7* Registration Rights Agreement, dated October 6, 1999, by and
among the Company and the Initial Purchasers of the 6%
convertible subordinated notes due 2006 (incorporated by
reference to Exhibit 4.7 to CoreComm Limited's annual report
on Form 10-K for the year ended December 31, 1999)
4.8+ Registration Rights Agreement, dated as of September 29,
2000, by and among the registrant and certain stockholders
of Voyager listed therein
4.9* Rights Agreement, dated as of September 29, 2000, by and
among the registrant and Continental Stock Transfer & Trust
Company, including form of rights certificate (incorporated
by reference to Exhibit 4.3 to the registrant's registration
statement on Form 8-A, filed on September 29, 2000)
4.10+ Supplemental Indenture, dated as of September 29, 2000 by
and between CoreComm Merger Sub, Inc. and The Chase
Manhattan Bank, as Trustee, with respect to the 6%
convertible subordinated notes due 2006
4.11+ Supplemental Indenture, dated as of September 29, 2000 by
and between the registrant and The Chase Manhattan Bank, as
Trustee, with respect to the 6% Convertible Subordinated
Notes due 2006
5.1+ Opinion of Paul, Weiss, Rifkind, Wharton & Garrison
9.1* Voting Agreement by and among CoreComm Limited and the
Voyager stockholders listed on Schedule A thereto, dated as
of March 12, 2000 (incorporated by reference to Exhibit 9.1
to the registrant's registration statement on Form S-4, file
no. 333-44028)
9.2+ Stockholders Agreement, dated as of September 29, 2000, by
and among CoreComm Limited and the Voyager stockholders
listed on Schedule A thereto
9.3+ Stockholder Agreement, dated as of September 29, 2000, by
and among ATX Telecommunications Services, Inc. and the
persons listed on Schedule A thereto
10.1* Lease Agreement dated as of January 18, 1994 between
Monument Road Associates and ATX Telecommunications
Services, Inc. (incorporated by reference to Exhibit 10.2 to
the registrant's registration statement on Form S-4, file
no. 333-44028)
10.2* Addendum, dated as of January 25, 1996, to Lease Agreement
dated as of January 18, 1994 between Monument Road
Associates and ATX Telecommunications Services, Inc.
(incorporated by reference to Exhibit 10.3 to the
registrant's registration statement on Form S-4, file no.
333-44028)
10.3* Addendum, dated as of January 1, 1998, to Lease Agreement
dated as of January 18, 1994 between Monument Road
Associates and ATX Telecommunications Services, Inc.
(incorporated by reference to Exhibit 10.4 to the
registrant's registration statement on Form S-4, file no.
333-44028)
10.4* Addendum, dated as of October 1, 1998, to Lease Agreement
dated as of January 18, 1994 between Monument Road
Associates and ATX Telecommunications Services, Inc.
(incorporated by reference to Exhibit 10.5 to the
registrant's registration statement on Form S-4, file no.
333-44028)
10.5* Addendum, dated as of November 1, 1999, to Lease Agreement
dated as of January 18, 1994 between Monument Road
Associates and ATX Telecommunications Services, Inc.
(incorporated by reference to Exhibit 10.6 to the
registrant's registration statement on Form S-4, file no.
333-44028)
10.6* Lease Agreement dated as of January 2, 1993 between Walnut
Bridge Associates and ATX Telecommunications Services, Inc.
(incorporated by reference to Exhibit 10.7 to the
registrant's registration statement on Form S-4, file no.
333-44028.)
10.7* Addendum, dated as of July 1, 1995, to Lease Agreement dated
as of January 2, 1993 between Walnut Bridge Associates and
ATX Telecommunications Services, Inc. (incorporated by
reference to Exhibit 10.8 to the registrant's registration
statement on Form S-4, file no. 333-44028)
</TABLE>
<PAGE> 270
<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION
-------- -----------
<C> <S>
10.8* Addendum, dated as of November 1, 1999, to Lease Agreement
dated as of January 2, 1993 between Walnut Bridge Associates
and ATX Telecommunications Services, Inc. (incorporated by
reference to Exhibit 10.9 to the registrant's registration
statement on Form S-4, file no. 333-44028)
10.9* Addendum, dated as of March 1, 2000, to Lease Agreement
dated as of January 2, 1993 between Walnut Bridge Associates
and ATX Telecommunications Services, Inc. (incorporated by
reference to Exhibit 10.10 to the registrant's registration
statement on Form S-4, file no. 333-44028)
10.10* Letter of Credit dated July 30, 1993 (incorporated by
reference to Exhibit 10.11 to the registrant's registration
statement on Form S-4, file no. 333-44028)
10.11* Letter of Credit dated October 14, 1997 (incorporated by
reference to Exhibit 10.12 to the registrant's registration
statement on Form S-4, file no. 333-44028)
10.12* Letter of Credit dated October 19, 1999 (incorporated by
reference to Exhibit 10.13 to the registrant's registration
statement on Form S-4, file no. 333-44028)
10.13* Letter of Credit dated October 30, 1998 (incorporated by
reference to Exhibit 10.14 to the registrant's registration
statement on Form S-4, file no. 333-44028)
10.14* Summary of loan by ATX Telecommunications Services, Inc. to
Thomas Gravina and Debra Buruchian (incorporated by
reference to Exhibit 10.15 to the registrant's registration
statement on Form S-4, file no. 333-44028)
10.15* Summary of indebtedness of ATX Telecommunications Services,
Inc. to Michael Karp (incorporated by reference to Exhibit
10.16 to the registrant's registration statement on Form
S-4, file no. 333-44028)
10.16* Summary of provision of services to ATX Telecommunications
Services, Inc. by University City Housing (incorporated by
reference to Exhibit 10.17 to the registrant's registration
statement on Form S-4, file no. 333-44028)
10.17* Form of Tax Disaffiliation Agreement between CoreComm
Incorporated and CoreComm Limited (incorporated by reference
to Exhibit 10.1 to CoreComm Limited's annual report on Form
10-K for the year ended December 31, 1999)
10.18* CoreComm Limited 1998 Stock Option Plan (incorporated by
reference to Exhibit 10.2 to CoreComm Limited's annual
report on Form 10-K for the year ended December 31, 1999)
10.19* CoreComm Limited Non-Employee Director Stock Option Plan
(incorporated by reference to Exhibit 10.3 to CoreComm
Limited's annual report on Form 10-K for the year ended
December 31, 1999)
10.20* CoreComm Ohio Limited 1999 Stock Option Plan (incorporated
by reference to Exhibit 10.4 to CoreComm Limited's annual
report on Form 10-K for the year ended December 31, 1999)
10.21* CoreComm Limited 1999 Stock Option Plan (incorporated by
reference to Exhibit 10.5 to CoreComm Limited's annual
report on Form 10-K for the year ended December 31, 1999)
10.22* Amended and Restated Promissory Note made by Voyager in
favor of Horizon Cable I Limited Partnership (incorporated
by reference to Exhibit 10.3 to Voyager.net, Inc.'s
registration statement on Form S-1, file no. 333-77917)
10.23* Asset Purchase Agreement, dated as of July 31, 1998, by and
among Voyager Information Networks, Inc., Freeway, Inc.
(n/k/a Offline, Inc.) and the other parties identified
therein (incorporated by reference to Exhibit 10.4 to
Voyager.net, Inc.'s registration statement on Form S-1, file
no. 333-77917)
10.24* Asset Purchase Agreement, dated as of September 23, 1998, by
and among Voyager Information Networks, Inc., EXEC-PC, Inc.
(n/k/a The Mahoney Group) and the other parties identified
therein (incorporated by reference to Exhibit 10.5 to
Voyager.net, Inc.'s registration statement on Form S-1, file
no. 333-77917)
10.25* Asset Purchase Agreement, dated as of October 2, 1998,
effective September 30, 1998, by and among Voyager
Information Networks, Inc., NetLinks Systems, L.L.C. and the
other parties identified therein (incorporated by reference
to Exhibit 10.6 to Voyager.net, Inc.'s registration
statement on Form S-1, file no. 333-77917)
10.26* Reseller Agreement, dated as of April 13, 1999, by and among
Voyager Information Networks, Inc. and Millennium Digital
Media Systems, L.L.C. (incorporated by Reference to Exhibit
10.7 to Voyager.net, Inc.'s registration statement on Form
S-1, file no. 333-77917)
</TABLE>
<PAGE> 271
<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION
-------- -----------
<C> <S>
10.27* Employment Agreement, dated as of February 20, 1998, between
Voyager Information Networks, Inc. and Christopher Torto, as
amended (incorporated by reference to Exhibit 10.8 to
Voyager.net, Inc.'s registration statement on Form S-1, file
no. 333-77917)
10.28* Employment Agreement, dated as of January 15, 1998, between
Voyager Information Networks, Inc. and Michael Williams
(incorporated by reference to Exhibit 10.9 to Voyager.net,
Inc.'s registration statement on Form S-1, file no.
333-77917)
10.29* Employment Agreement, dated as of October 2, 1998, between
Voyager Information Networks, Inc. and Christopher Michaels,
as amended (incorporated by reference to Exhibit 10.10 to
Voyager.net, Inc.'s registration statement on Form S-1, file
no. 333-77917)
10.30* Employment Agreement, dated as of October 2, 1998, between
Voyager Information Networks, Inc. and David Shires, as
amended (incorporated by reference to Exhibit 10.11 to
Voyager.net, Inc.'s registration statement on Form S-1, file
no. 333-77917)
10.31* Employment Agreement effective as of January 11, 1999
between Voyager Information Networks, Inc. and Osvaldo
deFaria (incorporated by reference to Exhibit 10.12 to
Voyager.net, Inc.'s registration statement on Form S-1, file
no. 333-77917)
10.32* Employment Agreement dated as of March 18, 1999 between
Voyager Information Networks, Inc. and Dennis Stepaniak
(incorporated by reference to Exhibit 10.13 to Voyager.net,
Inc.'s registration statement on Form S-1, file no.
333-77917)
10.33* Agreement Regarding Inventions, Non-competition and
Confidentiality dated as of February 20, 1998 between
Voyager Information Networks, Inc. and Christopher Torto
(incorporated by reference to Exhibit 10.14 to Voyager.net,
Inc.'s registration statement on Form S-1, file no. 333-
77917)
10.34* Agreement Regarding Inventions, Non-competition and
Confidentiality dated as of October 15, 1997 between Voyager
Information Networks, Inc. and Michael Williams
(incorporated by reference to Exhibit 10.15 to Voyager.net,
Inc.'s registration statement on Form S-1, file no. 333-
77917)
10.35* Agreement Regarding Inventions, Non-competition and
Confidentiality dated as of November 11, 1998 between
Voyager Information Networks, Inc. and Osvaldo deFaria
(incorporated by reference to Exhibit 10.16 to Voyager.net,
Inc.'s registration statement on Form S-1, file no. 333-
77917)
10.36* Agreement Regarding Inventions, Non-competition and
Confidentiality dated as of March 18, 1998 between Voyager
Information Networks, Inc. and Dennis Stepaniak
(incorporated by reference to Exhibit 10.17 to Voyager.net,
Inc.'s registration statement on Form S-1, file no. 333-
77917)
10.37* Employee Non-Competition Agreement, dated as of October 2,
1998 between Voyager Information Networks, Inc. and
Christopher Michaels (incorporated by reference to Exhibit
10.18 to Voyager.net, Inc.'s registration statement on Form
S-1, file no. 333-77917)
10.38* Employee Non-Competition Agreement, dated as of October 2,
1998 between Voyager Information Networks, Inc. and David
Shires (incorporated by reference to Exhibit 10.19 to
Voyager.net, Inc.'s registration statement on Form S-1, file
no. 333-77917)
10.39* Employee Agreement dated as of September 15, 1999 between
Voyager Information Networks, Inc. and Anthony Paalz
(incorporated by reference to Exhibit 10.34 to Voyager.net,
Inc.'s quarterly report on Form 10-Q for the quarter ended
September 30, 1999)
10.40* Agreement Regarding Inventions, Non-competition and
Confidentiality dated of September 15, 1999 between Voyager
Information Networks, Inc. and Anthony Paalz (incorporated
by reference to Exhibit 10.35 to Voyager.net, Inc.'s
quarterly report on Form 10-Q for the quarter ended
September 30, 1999)
10.41* Promissory Note made by Osvaldo deFaria in favor of Voyager
(incorporated by reference to Exhibit 10.23 to Voyager.net,
Inc.'s registration statement on Form S-1, file no.
333-77917)
10.42* Promissory Note made by Glenn Friedly in favor of Voyager
(incorporated by reference to Exhibit 10.24 to Voyager.net,
Inc.'s registration statement on Form S-1, file no.
333-77917)
10.43* Promissory Note made by Christopher Torto, dated April 13,
1999, on favor of Voyager (incorporated by reference to
Voyager.net, Inc.'s registration statement on Form S-1, file
no. 333-77917)
10.44* Voyager Form of Director Indemnification Agreement
(incorporated by reference to Voyager.net, Inc.'s
registration statement on Form S-1, file no. 333-77917)
</TABLE>
<PAGE> 272
<TABLE>
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EXHIBITS DESCRIPTION
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<C> <S>
10.45* Planet Direct Internet Service Provider Agreement dated as
of March 17, 1997 by and among Planet Direct Corporation and
Voyager Information Networks, Inc. (incorporated by
reference to Voyager.net, Inc.'s registration statement on
Form S-1, file no. 333-77917)
10.46* Stock Purchase Agreement dated as of May 7, 1999 by and
among Voyager Information Networks, Inc., GDR Enterprises,
Inc. and the other parties identified therein (incorporated
by reference to Exhibit 10.30 to Voyager.net, Inc.'s
registration statement on Form S-1, file no. 333-77917)
10.47* Promissory Note made by Christopher Torto, dated July 1999,
in favor of the Company (incorporated by reference to
Voyager.net, Inc.'s registration statement on Form S-1, file
no. 333-77917)
10.48* CoreComm Limited 2000 Stock Option Plan (incorporated by
reference to Annex B to CoreComm Limited's Proxy Statement
for its Annual Meeting of Shareholders, held on May 31,
2000)
10.49* CoreComm Limited 2000 Special Stock Option Plan
(incorporated by reference to Exhibit 4.5 to CoreComm
Limited's registration statement on Form S-8, file no.
333-33970)
10.50+ CoreComm Limited 2000 Special ATX Stock Option Plan
10.51+ CoreComm Limited 2000 Special Voyager Stock Option Plan
10.52* Credit Agreement, dated as of September 28, 2000, among the
registrant, Corecomm Communications, Inc., Corecomm Holdco,
Inc., the Lenders Party thereto and The Chase Manhattan
Bank, as Administrative Agent and Collateral Agent
10.53+ Senior Unsecured Note due 2003, dated September 29, 2000, by
and among registrant and Debra Buruchian.
10.54+ Senior Unsecured Note due 2003, dated September 29, 2000, by
and among the registrant and Michael Karp.
10.55+ Senior Unsecured Note due 2003, dated September 29, 2000, by
and among the registrant and The Florence Karp Trust.
10.56+ Senior Unsecured Note due 2003, dated September 29, 2000, by
and among the registrant and Thomas Gravina.
10.57+ Note Purchase Agreement, dated September 29, 2000, by and
among the registrant, Michael Karp, Debra Buruchian, Thomas
Gravina and The Florence Karp Trust
12.1+ Statement regarding computation of ratios
21.1+ Subsidiaries of registrant
23.1+ Consent of Ernst & Young LLP
23.2+ Consent of Ernst & Young LLP
23.3+ Consent of Ernst & Young LLP
23.4+ Consent of KPMG LLP
23.5+ Consent of Deloitte & Touche LLP
23.6+ Consent of PricewaterhouseCoopers LLP
23.7+ Consent of BDO Seidman, LLP
23.8+ Consent of Paul, Weiss, Rifkind, Wharton & Garrison
(included in Exhibit 5.1)
24.1* Power of Attorney (contained on signature page)
25.1+ Statement of Eligibility of Trustee on Form T-1
27.1* Financial Data Schedule -- CoreComm Limited (for SEC use
only) (incorporated by reference to Exhibit 27.1 to CoreComm
Limited's Annual Report to Form 10-K for the year ended
December 31, 1999, Exhibit 27 to CoreComm Limited's
Quarterly Report to Form 10-Q for the quarter ended March
31, 2000 and Exhibit 27 to CoreComm Limited's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2000)
</TABLE>
---------------
* Previously filed
+ Filed herewith
