Document is copied.
Filed pursuant to Rule 424(b)(3)
Registration No. 333-47984
PROSPECTUS SUPPLEMENT NO. 3
(TO PROSPECTUS DATED NOVEMBER 1, 2000)
CORECOMM LIMITED
-------------------------
6% CONVERTIBLE SUBORDINATED NOTES DUE 2006,
SERIES B SENIOR CONVERTIBLE EXCHANGEABLE PREFERRED STOCK
AND SHARES OF COMMON STOCK
-------------------------
This Prospectus Supplement No. 3 supplements and amends the Prospectus
dated November 1, 2000, and amended on November 14, 2000, relating to:
o The 6% convertible subordinated notes due 2006 of CoreComm Limited;
o CoreComm's Series B senior convertible exchangeable preferred stock;
o Shares of common stock issuable as dividends on the Series B preferred
stock, upon conversion of the convertible notes and the Series B
preferred stock and as interest on CoreComm's senior unsecured notes
due 2003; and
o The right, attached to each share of common stock, to purchase
CoreComm's Series C junior participating preferred stock.
The purpose of this Prospectus Supplement is to provide supplemental
information that was contained in a current report on Form 8-K/A dated December
13, 2000.
The Prospectus, together with all of the supplements filed to date
(including this supplement), constitutes the prospectus required to be delivered
by Section 5(b) of the Securities Act of 1933, with respect to offers and sales
of the securities described above.
WE URGE YOU TO READ CAREFULLY THE "RISK FACTORS" SECTION BEGINNING ON
PAGE 11 OF THE ACCOMPANYING PROSPECTUS, 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 Supplement No. 3 is December 21, 2000.
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): September 29, 2000
-----------------------
CoreComm Limited
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 000-31359 23-3032245
--------------------------------------------------------------------------------
(State or other (Commission (IRS Employer
jurisdiction File Number) Identification No.)
of incorporation)
110 East 59th Street, New York, NY 10022
--------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 906-8485
-------------------
-------------------------------------------------------------
(Former name or former address, if changed since last report)
Page 1
<PAGE>
Item 2. Acquisition or Disposition of Assets
------- ------------------------------------
The registrant hereby amends its Current Report on Form 8-K, dated October
13, 2000 by filing financial statements of the acquired businesses, ATX
Telecommunications Services, Inc. and Voyager.net, Inc. and certain pro forma
financial information for the registrant.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
------- ------------------------------------------------------------------
(A) The following financial statements are incorporated by reference to the
Registration Statment Ammendment on Form S-1/A (File No. 333-47984) of
CoreComm Limited, filed with the Securities and November 2, 2000:
(1) Pro Forma Financial Information
(a) CoreComm Limited and Subsidiaries
Unaudited Pro Forma Financial Data as of and for the periods
ended June 30, 2000 and December 31, 1999.
(B) Thefollowing financial statements are incorporated by reference to the
Registration Statement on Form S-1 (File No. 333-47984) of CoreComm
Limited, filed with the Securities and Exchange Commission on October 16,
2000.
(1) Financial Statements of Businesses Acquired
(a) Financial Statements of Voyager.net, Inc. as of and for the
periods ended June 30, 2000 and December 31, 1999, 1998 and
1997
(b) Financial Statements of ATX Telecommunications Services,
Inc. as of and for the periods ended June 30, 2000 and
December 31, 1999, 1998 and 1997
(C) Exhibits
99.1 Pro Forma Financial Information for CoreComm Limited and Subsidiaries
99.2 Financial Statements of Voyager.net, Inc.
99.3 Financial Statements of ATX Telecommunications Services, Inc.
Page 2
<PAGE>
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, hereunto duly authorized.
CORECOMM LIMITED
By: /s/ Gregg N. Gorelick
-------------------------
Name: Gregg N. Gorelick
Title: Vice President - Controller
Dated: December 13, 2000
Page 3
<PAGE>
Exhibit 99.1
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.
<PAGE>
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.
<PAGE>
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>
<PAGE>
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>
<PAGE>
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.
<PAGE>
CORECOMM LIMITED
NOTES TO THE UNAUDITED PRO FORMA FINANCIAL DATA -- (CONTINUED)
(IN THOUSANDS)
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
=======
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
========
H. RELATED PARTY TRANSACTIONS
Reclassification of related party receivables and payable... $ 12,210
========
<PAGE>
CORECOMM LIMITED
NOTES TO THE UNAUDITED PRO FORMA FINANCIAL DATA -- (CONTINUED)
(IN THOUSANDS)
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)
========
---------------
(1) This facility was repaid at the closing of the Voyager merger.
<PAGE>
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>
<PAGE>
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
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
========
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.
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)
---------------
(1) This facility was repaid at the closing of the Voyager merger.
<PAGE>
Exhibit 99.2
VOYAGER.NET, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30,
2000
------------
(UNAUDITED)
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
============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
<PAGE>
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.
<PAGE>
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)
========== ====== ============ =========== =========== ======== ============
</TABLE>
TOTAL
STOCKHOLDERS'
EQUITY
-------------
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
===========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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).
<PAGE>
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>
<PAGE>
VOYAGER.NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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:
1998 1999
----------- ------------
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
=========== ============
<PAGE>
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:
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
===========
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:
1998 1999
-------- ----------
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
======== ==========
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,
<PAGE>
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:
YEAR
----
2000 $ --
2001.................................................... 982,500
2002.................................................... 2,456,250
2003.................................................... 4,421,250
2004.................................................... 6,263,438
Thereafter.............................................. 5,526,562
-----------
$19,650,000
===========
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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:
YEAR
----
2000..................................................... $1,004,738
2001..................................................... 813,663
2002..................................................... 768,092
2003..................................................... 673,190
2004..................................................... 380,748
Thereafter............................................... 922,703
----------
$4,563,134
==========
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.
<PAGE>
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.
<PAGE>
Exhibit 99.3
ATX TELECOMMUNICATIONS SERVICES, INC.
BALANCE SHEET
(UNAUDITED)
JUNE 30,
2000
-----------
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
===========
See accompanying notes to unaudited financial statements.
<PAGE>
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
=========== =========== =========== ===========
See accompanying notes to unaudited financial statements.
</TABLE>
<PAGE>
ATX TELECOMMUNICATIONS SERVICES, INC.
STATEMENTS OF CHANGES IN EQUITY/PARTNERS' CAPITAL
(UNAUDITED)
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
===========
See accompanying notes to unaudited financial statements.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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
<PAGE>
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.
<PAGE>
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.
<PAGE>
ATX TELECOMMUNICATIONS SERVICES GROUP
COMBINED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
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
============
See accompanying notes to combined financial statements.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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> <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.
<PAGE>
ATX TELECOMMUNICATIONS SERVICES GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum rental payments, including those due to related parties, are
summarized as follows:
YEAR ENDING DECEMBER 31, AMOUNT
------------------------ ----------
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
==========
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.
<PAGE>
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:
NUMBER OF
PHANTOM UNITS
-------------
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
=========
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.
