AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 8, 2002
REGISTRATION NO. 333-_____
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
-----------------------------
CORECOMM HOLDCO, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 4812 13-4078506
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
110 East 59th Street, 26th Floor
New York, New York 10022
(212) 906-8485
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
--------------------------------------------------------------------------------
JARED L. GURFEIN, ESQ. THOMAS H. KENNEDY, ESQ.
DIRECTOR OF LEGAL AFFAIRS SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
CORECOMM HOLDCO, INC. FOUR TIMES SQUARE
110 EAST 59TH STREET, 26TH FLOOR NEW YORK, NEW YORK 10036
NEW YORK, NEW YORK 10022 (212) 735-3000
(212) 906-8485
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
-----------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE
SECURITIES TO THE PUBLIC:
As soon as practicable after this registration statement becomes
effective and all other conditions to the exchange offers described herein have
been satisfied or waived.
-----------------------------
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
CALCULATION OF REGISTRATION FEE
------------------------------------------------------------------------------------------------------------------------
AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE OFFERING PRICE(2) REGISTRATION FEE(2)
------------------------------------------------------------------------------------------------------------------------
Common Stock, par value $0.01 per share, 1,344,416 N/A $15,777,101 $1,452
including the associated Rights to
purchase Series A Junior Participating
Preferred Stock(3)
------------------------------------------------------------------------------------------------------------------------
(1) Represents the maximum number of shares of CoreComm Holdco common
stock estimated to be issuable upon consummation of the exchange
offers, based on the exchange ratios applicable in the exchange offers
(1/116.7 of a share of CoreComm Holdco common stock for each share of
CoreComm Limited common stock and 3.0349 shares of CoreComm Holdco
common stock for each $1,000 in principal amount of 6% Convertible
Subordinated Notes due 2006 of CoreComm Limited) including shares
issuable upon the exercise of warrants and shares that may be issued
due to rounding.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(f)(1), (2) and (3) and Rule 457(c) of the
Securities Act of 1933, based on (a) the product of (1) $0.0945, the
average of the high and low sale prices per share of CoreComm Limited
common stock on February 5, 2002, as reported by the Nasdaq National
Market times (2) the maximum number of shares of CoreComm Limited
common stock estimated to be received by CoreComm Holdco pursuant to
the exchange offers plus (b) one-third of the maximum aggregate
principal amount of 6% Convertible Subordinated Notes dues 2006 of
CoreComm Limited estimated to be received by CoreComm Holdco, Inc.
pursuant to the exchange offers minus (c) $142,500 aggregate cash
consideration payable with respect to the 6% Convertible Subordinated
Notes due 2006 pursuant to the exchange offers.
(3) The rights to purchase shares of our Series A Junior Participating
Preferred Stock initially are attached to and trade with the shares of
our common stock being registered hereby. Upon the occurrence of
specified events, our Series A Junior Participating Preferred Stock
will be evidenced separately from the shares of our common stock.
Value attributed to these rights, if any, is reflected in the market
price of our common stock.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(b), MAY DETERMINE.
CORECOMM HOLDCO, INC.
OFFERS TO EXCHANGE
SHARES OF CORECOMM HOLDCO, INC. COMMON STOCK
FOR SHARES OF COMMON STOCK OF CORECOMM LIMITED
AND SHARES OF CORECOMM HOLDCO, INC. COMMON STOCK AND CASH
FOR 6% CONVERTIBLE SUBORDINATED NOTES DUE 2006 OF CORECOMM LIMITED
--------------------------------------------------------------------------------
THE EXCHANGE OFFERS AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT,
NEW YORK CITY TIME, ON MARCH 8, 2002, UNLESS EXTENDED.
--------------------------------------------------------------------------------
CoreComm Holdco, Inc., referred to as "CoreComm Holdco" or "Holdco," which
was formerly a first-tier, wholly-owned subsidiary of CoreComm Limited, referred
to as "CoreComm Limited" or "Limited," hereby offers, upon the terms and subject
to the conditions set forth in this preliminary prospectus, referred to as the
"prospectus," and the accompanying letters of transmittal, to exchange:
- 1/116.7 of a share of its common stock, par value $0.01 per share, together
with the associated rights to purchase shares of its Series A Junior
participating preferred stock which are attached to each share of its common
stock, collectively referred to as the "Holdco common stock" or the "CoreComm
Holdco common stock," for each validly tendered and accepted share of common
stock, par value $0.01 per share of CoreComm Limited, referred to as the
"Limited common stock" or the "CoreComm Limited common stock," rounded up to
the nearest whole share for each unaffiliated holder; and
- 3.0349 shares of Holdco common stock and $30.00 in cash (which is equal to the
amount of the October 1, 2001 interest payment that has not been paid), net
without interest, for each validly tendered and accepted $1,000 in aggregate
principal amount of 6% Convertible Subordinated Notes due 2006 of CoreComm
Limited, referred to as the "public notes," with the number of shares of
Holdco common stock rounded up to the nearest whole share for each
unaffiliated holder. We refer to the public notes, together with the Holdco
common stock, as the "outstanding securities."
The 1/116.7 and 3.0349 exchange ratios will be adjusted proportionately for
any stock splits, combinations, stock dividends and the like.
CoreComm Holdco will accept up to an aggregate of all shares of outstanding
CoreComm Limited common stock and all outstanding public notes and will issue up
to an aggregate of 1,314,416 shares of Holdco common stock in the exchange
offers plus additional shares which may be issued as a result of rounding up in
the exchange offers.
Each of CoreComm Holdco and CoreComm Limited recommends that you tender
your outstanding securities in the exchange offers. None of the exchange agent,
the information agent or any of their respective officers or directors makes any
recommendation as to whether you should tender your outstanding securities in
the exchange offers.
All persons holding outstanding securities, including Limited common stock,
are eligible to participate in the exchange offers if they tender their
securities in a jurisdiction where the exchange offers are permitted under local
law. However, there are a number of conditions to these exchange offers,
including that, solely with respect to the exchange offer for Limited common
stock at least 90% of the outstanding shares of Limited common stock are validly
tendered and not withdrawn. In the event that any one of these conditions is not
satisfied, and we decide not to waive the satisfaction of that condition, we are
under no obligation to complete the exchange offers.
Currently, no public market exists for the shares of Holdco common stock.
CoreComm Limited's outstanding common stock is currently listed on the Nasdaq
National Market under the symbol "COMM." Pursuant to conversations with Nasdaq,
we intend to transfer the listing of Limited common stock on the Nasdaq National
Market to Holdco common stock upon successful completion of the exchange offers.
Please refer to the section of the prospectus entitled "Risk Factors - Risk
factors relating to our common stock and corporate control - Our common stock
could be delisted from the Nasdaq National Market if we fail to meet Nasdaq's
continued listing criteria, which could have a negative impact on the trading
activity and price of your common stock, and could make it more difficult for us
to raise capital."
PLEASE REFER TO THE "RISK FACTORS" SECTION OF THIS PROSPECTUS BEGINNING ON
PAGE 15 FOR A DISCUSSION OF THE RISKS ASSOCIATED WITH THE EXCHANGE OFFERS BEFORE
YOU MAKE YOUR DECISION AS TO WHETHER TO TENDER YOUR SHARES OF CORECOMM LIMITED
COMMON STOCK AND/OR PUBLIC NOTES.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The Information Agent for the exchange offers is: The Depositary and Exchange
Agent for the exchange offers is:
D.F. KING & CO., INC. CONTINENTAL STOCK TRANSFER & TRUST COMPANY
The date of this preliminary prospectus is February 8, 2002
[SIDENOTE]
THE INFORMATION IN THIS PRELIMINARY PROSPECTUS MAY CHANGE. WE MAY NOT COMPLETE
THE EXCHANGE OFFERS UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES
AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PRELIMINARY PROSPECTUS IS NOT AN
OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER IS NOT PERMITTED.
TABLE OF CONTENTS
PAGE
QUESTIONS AND ANSWERS ABOUT THE EXCHANGE OFFERS...................................................................4
PROSPECTUS SUMMARY................................................................................................7
RECENT DEVELOPMENTS............................................................................................8
THE EXCHANGE OFFERS AND THEIR CONSEQUENCES TO YOU..............................................................9
COMPARATIVE PER SHARE DATA.......................................................................................12
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA OF CORECOMM HOLDCO...............................................13
RISK FACTORS.....................................................................................................15
THE EXCHANGE OFFERS..............................................................................................30
SOURCE AND AMOUNT OF FUNDS.......................................................................................40
UNAUDITED PRO FORMA FINANCIAL DATA OF HOLDCO.....................................................................41
UNAUDITED PRO FORMA FINANCIAL DATA OF LIMITED....................................................................52
SELECTED HISTORICAL FINANCIAL DATA OF HOLDCO.....................................................................58
SELECTED HISTORICAL FINANCIAL DATA OF LIMITED....................................................................60
INFORMATION ABOUT HOLDCO.........................................................................................62
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.........................62
CAPITALIZATION................................................................................................70
OUR BUSINESS..................................................................................................72
GOVERNMENT REGULATION OF THE TELECOMMUNICATIONS SERVICES BUSINESS.............................................84
MANAGEMENT AND EXECUTIVE COMPENSATION............................................................................91
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...................................................96
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................................................................97
INFORMATION ABOUT LIMITED.......................................................................................100
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION........................100
CAPITALIZATION...............................................................................................107
OUR BUSINESS.................................................................................................108
OPTIONS......................................................................................................108
COMPARATIVE STOCK PRICES AND DIVIDENDS..........................................................................109
DESCRIPTION OF CAPITAL STOCK....................................................................................111
DESCRIPTION OF OUR INDEBTEDNESS.................................................................................120
COMPARISON OF RIGHTS OF HOLDERS OF HOLDCO COMMON STOCK AND THE OUTSTANDING SECURITIES...........................124
DESCRIPTION OF PUBLIC NOTES.....................................................................................130
MATTERS RELATING TO OUTSTANDING SECURITIES......................................................................135
MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES...................................................................137
LEGAL MATTERS...................................................................................................139
EXPERTS.........................................................................................................139
WHERE YOU CAN FIND MORE INFORMATION.............................................................................140
INDEX TO FINANCIAL STATEMENTS...................................................................................F-1
i
CONDENSED CORECOMM CORPORATE STRUCTURE
CoreComm Holdco, Inc., a Delaware corporation, was created by the 1999
merger of two former wholly owned subsidiaries of CoreComm Limited - CoreComm
Operating Co. Limited and CoreComm Ohio Limited, both Bermuda companies, which
were incorporated in 1998. Until December 17, 2001, CoreComm Holdco was a wholly
owned subsidiary of CoreComm Limited. On October 31, 2001 and December 17, 2001,
CoreComm Limited and CoreComm Holdco announced the Holdco Recapitalization in
which shares of common stock of CoreComm Holdco were to be issued in exchange
for:
(1) 6% Convertible Subordinated Notes due 2006 of CoreComm Limited;
(2) a significant portion of CoreComm Limited's other debt;
(3) a significant portion of joint debt of CoreComm Limited and CoreComm Holdco;
and
(4) all of CoreComm Limited's outstanding preferred stock.
The registration statement of which this prospectus forms a part is being filed
pursuant to the agreements entered into in connection with the Holdco
Recapitalization, relating to those shares of our common stock issued in those
transactions. CoreComm Holdco's only material assets are loans to, and the
capital stock of, its subsidiary, CoreComm Communications, Inc., which in turn
owns the capital stock of various operating companies.
As the final phase of the Holdco Recapitalization, we intend to offer to
exchange 1/116.7 of a share of our common stock, including the associated rights
to purchase shares of our Series A junior participating preferred stock, for
each validly tendered and not withdrawn share of CoreComm Limited common stock
accepted in the registered public exchange offer. We also intend to offer to
exchange 3.0349 shares of our common stock, including the associated rights to
purchase shares of our Series A junior participating preferred stock and $30.00
in cash for each $1,000 principal amount of 6% Convertible Subordinated Notes
due 2006 of CoreComm Limited that is validly tendered and not withdrawn and
accepted in the registered public exchange offer. In each case, we will round up
the number of our shares issued to each unaffiliated holder of either security.
We will issue up to an aggregate of 1,314,416 shares of our common stock in
these exchange offers (plus additional shares which may be issued as a result of
rounding up in the exchange offers) which will represent approximately 13% of
our outstanding shares. We operate the same businesses that CoreComm Limited
historically operated. As a result of the already completed phases of the Holdco
Recapitalization, CoreComm Limited now owns only approximately 13% of our
outstanding common shares. Moreover, we will become the parent of CoreComm
Limited if the exchange offers are completed and CoreComm Limited has agreed at
that time to surrender that number of shares of our common stock that are issued
in the exchange offers, which will leave CoreComm Limited with little or no
material assets.
The following three charts summarize the corporate structure of
CoreComm Limited and CoreComm Holdco, through which we conduct our operations
and hold our investments. The first chart illustrates our corporate structure
prior to December 17, 2001. The second chart illustrates our corporate structure
since the consummation of the initial phase of the Holdco Recapitalization which
commenced on December 17, 2001 and was completed on December 28, 2001. The third
chart indicates our corporate structure assuming we are successful in completing
the exchange offers. None of these charts shows details of our operating or
other intermediate companies or ownership interests in those entities.
[GRAPHIC OF CHART 1 - STRUCTURE PRIOR TO DECEMBER 17, 2001]
[GRAPHIC OF CHART 2 - PRESENT STRUCTURE]
[GRAPHIC OF CHART 3 - ASSUMING SUCCESSFUL COMPLETION OF THE EXCHANGE OFFERS(1)]
--------------------------
(1) Assumes 100% of the holders of CoreComm Limited common stock are validly
tendered and accepted in the exchange offer. One of the conditions to the
exchange offer for shares of CoreComm Limited common stock is that at least
90% of the outstanding shares of CoreComm Limited common stock are validly
tendered and not withdrawn in the exchange offer, which condition can be
waived by CoreComm Holdco, in whole or in part, at any time prior to the
expiration date of the exchange offers, subject to applicable rules and
regulations.
2
In this prospectus, "we," "us," "our," "CoreComm Holdco" and "Holdco" refer
to CoreComm Holdco, Inc. and, unless the context requires otherwise, its
consolidated subsidiaries. In this prospectus, "Limited" refers to CoreComm
Limited. As of December 31, 2001, (1) we did not own any shares of CoreComm
Limited's common stock, and (2) CoreComm Limited owned 1,314,416 shares of
our common stock which presently amounts to approximately 13% of our
outstanding shares.
3
QUESTIONS AND ANSWERS ABOUT THE EXCHANGE OFFERS
The following questions and answers, and the summary of the exchange offers
that follows, highlight selected information from this document and may not
contain all of the information that is important to you. To better understand
the exchange offers you should read this entire document, the accompanying
letters of transmittal and instructions to the letters of transmittal carefully.
Q: WHAT ARE WE AND CORECOMM LIMITED PROPOSING IN THE EXCHANGE OFFERS?
A: Pursuant to a plan to recapitalize the companies, we are offering to
exchange (a) shares of Holdco common stock for all of the outstanding
shares of Limited common stock and (b) shares of Holdco common stock
and cash for all of the outstanding public notes.
Q. WHAT WILL I RECEIVE FOR EACH OUTSTANDING SECURITY THAT I TENDER IN THE
EXCHANGE OFFERS?
A. You will receive 1/116.7 of a share of Holdco common stock for each
share of Limited common stock, and 3.0349 shares of Holdco common
stock and $30.00 in cash (which is equal to the amount of the October
1, 2001 interest payment that has not been paid), net without
interest, which we refer to as the "cash consideration," for each
$1,000 in aggregate principal amount of public notes, that you validly
tender in the exchange offers and that is accepted by CoreComm Holdco,
with the number of shares of Holdco common stock that you receive in
each of the two offers rounded up to the nearest whole share for each
unaffiliated holder. We sometimes refer to the 1/116.7 and 3.0349
numbers as the "exchange ratios." These exchange ratios will be
adjusted proportionately for any stock splits, combinations, stock
dividends and the like that may occur prior to completing the exchange
offers.
Q. WHEN DO THE EXCHANGE OFFERS EXPIRE?
A. If you wish to participate in the exchange offers, you must validly
tender your outstanding securities so that the exchange agent receives
them before 12:00 midnight, New York City time, on March 8, 2002,
unless we extend the exchange offers. We sometimes refer to this date
and time, including any extension, as the "expiration date."
Q. ARE THERE ANY CONDITIONS TO OUR OBLIGATION TO COMPLETE THE EXCHANGE
OFFERS?
A. Yes. We do not have to complete the exchange offers unless all of the
conditions outlined on pages 38 to 39 are satisfied. In particular,
there is a condition for the exchange offer relating to the Limited
common stock that at least 90% of the outstanding shares of Limited
common stock be tendered into that exchange offer. We sometimes refer
to this condition in this document as the "minimum condition." There
is no minimum condition for the exchange offer relating to the public
notes. We may at any time waive any or all of the conditions to the
exchange offers.
Q: DO I HAVE TO PAY ANY BROKERAGE FEES OR COMMISSIONS?
A: If you are the record owner of your outstanding securities and you
tender your outstanding securities in the exchange offers, you will
not incur any brokerage fees or commissions. If you own your
outstanding securities through a broker or other nominee who tenders
the outstanding securities on your behalf, your broker may charge you
a commission for doing so. You should consult with your broker or
nominee to determine whether any charges will apply.
Q: DOES CORECOMM LIMITED'S BOARD OF DIRECTORS SUPPORT THE EXCHANGE
OFFERS?
A: Yes. CoreComm Limited's board of directors unanimously supports the
exchange offers and recommends that you tender your shares of Limited
common stock and your public notes in the exchange offers so that we
can proceed with the recapitalization plan.
4
Q: WHAT PERCENTAGE OF HOLDCO COMMON STOCK WILL CORECOMM LIMITED
STOCKHOLDERS OWN AFTER THE CONSUMMATION OF THE RECAPITALIZATION PLAN?
A: If we obtain all of the shares of CoreComm Limited common stock, the
former CoreComm Limited common stockholders, together with holders of
warrants to purchase Limited common stock, assuming all holders
elected to exercise their warrants, would own approximately 13% of the
outstanding shares of Holdco common stock, based upon the number of
shares of Holdco common stock and Limited common stock outstanding on
December 31, 2001.
Q: HOW DO I PARTICIPATE IN THE EXCHANGE OFFERS?
A: You are urged to read this entire prospectus carefully, and to
consider how the exchange offers affect you. Then, if you wish to
tender your outstanding securities, you should complete and sign the
applicable enclosed letter of transmittal and return it with your
stock certificates and/or public notes to the designated exchange
agent, or, if you hold your outstanding securities in "street name"
through a broker, ask your broker to tender your outstanding
securities. Please read this prospectus carefully for more information
about procedures for tendering your outstanding securities, the timing
of the exchange offers, extensions of the exchange offer periods and
your rights to withdraw your shares from the exchange offers prior to
the expiration date.
Q: WILL I BE TAXED ON THE SHARES OF HOLDCO COMMON STOCK AND, IF
APPLICABLE, CASH THAT I RECEIVE?
A: We expect your exchange of Limited common stock for Holdco common
stock will not be a taxable exchange for United States federal income
tax purposes. In an exchange of public notes for Holdco common stock,
we expect that you will recognize gain, if any, but not loss, to the
extent of the cash you receive in the exchange. Such gain will be
taxed as ordinary income to the extent of any accrued market discount.
You should consult your own tax advisor as to the particular tax
consequences of the exchange offers to you.
Q: DO THE STATEMENTS ON THE COVER PAGE REGARDING THIS PROSPECTUS BEING
SUBJECT TO CHANGE AND THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION NOT YET BEING EFFECTIVE MEAN THAT
THE EXCHANGE OFFERS HAVE NOT YET COMMENCED?
A: No. The exchange offers have commenced and effectiveness of the
registration statement is not necessary for you to tender outstanding
securities.
Q. HOW CAN I GET MORE INFORMATION ABOUT THE EXCHANGE OFFERS?
A. You may call the information agent, D.F. King & Co., Inc., to ask any
questions or to request additional documents at (800) 848-2998 (toll
free) in the United States or at (212) 269-5550 (collect) elsewhere.
You also may obtain free copies of other documents publicly filed by
us or CoreComm Limited at the Securities and Exchange Commission's
website at www.sec.gov. For more information, please refer to the
section of the prospectus entitled "Where You Can Find More
Information."
Q: WHAT IS THE RECAPITALIZATION OF CORECOMM LIMITED AND CORECOMM HOLDCO?
A: The recapitalization is a series of transactions, culminating with
these exchange offers, through which CoreComm Limited and CoreComm
Holdco exchanged shares of common stock of CoreComm Holdco for
outstanding debt of CoreComm Limited and CoreComm Holdco, and
outstanding preferred stock and common stock of CoreComm Limited.
Q: WHAT IS THE DIFFERENCE BETWEEN CORECOMM LIMITED AND CORECOMM HOLDCO?
A: CoreComm Holdco today operates the same businesses that CoreComm
Limited has historically operated. The main difference is that
CoreComm Holdco was formerly a wholly-owned subsidiary of CoreComm
Limited. However, as a result of the already completed phases of the
recapitalization, CoreComm Limited now owns only approximately 13% of
CoreComm Holdco. Moreover, CoreComm Holdco will become the parent of
CoreComm Limited if the exchange offers are completed and CoreComm
Limited at that time will own little or no assets. If you choose not
to tender shares of CoreComm Limited common stock, you may wind up
owning shares in CoreComm Limited which will be a subsidiary of
CoreComm Holdco and no longer will own the businesses CoreComm Holdco
operates.
5
Q: WHY SHOULD I TENDER MY SHARES AND/OR PUBLIC NOTES?
A: The board of directors of CoreComm Limited has recommended you tender
your outstanding securities because, if you do not tender your
outstanding securities, you will continue to own securities of
CoreComm Limited, which as its only material assets holds only an
approximately 13% ownership interest in CoreComm Holdco, and following
the exchange offers, if completed, will own little or none of the
outstanding shares of CoreComm Holdco. Other than its interest in
CoreComm Holdco, CoreComm Limited does not hold any material assets.
By contrast, if you tender your outstanding securities, and the
exchange offers are completed successfully, you will own shares of
CoreComm Holdco, which owns 100% of the businesses historically owned
by CoreComm Limited prior to the recapitalization.
Q: WHY AM I ONLY RECEIVING 1/116.7 OF A SHARE FOR EACH SHARE OF CORECOMM
LIMITED COMMON STOCK I TENDER?
A: The exchange ratio is based on two factors:
(a) We are offering approximately 13% of our outstanding capital stock
to the holders of Limited common stock, assuming for purposes of this
13% that holders of warrants to purchase Limited common stock
exercised their warrants; and
(b) there will only be approximately 10,000,000 total shares of our
common stock outstanding after we complete the exchange offers.
Thus, approximately 1,300,000 shares are being offered to the holders
of Limited common stock and the holders of warrants who exercise their
warrants. By contrast, CoreComm Limited has approximately 152,000,000
shares outstanding, including shares issuable pursuant to the exercise
of warrants. That means that one share of Holdco common stock is a
much larger percent of the total shares of Holdco common stock than
one share of Limited common stock is as a percent of the total shares
of CoreComm Limited.
6
PROSPECTUS SUMMARY
This prospectus and the related letters of transmittal each contain
important information which should be read carefully before any decision is made
with respect to the exchange offers. The following summary therefore is
qualified in its entirety by reference to, and should be read in conjunction
with, the information appearing elsewhere in this prospectus and the related
letters of transmittal.
We are an integrated communications provider that offers local and
toll-related telephone, Internet and high-speed data services to business and
residential customers in targeted markets throughout the Mid-Atlantic and
Midwest regions of the United States. We operate three business divisions:
business services (ATX), residential services (CoreComm Residential) and
Internet services (Voyager). We are exploiting the convergence of
telecommunications and information services through our network strategy, which
involves the ownership of telephone switching equipment and the leasing of the
local telephone lines that run directly to homes and businesses, combined with
the provisioning of a leased regional network that carries Internet traffic.
This configuration of locally and regionally owned and leased facilities allows
us to deliver a wide range of communications services over a wide geography
within our regions. We currently offer services to business and residential
customers located principally in Pennsylvania, Ohio, New Jersey, Michigan,
Wisconsin, Maryland, Illinois, New York, Virginia, Delaware, Massachusetts,
Washington, D.C. and Indiana. In local exchange services, we compete against the
established local telephone service provider that was the service provider in a
region prior to the opening of local telephone service to competition.
In 2001, we streamlined our strategy and operations to focus on our two
most successful and promising lines of business. The first is integrated
communications products and other high bandwidth/data/web-oriented services for
the business market. The second is bundled local telephony and Internet products
efficiently sold, serviced and provisioned via Internet-centric interfaces to
the residential market. Our strategy is to attractively bundle telephony and
data services in our target markets in order to compete with the incumbents and
gain market share.
As of September 30, 2001, we had more than 295,000 local telephone access
lines in service and more than 350,000 Internet customers.
Through our business services division, we offer customers a full range of
high-speed communications services including local and toll-related telephony
services, network services such as network data integration, Internet access and
Web consulting, development and hosting, and other related services. In
addition, we offer Advanced Communications Solutions products tailored to meet
the needs of our business customers, such as conference calling, travel
services, pre-paid calling, enhanced fax and PC-based billing. Customers are
billed on a single, consolidated invoice, delivered by traditional means or near
real time Web-based billing that allows the customer to sort the information to
detail calling patterns. Our target markets are the Mid-Atlantic region
throughout the New York-Virginia corridor, and Midwest markets, including:
Cleveland, Ohio; Columbus, Ohio; Chicago, Illinois; and other markets in the
Great Lakes region.
Our residential services division offers residential customers voice, data
and other telecommunications services in Ohio, Illinois, Michigan, Wisconsin and
Pennsylvania, and Internet access services over a wider footprint in the Midwest
and Mid-Atlantic regions of the United States. Customers are billed for their
services with one, consolidated bill. If they choose, customers can access their
billing information and pay their bills online, or they may elect automatic bill
payment via credit or debit card. Our residential strategy is to bundle
telephony and Internet products and services in ways that are attractive to the
customer, distinctive in the marketplace, and offer convenience and simplicity.
Our Internet services division provides Internet access and high-speed data
communications services to residential and business subscribers. Services
include dial-up Internet access, dedicated telecommunications services to
business, cable modem access, Web-hosting, electronic commerce, and co-location
services. We operate one of the largest dial-up Internet networks in the Midwest
in terms of geographic coverage, with approximately 170 owned points of presence
in Michigan, Wisconsin, Ohio, Illinois, Indiana, Minnesota, Pennsylvania, New
York and California.
Our principal executive offices are located at 50 Monument Road, Bala
Cynwyd, Pennsylvania 19004 and 110 East 59th Street, New York, New York 10022,
and our telephone number is (212) 906-8485. The address of our Website is
WWW.CORE.COM. The information on our Website is not part of this prospectus.
The issuer of the outstanding securities is CoreComm Limited, a Delaware
corporation, whose principal executive offices are located at 50 Monument Road,
Bala Cynwyd, Pennsylvania 19004 and 110 East 59th Street, 26th Floor, New York,
New York 10022, telephone number (212) 906-8485.
7
RECENT DEVELOPMENTS
HOLDCO RECAPITALIZATION
In October 2001, CoreComm Limited entered into agreements with numerous
holders of its 6% Convertible Subordinated Notes due 2006 whereby the holders
agreed, among other things, to exchange their notes for the amount of the
October 1, 2001 interest payment of approximately $5 million, and shares of our
common stock as part of a recapitalization plan. The exchange was completed in
December 2001, including the payment of the approximately $5 million by CoreComm
Limited.
In December 2001, both CoreComm Holdco and CoreComm Limited entered into an
exchange agreement with
(1) holders of 10.75% Unsecured Convertible PIK Notes due 2011 and 10.75%
Senior Unsecured Convertible PIK Notes due 2010, both of which were a joint
obligation of CoreComm Limited and CoreComm Holdco, in the initial principal
amounts of $10,000,000 and $16,100,000, respectively, together with any interest
paid thereon,
(2) holders of Senior Unsecured Notes due September 29, 2003 of CoreComm
Limited in the principal amount of $105.7 million, and
(3) holders of all of the preferred stock of CoreComm Limited in the
initial principal amount of $300 million together with any dividends paid
thereon.
The exchange agreement provided for the securityholders to exchange their
securities for shares of our common stock as part of the Holdco
Recapitalization. Please refer to the section of the prospectus entitled
"Description of Capital Stock - The Exchange Agreement."
In December 2001, the credit agreement governing our senior secured
facility was amended to permit the Holdco Recapitalization to occur.
On December 17, 2001, Nasdaq granted CoreComm Limited an exception to
Nasdaq's stockholder approval requirements permitting the Holdco
Recapitalization to proceed without a vote of the stockholders of CoreComm
Limited because requiring a stockholder vote would seriously jeopardize the
financial viability of CoreComm Limited.
By December 28, 2001, we completed the first phase of the Holdco
Recapitalization.
In December 2001, we consummated other transactions to eliminate additional
amounts of our outstanding indebtedness.
As part of the Holdco Recapitalization, we plan to launch registered public
exchange offers whereby we will offer to exchange shares of our common stock
which will have been registered under the Securities Act of 1933, as amended,
which we refer to as the "Securities Act," pursuant to a Form S-4 registration
statement to all remaining holders of 6% Convertible Subordinated Notes due 2006
of CoreComm Limited and all holders of CoreComm Limited common stock for their
notes and CoreComm Limited common stock, respectively. As a result of the
already completed phases of the Holdco Recapitalization, CoreComm Limited's only
material asset is its ownership of approximately 13% of our outstanding shares.
CHANGES IN MANAGEMENT AND BOARD OF DIRECTORS
In January, 2002, our board of directors implemented changes to our
management and expanded our board to include three new directors. The changes
are as follows:
- Barclay Knapp was elected to be our Chairman of the board of directors;
- Thomas J. Gravina was elected to be our President - Chief Executive
Officer and was elected to serve as a director;
- Michael A. Peterson was elected to be our Executive Vice President -
Chief Operating Officer and Chief Financial Officer and was elected to
serve as a director;
- George S. Blumenthal was elected Chairman Emeritus; and
- Ralph H. Booth, II was elected to serve as a director.
8
THE EXCHANGE OFFERS AND THEIR CONSEQUENCES TO YOU
What Are The Exchange Offers?
In the exchange offers, we are giving you the opportunity to tender your
shares of CoreComm Limited common stock for shares of Holdco common stock and
your public notes for shares of Holdco common stock and the cash consideration.
We recommend that you tender all of your outstanding securities.
Regardless of whether you participate in the exchange offers, the exchange
offers will have consequences to you as a holder of outstanding securities. The
consequences differ depending on whether, and to what extent, you participate in
the exchange offers.
Holders of Limited common stock that do not to tender will not be entitled
to receive any amount of the Holdco common stock consideration delivered to
tendering holders and holders of public notes that do not tender will not be
entitled to receive any amount of the Holdco common stock or the cash
consideration delivered to tendering holders. To the extent outstanding
securities are tendered and accepted in the exchange offers, the trading market,
if any, for the untendered outstanding securities could be adversely affected.
Also, the public notes and shares of Limited common stock represent indebtedness
and equity, respectively, of CoreComm Limited rather than equity of CoreComm
Holdco. Therefore, unless you tender your Limited common stock and public notes
pursuant to the exchange offers, you will remain a holder of securities of
CoreComm Limited, which currently has as its only material asset an
approximately 13% ownership interest in CoreComm Holdco. Moreover, if the
exchange offers are successfully consummated, CoreComm Limited has agreed to
surrender to CoreComm Holdco that number of shares of Holdco common stock owned
by CoreComm Limited equal to the number of shares of Holdco common stock issued
to holders of outstanding securities pursuant to the exchange offers. At that
time, CoreComm Limited would become a subsidiary of CoreComm Holdco with little
or no material assets.
Holders of public notes who tender will receive shares of our common stock
and cash but will lose all rights associated with the public notes. The public
notes obligate CoreComm Limited to pay holders of public notes a specified
amount of interest on a semi-annual basis. Holders of our common stock will have
no similar right and we do not presently contemplate issuing cash dividends in
the foreseeable future. Please refer to the section of the prospectus entitled
"Comparison of rights of holders of Holdco common stock and the outstanding
securities - Description of public notes."
You should consider these consequences in making your decision as to
whether to tender outstanding securities in the exchange offers.
Terms of The Exchange Offers We are offering to exchange 1/116.7 of
a share of Holdco common stock for
each share of Limited common stock
that you validly tender and that we
accept in the exchange offers, up to
an aggregate maximum of all of the
outstanding shares. We are also
offering to exchange 3.0349 shares of
Holdco common stock and the cash
consideration for each $1,000 in
aggregate principal amount of the
public notes that you validly tender
and that we accept in the exchange
offers, up to an aggregate maximum of
all of the outstanding public notes.
The exchange ratios will be adjusted
proportionately for any stock splits,
combinations, stock dividends and the
like that may occur prior to
completion of the exchange offers. The
number of shares of Holdco common
stock issued to each unaffiliated
holder of Limited common stock and the
number of shares of Holdco common
stock issued to each unaffiliated
holder of public notes will be rounded
up to the nearest whole number. These
are voluntary exchange offers, which
means that you may tender all, some or
none of your shares of Limited common
stock and/or public notes in the
exchange offers.
We will exchange all shares of Limited
common stock and all public notes that
you validly tender and do not withdraw
and that we accept, on the terms and
subject to the conditions of the
exchange offers. We promptly will
return any shares of Limited common
stock or public notes that we do not
accept for exchange following the
expiration date.
Expiration Date; Extension; Termination The exchange offers and withdrawal
rights will expire at 12:00 midnight,
New York City time, on the expiration
date, unless we
9
extend the exchange offers. We may
extend the exchange offers for any
reason and will make a public
announcement if we do so. You must
validly tender your outstanding
securities so that the exchange agent
receives them before the expiration
date if you wish to participate in the
exchange offers. We also may terminate
the exchange offers in the
circumstances described in "The
Exchange Offers-- Conditions for
Completion of the Exchange Offers."
Withdrawal Rights You may withdraw tenders of your
outstanding securities at any time
before the expiration date. If you
change your mind before the expiration
date, you may retender your
outstanding securities by following
the tender procedures again and
retendering before the expiration
date.
Conditions for Completion of
The Exchange Offers The exchange offers are subject to
various conditions that must be
satisfied in order for us to be
obligated to complete the exchange
offers. With respect to the exchange
offer relating to Limited common
stock, at least 90% of the outstanding
shares of Limited common stock must be
tendered as a condition to completing
that exchange offer. There is no
similar minimum requirement with
respect to the exchange offer relating
to the public notes. We may, at any
time, waive any or all of the
conditions to the exchange offers.
Procedures for Tendering
Outstanding Securities If you hold shares of Limited common
stock, you must complete and sign the
yellow letter of transmittal
designating the number of shares of
Limited common stock you wish to
tender in the exchange offers. If you
hold public notes, you must complete
and sign the blue letter of
transmittal designating the aggregate
principal amount of public notes that
you wish to tender in the exchange
offers. Send the applicable letter of
transmittal, together with your
certificates representing shares of
Limited common stock or public notes,
as applicable, along with any other
required documents, by one of the
mailing methods described in the
applicable letter of transmittal, so
that it is received by the exchange
agent at the applicable address set
forth on the back cover of this
document before the expiration date.
Outstanding Securities Held Through
a Broker If you hold outstanding securities
through a broker, you should receive
instructions from your broker on how
to participate in the exchange offers.
Please contact your broker directly if
you have not yet received
instructions. Some financial
institutions also may effect tenders
by transferring securities
electronically through The Depository
Trust Company.
Guaranteed Delivery If you hold certificates representing
shares of Limited common stock or
public notes or if you hold shares of
Limited common stock or public notes
through a broker, you also may comply
with the procedures for guaranteed
delivery.
The Securities Currently, no public market exists for
the shares of our common stock.
CoreComm Limited's outstanding common
stock is currently listed on the
Nasdaq National Market under the
symbol "COMM." Pursuant to
conversations with the Nasdaq National
Market, we intend to transfer the
listing of the Limited common stock on
the Nasdaq National Market to the
Holdco common stock upon successful
completion of the exchange offers.
On December 17, 2001, the last trading
day before the public announcement of
our intention to commence the exchange
offers, the per share closing trading
price of Limited common stock was
$0.17. The public notes are currently
not traded on any national securities
10
exchange or authorized to be quoted in
any inter-dealer quotation system of
any national securities association.
Although certain institutions and
securities dealers do provide
quotations for and engage in
transactions in these securities,
there is no established trading market
for these securities, other than
through these limited or sporadic
quotations.
U.S. Federal Income Tax Consequences We expect your exchange of Limited
common stock for Holdco common stock
will not be a taxable exchange for
United States federal income tax
purposes. In an exchange of your
public notes for Holdco common stock,
we expect that you will recognize
gain, if any, but not loss, to the
extent of the cash you receive in the
exchange. Such gain will be taxed as
ordinary income to the extent of any
accrued market discount. You should
consult your own tax advisor as to the
particular tax consequences of the
exchange offers to you.
Appraisal Rights No appraisal rights are or will be
available to holders of outstanding
securities in connection with these
exchange offers. Please refer to the
section of the prospectus entitled
"The Exchange Offers - Effect of the
Exchange Offers - No Appraisal
Rights."
Regulatory Approvals CoreComm Limited and CoreComm Holdco
are engaged in a process to obtain any
necessary authorizations from the FCC
and any state authorities deemed
necessary, and do not anticipate any
issues related to any approvals to
delay consummation of the exchange
offers. Other than these approvals and
the SEC declaring the registration
statement on Form S-4 of which this
prospectus forms a part effective,
CoreComm Holdco does not believe that
any additional filings, including any
filings under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as
amended, approvals or other actions by
or with any governmental authority or
administrative or regulatory agency
are required with respect to the
exchange offers. Please refer to the
section of the prospectus entitled
"Risk Factors - Any determination of
non-compliance with FCC and state
regulations dealing with ownership
changes could result in monetary
penalties or loss if our
telecommunications authorizations."
Accounting Treatment CoreComm Holdco is performing an
analysis of the fair value of its net
tangible assets as if a purchase
business combination occurred as a
result of the issuance of over 80% of
its outstanding shares to new
stockholders.
Fractional Shares Instead of issuing any fractional
shares of Holdco common stock in the
exchange offers we will round up to
the nearest whole number the number of
shares of Holdco common stock issued
to each unaffiliated holder of Limited
common stock and the number of shares
of Holdco common stock issued to each
unaffiliated holder of public notes.
Depositary and Exchange Agent Continental Stock Transfer & Trust
Company
Information Agent D.F. King & Co., Inc.
Recommendation Each of CoreComm Holdco and CoreComm
Limited recommends that you tender
your outstanding securities in the
exchange offers. None of the exchange
agent, the information agent or any of
their respective officers or directors
makes any recommendation as to whether
you should tender your outstanding
securities in the exchange offers.
We urge you to read this document,
including the matters described under
"Risk Factors," and the accompanying
documents very carefully.
Legal Limitation: We are not making any offer to sell,
nor are we soliciting any offer to
buy, Holdco common stock in any
jurisdiction in which the offer or
sale is not permitted.
11
COMPARATIVE PER SHARE DATA
CoreComm Holdco historically was a wholly-owned subsidiary of CoreComm
Limited and a holding company for the CoreComm businesses. Upon consummation of
the exchange offers the relationship would reverse, with CoreComm Holdco
becoming the parent of CoreComm Limited. The pro forma per share data presented
below gives effect to the completed acquisitions of ATX and Voyager as well as
the recapitalization and exchange transactions completed in December 2001. In
addition, the unaudited pro forma per share data gives effect to other
transactions to eliminate additional amounts of outstanding CoreComm Holdco
indebtedness that were entered into by December 31, 2001, the public exchange
offers for the outstanding securities set forth in this prospectus, and an
estimated result of the fair value analysis of CoreComm Holdco's net tangible
assets as if a purchase business combination occurred in connection with the
recapitalization and exchange transactions. The fair value of the shares of
Holdco common stock issued in these transactions is estimated for pro forma
purposes to be $3.00 per share. The final determination of fair values will be
made upon the completion of a study to be undertaken to determine the fair value
of certain of our assets and liabilities, including intangible assets. Our
actual financial position and results of operations will differ, perhaps
significantly, from the unaudited pro forma amounts reflected in this prospectus
as a result of the completion of this fair value analysis.
AT AND FOR THE AT AND FOR THE
NINE-MONTH
PERIOD ENDED YEAR ENDED
SEPTEMBER 30, 2001 DECEMBER 31, 2000
------------------------------------------------- ----------------------------------------------------
HOLDCO LIMITED HOLDCO LIMITED
---------------- ------------------------------ ----------------- --------------------------------
PRO PRO EQUIVALENT PRO PRO EQUIVALENT
HISTORICAL FORMA HISTORICAL FORMA PRO FORMA HISTORICAL FORMA HISTORICAL FORMA PRO FORMA
---------------- ---------- ----- --------- ---------- ----- ---------- ----- ---------
Book value
per share $22.87 $3.0 $(.62) $(2.82) $.03 $62.99 n/a $4.47 n/a n/a
(Loss) per
share before
extraordinary
items (39.52) (33.55) (4.70) $ (.90) (.29) (31.66) (34.26 (6.73) $(1.30) (.29)
We have never paid or declared cash dividends on our common stock.
12
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA OF CORECOMM HOLDCO
The following information is only a summary and you should read it together
with the financial information we include elsewhere in this document.
The following summary financial data of CoreComm Holdco and its
predecessor, OCOM Corporation Telecoms Division, has been derived from, and
should be read in conjunction with, the historical consolidated financial
statements and related notes included in this prospectus. The summary historical
financial data relates to OCOM as it was operated prior to its acquisition by
CoreComm Holdco.
The following pro forma financial data as of and for the nine months ended
September 30, 2001 and for the year ended December 31, 2000, gives effect to the
Holdco Recapitalization. In addition, the unaudited pro forma financial data
gives effect to other transactions to eliminate additional amounts of our
outstanding indebtedness that were entered into by December 31, 2001, the public
exchange offers of our common stock to CoreComm Limited's stockholders, and to
the holders of CoreComm Limited's 6% Convertible Subordinated Notes and an
estimated result of the fair value analysis of our net tangible assets as if a
purchase business combination occurred in connection with the Holdco
Recapitalization and exchange transactions. For additional information with
respect to the Holdco Recapitalization, without giving effect to the public
exchange offers, refer to the Unaudited Pro Forma Financial Data included
elsewhere in this prospectus. The final determination of fair values will be
made upon the completion of a study to be undertaken to determine the fair value
of some of our assets and liabilities, including intangible assets. Our actual
financial position and results of operations will differ, perhaps significantly,
from the unaudited pro forma amounts reflected in this prospectus as a result of
the completion of this fair value analysis. This information should be read in
conjunction with the unaudited pro forma financial data included elsewhere in
this prospectus.
Interim data for the nine months ended September 30, 2001 and 2000 are
unaudited but include, in our opinion, all adjustments consisting only of normal
recurring adjustments necessary for a fair presentation of that data. Results
for the nine months ended September 30, 2001 are not necessarily indicative of
the results that may be expected for any other interim period or the year as a
whole.
In 2000, we completed two significant acquisitions. We acquired ATX
Telecommunications Services, Inc. and Voyager.net, Inc. In addition, we entered
into a senior secured credit facility with The Chase Manhattan Bank and CoreComm
Limited issued approximately $108.7 million aggregate principal amount of senior
unsecured notes to the former shareholders of ATX. The pro forma income
statement data for the year ended December 31, 2000 also gives effect to these
acquisitions as if they had been consummated on January 1, 2000. Also in 2000,
we recorded a non-cash compensation expense of approximately $43.4 million in
accordance with APB opinion No. 25, "Accounting for Stock Issued to Employees."
In 1999, we acquired 100% of the stock of MegsINet Inc. and some of the
assets of USN Communications, Inc. In addition, CoreComm Limited issued $175.0
million in aggregate principal amount of 6% Convertible Subordinated Notes due
2006, of which $4.75 million remains outstanding as a result of the Holdco
Recapitalization and prior conversions into CoreComm Limited common stock by
holders of the notes.
13
14
PRO FORMA HISTORICAL
--------------------- -----------------------------------------------------------------------
THE
FOR THE PERIOD PREDECESSOR
NINE FROM APRIL 1, (OCOM) FOR
MONTHS YEAR 1998 (DATE THE PERIOD
ENDED ENDED OPERATIONS FROM JANUARY
SEPTEMBER DECEMBER NINE MONTHS ENDED YEAR ENDED COMMENCED) TO 1, 1998 TO
30, 31, SEPTEMBER 30, DECEMBER 31, DECEMBER 31 MAY 31,
--------- -------- ----------------- ------------- -------------- ------------
2001 2000 2001 2000 2000 1999 1998 1998
---- ---- ---- ---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
INCOME STATEMENT DATA
Revenues................. $220,487 $298,446 $220,055 $56,155 $131,526 $57,151 $6,713 $1,452
Operating expenses....... 541,783 626,927 579,529 220,973 427,847 157,660 20,553 4,234
(Loss) before
extraordinary item.... (332,173) (339,292) (376,033) (167,150) (301,241)(103,180) (13,815) (2,782)
Gain from
extinguishment of
debt (1).......... 2,216 -- -- -- -- --
Net (loss)............... n/a n/a (373,817) (167,150) (301,241)(103,180) (13,815) (2,782)
Basic and diluted net
(loss) per common
share:
(Loss) before
extraordinary item.... (33.55) (34.26) (39.52) (17.57) (31.66) (10.85) (1.45) (.29)
Gain from
extinguishment of
debt............... .23 -- -- -- -- --
Net (loss)............... n/a n/a (39.29) (17.57) (31.66) (10.85) (1.45) (.29)
Basic and diluted weighted
average number of common
shares(1)........... 9,902 9,902 9,514 9,514 9,514 9,514 9,514 9,514
SEPTEMBER 30, 2001
---------------------------------
HISTORICAL PRO FORMA
---------- ---------
(IN THOUSANDS)
BALANCE SHEET DATA
Working capital (deficiency)........................................................ $(98,239) $(81,921)
Fixed assets-- net.................................................................. 120,464 113,310
Total assets........................................................................ 583,030 348,884
Long-term debt and capital leases................................................... 179,993 160,047
Shareholders' equity................................................................ 217,575 29,706
----------
(1) After giving retroactive effect to the 6,342.944-for-1 stock split in
December 2001. We have never declared or paid any cash dividends.
14
RISK FACTORS
You should consider these risk factors in evaluating whether to tender your
outstanding securities and thereby become a holder of Holdco common stock. An
investment in our common stock involves a high degree of risk. These factors
should be considered in conjunction with the other information contained in this
prospectus, including the financial statements and the related notes. If any of
the following risks actually occurs, the business, financial condition, or
results of operations of CoreComm Holdco may be seriously harmed. In this case,
the value of Holdco common stock may decline, and you may lose all or part of
your investment. Please refer to the section of the prospectus entitled "Special
Note Regarding Forward-Looking Statements."
RISK FACTORS RELATING TO FAILURE TO TENDER OUTSTANDING SECURITIES IN THE
EXCHANGE OFFERS:
CORECOMM LIMITED CURRENTLY HOLDS ONLY AN APPROXIMATELY 13% INTEREST IN CORECOMM
HOLDCO, AND FOLLOWING SUCCESSFUL COMPLETION OF THE EXCHANGE OFFERS, WOULD HOLD
VIRTUALLY NO MATERIAL ASSETS.
As a holder of either Limited common stock or public notes, you own
securities in CoreComm Limited. As a result of the first phase of transactions
involved in the Holdco Recapitalization, CoreComm Limited, which formerly owned
100% of our outstanding capital stock, now only owns approximately 13% of our
outstanding capital stock. CoreComm Holdco owns 100% of the business operations
which CoreComm Limited formerly owned indirectly through CoreComm Holdco. If you
do not tender your outstanding securities you will continue to own securities in
CoreComm Limited, rather than in CoreComm Holdco. If the exchange offers are
successful, CoreComm Limited has agreed that it will surrender to CoreComm
Holdco the number of shares of Holdco common stock it presently owns equal to
the number issued in the exchange offers. That means that if the exchange offers
are completed, CoreComm Limited will own little or no common stock of CoreComm
Holdco, and thus will own little or no material assets, since Holdco common
stock is CoreComm Limited's only material asset. CoreComm Limited also remains a
party liable under our $156.1 million senior secured credit facility, has no
right to withdraw any additional money under that facility, and does not
contemplate raising any additional financing in the foreseeable future.
HOLDERS OF PUBLIC NOTES FOLLOWING THE EXCHANGE OFFERS COULD FACE REDUCED
LIQUIDITY FOLLOWING THE EXCHANGE OFFERS.
To the extent public notes are tendered and accepted in the exchange
offers, the trading market, if any, for the untendered public notes could be
adversely affected. This adverse effect would be in addition to any adverse
effect that occurred to the trading market for the public notes due to $160.0
million in aggregate principal amount of public notes that were exchanged for
Holdco common stock pursuant to agreements previously entered into as part of
the Holdco Recapitalization.
SHARES OF LIMITED COMMON STOCK COULD FACE REDUCED LIQUIDITY AND COULD BE
DELISTED FROM NASDAQ FOLLOWING SUCCESSFUL COMPLETION OF THE EXCHANGE OFFERS.
Pursuant to conversations with Nasdaq, we intend to transfer CoreComm
Limited's current listing to CoreComm Holdco following successful completion of
the exchange offers. If any remaining outstanding shares of Limited common stock
no longer meet the requirements for inclusion on the Nasdaq National Market, it
is possible that the shares of Limited common stock would be delisted and may
trade in the Nasdaq Small Cap Market or the over-the-counter market and that
price quotations would be reported by other sources. The extent of the public
market for the shares of Limited common stock and the availability of quotations
for shares of Limited common stock would, however, depend upon the number of
holders of shares remaining at that time, the interest in maintaining a market
in shares of Limited common stock on the part of securities firms, the possible
termination of registration of the shares under the Securities Exchange Act of
1934, as described below, and other factors. CoreComm Holdco cannot predict
whether the reduction in the number of shares of Limited common stock that might
otherwise trade publicly would have an adverse or beneficial effect on the
market price for, or marketability of, the shares of Limited common stock.
STATUS AS "MARGIN SECURITIES."
The shares of Limited common stock are presently "margin securities" under
the regulations of the Federal Reserve Board, which has the effect, among other
things, of allowing brokers to extend credit on the collateral of shares of
Limited common stock. Depending on factors similar to those described above with
respect to market quotations, following completion of the exchange offers, the
shares of Limited common stock may no longer constitute "margin securities" for
the purposes of the Federal Reserve Board's margin regulations, in which event
the shares of Limited common stock would not be eligible as collateral for
margin loans made by brokers.
15
LIMITED COMMON STOCK'S REGISTRATION UNDER THE SECURITIES EXCHANGE ACT OF 1934
COULD BE TERMINATED.
Shares of Limited common stock are currently registered under the
Securities Exchange Act of 1934. CoreComm Limited can terminate that
registration upon application to the SEC if the outstanding shares are not
listed on a national securities exchange or listed on an automated inter-dealer
quotation system, or if there are fewer than 300 holders of record of shares of
Limited common stock. Termination of registration of the shares of Limited
common stock under the Exchange Act would reduce the information that CoreComm
Limited must furnish to its stockholders and to the SEC and would make
provisions of the Exchange Act, including the short-swing profit recovery
provisions of Section 16(b) and the requirement of furnishing a proxy statement
in connection with stockholders meetings pursuant to Section 14(a) and the
related requirement of furnishing an annual report to stockholders, no longer
applicable with respect to shares of Limited common stock. In addition, if
shares of Limited common stock are no longer registered under the Exchange Act,
the requirements of Rule 13e-3 under the Exchange Act with respect to
"going-private" transactions would no longer be applicable to CoreComm Limited.
Furthermore, the ability of "affiliates" of CoreComm Limited and persons holding
"restricted securities" of CoreComm Limited to dispose of these securities
pursuant to Rule 144 under the Securities Act of 1933 may be impaired or
eliminated. If registration of the shares under the Exchange Act were
terminated, Limited common stock would no longer be eligible for Nasdaq
reporting or for continued inclusion on the Federal Reserve Board's list of
"margin securities."
RISK FACTORS RELATING TO TENDERING OUTSTANDING SECURITIES IN THE EXCHANGE
OFFERS:
A LAWSUIT WAS FILED WHICH MAY PROHIBIT US FROM COMPLETING THE EXCHANGE OFFERS.
On or about September 14, 2001, a lawsuit was filed by WXIII/Far Yale
Gen-Par, LLC, as General Partner of WXIII/Far Yale Real Estate Limited
Partnership against CoreComm Communications, Inc. (our first tier wholly owned
subsidiary) and CoreComm Limited seeking approximately $172,500 in unpaid rent,
interest and other charges allegedly owed under a commercial real estate lease
between Yale and CoreComm Communications as to which CoreComm Limited is the
guarantor. On or about February 5, 2002, Yale filed a motion with the court
requesting permission to amend the complaint to specify a revised figure of
$404,290.87 as the amount allegedly due under the lease and to add an additional
count asking the court to issue a preliminary injunction preventing the
defendants from transferring, selling, assigning, encumbering or otherwise
hypothecating any of their assets, including any debt or equity interests in
their subsidiaries, except for usual and ordinary expenses paid in the usual and
ordinary course of business. We are currently defending ourselves in the
litigation and we do not believe that Yale's request for a preliminary
injunction is meritorious. However, we cannot predict the outcome of the
litigation. If Yale were to obtain the injunctive relief requested, it could
prevent us from closing the exchange offers and/or have a material adverse
effect on our business, financial condition and/or results of operations. Even
if the minimum condition is satisfied, before the expiration date we may choose
not to accept outstanding securities and not to complete the exchange offers if
any action, proceeding or litigation seeking to enjoin, make illegal or delay
completion of the exchange offers or otherwise relating in any manner to the
exchange offers is or has been threatened or instituted or is pending or if any
order, stay, injunction or decree is issued by any court which would or might
restrain, prohibit or delay completion of the exchange offers.
HOLDERS OF PUBLIC NOTES THAT TENDER IN THE EXCHANGE OFFERS WILL BE GIVING UP
THEIR RIGHTS TO RECEIVE INTEREST.
Holders of public notes who tender will receive shares of our common stock
but will lose all rights associated with the public notes. The public notes
obligate CoreComm Limited to pay holders of public notes a specified amount of
interest on a semi-annual basis, and to pay holders of public notes the face
value of those public notes at maturity. Presently, CoreComm Limited cannot
predict if it will be able to meet these obligations in the future. However, to
the extent that it may be able to make any or all future payments, by tendering
your public notes for Holdco common stock, you will lose the right to any of
these payments and instead will hold shares of Holdco common stock.
RISK FACTORS RELATING TO OUR COMMON STOCK AND CORPORATE CONTROL:
OUR ANTI-TAKEOVER DEFENSE PROVISIONS MAY DETER POTENTIAL ACQUIRERS AND MAY
DEPRESS OUR STOCK PRICE.
Delaware corporate law, our restated certificate of incorporation, as
amended, which we refer to as the "charter," and our amended by-laws contain
provisions that could have the effect of making it more difficult for a third
party to acquire, or of discouraging a third party from attempting to acquire,
control of us. These provisions include the following:
- we may issue preferred stock with rights senior to those of our common
stock;
- we have a classified board of directors with terms that do not expire for
three years from re-election;
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- our charter prohibits action by written consent by stockholders; and
- we require advance notice for nomination of directors and for stockholder
proposals.
In addition, under our stockholder rights plan, holders of our common stock
are entitled to one right to purchase 1/1000 of a share of our Series A junior
participating preferred stock for each outstanding share of common stock they
hold, exercisable under defined circumstances involving a potential change of
control as discussed in this prospectus. The preferred stock purchase rights
have the anti-takeover effect of causing substantial dilution to a person or
group that attempts to acquire us on terms not approved by our board of
directors. Those provisions could have a material adverse effect on the premium
that potential acquirers might be willing to pay in an acquisition or that
investors might be willing to pay in the future for shares of our common stock.
Please refer to the section of the prospectus entitled "Description of Capital
Stock -- The Stockholder Rights Plan."
SOME OF OUR SIGNIFICANT STOCKHOLDERS, WHO HAVE THE RIGHT TO MAINTAIN SPECIFIED
OWNERSHIP PERCENTAGES OF OUR VOTING SECURITIES AND HAVE A CONTRACTUAL RIGHT TO
REPRESENTATION ON OUR BOARD OF DIRECTORS, MAY HAVE INTERESTS THAT CONFLICT WITH
OUR INTERESTS AND THE INTERESTS OF OUR OTHER STOCKHOLDERS.
As a result of their ownership of our common stock and contractual rights,
some of our significant stockholders will be in a position to affect
significantly our corporate actions in a manner that could conflict with the
interests of our other stockholders.
Although Michael Karp (together with the Florence Karp Trust), Booth
American Company, Thomas Gravina and Debra Buruchian, as well as the other
parties to the Holdco Recapitalization exchange agreement, have agreed to
restrictions on their rights to acquire additional shares of our common stock,
they have the right to acquire some additional amounts. Specifically, each party
may acquire in any calendar year a number of additional shares of our common
stock sufficient to raise their percent ownership of all of our outstanding
shares by 0.0735 times the percent they owned immediately after the closing of
the transactions in the exchange agreement, up to a maximum of 39%. That means
that Michael Karp (together with the Florence Karp Trust), who currently owns
34.0% of our common stock, has the right to own up to 36.5% of our voting
securities in 2002 and up to 39.0% of our voting securities thereafter. Booth
American Company, which currently owns 20.0% of our common stock, has the right
to own up to 21.5% of our voting securities in 2002, 22.9% thereafter. Each of
Thomas Gravina, who is our CEO, President and a director, and Debra Buruchian
currently own 10.8% of our common stock, and thus have the right to own up to
11.6% of our voting securities in 2002 and up to 12.4% of our voting securities
thereafter. The ability of these stockholders to acquire additional shares of
our common stock could have a material adverse effect on the premium that
potential acquirers may be willing to pay in an acquisition or that investors
might be willing to pay in the future for shares of our common stock.
Each of Michael Karp and Booth American Company also have a contractual
right to designate directors to our board of directors. So long as Michael Karp,
together with his affiliates and associates, owns at least 15% of our
outstanding common stock, Michael Karp has the right to designate that number of
directors to our board of directors so that his representation on our board of
directors is proportionate to his, together with his affiliates' and
associates', ownership percentage of our common stock. So long as Booth American
Company, together with its affiliates and associates, owns at least 15% of our
outstanding common stock, Booth American Company has the right to designate one
director to our board of directors. As of January 14, 2002, Ralph Booth had been
elected to the board. As of January 14, 2002, Michael Karp had not nominated any
directors.
WE MAY ISSUE ADDITIONAL COMMON STOCK OR PREFERRED STOCK, WHICH COULD DILUTE YOUR
INTERESTS.
Our charter does not limit the issuance of additional common stock or
preferred stock up to the number of authorized shares of each class. We have
already adopted a stock option plan which is described in "Management and
Executive Compensation -- Executive Compensation -- Stock Option Plan." In
January 2002, our board of directors approved an initial grant of options
exercisable for 2.58 million shares of our common stock under the plan. We
cannot predict the extent to which this potential dilution, the availability of
a large amount of shares for sale, and the possibility of additional issuances
and sales of our common stock and/or preferred stock will negatively affect the
trading price of our common stock or the liquidity of our common stock.
OUR ABILITY TO PAY DIVIDENDS IS RESTRICTED.
We have never paid cash dividends on our common stock. In addition, the
payment of any dividends by us in the future will be at the discretion of our
board of directors and will depend upon, among other things, future earnings,
operations, capital requirements, our general financial condition, the general
financial condition of our subsidiaries and
17
general business conditions. The terms of our senior secured credit facility
further restrict our ability to pay dividends on our common stock. Under
applicable law, in order for us to declare and pay a dividend we must have
available surplus.
In addition, any future debt instruments of ours or our subsidiaries may
restrict our payment of dividends or the payment of dividends or distributions
to us by our subsidiaries. Please refer to the section of this discussion of
risk factors entitled "Restrictions imposed by our debt agreements may
significantly limit our ability to execute our business strategy and increase
the risk of default under our debt obligations" and the section of this
prospectus entitled "Dividend Policy."
THE MARKET PRICE OF OUR COMMON STOCK COULD BE VOLATILE.
The market price of our common stock could fluctuate widely in response to
numerous factors and events, including the depth and liquidity of the trading
market, many of which are beyond our control. These factors include actual or
anticipated variations in our operating results, earnings releases by us and our
competitors, announcements of technological innovations, changes in financial
estimates by securities analysts, the possibility of Nasdaq delisting, market
conditions in the industry and the general state of the securities markets,
governmental legislation or regulation, currency and exchange rate fluctuations,
as well as general economic and market conditions, such as recessions. In
addition, the stock market in general, and the telecommunications sector
specifically, in recent years have experienced broad price and volume
fluctuations.
OUR COMMON STOCK COULD BE DELISTED FROM THE NASDAQ NATIONAL MARKET IF WE FAIL TO
MEET NASDAQ'S CONTINUED LISTING CRITERIA, WHICH COULD HAVE A NEGATIVE IMPACT ON
THE TRADING ACTIVITY AND PRICE OF YOUR COMMON STOCK, AND COULD MAKE IT MORE
DIFFICULT FOR US TO RAISE CAPITAL.
If the exchange offer for CoreComm Limited common stock is successful and
the Nasdaq listing is transferred to our common stock and we fail to meet any of
the Nasdaq continued listing requirements, our common stock could be delisted
from the Nasdaq National Market. If our common stock is delisted from the Nasdaq
National Market, it could have a negative impact on the trading activity and
price of your common stock and could make obtaining timely and accurate
quotations with respect to the trading of our common stock difficult. It could
also make it more difficult for us to raise additional equity capital in the
future.
SALES OF LARGE AMOUNTS OF OUR COMMON STOCK OR THE PERCEPTION THAT SALES COULD
OCCUR MAY DEPRESS OUR STOCK PRICE.
We issued an aggregate of 8,685,602 shares of our common stock to former
holders of preferred stock of CoreComm Limited, former holders of debt
securities of CoreComm Limited and former holders of debt securities that were a
joint obligation of CoreComm Limited and CoreComm Holdco, Inc. as part of the
Holdco Recapitalization. These shares represent approximately 87% of our
outstanding common stock. None of these shares are subject to any lock up
restrictions and may be sold at any time, except that some shares issued in
accordance with the exchange agreement may only be transferred in the following
manners:
- pursuant to a bona fide public offering;
- pursuant to unsolicited open market sales on any national securities
exchange or automated inter-dealer quotation system on which the shares
are listed;
- pursuant to a tender offer made to our stockholders which our board of
directors has recommended;
- pursuant to a privately-negotiated transaction with a person or entity
that, together with its affiliates and associates, does not own at least
15% of our common stock;
- pursuant to a will or the laws of descent and distribution;
- pursuant to a bequest or similar gift or transfer to any person or entity
that, together with its affiliates and associates, does not own at least
15% of our common stock; or
- as a result of any pledge or hypothecation to a bona fide financial
institution to secure a bona fide loan, guaranty or other financial
accommodation or as a result of any foreclosure with respect thereto.
Please refer to the section of the prospectus entitled "Description of
Capital Stock - The Exchange Agreement."
Sales of the securities acquired in connection with the Holdco
Recapitalization in the public market could lower our stock price and impair our
ability to raise funds in additional stock offerings. Future sales of a
substantial number of shares of our common stock in the public market, or the
perception that these sales could occur, could adversely affect the prevailing
18
market price of our common stock and could make it more difficult for us to
raise funds through a public offering of our equity securities.
RISK FACTORS RELATING TO OUR BUSINESS:
WE ARE AT RISK OF NOT BEING ABLE TO MEET OUR NEAR TERM CASH REQUIREMENTS.
We still have significant liabilities even after the successful completion
of the Holdco Recapitalization. On a pro forma basis, at September 30, 2001, our
current liabilities would exceed our current assets by approximately $82
million. Our operating losses and capital expenditures currently result in
negative cash flow. Although we believe that we will have sufficient cash to
execute our business plan, we cannot assure you that:
(1) actual costs will not exceed the amounts estimated or additional
funding will not be required;
(2) we will be able to generate sufficient cash from operations to meet
capital requirements, debt service and other obligations when required;
(3) we will be able to access this cash flow;
(4) we will be able to sell assets or businesses;
(5) we will not be adversely affected by interest rate fluctuations; or
(6) we will be able to secure additional financing.
These factors may affect our ability to meet our cash requirements, which may
have an adverse effect on us, and potentially our viability as an ongoing
business.
TO DEVELOP OUR BUSINESS, FUND OUR CAPITAL COMMITMENTS AND SERVICE OUR
INDEBTEDNESS AND OTHER OBLIGATIONS, WE WILL REQUIRE A SIGNIFICANT AMOUNT OF
CASH.
Our strategy will require capital to build and maintain the network,
including potentially building through acquisitions. In addition, our businesses
that resell services provided by larger, facilities-based companies will require
additional money to acquire new customers and to finance the support of these
new customers. Our businesses will also require additional billing, customer
service and other back-office expenditures. In addition, we will require
significant amounts of capital to meet all of our debt service and other
obligations as they become due.
We intend to fund these requirements from cash and cash equivalents on
hand, future issuances of both public and private debt and equity and funds
internally generated by operations. We cannot give you any assurance that
sufficient resources will be available to meet our expected requirements and
obligations. There can be no assurance that we will be able to meet these
obligations with the resources currently on hand or the cash that may be
generated by our operations in the future.
As a result, we cannot assure you that we will be able to repay our present
or future indebtedness. Accordingly, we may be required to consider a number of
measures, including:
- limiting or eliminating business projects;
- refinancing all or a portion of our debt;
- seeking modifications of the terms of our debt;
- seeking additional debt financing, which may be subject to obtaining
necessary lender consents;
- seeking additional equity financing; or
- a combination of these measures.
We cannot assure you that any of these possible measures can be
accomplished, or can be accomplished in sufficient time to make timely payments
with respect to our indebtedness. In addition, we cannot assure you that any
measures can be accomplished on terms which will be favorable to us and our
subsidiaries.
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WE EXPECT TO INCUR NET LOSSES AND NEGATIVE CASH FLOW FROM OPERATIONS FOR SOME
TIME.
On a pro forma basis, we would have had net losses before extraordinary
item for the nine months ended September 30, 2001 and for the fiscal year ended
December 31, 2000 of approximately $332.2 million and $339.3 million,
respectively.
We expect that our capital and operating expenditures will result in
negative cash flow until at least the fourth quarter of 2002. We cannot assure
you that this will not continue beyond that time.
We also expect to incur future operating losses, and we cannot assure you
that we will achieve or sustain profitability in the future. If we fail to
become profitable, it could adversely affect our ability to sustain our
operations and to obtain additional required funds. In addition, failing to
become profitable would adversely affect our ability to make the required
payments on our indebtedness.
For more information, please refer to the section of the prospectus
entitled "Unaudited Pro Forma Financial Data."
UNCERTAINTIES REGARDING OUR FINANCIAL CONDITION MAY ADVERSELY IMPACT OUR ABILITY
TO OBTAIN TRADE CREDIT AND VENDOR FINANCING, AND MAY ADVERSELY AFFECT OUR
RELATIONSHIPS WITH CREDITORS AND VENDORS.
Our recently experienced financial difficulties and our anticipated cash
flow and liquidity problems led to our decision to consummate the Holdco
Recapitalization. In addition, we have negotiated favorable settlements for less
than the full amount owed to many of our trade creditors. These events may cause
trade creditors and vendors to view our business prospects with a heightened
level of uncertainty, and as a result:
- our existing trade creditors and vendors may be less willing to advance
trade credit and vendor financing on the terms or at the levels
previously provided; and
- we may have difficultly in securing trade credit and vendor financings
from new sources.
If this were to occur and we were to experience difficulty in obtaining new
trade credit and vendor financing, or if the terms of financing were to be less
favorable than those previously provided, our future revenues, cash flows and
profitability may be adversely affected, and we may not have sufficient cash to
fund our current operations unless we locate alternative sources of this
financing, which may not be possible on acceptable terms or at all.
OUR SUBSTANTIAL INDEBTEDNESS COULD ADVERSELY AFFECT OUR FINANCIAL HEALTH.
As of September 30, 2001, as adjusted for the Holdco Recapitalization and
other transactions, we have $171.2 million in outstanding debt obligations in
the form of: our $144.3 million, net of unamortized discount of $11.8 million,
senior secured credit facility with The Chase Manhattan Bank; $15.4 million, net
of unamortized discount of $0.4 million of Unsecured Convertible PIK Notes due
2011; and $11.5 million in capital leases and other notes. In addition, we have
$118.1 million in trade payables and accrued expenses outstanding. This
substantial amount of debt, cash interest due to The Chase Manhattan Bank from
time to time and any other trade payables and other debt which we may incur may
have important consequences for you. For example, it could:
- limit our ability to obtain additional financing, if we need it, for
working capital, capital expenditures, acquisitions, debt service
requirements or other purposes;
- increase our vulnerability to adverse economic and industry conditions;
- require us to dedicate a substantial portion of our cash flow from
operations to payments on our debt, thereby reducing funds available for
operations, future business opportunities or other purposes;
- limit our flexibility in planning for, or reacting to, changes in our
business and the industry in which we compete; and
- place us at a competitive disadvantage compared to competitors that may
have less debt.
RESTRICTIONS IMPOSED BY OUR DEBT AGREEMENTS MAY SIGNIFICANTLY LIMIT OUR ABILITY
TO EXECUTE OUR BUSINESS STRATEGY AND INCREASE THE RISK OF DEFAULT UNDER OUR DEBT
OBLIGATIONS.
The credit agreement governing our senior secured credit facility contains
a number of covenants which may significantly limit our or our subsidiaries'
ability to, among other things:
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- borrow additional money;
- make capital expenditures and other investments;
- pay dividends;
- merge, consolidate or dispose of our assets;
- enter into transactions with related entities;
- incur additional liens; and
- refinance junior indebtedness.
It is an event of default under our senior secured credit facility if we
experience change of control events including the acquisition by a person or
group of more than 35% of our voting power in the circumstances set forth in the
senior secured credit facility. In December 2001, the credit agreement governing
our senior secured facility was amended to permit the Holdco Recapitalization to
occur.
In addition, the senior secured credit agreement contains financial
maintenance covenants. If we fail to comply with these covenants, we will be in
default under that credit agreement. A default, if not waived, could result in
acceleration of our indebtedness, in which case the debt would become
immediately due and payable. If this were to occur today, we would not be able
to repay our debt and may not be able to borrow sufficient funds to refinance
it. Even if new financing were available, it may not be on terms that are
acceptable to us. In addition, complying with these covenants may cause us to
take actions that we otherwise would not take, or not take actions that we
otherwise would take.
For more information about these restrictions, please refer to the section
of the prospectus entitled "Description of Our Indebtedness."
WE ARE A HOLDING COMPANY THAT IS DEPENDENT UPON CASH FLOW FROM OUR SUBSIDIARIES
TO MEET OUR OBLIGATIONS - OUR ABILITY TO ACCESS THAT CASH FLOW MAY BE LIMITED IN
SOME CIRCUMSTANCES.
We are a holding company with no independent operations or significant
assets other than investments in and advances to our subsidiaries. We depend
upon the receipt of sufficient funds from our subsidiaries to meet our
obligations. The terms of existing and future indebtedness of our subsidiaries
and the laws of the jurisdictions under which those subsidiaries are organized
generally limit the payment of dividends, loan repayments and other
distributions to them, subject in some cases to exceptions that allow them to
service indebtedness in the absence of specified defaults.
WE HAVE MATERIAL DISPUTES WITH VENDORS AND OTHER PARTIES THAT COULD EXPOSE US TO
MATERIAL BREACH OF CONTRACT AND OTHER COMMERCIAL CLAIMS.
We purchase goods and services from a wide variety of vendors under
contractual and other arrangements that sometimes give rise to litigation in the
ordinary course of business. We also provide goods and services to a wide range
of customers under arrangements that sometimes lead to disputes over payment,
performance and other obligations. Some of these disputes, regardless of their
merit, could subject us to costly litigation and the diversion of our technical
and/or management personnel. Additionally, any liability from litigation that is
not covered by our insurance or exceeds our coverage could have a negative
effect on our business, financial condition and/or operating results. Currently,
we have the following outstanding matters which, if resolved unfavorably to us,
could have a material adverse effect on us:
- We are currently in litigation with Ameritech Ohio, a supplier from whom
we purchase telecommunications products and services, over the adequacy
of Ameritech's performance under a 1998 contract between us and Ameritech
and related issues. This litigation began in June 2001 when Ameritech
threatened to stop processing new orders following our exercise of our
right under the contract to withhold payments for Ameritech's performance
failures. In response to their threat, we sought, and on June 29, 2001
received, an order from an official of the Public Utilities Commission of
Ohio, which we refer to as "PUCO," barring Ameritech from refusing to
process new CoreComm orders. Ameritech has appealed that order to the
PUCO and the appeal is still pending.
21
On July 5, 2001, Ameritech filed a claim with the PUCO seeking payment
from us of approximately $8,600,000 allegedly owed under the contract. On
August 8, 2001, Ameritech filed a second claim against CoreComm in Ohio
state court, seeking an additional approximately $4,300,000 in allegedly
improperly withheld amounts. On August 28, 2001, we exercised our right
to remove the state court claim to the United States District Court for
the Northern District of Ohio, and the parties then stipulated to a
consolidation of both of Ameritech's claims in the United States District
Court. To consolidate the two claims, on October 9, 2001, Ameritech filed
an amended complaint in the United States District Court, seeking a total
of approximately $14,400,000.
On December 26, 2001, we filed our answer to Ameritech's amended
complaint and simultaneously filed three counterclaims against Ameritech
and some of its affiliates, alleging breach of contract, antitrust
violations, and fraudulent or negligent misrepresentation. Ameritech's
response to our counterclaims is currently due on February 13, 2002.
Although we believe that we have meritorious defenses to Ameritech's
amended complaint, and that the amount currently in dispute is
substantially less than the $14,400,000 claimed in Ameritech's amended
complaint, we cannot be certain how the matter will be resolved. We also
believe that to the extent that Ameritech prevails with respect to any of
its claims, Ameritech's award may be offset in whole or in part by
amounts that we are seeking to obtain from Ameritech under its
counterclaims. However, it is impossible at this time to predict the
outcome of the litigation.
- We have received correspondence from various operating subsidiaries of
Verizon Communications, Inc. ("Verizon") claiming that Verizon is owed a
total of approximately $14.4 million for services allegedly provided in
Delaware, Maryland, Virginia, Pennsylvania, District of Columbia,
Massachusetts and New York, and threatening to activate account embargo
and service suspension procedures in those states if payment of the
alleged amounts is not received by February 11, 2002 (as to the amounts
allegedly owed in Pennsylvania) and March 3, 2002 (as to the amounts
allegedly owed for the remaining states). We are currently reviewing
Verizon's claims against our own billing records, including records
reflecting unresolved disputed charges, and believe that the amount at
issue could be substantially less than the amount claimed by Verizon.
Moreover, we intend to vigorously defend against any effort to implement
any embargo or service suspension. However, we cannot presently predict
how the matter will be resolved and if Verizon were to prevail on its
claims and/or activate an account embargo or service suspension, it could
have a material adverse affect on our business, financial condition
and/or results of operations.
- On December 3, 2001, General Electric Capital Corp. filed a lawsuit in
the Circuit Court of Cook County, Illinois against CoreComm Limited and
our subsidiary, MegsINet, Inc. seeking approximately $8 million in
allegedly past due amounts under a capital equipment lease agreement
between Ascend and MegsINet. GECC is seeking all amounts allegedly owed
under the lease as well as repossession of the equipment. The company's
response to GECC's complaint is due February 20, 2002 and we intend to
defend the suit vigorously. A finding in favor of GECC could adversely
affect our financial condition.
- On May 25, 2001, KMC Telecom, Inc. and some of its operating subsidiaries
filed an action in the Supreme Court of New York for New York County
against CoreComm Limited, Cellular Communications of Puerto Rico, Inc.,
CoreComm New York, Inc. and MegsINet, Inc. On that same date, KMC filed
the same cause of action in the Circuit Court of Cook County, IL. Upon
defendant's Motion to Stay the New York action, KMC voluntarily dismissed
the Illinois litigation and the matter is currently proceeding in New
York. KMC contends that it is owed approximately $2 million under a
services agreement and a collocation agreement with MegsINet. The
defendants have denied KMC's claims and have asserted that KMC failed to
perform under the alleged contracts. The defendants have served discovery
and intend to defend themselves in coordination with one of their
insurance carriers. However, a finding in favor of KMC in this litigation
could have a material adverse effect on our business, financial condition
and/or results of operations.
- On July 6, 2001, MCI initiated a compulsory arbitration action against
our subsidiary CoreComm Communications, Inc. in connection with a dispute
arising under a carrier services agreement between the parties. The
arbitration demand contends that MCI is owed in excess of $1.9 million
for circuits that were allegedly ordered by CoreComm Communications, Inc.
under the carrier agreement, and MCI has subsequently asserted that under
one theory of the case, its claims could exceed $10 million. We have
denied MCI's claims, asserting that the circuits were never ordered under
the contract and have been improperly billed by MCI and we do not agree
with MCI's various damages theories. Discovery in this matter has been
completed, and the case is currently scheduled for trial before the
arbitrator in April 2002. We are defending the suit and pursuing
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all available claims and defenses. However, a finding in favor of MCI in
this arbitration could have a material adverse effect on our business,
financial condition and/or results of operations.
- We have received correspondence from a law firm on behalf of Weston
Telecommunications, L.L.C. asserting that Weston is the assignee of
certain rights of Easton Telecom Services, Inc. under an asset purchase
agreement approved as part of the bankruptcy disposition of Teligent,
Inc., and demanding payment of approximately $4.9 million for
telecommunications services purportedly provided under alleged contracts
between Easton and our subsidiary MegsINet, Inc. We have investigated
Weston's claims and do not believe they have any merit, and we intend to
defend ourselves vigorously and pursue all available claims and defenses
should the matter proceed to litigation. However, a finding in favor of
Weston in this matter could have a material adverse effect on our
business, financial condition and/or results of operations.
- For a discussion of a lawsuit that may prohibit us from completing the
exchange offers, please refer to the section of the prospectus entitled
"-- Risk factors relating to tendering outstanding securities in the
exchange offers -- A lawsuit was filed which may prohibit us from
completing the exchange offers."
WE FACE HEAVY COMPETITION IN THE TELECOMMUNICATIONS INDUSTRY FOR ALL OF THE
SERVICES WE PROVIDE AT PRESENT AND THOSE WE INTEND TO PROVIDE IN THE FUTURE.
Some of our present competitors and potential future competitors may have
greater financial, technical, marketing, personnel and other resources than we
have. The competitive environment could have a variety of adverse effects on us.
For example, it could:
- require price reductions in the fees for services and require increased
spending on marketing, network capacity and product development;
- negatively impact our ability to generate greater revenues and profits
from sources other than our core local and long distance telephone and
Internet service businesses;
- limit our ability to develop new products and services;
- limit our ability to continue to grow our subscriber base; and
- result in attrition in our subscriber base.
Any of the above events could have an adverse impact on revenues or result
in an increase in costs as a percentage of revenues, either of which could have
a material adverse effect on our business, financial condition and operating
results.
LOCAL TELEPHONE BUSINESS. In each of our markets, we face competition from
larger, better capitalized incumbent local exchange carriers, including Verizon
and SBC, as well as other providers of telecommunications services, other
competitive local exchange carriers and cable television companies. An incumbent
local exchange carrier is an established local telephone service provider that
was the monopoly service provider in a region prior to the opening of local
telephone service to competition. We also will face competition or prospective
competition from other telecommunications companies. For example, AT&T, MCI
WorldCom and Sprint, among other carriers, have begun to offer local
telecommunications services in major U.S. markets using their own facilities or
by resale of the incumbent local exchange carriers' or other providers'
services. In fact, some of our potential competitors, including AT&T, MCI
WorldCom and Sprint, have entered into interconnection agreements with Verizon
and SBC to provide local exchange service in states in which we operate.
In addition to these long distance carriers, entities that currently offer
or are potentially capable of offering switched telecommunications services
include:
- other competitive local exchange carriers;
- other long distance carriers;
- wireless telephone s9ystem operators;
- large customers who build private networks;
- cable television companies; and
23
- other utilities.
These entities may provide a bundled package of telecommunications
products, including local and long distance telephone, that is in direct
competition with the products we offer or plan to offer. Competition in the
competitive local exchange carrier business will continue to intensify in the
future due to the increase in the size, resources and number of market
participants.
INTERNET SERVICES. The Internet services market is extremely competitive.
We compete directly or indirectly with the following categories of companies:
- established online services, such as America Online, the Microsoft
Network and Prodigy;
- local, regional and national Internet service providers, which are
vendors that provide subscribers access to the Internet, such as
EarthLink Network, Inc. and United Online;
- national telecommunications companies, such as AT&T;
- incumbent local exchange carriers, such as Verizon and SBC; and
- online cable services, such as Roadrunner.
This competition will likely increase as large diversified
telecommunications and media companies acquire Internet service providers and as
Internet service providers consolidate into larger, more competitive companies.
Diversified competitors may bundle other services and products with Internet
connectivity services, potentially placing us at a significant competitive
disadvantage. As a result, our businesses may suffer.
OTHER BUSINESSES. In addition to our competitive local exchange carrier and
Internet services businesses, our other businesses face strong competition as
well. These competitive businesses include long distance service, cellular
service and messaging services such as paging. Our long distance service faces
competition from long distance carriers, including facilities-based carriers
such as AT&T, MCI WorldCom and Sprint and resellers of long distance service.
Moreover, as more incumbent local exchange carriers enter the long distance
market, our long distance service will face increased competition from those
entities given their ability to offer bundles of local and long distance
services. Our cellular service faces competition from other cellular carriers,
such as Verizon, Cingular and AT&T Wireless, and from personal communications
service carriers, such as Sprint PCS. Our paging services are similarly exposed
to competition from other providers of paging services operating in the same
local markets, regionally or nationally.
THE TELECOMMUNICATIONS INDUSTRY IS HIGHLY REGULATED BY THE FEDERAL GOVERNMENT
AND BY STATE GOVERNMENTS, AND POTENTIAL REGULATORY CHANGES COULD HAVE AN ADVERSE
EFFECT ON OUR OPERATIONS.
LOCAL TELEPHONE AND OTHER BUSINESSES. Our telephone businesses are subject
to extensive regulation by the FCC and by the public utility commissions of
various states. Changes in statutes, regulations or judicial interpretations
could have material adverse effects on our operations. In particular,
unfavorable decisions with respect to regulatory matters that affect our
operations, status or relationships with our customers or other carriers could
decrease our revenues, increase our costs, and make it more difficult to attract
and retain customers. It is impossible to determine at this time how the FCC or
the various State regulatory commissions will rule on any of the numerous issues
before it that affect our business.
INTERNET SERVICES. We will provide Internet services through data
transmissions over public telephone lines and networks. These transmissions are
subject to the regulation of the FCC and state public utility commissions
described above. As an Internet service provider, we are not currently subject
to direct regulation by the FCC or any other governmental agency, other than
regulations applicable to businesses generally. However, we could become subject
to FCC or other regulatory agency regulation, especially as Internet services
and telecommunications services converge. Changes in the regulatory environment
could decrease our revenues, increase our costs and affect our service
offerings.
There have been various regulations and court cases relating to liability
of Internet service providers and other online service providers for information
carried on or through their services or equipment, including in the areas of
copyright, indecency, obscenity, defamation and fraud. The United States Supreme
Court declared the Communications Decency Act of 1996 to be unconstitutional as
it applies to the transmission of indecent online communications to minors, and
a lower court declared the 1998 Federal Child Online Protection Act to be
unconstitutional. Other federal and state statutes continue to prohibit the
online distribution of obscene materials. Additional laws and regulations may be
adopted with respect to the Internet, covering issues such as Universal Service
Fund support payments, content, user privacy, pricing, libel, obscene
24
material, indecency, taxation, gambling, intellectual property protection and
infringement and technology export and other controls. Other federal
Internet-related legislation has been introduced which may limit commerce and
discourse on the Internet. The law in this area is unsettled and there may be
new legislation and court decisions that expose Internet service providers to
liabilities or affect their services.
In addition, because users may download materials and subsequently
distribute them to others, persons may potentially make claims against us for
defamation, negligence, copyright or trademark infringement, personal injury or
other claims based on the nature, content, publication and distribution of these
materials. We also could be exposed to liability with respect to the offering of
third-party content that may be accessible through its services. It is also
possible that if any third-party content provided through our services contains
errors, third parties who access this material could make claims against us for
losses incurred in reliance on this information. We also will offer e-mail
services, which will expose us to other potential risks, such as liabilities or
claims resulting from unsolicited e-mail, lost or misdirected messages, illegal
or fraudulent use of e-mail or interruptions or delays in e-mail service. These
claims, whether with or without merit, likely would divert management's time and
attention, may result in negative publicity and could result in significant
costs to investigate and defend.
ANY DETERMINATION OF NON-COMPLIANCE WITH FCC AND STATE REGULATIONS DEALING WITH
OWNERSHIP CHANGES COULD RESULT IN MONETARY PENALTIES OR LOSS OF OUR
TELECOMMUNICATIONS AUTHORIZATIONS.
We hold federal and state authorizations to provide international and
domestic wireline and wireless telecommunications services. Both the FCC and
some of the states in which we operate have regulatory regimes that require
authorization holders to obtain the prior approval of the relevant regulatory
agency before undergoing changes in ownership or control. At the federal level,
for non-substantial, also referred to as "PRO FORMA," changes in ownership or
control, we are only required to notify the FCC after closing the transaction
which results in the non-substantial change. In some of the states, however, the
regulatory agencies require prior approval for even PRO FORMA transfers of
control.
Based on our review of the relevant regulations and policies, we determined
that the Holdco Recapitalization was PRO FORMA in nature and that we could
complete that transaction without securing prior regulatory approval relating to
our FCC telecommunications authorizations. Accordingly, we did not seek any
prior approvals from the FCC. Nor did we seek prior approval from any state
telecommunications regulatory agency. In the event that we completed the
transaction without obtaining the requisite regulatory approvals, either because
our determination of the PRO FORMA nature of the transaction was erroneous or
because a particular agency requires prior approval even for PRO FORMA transfers
of control, we remain subject to enforcement actions from the telecommunications
regulatory agencies. These enforcement actions could include monetary penalties,
and/or revocation or impairment of our telecommunications authorizations.
OUR RELIANCE ON INCUMBENT LOCAL EXCHANGE CARRIERS AND OTHER FACILITIES-BASED
PROVIDERS OF TELECOMMUNICATIONS SERVICES AND CHANGES TO OUR AGREEMENTS WITH
THESE PROVIDERS COULD HAVE A MATERIAL ADVERSE EFFECT ON US.
We depend upon our agreements with the incumbent local exchange carriers
operating in our existing and targeted markets. There are two primary types of
agreements that we enter into with these providers:
- interconnection agreements, which specify how we connect our network
with, and purchase unbundled elements of, the network of the incumbent
local exchange carriers in each of our markets; and
- resale agreements, through which we provide telecommunications services
on a resale basis.
Federal legislation regulating the telecommunications industry has enhanced
competition in the local service market by requiring the incumbent local
exchange carriers to provide access to their networks through interconnection
agreements and to offer separate elements of their network and retail services
at prescribed rates to other telecommunications carriers. The termination of any
of our contracts with our carriers or a reduction in the quality or increase in
cost of their services could have a material adverse effect on our financial
condition and results of operations. Similarly, the failure by the incumbent
local exchange carriers to comply with their obligations under our
interconnection agreements or resale agreements could result in customer
dissatisfaction and the loss of existing and potential customers. In addition,
the rates charged to us under the interconnection agreements or resale
agreements may limit our flexibility to price our services at rates that are low
enough to attract a sufficient number of customers and permit us to operate
profitably.
Interconnection and resale agreements are subject to review and approval by
various federal and state regulators. In addition, parties to the agreements may
seek to have the agreements modified based upon the outcome of regulatory or
judicial rulings occurring after the dates of the agreements. The outcome of
these rulings, or any modified agreements, could have a material adverse effect
on our financial condition and results of operations. In addition, some aspects
of the
25
agreements, including the price and economic terms of these agreements,
have been subject to litigation and regulatory action. Please refer to the
section of the prospectus entitled "Government Regulation of the
Telecommunications Services Business."
We rely on telecommunications carriers to transmit our traffic over local
and long distance networks. Our dependence on other facilities-based carriers
means that we depend on the quality and condition of their networks. These
networks may experience disruptions that are not easily remedied. For example,
the following conditions of the facilities-based carriers could cause
interruption in service and/or reduced capacity for our customers:
- physical damage;
- power loss; and
- software defects.
We depend upon cooperation with the incumbent local exchange carriers and
other providers for the provision and repair of transmission facilities and to
provide the services and network components that are ordered. We may not be able
to obtain the facilities and services we require at satisfactory quality levels,
rates, terms and conditions, which could delay the buildout of our networks and
degrade the quality of service to our subscribers.
In addition, we depend upon suppliers of network services, hardware and
software. If these suppliers fail to provide network services, equipment or
software in the quantities, at the quality levels or at the times required, or
if we cannot develop alternative sources of supply, it will be difficult, if not
impossible, for us to provide our services.
The pace at which we are able to add new customers and services could be
adversely affected if the incumbent local exchange carriers do not provide us
with necessary network elements, collocation space, intercompany network
connections and billing information and the means to share information about
customer accounts, service orders and repairs on a timely basis. In many
instances, the incumbent local exchange carriers do not timely or fully provide
these services or facilities. Also, the rules governing which elements the
incumbent local exchange carriers must provide, the cost methodology for
providing these elements, and the types of equipment that may be placed together
are currently under FCC and judicial review.
In the event that our long distance carriers are unable to handle the
growth in customer usage, we could try to transfer traffic to a carrier with
sufficient capacity, but we cannot be sure that additional capacity will be
available. If any of the local exchange carriers are unable to handle the growth
in customer usage, we will be required to use another local carrier, which could
be difficult in light of the limited number of local carriers with their own
facilities. In the event we elect to use other carriers, the charges for
services may exceed those under the existing contracts, which could have a
material adverse effect on our financial condition and results of operations.
In addition, the accurate and prompt billing of our customers will depend
upon the timeliness and accuracy of call detail records provided by the carriers
whose services we will resell. We cannot be sure that our carriers will provide
accurate information on a timely basis. A carrier's failure to do so could have
a material adverse effect on our ability to bill our customers and, therefore,
on our operating results.
WE MAY NOT BE ABLE TO IMPLEMENT SUCCESSFULLY OUR BUSINESS STRATEGY BECAUSE DOING
SO DEPENDS ON FACTORS BEYOND OUR CONTROL, WHICH COULD ADVERSELY AFFECT OUR
RESULTS OF OPERATIONS.
Our success depends on our ability to implement our business strategy in
order to increase our earnings and cash flow. Our results of operations and cash
flow will be adversely affected if we cannot fully implement our business
strategy. Successful implementation depends on factors unique to the
telecommunications industry and numerous other factors beyond our control. These
include changes in:
- general economic conditions;
- characteristics of local markets;
- the perception of attractiveness of a particular product;
- evolving consumer preferences;
26
- federal, state and local regulations; and
- our continued ability to hire and retain qualified management personnel.
In addition, because of these and other factors, we may not be able to
implement our business plans within planned time periods and budgets. If we
cannot implement our expansion and business plans in a timely fashion or if
there are delays or cost overruns, our business, financial condition and results
of operations will be adversely affected.
BECAUSE OF THE FAST PACE OF TECHNOLOGICAL CHANGE IN THE TELECOMMUNICATIONS
INDUSTRY, THERE IS A RISK THAT WE WILL FALL BEHIND OR WILL FAIL TO SUCCESSFULLY
ADDRESS THIS CHANGE, WHICH COULD HARM OUR ABILITY TO COMPETE AND COULD
MATERIALLY AND ADVERSELY AFFECT OUR BUSINESS AND RESULTS OF OPERATIONS.
The telecommunications industry is subject to rapid and significant changes
in technology. We cannot predict the effect of technological changes on our
business. However, the cost of implementing emerging and future technologies may
be significant.
The Internet services market is characterized by rapid technological
change, evolving industry standards, changes in member needs and frequent new
service and product introductions. Our future success depends, in part, on our
ability to use leading technologies effectively, develop our technical
expertise, enhance our existing services and develop new services that meet
changing member needs on a timely and cost-effective basis. In particular, we
must provide subscribers with the appropriate products, services and guidance to
best take advantage of the rapidly evolving telecommunications industry. Our
failure to respond in a timely, cost-efficient and effective manner to new and
evolving technologies, such as those offering greater bandwidth services, among
others, could have a negative impact on our business and financial results.
OUR SERVICES DEPEND UPON OUR NETWORK INFRASTRUCTURE, AND THE FAILURE TO HAVE
SUFFICIENT CAPACITY TO ACCOMMODATE NEW USERS, TO MAINTAIN RELIABILITY OR TO
MAINTAIN SECURITY COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR ABILITY TO ATTRACT
AND RETAIN CUSTOMERS.
Success in our businesses depends, in part, on the capacity, reliability
and security of our network infrastructure. Network capacity constraints may
occur in the future, both at the local and national levels. These capacity
constraints would result in slowdowns, delays or inaccessibility when members
try to use a particular service. Poor network performance could cause customers
to discontinue service with us. Reducing the incidence of these problems
requires constantly expanding and improving our infrastructure, which could be
very costly and time consuming.
Our Internet services network infrastructure is composed of a complex
system of routers, switches, transmission lines and other hardware used to
provide Internet access and other services. This network infrastructure will
require continual upgrades and adaptation as the number of customers and the
amount and type of information they wish to transmit over the Internet
increases. This development of network infrastructure will require substantial
financial, operational and managerial resources. We cannot be certain that we
will be able to upgrade or adapt our network infrastructure to meet additional
demand or changing customer requirements on a timely basis and at a commercially
reasonable cost, or at all. If we fail to upgrade our network infrastructure on
a timely basis or adapt it to an expanding customer base, changing customer
requirements or evolving industry standards, our business could be adversely
affected.
We also have to protect our infrastructure against fire, power loss,
telecommunications failure, computer viruses, security breaches and similar
events. We do not currently maintain a redundant or backup network operations
center. A significant portion of our computer equipment, including critical
equipment dedicated to our telephone network and Internet access services, is
presently located at four network operating centers: Philadelphia, Pennsylvania;
Cleveland, Ohio; East Lansing, Michigan; and New Berlin, Wisconsin. A natural
disaster or other unanticipated occurrence at our switch or collocation
facilities, network operations center or points-of- presence through which
members connect to the Internet, in the networks of telecommunications carriers
we will use, or in the Internet backbone in general could cause interruptions in
our Internet services.
WE MAY BE REQUIRED TO MAKE SIGNIFICANT CAPITAL EXPENDITURES RELATING TO THE
INFORMATION SYSTEMS INFRASTRUCTURE OF OUR OPERATIONS.
Our billing, customer service and management information systems are vital
to our ability to bill customers, monitor costs and respond to customer service
issues. As our operations grow, our need for sophisticated systems will
increase. The cost of implementing these systems has been, and will continue to
be, significant. Furthermore, any of the following developments could negatively
affect our results of operations:
27
- the failure to adequately and timely identify all information and
processing needs;
- the failure of systems to operate as expected;
- the failure to upgrade systems as necessary; and
- failure by third party service providers to deliver necessary systems or
services.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
In this prospectus there are "forward-looking statements" within the
meaning of Section 27A of the Securities Act and Section 21E of the Securities
Exchange Act of 1934, as amended, which we refer to as the "Exchange Act," which
are usually identified by the use of forward-looking words or phrases,
including, "anticipates," "believes," "estimates," "expects," "intends,"
"projects," "plans," "should," "strategy," "will" and similar expressions.
These forward-looking statements reflect current judgments about our plans,
strategies and prospects, which are based on the information currently available
and on current assumptions as of the date of this prospectus.
Although we believe that our plans, intentions and expectations as
reflected in or suggested by these forward-looking statements are reasonable as
of the date of this prospectus, we can give no assurance that the plans,
intentions or expectations will be achieved in a timely manner, if at all. In
reviewing information included in this prospectus, keep in mind that our actual
results, performances, or achievements may differ materially from the
forward-looking statements made in this prospectus. The risks identified in this
section could cause our actual results, performance or achievements to be
materially different from the forward-looking statements made in this
prospectus. These risks, uncertainties and contingencies include the following:
- the success or failure of our efforts to implement our current business
strategy;
- operating cash flow will meet expectations or that we will be able to
access this cash form our subsidiaries' operations to meet any unfunded
portion of our capital requirements when required or to satisfy the terms
of our indebtedness;
- additional financing will not be required in excess of our projected
funding requirements;
- any financings will be obtained when required on acceptable terms or at
all;
- our access to trade credit and vendor financings;
- technological developments;
- our ability to continue to design and deploy efficient network routes,
install facilities, obtain and maintain any required regulatory licenses
or approvals and finance construction and development of our network, all
in a timely manner, at reasonable costs and on satisfactory terms and
conditions;
- our assumptions about customer acceptance, churn rates, overall market
penetration and competition from providers of alternative services;
- the impact of restructuring, the Holdco Recapitalization and integration
actions;
- economic conditions generally and in the competitive local exchange
carrier market specifically;
- industry trends in the telecommunications industry generally;
- the actions of competitors and our ability to respond to those actions;
- legislative and regulatory changes; and
- availability, terms and deployment of capital.
We disclaim any intent or obligation to update any forward-looking
statements, whether as a result of changes in our plans, intentions or
expectations, new information, future events or otherwise. In evaluating
forward-looking statements, you
28
should consider these risks and uncertainties, together with the other risks
described from time to time in our reports and documents filed with the SEC, and
you should not place undue reliance on these statements, which are not a
guarantee of performance and are subject to a number of risks and uncertainties,
many of which are outside our control. All written and oral forward-looking
statements relating to the exchange offers are expressly qualified in their
entity by the foregoing cautionary statements.
29
THE EXCHANGE OFFERS
BACKGROUND AND PURPOSE
We are making the exchange offers in connection with our publicly announced
plan of recapitalization, through which CoreComm Limited and CoreComm Holdco
have previously exchanged approximately $600 million of principal amount of
outstanding debt and liquidation preference of preferred stock for Holdco common
stock. The specific transactions CoreComm Limited and/or CoreComm Holdco entered
into as part of the recapitalization plan include the following:
- In October 2001, CoreComm Limited entered into agreements with numerous
holders of public notes whereby the holders agreed, among other things,
to exchange their notes for shares of Holdco common stock as part of a
recapitalization plan at the same exchange ratio and the same cash
consideration that is being offered pursuant to the present exchange
offer to the holders of public notes. The exchanges closed December,
2001.
- In December 2001, both CoreComm Holdco and CoreComm Limited entered into
an exchange agreement with
(1) holders of 10.75% Unsecured Convertible PIK Notes due 2011,
and 10.75% Senior Unsecured Convertible PIK Notes due 2010,
both of which are a joint obligation of CoreComm Limited and
CoreComm Holdco, in the initial principal amount of
$10,000,000 and $16,100,000, respectively, together with any
interest paid thereon,
(2) holders of Senior Unsecured Notes due September 29, 2003 of
CoreComm Limited in the principal amount of $105.7 million,
and
(3) holders of all outstanding shares of preferred stock of
CoreComm Limited in the initial principal amount of $300
million together with any dividends paid thereon.
The exchange agreement provided for the security holders to exchange
their securities for shares of Holdco common stock as part of the
recapitalization plan. The exchanges closed on December 28, 2001. Please
refer to the section of the prospectus entitled "Description of Capital
Stock - The Exchange Agreement."
- In December 2001, the credit agreement governing our senior secured
facility was amended to permit the recapitalization transactions to
occur.
- On December 17, 2001, Nasdaq granted CoreComm Limited an exception to
Nasdaq's stockholder approval requirements permitting the
recapitalization transactions to proceed without a vote of the
stockholders of CoreComm Limited because requiring a stockholder vote
would seriously jeopardize the financial viability of CoreComm Limited.
- On December 17, 2001, CoreComm Holdco adopted a stockholder rights plan.
Please refer to the section of the prospectus entitled "Description of
Capital Stock - The Stockholder Rights Plan."
- On December 18, 2001, the indenture governing the public notes was
amended to, among other things,
- delete the provision requiring that any offer by CoreComm Limited to
all holders of public notes to purchase their public notes be made
in accordance with the "purchase offer" procedures originally set
forth in the indenture,
- delete the provision providing that upon any change in control of
CoreComm Limited each holder of public notes has the right to
require CoreComm Limited to repurchase all or any part of that
holder's public notes at the price set forth in the indenture and in
accordance with the "purchase offer" procedures set forth in the
indenture, and
- delete the restriction on CoreComm Limited's ability to dispose of
all or substantially all of its properties to another corporation.
EFFECT OF THE EXCHANGE OFFERS
Because holders of all of CoreComm Limited's outstanding common stock are
being asked to exchange that stock for shares of Holdco common stock,
consummation of the exchange offers would result in CoreComm Limited becoming a
subsidiary of CoreComm Holdco because CoreComm Holdco would then hold all or
substantially all the shares of Limited
30
common stock. Moreover, the issuance of shares of Holdco common stock in the
exchange offers will not increase the number of shares of Holdco common stock
outstanding as we plan to exercise our right granted to us pursuant to the
exchange agreement that we entered into with CoreComm Limited on December 14,
2001 requiring CoreComm Limited to deliver to us that number of shares of our
common stock which we issue in the exchange offers. Thus, CoreComm Limited will
have little or no material assets following consummation of the exchange offers.
Please refer to the section of the prospectus entitled "Certain Relationships
and Related Transactions - Exchange Agreement between CoreComm Limited and
CoreComm Holdco."
All public notes tendered in the exchange offers and shares of Limited
common stock tendered in the exchange offers will be retained by CoreComm
Holdco. CoreComm Holdco may merge a subsidiary of CoreComm Holdco into CoreComm
Limited following the consummation of the exchange offers, but no determination
as to the timing or execution of a merger has been made. There can be no
assurance that a merger will occur or the timing thereof.
CHANGE OF CONTROL
If CoreComm Holdco acquires shares of Limited common stock pursuant to the
exchange offers, a change of control of CoreComm Limited could result.
OPTIONS PLANS
In December 2001, the CoreComm Limited board of directors, in connection
with the Holdco Recapitalization, accelerated all outstanding options to acquire
shares of CoreComm Limited common stock so that all are presently fully vested
and exercisable. CoreComm Limited options are not exercisable for shares of our
common stock. In the event that we are successful in consummating the exchange
offers, CoreComm Limited would become a subsidiary of CoreComm Holdco.
Subsequent to that time, CoreComm Holdco and CoreComm Limited may agree to
effect a merger between CoreComm Limited and a subsidiary of CoreComm Holdco
which would have the effect of converting holders of any remaining outstanding
shares of Limited common stock not owned by us into shares of our common stock
at an exchange ratio identical to that being offered in the exchange offer for
the Limited common stock. Between now and that time, if holders of CoreComm
Limited options exercise their options, they would, at the time of a merger,
have the same rights as other holders of Limited common stock to have their
shares of Limited common stock converted into shares of our common stock at that
exchange ratio.
REGULATORY APPROVALS
CoreComm Limited and CoreComm Holdco and/or their various subsidiaries hold
federal and state authorizations to provide international and domestic wireline
and wireless telecommunications services. Both the FCC and some of the states in
which we operate have regulatory regimes that require authorization holders to
obtain the approval of the relevant regulatory agency in connection with
undergoing changes in ownership or control. CoreComm Limited and CoreComm Holdco
are engaged in a process to secure any necessary approvals and do not anticipate
any issues related to approvals interfering with the completion of the exchange
offers. Please refer to the section of the prospectus entitled "Risk Factors -
Risk Factors Relating to Our Business - Any determination of non-compliance with
FCC and state regulations dealing with ownership changes could result in
monetary penalties or loss of our telecommunications authorizations."
Other than the foregoing and the SEC declaring the registration statement
on Form S-4 of which this prospectus forms a part effective, CoreComm Holdco
does not believe that any additional filings, including any filings under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, approvals or
other actions by or with any governmental authority or administrative or
regulatory agency are required with respect to the exchange offers.
NO APPRAISAL RIGHTS
Appraisal is a statutory remedy available to stockholders of corporations
that object to mergers and other extraordinary and statutorily specified
corporate actions. No appraisal rights are or will be available to holders of
outstanding securities in connection with the exchange offers.
ACCOUNTING TREATMENT
CoreComm Holdco is performing an analysis of the fair value of its net
tangible assets as if a purchase business combination occurred as a result of
the issuance of over 80% of its outstanding shares to new stockholders.
31
TERMS OF THE EXCHANGE OFFERS
CoreComm Holdco is offering to exchange 1/116.7 of a share of Holdco common
stock for each share of Limited common stock, and 3.0349 shares of Holdco common
stock and the cash consideration for each $1,000 in aggregate principal amount
of public notes, that are validly tendered and accepted by CoreComm Holdco, on
the terms and subject to the conditions described below by 12:00 midnight, New
York City time, on March 8, 2002. The number of shares of Holdco common stock
issued to each unaffiliated holder of Limited common stock and the number of
shares of Holdco common stock issued to each unaffiliated holder of public notes
will be rounded up to the nearest whole number in each exchange offer. CoreComm
Holdco may extend this deadline for any reason, including under those
circumstances specified below. The last day on which tenders will be accepted,
whether on March 8, 2002 or any later date to which the exchange offers may be
extended, is sometimes referred to in this document as the "expiration date."
These are voluntary exchange offers, which means that holders of outstanding
securities may tender all, some or none of their outstanding securities in the
exchange offers. All persons holding outstanding securities are eligible to
participate in the exchange offers if they validly tender their outstanding
securities during the exchange offer period in a jurisdiction where the exchange
offers are permitted under the laws of that jurisdiction.
The exchange offers are open to all holders of outstanding securities who
tender their securities in a jurisdiction where the exchange offers are
permitted under the laws of that jurisdiction. Therefore, any officer, director
or affiliate of CoreComm Limited or CoreComm Holdco who is a holder of
outstanding securities may participate in the exchange offers.
The exchange ratios of 1/116.7, applicable to the exchange offer for shares
of Limited common stock, and 3.0349 per $1,000 in aggregate principal amount,
applicable to the exchange offer for public notes, will be adjusted
proportionately for any stock splits, combinations, stock dividends and the like
that occurs prior to the expiration date of the exchange offers, including
extensions. For example, if CoreComm Holdco were to effect a 3-for-1 split, upon
consummation of the exchange offers a holder of outstanding securities who
tendered 1,000 shares of Limited common stock and $10,000 in aggregate principal
amount of public notes would receive 118 shares of Holdco common stock (plus
$300.00 in cash in connection with the public notes), calculated as the sum,
rounded up in each offer, of the following:
- the product of 1,000 shares, multiplied by the 1/116.7 exchange ratio,
and multiplied by three (reflecting the 3-for-1 split), resulting in the
right to receive 25.71 shares of Holdco common stock, rounded up to 26
shares; plus
- the product of $10,000 in aggregate principal amount of notes, multiplied
by the 3.0349/$1,000 exchange ratio, and multiplied by three (reflecting
the 3-for-1 split), resulting in the right to receive 91.05 shares of
Holdco common stock, rounded up to 92 shares.
CoreComm Holdco will accept up to all of (1) the outstanding shares of
Limited common stock and (2) the outstanding public notes for exchange and will
issue up to 1,314,416 shares of Holdco common stock in the exchange offers plus
additional shares which may be issued as a result of rounding up in the exchange
offers. CoreComm Holdco's obligation to complete the exchange offers is subject
to important conditions that are described under "-- Conditions for Completion
of the Exchange Offers."
The exchange ratio applicable to the exchange of Limited common stock is
based upon CoreComm Holdco's and CoreComm Limited's previously announced
intention to offer 13% of CoreComm Holdco's outstanding common stock to the
holders of Limited common stock and holders of warrants to purchase Limited
common stock. The shares being offered under the exchange offer to holders of
Limited common stock are equal to this 13%, less any amount reserved for holders
of warrants to purchase Limited common stock. This percentage represents, in our
view, a fair offer to the holders of Limited common stock based upon the
percentages of Holdco common stock that were offered to holders of CoreComm
Limited preferred stock and CoreComm Limited's and CoreComm Holdco's debt in the
prior phase of the recapitalization. Although holders of these securities had a
senior position in our capital structure to the holders of Limited common stock,
these holders agreed to allow us to offer the holders of Limited common stock
13% of Holdco's common stock.
In determining the exchange ratio and the cash consideration applicable to
the exchange of public notes, CoreComm Holdco is offering the same ratio and
cash consideration that was offered and accepted by the holders of 97.0% of the
outstanding principal amount of the public notes pursuant to a prior phase of
the Holdco Recapitalization.
CoreComm Holdco will furnish this document and related documents to
brokers, banks and similar persons whose names or the names of whose nominees
appear on CoreComm Limited's stockholder list or, if applicable, that are listed
as participants in a clearing agency's security position listing for subsequent
transmittal to beneficial owners of shares of Limited common stock and/or public
notes.
32
The terms and conditions of the exchange offers are set forth in this
document, the letters of transmittal and the instructions to the letters of
transmittal. Each holder of outstanding securities that tenders outstanding
securities in the exchange offers will be agreeing to the terms and conditions
of the exchange offers and will be making representations and warranties to, and
agreements with, CoreComm Holdco, as described in these documents. We urge you
to read these documents carefully before deciding whether to participate in the
exchange offers.
FRACTIONAL SHARES
Instead of issuing any fractional shares of Holdco common stock in the
exchange offers we will round up to the nearest whole number the number of
shares of Holdco common stock issued to each unaffiliated holder of Limited
common stock and the number of shares of Holdco common stock issued to each
unaffiliated holder of public notes.
RECOMMENDATION
Each of CoreComm Holdco and CoreComm Limited recommends that you tender
your outstanding securities in the exchange offers. None of the exchange agent,
the information agent or any of their respective officers or directors makes any
recommendation as to whether you should tender your outstanding securities in
the exchange offers.
ANNOUNCEMENT OF RESULTS
We expect to announce preliminary results of the exchange offers by press
release promptly after the expiration date. However, because of the time
required and difficulty involved in determining the number of outstanding
securities validly tendered for exchange, CoreComm Holdco expects that the final
results will not be determined until some time after the expiration date. We
will announce the final results of the exchange offers by press release promptly
after the results have been determined.
EXCHANGE OF THE OUTSTANDING SECURITIES
If all of the conditions of the exchange offers are satisfied or waived,
CoreComm Holdco will exchange 1/116.7 of a share of Holdco common stock for each
validly tendered share of Limited common stock and 3.0349 shares of Holdco
common stock and the cash consideration for each $1,000 in aggregate principal
amount of validly tendered public notes that were not properly withdrawn before
the expiration date, with the number of shares of Holdco common stock issued to
each unaffiliated holder of Limited common stock and the number of shares of
Holdco common stock issued to each unaffiliated holder of public notes being
rounded up to the nearest whole number in each exchange offer. The exchange
ratios will be adjusted proportionately for any stock splits, combinations,
stock dividends and the like. CoreComm Holdco may, subject to the rules under
the Exchange Act, delay accepting or exchanging any outstanding securities in
order to comply, in whole or in part, with any applicable law. For a description
of CoreComm Holdco's right to delay, terminate or amend the exchange offers,
please refer to the section of the prospectus entitled "-- Extension of Tender
Period; Termination; Amendment."
If CoreComm Holdco notifies the exchange agent, either orally or in
writing, that it has accepted the tenders of shares of outstanding securities
for exchange, the exchange of these outstanding securities will be complete.
Promptly following the announcement by CoreComm Holdco of the final results of
the exchange offers, the exchange agent will deliver the tendered shares of
outstanding securities to CoreComm Holdco. Simultaneously, the exchange agent,
as agent for the tendering stockholders, will receive from CoreComm Holdco the
shares of Holdco common stock that correspond, based on the exchange ratios, to
the number of outstanding securities accepted. The exchange agent then will
deliver the shares of Holdco common stock to you either by crediting the shares
of Holdco common stock, including fractional shares rounded up to the nearest
whole number, to book-entry accounts maintained by CoreComm Holdco's transfer
agent for the benefit of the tendering holders, or by physically delivering to
you shares, depending on the manner in which you tendered your outstanding
securities. In addition, the exchange agent will deliver the cash consideration
to the tendering public note holders.
If any tendered outstanding securities are not exchanged for any reason,
these unexchanged or untendered outstanding securities will be returned to the
tendering holders.
As soon as reasonably practicable following the crediting of shares to your
respective book-entry accounts, CoreComm Holdco's transfer agent will send you
an account statement evidencing your holdings.
CoreComm Holdco will not pay any interest in connection with the exchange
offers, regardless of any delay in making the exchange or crediting or
delivering shares.
33
No alternative, conditional or contingent tenders will be accepted in the
exchange offers. Tendering security holders waive any right to receive notice of
the acceptance by CoreComm Holdco of their outstanding securities for exchange.
PROCEDURES FOR TENDERING OUTSTANDING SECURITIES
To tender your outstanding securities, you must complete the following
procedures so that your tender is received by the exchange agent before the
expiration date:
If you have certificates representing shares of Limited common stock, you
should send the following documents to the exchange agent by one of the mailing
methods described in the yellow letter of transmittal, at the applicable address
set forth on the back cover of this document sufficiently in advance of the
expiration date for them to be received by the exchange agent before the
expiration date:
- a properly completed and executed yellow letter of transmittal indicating
the number of shares of Limited common stock to be tendered, along with
any other documents required by the instructions to the yellow letter of
transmittal; and
- the certificates representing the shares of Limited common stock to be
tendered.
If you have certificates representing public notes, you should send the
following documents to the exchange agent by one of the mailing methods
described in the blue letter of transmittal, at the applicable address set forth
on the back cover of this document sufficiently in advance of the expiration
date for them to be received by the exchange agent before the expiration date:
- a properly completed and executed blue letter of transmittal indicating
the aggregate principal amount of public notes to be tendered, along with
any other documents required by the instructions to the blue letter of
transmittal; and
- the certificates representing the public notes to be tendered.
In addition, the certificates representing shares of Limited common stock
and/or public notes, as applicable, to be tendered must be endorsed or you must
enclose an appropriate stock power relating to the delivery of Limited common
stock or an instrument of assignment relating to the delivery of public notes,
as applicable, if:
- that certificate is registered in the name of a person other than the
signer of a letter of transmittal;
- delivery of shares of Holdco common stock is to be made to the exchange
agent on behalf of a person other than the registered owner of the shares
of Limited common stock and/or public notes being tendered; or
- in the event that the shares of Limited common stock and/or public notes
are not accepted for exchange, they are to be delivered to CoreComm
Limited's transfer agent on behalf of a person other than the registered
owner.
The signature on the letter of transmittal must be guaranteed by an
eligible institution unless the shares of Limited common stock and/or public
notes, as applicable, tendered under the letters of transmittal are tendered in
one of the following ways:
- by the registered holder of the shares of Limited common stock or public
notes tendered if the holder has not requested special issuance as
described in "Special Issuance Instructions" of the instructions to the
letter of transmittal; or
- for the account of an eligible institution.
An eligible institution is a member of a registered national securities
exchange or a member of the National Association of Securities Dealers, Inc. or
a commercial bank or trust company having an office or a correspondent in the
United States. Most banks and financial institutions are eligible institutions.
If the certificate representing your shares of Limited common stock or
public notes has been lost, destroyed, mutilated or stolen, please refer to the
section of the prospectus entitled "-- Lost, Destroyed, Mutilated or Stolen
Certificates" for information regarding special procedures that must be
followed.
The exchange agent's address is set forth on the back cover of this
document.
34
BOOK-ENTRY TRANSFER
If you hold your shares of Limited common stock and/or public notes, as
applicable, through a broker, you should follow the instructions sent to you
separately by your broker. You should not use the letters of transmittal to
direct the tender of your shares of Limited common stock or public notes, as
applicable. Your broker must notify The Depository Trust Company and cause it to
transfer the shares or notes, as applicable, into the exchange agent's account
in accordance with The Depository Trust Company's procedures. The broker must
also ensure that the exchange agent receives an agent's message from The
Depository Trust Company confirming the book-entry transfer of your shares of
Limited common stock or public notes, as applicable. An agent's message is a
message, transmitted by The Depository Trust Company and received by the
exchange agent, that forms a part of a book-entry confirmation, which states
that The Depository Trust Company has received an express acknowledgment from
the participant in The Depository Trust Company tendering the shares or notes,
as applicable, that the participant has received and agrees to be bound by the
terms of the letter of transmittal and the instructions to the letters of
transmittal.
If you are an institution that is a participant in The Depository Trust
Company's book-entry transfer facility, you should follow the same procedures
that are applicable to persons holding shares or notes, as applicable, through a
broker as described in the immediately preceding paragraph.
Trustees, executors, administrators, guardians, attorneys-in-fact, officers
of corporations or others acting in a fiduciary or representative capacity who
sign a letter of transmittal, notice of guaranteed delivery, certificates
representing shares of Limited common stock and/or public notes to be tendered
or stock powers or other instruments of assignment must indicate the capacity in
which they are signing, and must submit evidence, which is current as of a date
within 180 days before the date that the applicable letters of transmittal is
delivered to the exchange agent, of their power to act in that capacity, unless
this requirement is waived by CoreComm Holdco.
If you validly tender your shares of Limited common stock and/or public
notes and they are accepted by CoreComm Holdco, there will be a binding
agreement between you and CoreComm Holdco on the terms and subject to the
conditions set forth in this document and in the applicable letter of
transmittal and the instructions to the applicable letter of transmittal. A
person who tenders shares of Limited common stock and/or public notes for their
own account violates U.S. federal securities laws unless the person owns:
- those shares of Limited common stock and/or public notes;
- other securities convertible into or exchangeable for those shares of
Limited common stock and/or public notes and intends to acquire shares of
Limited common stock and/or public notes for tender by conversion or
exchange of those securities; or
- an option, warrant or right to purchase those shares of Limited common
stock and/or public notes and intends to acquire shares of Limited common
stock and/or public notes for tender by exercise of that option, warrant
or right.
U.S. federal securities laws provide a similar restriction applicable to
the tender or guarantee of a tender on behalf of another person.
Do not send letters of transmittal, certificates representing shares of
Limited common stock and/or public notes or other exchange offer documents to
CoreComm Holdco, CoreComm Limited or the information agent. These materials must
be submitted to the exchange agent at the address set forth on the back cover of
this document as described above and in the instructions to the applicable
letter of transmittal in order for you to participate in the exchange offers.
It is up to you to decide how to deliver your shares of Limited common
stock and/or public notes, as applicable, and all other required documents to
the exchange agent. It is your responsibility to ensure that all necessary
materials are received by the exchange agent before the expiration date. If the
exchange agent does not receive all of the materials required by this section at
one of the addresses set forth on the back cover of this document before the
expiration date, your shares of Limited common stock and/or public notes, as
applicable, will not be validly tendered in the exchange offers.
CORECOMM HOLDCO'S INTERPRETATIONS ARE BINDING
CoreComm Holdco will determine, in its sole and absolute discretion, all
questions as to the form of documents, including notices of withdrawal, and the
validity, form, eligibility, including time of receipt, and acceptance for
exchange of
35
any tender of outstanding securities in the exchange offers. This determination
will be final and binding on all tendering security holders.
CoreComm Holdco reserves the absolute right to:
- determine whether a tendering security holder is eligible;
- reject any and all tenders of any outstanding securities not validly
tendered or the acceptance of which, in the opinion of CoreComm Holdco's
counsel, may be unlawful;
- waive any defects or irregularities in the tender of any outstanding
security or any conditions of the exchange offers either before or after
the expiration date; and
- request any additional information from any record or beneficial owner of
outstanding securities that CoreComm Holdco deems necessary or
appropriate.
None of CoreComm Holdco, CoreComm Limited, the information agent, the
exchange agent or any other person will be under any duty to notify tendering
security holders of any defect or irregularity in tenders or notices of
withdrawal or incur any liability for failure to give this notification. It is
your responsibility to ensure that your outstanding securities are validly
tendered in accordance with the procedures described in this document and the
related documents before the expiration date.
LOST, DESTROYED, MUTILATED OR STOLEN CERTIFICATES
If any certificate representing your shares of Limited common stock or
public notes, as applicable, has been lost, destroyed, mutilated or stolen and
you wish to tender your shares or notes represented by that certificate, please
complete Box A of the accompanying applicable letter of transmittal. If this
occurs, CoreComm Limited or CoreComm Holdco may require a bond as indemnity
against any claim that may be made with respect to the certificate alleged to
have been lost, destroyed, mutilated or stolen.
GUARANTEED DELIVERY PROCEDURES
If you wish to tender your outstanding securities but the shares of Limited
common stock and/or public notes, as applicable, are not immediately available,
or time will not permit the shares or notes or other required documentation to
reach the exchange agent before the expiration date, you may still tender your
outstanding securities if:
- the tender is made through an eligible institution;
- the exchange agent receives from the eligible institution before the
expiration date, a properly completed and duly executed notice of
guaranteed delivery, substantially in the form provided by CoreComm
Holdco; and
- the exchange agent receives the certificates representing all physically
tendered shares of Limited common stock and/or public notes, as
applicable, in proper form for transfer and a properly completed
applicable letter of transmittal, or a facsimile of the applicable letter
of transmittal and all other documents required by the applicable letter
of transmittal and the instructions to the applicable letter of
transmittal, within three Nasdaq National Market trading days after the
date of execution of the notice of guaranteed delivery.
You may deliver the notice of guaranteed delivery by hand, facsimile
transmission or mail to the exchange agent at the applicable address set forth
on the back cover of this document and you must include a guarantee by an
eligible institution in the form set forth in the notice of guaranteed delivery.
WITHDRAWAL RIGHTS
You may withdraw tenders of shares of outstanding securities at any time
before the expiration date, and, unless CoreComm Holdco has accepted your tender
as provided in this document and the accompanying documents, after the
expiration of 40 business days from the commencement of the exchange offers. If
CoreComm Holdco:
- delays its acceptance of the shares of Limited common stock or public
notes, as applicable, for exchange;
- extends the exchange offers; or
36
- is unable to accept the shares of Limited common stock or public notes,
as applicable, for exchange under the exchange offers for any reason,
then, without prejudice to CoreComm Holdco's rights under the exchange offers,
the exchange agent may, on behalf of CoreComm Holdco, retain any outstanding
securities tendered, and these outstanding securities may not be withdrawn,
except as otherwise provided in this document and the accompanying documents,
subject to provisions under the Exchange Act that provide that an issuer making
an exchange offer shall either pay the consideration offered or return tendered
securities promptly after the termination or withdrawal of the exchange offers.
For a withdrawal to be effective, a written notice of withdrawal must be
received by the exchange agent at one of its addresses set forth on the back
cover of this document. The notice of withdrawal must:
- specify the name of the person having tendered the shares of Limited
common stock and/or public notes, as applicable, to be withdrawn;
- identify the number of the shares of Limited common stock and/or public
notes, as applicable, to be withdrawn; and
- specify the name in which certificates representing the shares of Limited
common stock and/or public notes, as applicable, are registered, if
different from that of the withdrawing holder.
If certificates representing the shares of Limited common stock or public
notes, as applicable, have been delivered or otherwise identified to the
exchange agent, then, before the release of these certificates, the withdrawing
holder must also submit the serial numbers of the particular certificates to be
withdrawn.
If the outstanding securities have been tendered pursuant to the procedures
for book-entry transfer, any notice of withdrawal must specify the name and
number of the account at The Depository Trust Company to be credited with the
withdrawn outstanding securities and otherwise comply with the procedures of The
Depositary Trust Company.
Any outstanding securities withdrawn will be deemed not to have been
validly tendered for exchange for purposes of the exchange offers. Properly
withdrawn outstanding securities may be retendered by following one of the
procedures described under "-- Procedures for Tendering Outstanding Securities"
at any time on or before the expiration date.
If you withdraw your tender of any outstanding securities, these shares of
Limited common stock and/or public notes, as applicable, will be returned to you
either by crediting a book-entry account maintained by the Exchange Agent or by
delivering to you physical certificates, depending on the form in which you
tendered.
Except as otherwise provided above, any tender of outstanding securities
made under the exchange offers is irrevocable. No alternative, conditional or
contingent tenders will be accepted in the exchange offers.
EXTENSION OF TENDER PERIOD; TERMINATION; AMENDMENT
CoreComm Holdco expressly reserves the right, in its sole and absolute
discretion, for any reason, including the non-satisfaction of any of the
conditions for completion set forth below, at any time and from time to time, to
extend the period of time during which the exchange offers are open or to amend
the exchange offers in any respect, including changing the exchange ratios.
CoreComm Holdco also expressly reserves the right to extend the period of time
during which the exchange offers are open in the event either or both of the
exchange offers is undersubscribed -- that is, fewer than all of the outstanding
securities are tendered. In any of these cases, CoreComm Holdco will make a
public announcement of the extension or amendment.
If CoreComm Holdco materially changes the terms of, or information
concerning, the exchange offers, CoreComm Holdco will extend the exchange
offers. Depending on the substance and nature of the change, CoreComm Holdco
will extend the offers for at least five to 10 business days following the
announcement if the exchange offers would have otherwise expired within those
five to 10 business days.
If any condition for completion of the exchange offers described below is
not satisfied, CoreComm Holdco reserves the right to choose to delay acceptance
for exchange of any outstanding securities or to terminate the exchange offers
and not accept for exchange any outstanding securities. For more information,
please refer to the section of the prospectus entitled "-- Consequences of
Unsatisfied Conditions."
37
If CoreComm Holdco extends the exchange offers, is delayed in accepting any
outstanding securities or is unable to accept for exchange any outstanding
securities under the exchange offers for any reason, then, without affecting
CoreComm Holdco's rights under the exchange offers, the exchange agent may, on
behalf of CoreComm Holdco, retain all outstanding securities tendered. These
outstanding securities may not be withdrawn except as provided under "--
Withdrawal Rights."
CoreComm Holdco's reservation of the right to delay acceptance of any
outstanding security is subject to applicable law, which requires that CoreComm
Holdco pay the consideration offered or return the outstanding securities
deposited promptly after the termination or withdrawal of the exchange offers.
CoreComm Holdco will issue a press release or other public announcement no
later than 9:00 a.m., New York City time, on the next business day following any
extension, amendment, non-acceptance or termination of the previously scheduled
expiration date.
CONDITIONS FOR COMPLETION OF THE EXCHANGE OFFERS
CoreComm Holdco will not be obligated to complete the exchange offer
relating to Limited common stock unless at least 90% of the outstanding shares
of Limited common stock are validly tendered and not withdrawn and all of the
other conditions to the exchange offers described below have been satisfied.
This condition is sometimes referred to in this document as the "minimum
condition" and does not apply to the exchange offer relating to the public
notes.
Even if the minimum condition is satisfied, before the expiration date
CoreComm Holdco may choose not to accept outstanding securities for exchange and
not to complete the exchange offers if:
- CoreComm Holdco or CoreComm Limited does not receive or obtain any
consent, authorization, approval or exemption of or from any governmental
authority that may be advisable in connection with the completion of the
exchange offers;
- the registration statement on Form S-4 of which this prospectus forms a
part has not been declared effective under the Securities Act of 1933, as
amended, or is the subject of any stop order or proceeding seeking a stop
order;
- any action, proceeding or litigation seeking to enjoin, make illegal or
delay completion of the exchange offers or otherwise relating in any
manner to the exchange offers is or has been threatened or instituted or
is pending;
- any order, stay, judgment or decree is issued by any court, government,
governmental authority or other regulatory or administrative authority
and is in effect, or any statute, rule, regulation, governmental order or
injunction shall have been proposed, enacted, enforced or deemed
applicable to the exchange offers, any of which would or might restrain,
prohibit or delay completion of the exchange offers or impair the
contemplated benefits of the exchange offers to CoreComm Holdco or
CoreComm Limited;
- any of the following occurs and the adverse effect of which shall, in the
judgment of CoreComm Holdco, be continuing:
- any general suspension of trading in, or limitation on prices for,
securities on any national securities exchange, automated inter-dealer
quotation system or in the over-the-counter market in the United
States;
- a declaration of a banking moratorium or any suspension of payments in
respect of banks in the United States;
- any limitation, whether or not mandatory, by any governmental authority
on, or any other event that would reasonably be expected to materially
adversely affect, the extension of credit by banks or other lending
institutions;
- a commencement of a war or other national or international calamity,
directly or indirectly, involving the United States, which would
reasonably be expected to affect materially and adversely, or to delay
materially, the completion of the exchange offers;
- if any of the situations described above existed at the time of
commencement of the exchange offers and CoreComm Holdco determines that
the situation has deteriorated materially subsequent to the time of
commencement; or
38
- any tender or exchange offer, other than the exchange offers by CoreComm
Holdco, with respect to some or all of the outstanding public notes,
Limited common stock or Holdco common stock, or any merger, acquisition
or other business combination proposal involving CoreComm Holdco or
CoreComm Limited or a substantial portion of their respective assets,
shall have been proposed, announced or made by any person or entity;
the occurrence of which event, in the judgment of CoreComm Holdco, in any case
and regardless of the circumstances, makes it inadvisable to proceed with the
exchange offers or with the acceptance of outstanding securities tendered for
exchange.
CONSEQUENCES OF UNSATISFIED CONDITIONS
If any condition to the exchange offers is not satisfied, subject to
applicable rules and regulations, CoreComm Holdco may, in its sole and absolute
discretion:
- terminate one or both of the exchange offers and promptly return all
outstanding securities tendered in a terminated exchange offer to
tendering security holders, except in the case of a failure to achieve
the minimum condition, which only applies to the exchange offer for
Limited common stock;
- delay acceptance for exchange of any outstanding security, extend one or
both of the exchange offers, and, subject to the withdrawal rights
described under "-- Withdrawal Rights," retain all tendered outstanding
securities until the expiration date;
- amend the terms and conditions of one or both of the exchange offers; or
- waive the unsatisfied condition and, subject to any requirement to extend
the period of time during which one or both of the exchange offers are
open, complete one or both of the exchange offers.
These conditions are for the sole and exclusive benefit of CoreComm Holdco.
CoreComm Holdco may assert these conditions with respect to all or any portion
of one or both of the exchange offers regardless of the circumstances giving
rise to the conditions. CoreComm Holdco may waive any condition, in whole or in
part at any time prior to the expiration date in its sole and absolute
discretion, subject to applicable rules and regulations. CoreComm Holdco's
failure to exercise its rights under any of the conditions described above does
not represent a waiver of these rights. Each right is an ongoing right which may
be asserted at any time prior to the expiration date. Any determination by
CoreComm Holdco concerning the conditions described above will be final and
binding upon all parties.
If a stop order issued by the SEC is in effect at any time after the
commencement of the exchange offers with respect to the registration statement
of which this document is a part, CoreComm Holdco will not accept any
outstanding securities tendered and will not exchange shares of Holdco common
stock for any outstanding securities during the period in which a stop order is
in effect.
LEGAL LIMITATION
This document is not an offer to sell, and is not soliciting any offer to
buy, any Holdco common stock in any jurisdiction in which the offer or sale is
not permitted. If CoreComm Holdco learns of any jurisdiction in the United
States where making the exchange offers or its acceptance would not be
permitted, CoreComm Holdco intends to make a good faith effort to comply with
the relevant law of that jurisdiction. If, after a good faith effort, CoreComm
Holdco cannot comply with that law, CoreComm Holdco will determine whether the
exchange offers will be made to, and whether tenders will be accepted from or on
behalf of, persons that are holders of outstanding securities residing in the
jurisdiction.
FEES AND EXPENSES
CoreComm Holdco will not pay any fees or commissions to any broker or
dealer or any other person for soliciting tenders of outstanding securities
under the exchange offers. CoreComm Holdco will, out of its available cash on
hand, reimburse brokers, dealers, commercial banks and trust companies, upon
request made within a reasonable period of time, for reasonable and necessary
costs and expenses incurred by them in forwarding materials to their customers.
INFORMATION AGENT, EXCHANGE AGENT AND DEPOSITARY
CoreComm Holdco has retained D.F. King & Co., Inc. to act as the
information agent and Continental Stock Transfer & Trust Company to act as the
exchange agent and depositary in connection with the exchange offers.
Continental
39
Stock Transfer & Trust Company currently serves as the transfer agent for each
of CoreComm Limited and CoreComm Holdco and as the rights agent pursuant to the
rights agreement entered into with each of CoreComm Limited and CoreComm Holdco
and has served as the escrow agent pursuant to escrow agreements in connection
with the first phase of the Holdco Recapitalization.
The information agent may contact holders of outstanding securities by
mail, telephone, facsimile transmission and personal interviews and may request
brokers, dealers and other nominee stockholders to forward materials relating to
the exchange offers to beneficial owners. The information agent and the exchange
agent each will receive reasonable compensation for their respective services,
will be reimbursed for reasonable out-of-pocket expenses and will be indemnified
against liabilities in connection with their services.
Neither the information agent nor the exchange agent has been retained to
make solicitations or recommendations. The fees they receive will not be based
on the number of outstanding securities tendered under the exchange offers;
however, the exchange agent will be compensated in part on the basis of the
number of letters of transmittal received and the number of account statements
distributed.
SOURCE AND AMOUNT OF FUNDS
The exchange offers are not conditioned upon any financing arrangements.
The total amount of funds or other consideration required by CoreComm Holdco to
complete the Exchange Offers is approximately 1,314,416 shares of Holdco common
stock (consisting of approximately 1,300,000 shares in exchange for Limited
common stock, assuming all holders of outstanding warrants to acquire Limited
common stock were to exercise and tender in the exchange offer, and 14,416
shares in exchange for public notes) plus any additional shares required to be
issued as a result of rounding up. In lieu of issuing fractional shares of
Holdco common stock in the exchange offers, the number of shares of Holdco
common stock being issued to each holder of Limited common stock and the number
of shares of Holdco common stock being issued to each holder of public notes
will be rounded up to the nearest whole number, which may increase the aggregate
number of shares of Holdco common stock issued. We will pay up to $142,500 of
cash consideration, plus reimbursements of costs and expenses, in the exchange
offer for the public notes out of our available cash on hand.
40
UNAUDITED PRO FORMA FINANCIAL DATA OF HOLDCO
In October 2001, CoreComm Limited entered into agreements with numerous
holders of its 6% Convertible Subordinated Notes due 2006 whereby the holders
agreed, among other things, to exchange their notes for approximately $5 million
in cash (the amount of the October 1, 2001 interest payment) and shares of our
common stock as part of the Holdco Recapitalization. The exchange was completed
in December 2001, including the payment of the approximately $5 million by
CoreComm Limited.
On December 28, 2001, we completed the exchange of shares of our common
stock for substantial amounts of the outstanding indebtedness of CoreComm
Limited, substantial amounts of our outstanding indebtedness as co-obligors with
CoreComm Limited and all of the outstanding preferred stock of CoreComm Limited.
This exchange was completed pursuant to an exchange agreement with CoreComm
Limited and
(1) holders of 10.75% Unsecured Convertible PIK Notes due 2011 and 10.75%
Senior Unsecured Convertible PIK Notes due 2010, which were a joint obligation
of CoreComm Holdco and CoreComm Limited, in the initial principal amounts of
$10,000,000 and $16,100,000, respectively, together with any interest paid
thereon,
(2) the holders of Senior Unsecured Notes due September 29, 2003 of
CoreComm Limited in the principal amount of $105.7 million, and
(3) the holders of all of the preferred stock of CoreComm Limited in the
initial principal amount of $300 million together with any dividends paid
thereon.
The following summarizes the indebtedness and preferred stock that was
exchanged for shares of our common stock in December 2001:
---------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT OR
DESCRIPTION DATE ISSUED ISSUER LIQUIDATION PREFERENCE WHEN
ISSUED
---------------------------------------------------------------------------------------------------------------------
10.75% Unsecured Convertible PIK CoreComm Limited and
Notes due 2011 April 2001 CoreComm Holdco $10.0 million
---------------------------------------------------------------------------------------------------------------------
10.75% Senior Unsecured CoreComm Limited and
Convertible PIK Notes due 2010 December 2000 CoreComm Holdco $16.1 million
---------------------------------------------------------------------------------------------------------------------
Senior Unsecured Notes due
September 29, 2003 September 2000 CoreComm Limited $108.7 million
---------------------------------------------------------------------------------------------------------------------
6% Convertible Subordinated Notes
due 2006 October 1999 CoreComm Limited $175.0 million(1)
---------------------------------------------------------------------------------------------------------------------
Series A and Series A-1 Preferred
Stock September 2000 CoreComm Limited $51.1 million
---------------------------------------------------------------------------------------------------------------------
Series B Preferred Stock September 2000 CoreComm Limited $250.0 million
---------------------------------------------------------------------------------------------------------------------
------------
(1) $164.75 million was outstanding as of September 30, 2001, of which $160
million was exchanged.
As a result of the completed exchanges in December 2001, approximately 87%
of our outstanding shares, or 8,685,602 shares, are owned by the former holders
of indebtedness of CoreComm Holdco and CoreComm Limited and the former holders
of preferred stock of CoreComm Limited, and approximately 13% of our outstanding
shares, or 1,314,416 shares, continue to be held by CoreComm Limited. We hold
$160 million principal amount of CoreComm Limited's 6% Convertible Subordinated
Notes due 2006, approximately $105.7 million principal amount of CoreComm
Limited's Senior Unsecured Notes due September 29, 2003, approximately 51,000
shares of CoreComm Limited's Series A and Series A-1 preferred stock and 250,000
shares of CoreComm Limited's Series B preferred stock as a result of the
exchanges. In addition, we exchanged the approximately $10.8 million principal
and accrued interest of 10.75% Unsecured Convertible PIK Notes due 2011 and the
approximately $18.0 million principal and accrued interest of 10.75% Senior
Unsecured Convertible PIK Notes due 2010 for shares of our common stock.
We will determine the gain on restructuring of our indebtedness and the
carrying value of our investment in CoreComm Limited's notes and preferred stock
based on the fair value of our shares issued in the recapitalization. As a
result
41
of the issuance of over 80% of our outstanding shares to new stockholders, we
are performing an analysis of the fair value of our net tangible assets as if a
purchase business combination occurred.
We intend to offer our common stock to CoreComm Limited's stockholders
through registered public exchange offers. These offers will also be made to
solicit any remaining holders of CoreComm Limited's 6% Convertible Subordinated
Notes due 2006, who will be offered a pro rata share in the aggregate
consideration described above. We have agreed to file a shelf registration
statement under the Securities Act to permit the sale of our common stock that
was issued in the first phases of the Holdco Recapitalization.
In September 2000, CoreComm Limited acquired ATX in exchange for cash,
notes, convertible preferred stock and common stock and CoreComm Limited
acquired Voyager in exchange for cash and common stock.
The unaudited pro forma financial data presented below gives effect to the
completed acquisitions of ATX and Voyager as well as the recapitalization and
exchange transactions completed in December 2001. In addition, the unaudited pro
forma financial data gives effect to other transactions to eliminate additional
amounts of our outstanding indebtedness that were entered into by December 31,
2001. The unaudited pro forma financial data also gives effect to the intended
public exchange offers of our common stock to CoreComm Limited's stockholders,
and to the holders of CoreComm Limited's 6% Convertible Subordinated Notes.
Finally, the unaudited pro forma financial data gives effect to an estimated
result of the fair value analysis of our net tangible assets as if a purchase
business combination occurred in connection with the recapitalization and
exchange transactions. We have estimated that the fair value of our shares
issued in these transactions is $3.00 per share. The final determination of fair
value will be made upon the completion of a study to be undertaken to determine
the fair value of some of our assets and liabilities, including intangible
assets. Our actual financial position and results of operations may differ,
perhaps significantly, from the unaudited pro forma amounts reflected in this
prospectus as a result of the completion of this fair value analysis.
The pro forma financial data is based on our historical financial
statements and the historical financial statements of ATX, Voyager and CoreComm
Limited. 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 fair values. Some amounts in these
historical financial statements have been reclassified to conform to our
presentation.
The unaudited pro forma condensed statements of operations for the nine
months ended September 30, 2001 and the year ended December 31, 2000 give effect
to the recapitalization and exchange transactions, the other transactions to
eliminate additional amounts of our outstanding indebtedness and the estimated
result of the fair value analysis as if they had occurred on January 1, 2000.
The unaudited pro forma condensed statements of operations for the year ended
December 31, 2000 also gives effect to the ATX and Voyager acquisitions as if
they had been consummated on January 1, 2000. The unaudited pro forma condensed
balance sheet at September 30, 2001 gives effect to the recapitalization and
exchange transactions, the other transactions to eliminate additional amounts of
our outstanding indebtedness and the estimated result of the fair value analysis
as if they had occurred on September 30, 2001.
The pro forma adjustments are based upon available information and
assumptions that we believe are reasonable. The unaudited pro forma condensed
statements of operations do not purport to present our results of operations had
the various transactions or 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 financial statements should be
read in conjunction with our financial statements and related notes, and with
the financial statements and related notes of ATX and Voyager appearing
elsewhere in this prospectus.
As of December 31, 2001, there were options to purchase approximately 22.1
million shares of CoreComm Limited common stock outstanding. In December 2001,
the CoreComm Limited board of directors, in connection with the Holdco
Recapitalization, accelerated all outstanding options to acquire shares of
CoreComm Limited common stock so that all are presently fully vested and
exercisable. However, based on the last sales price of CoreComm Limited common
stock on the Nasdaq Stock Market on February 4, 2002 of $.10, less than 1% of
those options are at exercise prices below the market price for CoreComm Limited
common stock. CoreComm Limited options are not exercisable for shares of our
common stock. In the event that we are successful in consummating the exchange
offers, CoreComm Limited would become a subsidiary of CoreComm Holdco.
Subsequent to that time, CoreComm Holdco and CoreComm Limited may agree to
effect a merger between CoreComm Limited and a subsidiary of CoreComm Holdco
which would have the effect of converting holders of any remaining outstanding
shares of CoreComm Limited common stock not owned by us into shares of our
common stock at an exchange ratio identical to that being offered in the
exchange offers. Between now and that time, if holders of CoreComm Limited
options exercise their options, they would, at the time of a merger, have the
same rights as other holders of CoreComm Limited common stock to have their
shares of CoreComm Limited converted to shares of our common stock at
42
that exchange ratio. The pro forma financial data does not give effect to
non-cash compensation expense, if any, that may be recorded upon such option
transactions.
43
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
SEPTEMBER 30, 2001
(IN THOUSANDS)
PRO FORMA
FOR
COMPLETED
PORTION OF CORECOMM CORECOMM
CORECOMM HOLDCO LIMITED & HOLDCO
HOLDCO RECAPITALIZATION SUBSIDIARIES RECAPITALIZATION
HISTORICAL ADJUSTMENTS & OTHER HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------------- ------------ ----------- ----------------
Assets
Cash and cash equivalents. $ 46,713 $ (3,200) (C) $ 43,513 $ 240 $(7,628) (E, G, H) $ 36,125
Other current assets...... 40,510 40,510 575 41,085
-------- ---------- -------- -------- -------- ---------
Total current assets...... 87,223 (3,200) 84,023 815 (7,628) 77,210
Fixed assets, net......... 120,464 (7,222) (C) 113,242 68 113,310
Goodwill, net............. 355,448 (249,688) (D) 105,760 29,155 (I) 134,915
Intangible assets, net.... 5,790 5,790 5,790
Investment in and
receivable
from CoreComm Limited.. 22,937 (B) 22,937 (22,937) (F, G) --
Other, net................ 14,105 14,105 8,595 (5,041) (G) 17,659
-------- ---------- -------- -------- --------- ---------
$583,030 $(237,173) $345,857 $ 9,478 $6,451 $348,884
======== ========== ======== ======== ========= =========
Liabilities and
shareholders'
equity
Current liabilities
Current portion of debt
and capital leases..... $40,772 $ (29,607) (C) $11,165 $2,739 $(2,739) (G) $11,165
Other current liabilities. 144,690 (45) (C) 144,645 26,532 (23,211) (E, G) 147,966
-------- ---------- -------- -------- -------- ---------
Total current liabilities. 185,462 (29,652) 155,810 29,271 (25,950) 159,131
Debt and capital leases... 147,124 (2,452) (A, C) 144,672 257,686 (257,686) (G) 144,672
Notes payable to related
parties................ 32,869 (17,494) (A) 15,375 15,375
(A, B, (F, G,
Shareholders' equity...... 217,575 (187,575) C, D) 30,000 (277,479) 277,185 H, I) 29,706
-------- ---------- -------- -------- -------- ---------
$583,030 $(237,173) $345,857 $9,478 $(6,451) $348,884
======== ========== ======== ======== ========= =========
44
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
(IN THOUSANDS, EXCEPT PER SHARE DATA)
PRO FORMA FOR
COMPLETED
PORTION OF CORECOMM CORECOMM
CORECOMM HOLDCO LIMITED & HOLDCO
HOLDCO RECAPITALIZATION SUBSIDIARIES RECAPITALIZATION
HISTORICAL ADJUSTMENTS AND OTHER HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------------- ------------ ----------- -----------------
Revenues $ 220,055 $220,055 $ 432 - $ 220,487
Costs and expenses.........
Operating.................. 175,942 175,942 175,942
Selling, general and 75,021 75,021 826 75,847
administrative.............
Corporate.................. 3,854 3,854 2,860 6,714
Non-cash compensation...... 9,702 9,702 9,702
Other charges.............. 37,395 37,395 37,395
Write-down of intangibles.. 167,599 167,599 167,599
Depreciation............... 34,626 34,626 26 34,652
Amortization............... 75,390 $(45,833) (N) 29,557 2 $ 4,373 (R) 33,932
--------- -------- --------- -------- --------- ---------
579,529 (45,833) 533,696 3,714 $ 4,373 541,783
--------- -------- --------- -------- --------- ---------
Operating (loss)........... (359,474) 45,833 (313,641) (3,282) (4,373) (321,296)
Other income (expense).....
Interest income and other,
net..................... 1,875 (320) (Q) 1,555 151 (4) (S) 1,702
Interest expense........... (18,467) 5,654 (P) (12,813) (16,955) 16,955 (T) (12,813)
--------- -------- --------- -------- --------- ---------
(Loss) before income taxes
and
extraordinary item...... (376,066) 51,167 (324,899) (20,086) 12,578 (332,407)
Income tax benefit......... 33 33 201 234
--------- -------- --------- -------- --------- ---------
(Loss) before extraordinary
item.................... $(376,033) $ 51,167 $(324,866) $(19,885) $ 12,578 $(332,173)
========= ======== ========= ======== ========= =========
Basic and diluted (loss) per
share before
extraordinary item...... $(39.52) $(32.49) $ (33.55)
========= ======== ========= ======== ========= =========
Weighted average shares.... 9,514 486 (O) 10,000 (98) (U) 9,902
========= ======== ========= ======== ========= =========
45
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE YEAR ENDED DECEMBER 31, 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA)
COMPLETED ACQUISITIONS
----------------------------------------
PRO
FORMA
FOR
COMPLETED
PORTION CORECOMM
OF LIMITED CORECOMM
CORECOMM HOLDCO AND HOLDCO
HOLDCO ATX VOYAGER RECAPITAL- SUB- RECAPITALI-
HISTORI- HISTORI- PRO ADJUST- PRO ADJUST- IZATION SIDIARIES ADJUST- ZATION
CAL CAL FORMA MENTS FORMA MENTS & OTHER HISTORICAL MENTS PROFORMA
---------------------------------------------------------------------------------------------------------------
Revenues $ 131,526 $ 110,817 $ 55,507 $ 297,850 - $297,850 $596 $298,446
Costs and
expenses
Operating 142,323 84,176 24,812 251,311 251,311 251,311
Selling, general
and
administrative 109,197 43,603 26,189 $ (1,400)(J) 177,589 177,589 1,813 179,402
Corporate 11,224 11,224 11,224 1,660 12,884
Non-cash
compensation 43,440 75 43,515 43,515 43,515
Other charges 12,706 1,103 1,707 (2,810)(K) 12,706 12,706 12,706
Write-down of
intangibles 35,920 35,920 35,920 35,920
Depreciation 30,641 2,227 5,265 38,133 38,133 105 38,238
Amortization 42,396 134 23,024 65,000 (L) 130,554 $(83,458) 47,096 24 $5,831 (R) 52,951
-----------------------------------------------------------------------------------------------------------------
((83,458)
427,847 131,243 81,072 60,790 700,952 617,494 3,602 5,831 626,927
-----------------------------------------------------------------------------------------------------------------
Operating (loss) (296,321) (20,426) (25,565) (60,790) (403,102) 83,458 (319,644) (3,006) (5,831) (328,481)
Other income
(expense)
Interest income
and other,
net 1,134 76 712 1,922 (394)(Q) 1,528 5,089 (5) (S) 6,612
Interest expense (5,929) (2,273) (10,177)(M) (18,379) 1,210 (P) (17,169) (14,528) 14,524 (T) (17,173)
-----------------------------------------------------------------------------------------------------------------
(Loss) before
income taxes
and extraordinary
item (301,116) (20,350) (27,126) (70,967) (419,559) 84,274 (335,285) (12,445) 8,688 (339,042)
Income tax
provision (125) (125) (125) (125) (250)
-----------------------------------------------------------------------------------------------------------------
(Loss) before
extraordinary
item $(301,241) $ (20,350) $(27,126) $(70,967) $(419,684) $ 84,274 $(335,410) $(12,570) $8,688 $(339,292)
=================================================================================================================
Basic and diluted
(loss)
per share before
extra-ordinary
item $ (31.66) $(44.11) $ (33.54) $ (34.26)
========= ========= ========= =========
Weighted average
shares 9,514 9,514 (O) 10,000 (98) (U) 9,902
========= ========= ========= ======= ========
46
NOTES TO UNAUDITED PRO FORMA FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Pro Forma Adjustments for Holdco Recapitalization and Other
(A) HOLDCO RECAPITALIZATION CORECOMM HOLDCO NOTES
--------------------------------------------------------------------------------
10.75% UNSECURED 10.75% UNSECURED
CONVERTIBLE NOTES CONVERTIBLE NOTES
DUE 2011 DUE 2010 TOTAL
--------------------------------------------------------------------------------
Note payable $10,502 $10,502
Notes payable to related $17,494 17,494
parties
Shares issued 400 640 1,040
Value of CoreComm Holdco
common stock $3.00 $3.00 $3.00
--------------------------------------------- ----------------
$1,200 $1,920 $3,120
--------------------------------------------- ----------------
Extraordinary gain $9,302 $15,574 $24,876
============================================= ================
(B) HOLDCO RECAPITALIZATION CORECOMM LIMITED NOTES & PREFERRED STOCK
--------------------------------------------------------------------------------
SENIOR UNSECURED
NOTES DUE 2003 AND
SERIES B PREFERRED 6% CONVERTIBLE SERIES A AND A-1
STOCK SUBORDINATED NOTES PREFERRED STOCK TOTAL
--------------------------------------------------------------------------------
Shares issued 5,560 486 1,600 7,646
Value of CoreComm Holdco
common stock $3.00 $3.00 $3.00 $3.00
Investment in CoreComm
Limited $16,680 $1,457 $4,800 $22,937
================================================================================
An aggregate of 8,200 of the shares issued in (A) and (B) were
contributed by CoreComm Limited.
(C) OTHER DEBT
---------------------------------------------------------------------------
Current portion of debt and
capital leases $29,607
Accrued interest 45
Reclassify to noncurrent debt, net
of discount (8,050)
Fixed assets, net returned (7,222)
Cash paid (3,200)
----------------
Extraordinary gain $11,180
================
Other transactions included above to eliminate additional amounts of
our indebtedness that were negotiated away or settled for a reduced
amount paid in cash and through the return of assets. All were entered
into by December 31, 2001.
(D) Adjustment to record the estimated
result of the analysis of the fair
value of our net tangible assets
as if a purchase business
combination occurred
Goodwill and shareholders'
equity reduction $ 249,688
================
(E) CORECOMM LIMITED EXCHANGE 6% CONVERTIBLE SUBORDINATED NOTES
---------------------------------------------------------------------------
Cash to be paid for accrued
interest
$4,750 principal amount 6% for
1/2 year $ 143
================
47
NOTES TO UNAUDITED PRO FORMA FINANCIAL DATA (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(F) EXCHANGE OFFER 6% CONVERTIBLE SUBORDINATED NOTES
---------------------------------------------------------------------------
Shares to be issued for $4,750
principal amount of 6%
Convertible
subordinated notes 14
Value of CoreComm Holdco common
stock $3.00
----------------
Investment in CoreComm Limited $43
================
(G) ELIMINATION TO CONSOLIDATE CORECOMM HOLDCO AND CORECOMM
LIMITED AFTER THE HOLDCO RECAPITALIZATION
--------------------------------------------------------------------
Cash and cash equivalents: Total
Cash paid for 6% convertible
subordinated
notes - exchanged $(4,800)
Other, net:
Deferred financing costs on exchanged
debt (5,041)
Current portion of debt and capital
leases:
Senior unsecured notes due 2003 -
current portion 2,739
Other current liabilities:
Accrued interest 6% convertible
subordinated notes 4,813
Accrued interest senior unsecured
notes due 2003 3,405
Series A preferred dividend payable 3,326
Series B preferred dividend payable 11,524 23,068
Debt and capital leases:
6% convertible subordinated notes 164,750
payable
Senior unsecured notes due 2003 92,936 257,686
Shareholders' equity:
Series A preferred stock 50,000
Series B preferred stock 67,298 117,298
-------------------- --------------
390,950
CoreComm Holdco investment in:
CoreComm Limited 6% convertible
subordinated notes to be
exchanged (43)
CoreComm Limited notes & preferred
stock from recapitalization (22,937)
--------------
Adjustment to investment in and
receivable from CoreComm Limited (22,980)
--------------
$367,970
==============
(H) HOLDCO RECAPITALIZATION AND OTHER COSTS
-----------------------------------------------------
Legal, accounting and other $685
Employee incentives 2,000
---------------------
Cash paid (offset to extraordinary gain)
to record estimated cost of transactions. $2,685
=====================
To record estimated cost of transactions.
48
NOTES TO UNAUDITED PRO FORMA FINANCIAL DATA (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(I) Adjustment to record consolidation of CoreComm
Limited's negative net assets, and shares of CoreComm
Holdco held by CoreComm Limited (98 shares at $3.00
per share or $294) $29,155
============
YEAR ENDED
DECEMBER 31, 2000
-------------------
PRO FORMA ADJUSTMENTS FOR COMPLETED
ACQUISITIONS
(J) Phantom Unit Compensation
Upon a change in control of ATX, ATX recorded
a compensation charge equal to the fair
value of its currently outstanding phantom
units under its Phantom Unit Plan less amounts
previously recorded $ 13,600
The expense related to the Phantom Unit Plan has
been excluded from the pro forma condensed
statement of operations since it is a
non-recurring charge (15,000)
-------------------
Net statement of operations impact $ (1,400)
===================
To adjust ATX Phantom Unit costs which are
non-recurring
(K) Nonrecurring merger related charges $ (2,810)
===================
(L) Amortization
ATX goodwill $397,796
Number of months 60
Pro forma period 9
-----------
59,669
Historical amortization in ATX (134)
Historical amortization in CoreComm Holdco (208)
-----------
59,327
Voyager goodwill $190,682
Number of months 60
Pro forma period 9
-----------
28,602
Historical amortization in Voyager (22,826)
Historical amortization in CoreComm Holdco (103) 5,673
-------------------------------
Amortization adjustment $65,000
===================
49
NOTES TO UNAUDITED PRO FORMA FINANCIAL DATA (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED NINE MONTHS
DECEMBER 31, ENDED
2000 SEPTEMBER 30, 2001
---------------- --------------------
(M) To record additional interest costs associated with
financing the ATX and Voyager acquisitions for periods
prior to their acquisitions in September 2000
Interest expense
Senior secured credit facility $75,000 at
11.04% for nine months $ 6,210
Senior unsecured notes due 2003 $108,700 at
6.47% for nine months 5,273
Amortization of fees on borrowing recorded as
deferred financing costs (eight year term)
for nine months
473
---------------
11,956
Historical interest expense on Voyager debt(1) (1,641)
Historical interest expense on CoreComm Holdco (138)
--------------
Interest expense adjustment $10,177
==============
(1) This facility was repaid at the closing of the Voyager merger
(N) Purchase Price Adjustment
Goodwill write-down March 2001 $(167,599) $(167,599)
Useful life (months) 60
Pro forma period (33,520) 3 (8,380)
------------ ---------
Purchase price allocation write-down -
pro forma (249,688) (249,688)
Useful life (months) 60
Pro forma period (49,938) 9 (37,453)
---------- -------- ---------
amortization adjustment $(83,458) $(45,833)
========== ======== =========
(O) Shares issued for 6% convertible subordinated
notes 486 486
=== ===
PRO FORMA ADJUSTMENTS FOR HOLDCO
RECAPITALIZATION AND OTHER
(P) To decrease interest expense for debt that
has been exchanged for shares of CoreComm
Holdco common stock
Interest expense
10.75% unsecured convertible notes due 2011 $502
10.75% senior unsecured convertible notes due
2010 70 1,323
Equipment payable 477
Senior secured credit facility 3,037
Working capital promissory note 216 70
Capital lease 223 67
Note payable for equipment 701 178
------- -------
$1,210 $5,654
======= =======
50
NOTES TO UNAUDITED PRO FORMA FINANCIAL DATA (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NINE MONTHS
ENDED
YEAR ENDED SEPTEMBER 30,
DECEMBER 31, 2000 2001
-------------------- -----------------
(Q) Interest income adjustment
Cash paid 10,685 10,685
Interest rate 3.68% 3.99%
Pro forma period 12 9
------------------ -----------------
$394 $320
================== =================
(R) To record amortization on the additional
goodwill as a result of the consolidation of
CoreComm Limited $29,155 $29,155
Useful life (months) 60 60
Pro forma period 12 9
----------------- -----------------
$5,831 $4,373
================= =================
(S) Interest income adjustment
Cash to be paid for 6% convertible
subordinated notes $143 $143
Interest rate 3.68% 3.99%
Pro forma period 12 9
----------------- -----------------
$5 $4
================= =================
(T) Interest expense - CoreComm Limited
recapitalization
6% convertible subordinated notes $10,500 $7,602
Amortization of fees on borrowing recorded as
deferred financing costs 1,006 756
Senior unsecured notes due 2003 3,018 8,597
----------------- -----------------
$14,524 $16,955
================= =================
(U) Shares held by CoreComm Limited that become
treasury shares (98) (98)
================= =================
51
UNAUDITED PRO FORMA FINANCIAL DATA OF LIMITED
In October 2001, CoreComm Limited entered into agreements with numerous
holders of its public notes whereby the holders agreed, among other things, to
exchange their notes for approximately $5 million in cash (the amount of the
October 1, 2001 interest payment) and shares of our common stock as part of the
Holdco Recapitalization. The exchange was completed in December 2001, including
the payment of the approximately $5 million by CoreComm Limited.
On December 28, 2001, we completed the exchange of shares of our common
stock for substantial amounts of the outstanding indebtedness of CoreComm
Limited, substantial amounts of our outstanding indebtedness as co-obligors with
CoreComm Limited and all of the outstanding preferred stock of CoreComm Limited.
This exchange was completed pursuant to an exchange agreement with CoreComm
Limited and
(1) holders of 10.75% Unsecured Convertible PIK Notes due 2011 and 10.75%
Senior Unsecured Convertible PIK Notes due 2010, which were a joint obligation
of CoreComm Holdco and CoreComm Limited, in the initial principal amounts of
$10,000,000 and $16,100,000, respectively, together with any interest paid
thereon,
(2) the holders of Senior Unsecured Notes due September 29, 2003 of
CoreComm Limited in the principal amount of $105.7 million, and
(3) the holders of all of the preferred stock of CoreComm Limited in the
initial principal amount of $300 million together with any dividends paid
thereon.
The following summarizes the indebtedness and preferred stock that was
exchanged for shares of our common stock in December 2001:
------------------------------------------ -------------------- ----------------------- -----------------------------
PRINCIPAL AMOUNT OR
DESCRIPTION DATE ISSUED ISSUER LIQUIDATION PREFERENCE WHEN
ISSUED
------------------------------------------ -------------------- ----------------------- -----------------------------
10.75% Unsecured Convertible PIK CoreComm Limited and
Notes due 2011 April 2001 CoreComm Holdco $10.0 million
------------------------------------------ -------------------- ----------------------- -----------------------------
10.75% Senior Unsecured CoreComm Limited and
Convertible PIK Notes due 2010 December 2000 CoreComm Holdco $16.1 million
------------------------------------------ -------------------- ----------------------- -----------------------------
Senior Unsecured Notes due
September 29, 2003 September 2000 CoreComm Limited $108.7 million
------------------------------------------ -------------------- ----------------------- -----------------------------
6% Convertible Subordinated Notes
due 2006 October 1999 CoreComm Limited $175.0 million (1)
------------------------------------------ -------------------- ----------------------- -----------------------------
Series A and Series A-1 Preferred
Stock September 2000 CoreComm Limited $51.1 million
------------------------------------------ -------------------- ----------------------- -----------------------------
Series B Preferred Stock September 2000 CoreComm Limited $250.0 million
------------------------------------------ -------------------- ----------------------- -----------------------------
----------
(1) $164.75 million was outstanding as of September 30, 2001, of which $160
million was exchanged.
As a result of the exchanges completed in December 2001, approximately 87%
of our outstanding shares, or 8,685,602 shares, are owned by the former holders
of indebtedness of CoreComm Holdco and CoreComm Limited and the former holders
of preferred stock of CoreComm Limited, and approximately 13% of our outstanding
shares, or 1,314,416 shares, continue to be held by CoreComm Limited. We hold
$160 million principal amount of public notes, approximately $105.7 million
principal amount of CoreComm Limited's Senior Unsecured Notes due September 29,
2003, approximately $10.8 million principal amount and accrued interest of
10.75% Unsecured Convertible PIK Notes due 2011, approximately $18 million
principal amount and accrued interest of 10.75% Senior Unsecured Convertible PIK
Notes due 2010, approximately 51,000 shares of CoreComm Limited's Series A and
Series A-1 preferred stock and 250,000 shares of CoreComm Limited's Series B
preferred stock as a result of the exchanges.
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.
52
The unaudited pro forma financial data presented below gives effect to the
completed acquisitions of ATX and Voyager as well as the recapitalization and
exchange transactions completed in December 2001. The pro forma financial data
is based on our historical financial statements and the historical financial
statements of ATX, Voyager, CoreComm Limited and CoreComm Holdco. 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 fair values.
The unaudited pro forma condensed statements of operations for the nine
months ended September 30, 2001 and the year ended December 31, 2000 give effect
to the completed recapitalization and exchange transactions as if they had
occurred on January 1, 2000. The unaudited pro forma condensed balance sheet at
September 30, 2001 gives effect to the completed recapitalization and exchange
transactions as if they had occurred on September 30, 2001. The effect of the
Holdco Recapitalization completed to date is to reduce CoreComm Limited's
ownership in CoreComm Holdco from 100% to approximately 13%. Therefore CoreComm
Limited would account for CoreComm Holdco on the equity method where as it was
previously consolidated. The CoreComm Limited unaudited condensed consolidated
pro forma financial statements do not give effect to the exchange offers.
The pro forma adjustments are based upon available information and
assumptions that we believe are reasonable. The unaudited pro forma condensed
statements of operations do not purport to present the results of operations of
CoreComm Limited had the various transactions or 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 financial
statements should be read in conjunction with our financial statements and
related notes, and with the financial statements and related notes of CoreComm
Limited, ATX and Voyager appearing elsewhere in this prospectus.
53
CORECOMM LIMITED
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
SEPTEMBER 30, 2001
(IN THOUSANDS)
CORECOMM TO ELIMINATE
LIMITED CORECOMM CORECOMM
HISTORICAL HOLDCO LIMITED
HISTORICAL ADJUSTMENTS PRO FORMA
----------- --------------- --------------- ------------
Assets
Cash and cash equivalents............. $46,953 $ 46,713 $- $240
Other current assets.................. 41,085 40,510 575
----------- --------------- --------------- ------------
Total current assets................... 88,038 87,223 - 815
Fixed assets, net...................... 120,532 120,464 68
Goodwill, net......................... 355,448 355,448 -
Intangible assets, net................. 5,790 5,790 -
Investment in CoreComm Holdco 3,900 (A)
Other, net............................ 22,700 14,105 8,595
----------- --------------- --------------- ------------
$592,508 $583,030 $3,900 $13,378
=========== =============== =============== ============
Liabilities and
shareholders' equity
Current liabilities
Current portion of debt
and capital leases................. $43,511 $40,772 $- $2,739
Other current liabilities....... 171,222 144,690 26,532
----------- --------------- --------------- ------------
Total current liabilities. 214,733 185,462 - 29,271
Debt and capital leases 404,810 147,124 257,686
Notes payable to related
parties............................ 32,869 32,869 -
Shareholders' equity.................. (59,904) 217,575 3,900 (A) (273,579)
----------- --------------- --------------- ------------
$592,508 $583,030 $3,900 $13,378
=========== =============== =============== ============
54
CORECOMM LIMITED
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
(IN THOUSANDS, EXCEPT PER SHARE DATA)
TO ELIMINATE
CORECOMM CORECOMM CORECOMM
LIMITED HOLDCO LIMITED
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
----------- ------------- ------------ --------------
Revenues................................ $220,487 $ 220,055 $ - $432
Costs and expensess
Operating............................... 175,942 175,942 -
Selling, general and administrative..... 75,847 75,021 826
Corporate .............................. 6,714 3,854 2,860
Non-cash compensation .................. 9,702 9,702 -
Other charges .......................... 37,395 37,395 -
Write-down of intangibles .............. 167,599 167,599 -
Depreciation ........................... 34,652 34,626 26
Amortization ........................... 75,392 75,390 2
-------- --------- -------- --------
583,243 579,529 - 3,714
-------- --------- -------- --------
Operating (loss) ....................... (362,756) (359,474) - (3,282)
Other income (expense) .................
Interest income and other, net ......... 2,026 1,875 151
Equity in net (loss) of CoreComm Holdco. (42,233)(B) (42,233)
Interest expense ....................... (35,422) (18,467) (16,955)
-------- --------- -------- --------
(Loss) before income taxes and
extraordinary item .................. (396,152) (376,066) (42,233) (62,319)
Income tax benefit ..................... 234 33 201
-------- --------- -------- --------
(Loss) before extraordinary item ....... $(395,918) $(376,033) $(42,233) $(62,118)
======== ========= ======== ========
Basic and diluted (loss) per share before
extraordinary item (1) .............. $(4.72) $(.90)
======== ========= ======== ========
Weighted average shares 87,390 87,390
======== ========= ======== ========
(1) After deduction for preferred stock dividends and accretion of $16,728.
55
CORECOMM LIMITED
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE YEAR ENDED DECEMBER 31, 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA)
TO ELIMINATE
CORECOMM CORECOMM
CORECOMM LIMITED HOLDCO LIMITED
HISTORICAL HISTORICAL ADJUSTMENTS PROFORMA
------------------ -------------- ------------- ------------
Revenues $132,122 $ 131,526 $- $596
Costs and expenses
Operating 142,323 142,323 -
Selling, general and administrative 111,010 109,197 1,813
Corporate 12,884 11,224 1,660
Non-cash compensation 43,440 43,440 -
Other charges 12,706 12,706 -
Write-down of intangibles 35,920 35,920 -
Depreciation 30,746 30,641 105
Amortization 42,420 42,396 - 24
------------------ -------------- ------------- ------------
431,449 427,847 - 3,602
------------------ -------------- ------------- ------------
Operating (loss) (299,327) (296,321) - (3,006)
Other income (expense)
Interest income and other, net 6,223 1,134 5,089
Equity in net (loss) of CoreComm Holdco (43,603)(B) (43,603)
Interest expense (20,457) (5,929) (14,528)
------------------ -------------- ------------- ------------
(Loss) before income taxes and
extraordinary item (313,561) (301,116) (43,603) (56,048)
Income tax provision (250) (125) (125)
------------------ -------------- ------------- ------------
(Loss) before extraordinary item $(313,811) $(301,241) (43,603) $(56,173)
================== ============== ============= ============
Basic and diluted (loss) per share
before extraordinary item (1) $(6.73) $(1.30)
================== ============
Weighted average shares 47,480 47,480
================== ============
(1) After deduction for preferred dividends and accretion of $5,590.
56
CORECOMM LIMITED
NOTES TO UNAUDITED PRO FORMA FINANCIAL DATA
(IN THOUSANDS)
(A) To record equity investment in CoreComm Holdco on September 30, 2001 at 13%
of the equity of CoreComm Holdco after the transactions:
CoreComm Holdco net assets pro forma for the
completed portion of the Holdco Recapitalization
and other transactions $ 30,000
CoreComm Limited ownership percentage 13%
----------
$ 3,900
==========
(B) To record equity in net loss of CoreComm Holdco on a pro forma basis as if
the recapitalization and other transactions occurred on January 1, 2000:
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
Historical (loss) before extraordinary item of
CoreComm Holdco $(376,033)
Pro forma adjustments for the completed portion
of the Holdco Recapitalization and other transactions 51,167
----------
324,866
CoreComm Limited ownership percentage 13%
----------
$ (42,233)
==========
FOR THE YEAR ENDED DECEMBER 31, 2000
Historical (loss) before extraordinary item of
CoreComm Holdco $(301,241)
Pro forma adjustments for the completed acquisitions
of ATX and Voyager (118,443)
---------
(419,684)
Pro forma adjustments for the completed portion
of the Holdco Recapitalization and other transactions 84,274
---------
(335,410)
CoreComm Limited ownership percentage 13%
----------
$ (43,603)
==========
57
SELECTED HISTORICAL FINANCIAL DATA OF HOLDCO
The following selected historical financial data of CoreComm Holdco and our
predecessor, OCOM Corporation Telecoms Division, has been derived from, and
should be read in conjunction with, the historical consolidated financial
statements and related notes included in this prospectus. The summary historical
financial data relates to OCOM as it was operated prior to its acquisition by
CoreComm Holdco. The selected historical financial data as of December 31, 2000,
1999, 1998, 1997 and 1996 and for the years ended December 31, 2000 and 1999,
for the period from April 1, 1998 to December 31, 1998, for the period from
January 1, 1998 to May 31, 1998, and for the years ended December 31, 1997 and
1996 have been derived from the historical financial statements of CoreComm
Holdco or OCOM audited by Ernst & Young LLP, independent auditors.
Interim data for the nine months ended September 30, 2001 and 2000 are
unaudited but include, in our opinion, all adjustments consisting only of normal
recurring adjustments necessary for a fair presentation of that data. Results
for the nine months ended September 30, 2001 are not necessarily indicative of
the results that may be expected for any other interim period or the year as a
whole.
In 2000, we completed two significant acquisitions. We acquired ATX
Telecommunications Services, Inc. and Voyager.net, Inc. In addition, we entered
into a senior secured credit facility with The Chase Manhattan Bank and CoreComm
Limited issued approximately $108.7 million aggregate principal amount of senior
unsecured notes to the former shareholders of ATX. Also in 2000, we recorded a
non-cash compensation expense of approximately $43.4 million in accordance with
APB opinion No. 25, "Accounting for Stock Issued to Employees."
In 1999, we acquired 100% of the stock of MegsINet Inc. and some of the
assets of USN Communications, Inc. In addition, CoreComm Limited issued $175.0
million in aggregate principal amount of 6% Convertible Subordinated Notes due
2006.
58
SELECTED HISTORICAL FINANCIAL DATA OF HOLDCO (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE
PERIOD
FROM APRIL 1,
1998 (DATE THE PREDECESSOR (OCOM)
OPERATIONS FOR THE ------------------------
COMMENCED) PERIOD
TO FROM JANUARY 1, YEAR ENDED YEAR ENDED
NINE MONTHS ENDED YEAR ENDED DECEMBER 1998 TO MAY DECEMBER DECEMBER
SEPTEMBER 30, DECEMBER 31, 31, 31, 31, 31,
2001 2000 2000 1999 1998 1998 1997 1996
---- ---- ---- ---- ---- ---- ---- ----
INCOME STATEMENT DATA
Revenues.................... $220,055 $ 56,155 $131,526 $ 57,151 $ 6,713 $ 1,452 $ 3,579 $ 5,103
Costs and expense..........
Operating................. 175,942 77,321 142,323 57,551 5,584 772 1,581 3,065
Selling, general and
administrative 75,021 70,783 109,197 72,821 11,940 3,205 5,934 3,119
Corporate................. 3,854 7,465 11,224 6,686 2,049 -- -- --
Non-cash compensation...... 9,702 35,420 43,440 1,056 -- -- -- --
Reorganization charges 37,395 775 12,706 -- -- -- -- --
Write-down of intangibles... 167,599 -- 35,920 -- -- -- -- --
Depreciation and
amortization............... 110,016 29,209 73,037 19,546 980 257 439 149
------- ------ -------- ------ --- --- -------- --------
579,529 220,973 427,847 157,660 20,553 4,234 7,954 6,333
------- ------- -------- ------- ----------- ------------- -------- --------
Operating (loss)............. (359,474) (164,818) (296,321) (100,509) (13,840) (2,782) (4,375) (1,230)
Other income (expense)
Interest and other income.... 1,875 589 1,134 55 46 -- (4) 133
Interest expense............. (18,467) (2,767) (5,929) (2,624) (21) -- -- --
------- ------ --------- ------- ------- ------ --------- -------
(Loss) before income
taxes and extraordinary
item.................. (376,066) (166,996) (301,116) (103,078) (13,815) (2,782) (4,379) (1,097)
Income tax benefit
(provision)................ 33 (154) (125) (102) -- -- --
------- ------ --------- ------- ------- ------ --------- -------
(Loss) before
extraordinary item......... (376,033) (167,150) (301,241) (103,180) (13,815) -- -- --
Gain from
extinguishment of debt..... 2,216 -- -- -- -- -- -- --
--------- ---------- ---------- ---------- -------- ---------- --------- ---------
Net (loss).................. $(373,817)$(167,150) $(301,241) $(103,180)$ (13,815) $ (2,782) $ (4,379) $ (1,097)
========= ========== ========== ========== ======== ========= ========= =========
Basic and diluted net (loss)
per common share:
(Loss) before extraordinary
item.................. $(39.52) $ (17.57) $(31.66) $ (10.85) $ (1.45) (.29) $ (.46) $ (.12)
Gain from
extinguishment of debt..... .23 -- -- -- -- -- -- --
------- ------ --------- ------- ------- ------ --------- ---------
Net (loss).................. $(39.29) $ (17.57) $(31.66) $ (10.85) $ (1.45) (.29) $ (.46) $ (.12)
Weighted average shares (1) 9,514 9,514 9,514 9,514 9,514 9,514 9,514 9,514
========= ========== ========== ========== ======== ========= ========= =========
THE PREDECESSOR
(OCOM)
-----------------
SEPTEMBER 30, DECEMBER 31,
------------------------------------------------------------------
2001 2000 1999 1998 1997 1996
---- ---- ---- ---- ---- ----
BALANCE SHEET DATA
Working capital (deficiency).. $ (98,239) $(100,684) $(43,279) $ 1,695 (950) $ (491)
Fixed assets-- net............ 120,464 179,379 90,347 3,581 1,269 270
Total assets.................. 583,030 896,606 216,877 44,596 1,731 917
Long-term debt and capital 179,993 109,990 18,882 501 -- --
leases........................
Shareholders' equity.......... 217,575 599,304 129,990 36,278 -- --
Parent's investment (deficiency) -- -- -- -- 321 (208)
----------
We have never declared or paid any cash dividends.
(1) After giving retroactive effect to the 6,342.944-for-1 stock split in
December 2001.
59
SELECTED HISTORICAL FINANCIAL DATA OF LIMITED
The following selected financial data of CoreComm Limited and its
predecessor, OCOM Corporation Telecoms Division ("OCOM") should be read in
conjunction with the historical financial statements and notes thereto included
elsewhere in this prospectus. The selected historical financial data relates to
OCOM as it was operated prior to its acquisition by us.
Nine Months Ended
September 30,
---------------------------------
2001 2000
--------------- --------------
Income Statement Data:
Revenues $ 220,487 $ 56,619
Operating expenses 583,243 223,550
(Loss) before extraordinary item (395,918) (173,210)
Gain from early extinguishment of debt 2,216 -
Net (loss) (393,702) (173,210)
Basic and diluted net (loss) per common share:
(Loss) before extraordinary item $ (4.70) $ (4.35)
Gain from extinguishment of debt 0.03 -
--------------- --------------
Net (loss) $ (4.67) $ (4.35)
=============== ==============
September 30,
2001
---------------
Balance Sheet Data:
Working capital (deficiency) (126,695)
Fixed assets, net 120,532
Total assets 592,508
Long-term debt 404,486
Notes payable to affiliates 32,869
Other noncurrent liabilities 324
Shareholders' equity (59,904)
60
THE PREDECESSOR (OCOM)
----------------------
FOR THE PERIOD FROM
APRIL 1,1998 (DATE
OPERATIONS COMMENCED FOR THE PERIOD FROM
YEAR ENDED DECEMBER 31 TO DECEMBER 31, JANUARY 1, 1998 TO YEAR ENDED DECEMBER 31
2000 (1) 1999 (2) 1998(3) MAY 31, 1998 1997 1996
---------- ----------- -------------------- -------------------- ---------- ----------
(in thousands, except per share data)
INCOME STATEMENT DATA:
Revenues $132,122 $ 58,151 $ 6,713 $ 1,452 $ 3,579 $ 5,103
Operating expenses 431,449 161,376 25,139 4,234 7,954 6,333
Net (loss) (313,811) (103,524) (16,255) (2,782) (4,379) (1,097)
Net (loss) per common
share basic and diluted (4) (6.73) (3.03) (.55) (.09) (.15) (.04)
Weighted average
number of common
shares basic
and diluted (4): 47,480 34,189 29,678 29,664 29,419 29,691
DECEMBER 31,
2000 (1) 1999 (2) 1998 (3) 1997 1996
---------- --------------- -------------- ------------- -------------
(in thousands)
BALANCE SHEET DATA:
Working capital (deficiency) $(123,712) $121,292 $133,899 $ (950) $ (490)
Fixed assets, net 179,651 90,619 3,582 1,269 270
Total assets 909,763 392,103 176,526 1,731 917
Long-term debt 358,624 179,318 283 -- --
Notes payable to affiliates 16,100 -- -- -- --
Other noncurrent liabilities 2,693 14,564 218 -- --
Shareholders' equity 316,278 126,926 169,297 -- --
Parent's investment -- -- -- 321 (208)
----------
(1) In 2000, we acquired Voyager.net, Inc. and ATX Telecommunications Services,
Inc. In addition, we borrowed $91.1 million under a senior secured credit
facility, issued $108.7 million aggregate principal amount of senior
unsecured notes and issued $16.1 million aggregate principal amount of
senior unsecured public notes.
Also in 2000, we reduced the carrying amount of goodwill and other
intangibles by $35.9 million, we recorded non-cash compensation expense of
$43.4 million and we recorded restructuring and other charges of $12.7
million.
(2) In 1999, we acquired 100% of the stock of MegsINet Inc. and the CLEC assets
of USN Communications, Inc. In addition, we issued $175 million principal
amount of 6% Convertible Subordinated Notes due 2006.
(3) During the period from April 1, 1998 (date operations commenced) to
December 31, 1998, CCPR made the following contributions to CoreComm
Limited prior to the spin-off: (a) a cash contribution of $150 million, (b)
businesses acquired by CCPR in April and June 1998 and (c) the subsidiary
that owns various LMDS licenses in Ohio that were acquired for an aggregate
of $25,241,000.
(4) After giving retroactive effect to the 3-for-2 stock split by way of stock
dividend paid in September 1999 and the 3-for-2 stock split by way of
stock dividend paid in February 2000. The weighted average number of
common shares prior to September 1998 are equivalent to CCPR's historical
weighted average shares (since CCPR stockholders received one share of
CoreComm Limited for each CCPR shared owned).
We have never declared or paid any cash dividends.
61
INFORMATION ABOUT HOLDCO
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
In July 2001, we finalized the streamlining of our operating structure to
focus on our two most successful and promising lines of business. The first is
integrated communications products and other high bandwidth/data/web-oriented
services for the business market and the second is bundled local telephony and
Internet products efficiently sold, serviced and provisioned via
Internet-centric interfaces to the residential market.
We have engaged in significant efforts to reduce expenses in all areas of
our business, while maintaining our revenue initiatives. These plans were
implemented through a variety of means, including facility consolidation,
headcount reduction, efficiency improvements, vendor negotiations and network
optimization.
We have also engaged in significant efforts to capitalize on more
profitable UNE, UNE-P and Enhanced Extended Loop provisioning and pricing to
reduce existing network costs and capital expenditures, and enhance gross
margins going forward. A large portion of our business and residential local
access lines have been converted to these more profitable services, resulting in
improved operating results on a going forward basis.
In addition, we have made significant progress in improving the operating
efficiency of our networks, while also reducing network costs. The associated
cost savings and product enhancements have come from increased overall
efficiency, improved pricing terms, as well as the elimination of duplicative or
unneeded network facilities.
In April 2001, we announced that we are evaluating strategic alternatives
for our non-CLEC assets and businesses, and we have retained advisors for the
purpose of conducting this review.
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
Following the completion of the acquisitions of ATX and Voyager in
September 2000, we consolidated the results of operations of these businesses
from the dates of acquisition. The results of these businesses are not included
in the 2000 results.
The increase in revenues to $220,055,000 from $56,155,000 is due to
acquisitions in 2000, which accounted for $166,737,000 of the increase. This
increase is offset by a decline in revenue attributed to the customer base
associated with the USN assets to $17,093,000 from $20,642,000. The revenues
from the USN customer based peaked in the third quarter of 1999 after our
acquisition in May 1999 and, as expected, declined thereafter. USN
Communications, Inc. was a CLEC that operated on a resale basis. The underlying
operations, customer relationships and future revenue streams of the resale CLEC
business have declined since our acquisition. This trend will affect future
operations because, in accordance with our revised business plan, we are
substantially reducing our resale business.
Operating costs include direct cost of sales, network costs and salaries
and related expenses of network personnel. Operating costs increased to
$175,942,000 from $77,321,000 due to acquisitions in 2000, which amounted to
$111,878,000 of the increase. This increase is offset by a decrease in costs as
a result of the implementation of our modified business plan as described above.
Selling, general and administrative expenses increased to $75,021,000 from
$70,783,000 due to acquisitions in 2000, which amounted to $52,448,000 of the
increase. This increase is offset by a decrease in costs as a result of the
implementation of our modified business plan as described above.
Corporate expenses include the costs of our officers and headquarters
staff, the costs of operating the headquarters and costs incurred for strategic
planning and evaluation of business opportunities. Corporate expenses decreased
to $3,854,000 from $7,465,000 primarily as a result of the implementation of our
modified business plan as described above.
In accordance with APB Opinion No. 25, "Accounting for Stock Issued to
Employees," in April 2000, we recorded a non-cash compensation expense of
approximately $29.0 million and a non-cash deferred expense of approximately
$31.3 million due to the issuance of options to employees by CoreComm Limited as
compensation for services provided to us at an exercise price of $14.55 which
was less than the fair value of CoreComm Limited's
62
common stock on the date of the grant. From April 2000 to September 30, 2001,
$19.4 million of the deferred non-cash compensation was charged to expense,
including $9.7 million in the nine months ended September 30, 2001. We will
charge the remaining $11.9 million deferred expense to non-cash compensation
expense over the vesting period of the CoreComm Limited stock options.
Reorganization charges of $37,395,000 in 2001 relate to our announcements
in May and July 2001 that we were taking additional actions to reorganize,
re-size and reduce operating costs and create greater efficiency in various
areas of our business. An aggregate of $21,497,000 of these costs are for
equipment and other assets that will not require any future cash outlays. The
employee severance and related costs in 2000 were for approximately 250
employees to be terminated, none of whom are still employed by us. These costs
in 2001 are for approximately 630 employees to be terminated of which
approximately 40 employees were still employed by us as of September 30, 2001.
The major actions involved in the 2001 reorganization include (1) consolidation
of functions such as network operations, customer service and finance, (2)
initiatives to increase gross margins and (3) discussions with vendors to reduce
or eliminate purchase commitments. The consolidation of functions resulted in
employee terminations and the closing of offices. Employee severance and related
costs, lease exit costs and fixed assets and prepayment write-downs include
charges related to these actions. Initiatives to increase gross margins resulted
in consolidation of network assets and elimination of redundant and less
profitable facilities. Charges for these actions include lease exit costs and
fixed assets and prepayment write-downs. Finally, reductions or elimination of
purchase commitments resulted in agreement termination charges. All of these
actions are expected to be completed by June 30, 2002. Fixed assets and
prepayments written-off include $5.3 million related to vacated offices, $13.4
million for network assets in abandoned markets and $2.8 million for prepayments
in respect of ILEC facilities in abandoned markets. We continue to review our
operations and may incur additional charges in the future related to our
operations.
The following table summarizes the reorganization charges incurred and
utilized in 2000 and 2001:
EMPLOYEE FIXED
SEVERANCE LEASE ASSETS
AND RELATED EXIT AGREEMENT AND
COSTS COSTS TERMINATIONS PREPAYMENTS TOTAL
-----------------------------------------------------------------------------------
(IN THOUSANDS)
Charged to expense $2,089 $1,917 $ - $ - $ 4,006
Utilized (775) (1,396) - - (2,171)
-----------------------------------------------------------------------------------
Balance, December 31, 2000 1,314 521 - - 1,835
Charged to expense 3,262 6,977 6,582 21,883 38,704
Adjustments (996) 73 - (386) (1,309)
Utilized (2,701) (4,137) (2,712) (21,497) (31,047)
-----------------------------------------------------------------------------------
Balance, September 30, 2001 $ 879 $3,434 $ 3,870 $ - $ 8,183
===================================================================================
Reorganization charges of $775,000 in 2000 relate to the March 2000
announcement of a reorganization of some of our operations.
At March 31, 2001, we reduced the carrying amount of goodwill related to
the Voyager and MegsINet acquisitions by $167,599,000. In connection with the
reevaluation of our business plan and the decision to sell our non-CLEC assets
and businesses announced in April 2001, we were required to report all
long-lived assets and identifiable intangibles to be disposed of at the lower of
carrying amount or estimated fair value less cost to sell. The carrying amount
of goodwill related to these acquisitions is eliminated before reducing the
carrying amounts of the other assets. The estimated fair value of these
businesses was determined based on information provided by the investment bank
retained for the purpose of conducting this sale.
Depreciation expense increased to $34,626,000 from $19,416,000 primarily as
a result of an increase in fixed assets due to acquisitions in 2000.
Amortization expense increased to $75,390,000 from $9,793,000 due to the
amortization of goodwill from the acquisitions in 2000.
Interest income and other, net, increased to $1,875,000 from $589,000
primarily due to an increase in interest income on our cash and cash
equivalents.
63
Interest expense increased to $18,467,000 from $2,767,000 primarily due to
increased borrowings to fund our acquisitions and operations.
The income tax benefit of $33,000 in 2001 is from state and local income
tax refunds net of payments, and the provision of $154,000 in 2000 is for state
and local income tax.
In September 2001, we and the holder of the $3,016,000 principal amount
12.75% note payable for equipment agreed to a modification of the note that
reduced the principal amount to $800,000 which was paid on October 1, 2001. We
recorded an extraordinary gain on the extinguishment of debt of $2,216,000 for
the difference between the $3,016,000 obligation and the $800,000 liability.
YEAR ENDED DECEMBER 31, 2000 AND 1999
Following completion of our acquisitions of ATX and Voyager in September
2000, we consolidated the results of operations of these businesses from the
dates of acquisition. The results of these businesses are not included in the
1999 results.
The increase in revenues to $131,526,000 from $57,151,000 is primarily due
to acquisitions in 2000, which accounted for $59,164,000 of the increase. The
remainder of the increase is primarily due to an increase in CLEC and ISP
revenues from an increase in customers. The revenues from the USN customer base
peaked in the third quarter of 1999 after our acquisition in May 1999 and
declined thereafter. Additionally, prepaid cellular debit card and cellular long
distance revenues declined as a result of our termination of these services in
the third quarter of 1999. We had revenues of $2,379,000 in 1999 from the
provision of these services.
Operating costs increased to $142,323,000 from $57,551,000 primarily due to
acquisitions in 2000, which accounted for $41,650,000 of the increase. The
remainder of the increase is primarily due to an increase in the fixed component
of operating expenses due to our migration to a facilities-based infrastructure.
In 1999, operating costs included $2,211,000 related to the prepaid cellular
debit card and cellular long distance services.
Selling, general and administrative expenses increased to $109,197,000 from
$72,821,000 primarily due to acquisitions in 2000, which accounted for
$21,432,000 of the increase. The remainder of the increase is a result of
increased selling and marketing costs and increased customer service costs.
Corporate expenses include the costs of our officers and headquarters
staff, the costs of operating the headquarters and costs incurred for strategic
planning and evaluation of business opportunities. Corporate expenses increased
to $11,224,000 from $6,686,000 primarily due to increased strategic planning
activities.
Non-cash compensation in 2000 of $43,440,000 includes $38,652,000 from the
grant of options by CoreComm Limited as compensation for services provided to us
at an exercise price below fair market value, and $4,788,000 from the rescission
of CoreComm Limited stock option exercises. In April 2000, the CoreComm Limited
compensation and option committee of its board of directors approved the
issuance of options to purchase approximately 2.7 million shares of CoreComm
Limited common stock to various employees at an exercise price of $14.55, which
was less than the fair market value of CoreComm Limited common stock on the date
of the grant. In accordance with APB Opinion No. 25, "Accounting for Stock
Issued to Employees," in April 2000, we recorded a non-cash compensation expense
of approximately $29.0 million and a non-cash deferred expense of approximately
$31.3 million. From April 2000 to December 31, 2000, $9.7 million of the
deferred non-cash compensation was charged to expense. We will charge the
deferred expense to non-cash compensation expense over the vesting period of the
CoreComm Limited stock options. In December 2000, the CoreComm Limited board of
directors approved the rescission of some previously exercised CoreComm Limited
employee stock options. CoreComm Limited issued notes to employees for the
repurchase of the 671,000 shares of common stock for an aggregate of $6,803,000,
which exceeded the fair market value of our common stock on the date of
repurchase. The notes earned interest at a rate of 4.5% and were redeemed in
December 2000. We recorded non-cash compensation of $4.7 million from these
transactions.
The non-cash compensation charge of $1,056,000 in 1999 was recorded in
accordance with APB Opinion No. 25, related to a change in employee stock option
agreements.
Other charges of $12,706,000 in 2000 include a reserve of $8,700,000 for
notes receivable from former officers of Voyager, and restructuring costs of
$4,006,000. The restructuring costs relate to our announcements in March and
December 2000 of reorganizations of certain of our operations. The charge
consisted of employee severance and related costs of $2,089,000 for
approximately 250 employees to be terminated and lease exit costs of
64
$1,917,000. As of December 31, 2000, $2,171,000 of these provisions had been
used, including $775,000 for employee severance and related costs and $1,396,000
for lease exit costs. As of December 31, 2000, none of the employees to be
terminated were still employed by us. The remaining provision for leases will be
used through 2003.
The write-down of intangibles in 2000 of $35,920,000 is comprised of
$14,784,000 related to business combinations and $21,136,000 related to our LMDS
licenses. At December 31, 2000, we wrote-off the carrying amount of intangible
assets from business combinations including goodwill of $6,690,000, workforce of
$577,000 and customer lists of $7,517,000. These assets were primarily related
to our resale CLEC business, which was acquired in 1999. The underlying
operations, customer relationships and future revenue streams had deteriorated
significantly since the acquisition. These were indicators that the carrying
amount of these resale-related assets was not recoverable. We estimated that the
fair value of these assets was zero due to the lack of potential buyers, the
overall deterioration of the resale CLEC business environment and because of the
negative cash flow of these resale businesses for the foreseeable future. In
connection with the reevaluation of our business plan, we reduced the carrying
amount of the LMDS licenses at December 31, 2000 by $21,136,000 to reflect their
estimated fair value. The estimated fair value was determined based on an
analysis of sales of other LMDS licenses.
Depreciation expense increased to $30,641,000 from $10,916,000 primarily as
a result of an increase in fixed assets.
Amortization expense increased to $42,396,000 from $8,630,000 due to the
amortization of goodwill from the acquisitions in 2000.
Interest income and other, net, increased to $1,134,000 from $55,000
primarily due to interest income on our cash, cash equivalents and marketable
securities.
Interest expense increased to $5,929,000 from $2,624,000 primarily due to
interest on the senior secured credit facility beginning in September 2000, the
senior unsecured notes due 2003 issued in September 2000 and the senior
unsecured notes due 2010 issued in December 2000.
The income tax provisions of $125,000 in 2000 and $102,000 in 1999 are for
state and local income tax.
YEAR ENDED DECEMBER 31, 1999 AND THE PERIOD FROM APRIL 1, 1998 (DATE OPERATIONS
COMMENCED) TO DECEMBER 31, 1998
Following the completion of the acquisitions of 100% of the stock of
MegsINet Inc. and the CLEC assets of USN Communications, Inc. in May 1999, we
consolidated the results of operations of these businesses from the dates of
acquisition. The results of these businesses are not included in the 1998
results.
The increase in revenues to $57,151,000 from $6,713,000 is primarily due to
acquisitions in 1999, which accounted for $40,909,000 of the increase. The
remainder of the increase is primarily due to an increase in CLEC and ISP
revenues from an increase in customers, offset by the decline in cellular long
distance revenue as a result of customers switching to other long distance
providers. In the third quarter of 1999, we sold most of our prepaid cellular
debit card business and we terminated our cellular long distance business in
some markets. We had revenues in 1999 of $2,379,000 from the prepaid cellular
debit card business and from the cellular long distance business in these
markets.
Operating costs increased to $57,551,000 from $5,584,000 primarily due to
acquisitions in 1999, which accounted for $43,315,000 of the increase. The
remainder of the increase is primarily due to the increase in revenues.
Operating costs as a percentage of revenues increased to 101% from 83%. The
increase in percentage terms is the result of an increase in the fixed component
of operating expenses due to the migration toward a facilities-based
infrastructure. In 1999, operating costs were $2,211,000 from the prepaid
cellular debit card business and from the cellular long distance business in the
terminated markets.
Selling, general and administrative expenses increased to $72,821,000 from
$11,940,000 primarily due to acquisitions in 1999, which accounted for
$33,184,000 of the increase. The remainder of the increase is a result of
increased selling and marketing costs and increased customer service costs.
Corporate expenses include the costs of our officers and headquarters
staff, the costs of operating the headquarters and costs incurred for strategic
planning and evaluation of business opportunities. Corporate expenses increased
to $6,686,000 from $2,049,000 because the 1998 expenses did not represent a full
period of results due to
65
the fact that CoreComm Limited was spun off from another company, Cellular
Communications of Puerto Rico, Inc. on September 2, 1998, at which time
corporate expenses commenced. In addition, allocated charges from NTL
Incorporated (a company that has some of the same officers and directors as us)
increased due to the acquisitions by third parties in 1999 of other companies
that had been sharing these expenses.
The non-cash compensation charge of $1,056,000 in 1999 was recorded in
accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees,"
related to a change in CoreComm Limited employee stock option agreements.
Depreciation expense increased to $10,916,000 from $749,000 as a result of
acquisitions in 1999, which accounted for $7,176,000 of the increase and an
increase in fixed assets.
Amortization expense increased to $8,630,000 from $231,000 due to the
amortization of goodwill and other intangibles from the acquisitions in 1999.
Interest income and other, net, increased to $55,000 from $46,000 primarily
due to interest income on our cash, cash equivalents and marketable securities.
Interest expense increased to $2,624,000 from $21,000 primarily due to
interest on notes payable and capital leases of acquired businesses.
OTHER RESULTS OF OPERATIONS MATTERS
In June 2001, the board of directors of CoreComm Limited approved the
repricing of some stock options granted to our employees by CoreComm Limited.
George Blumenthal, CoreComm Limited's then Chairman of the board, Barclay Knapp,
CoreComm Limited's then President and Chief Executive Officer, and the
non-employee members of CoreComm Limited's board of directors did not
participate in the repricing. Options to purchase an aggregate of approximately
10.2 million shares of CoreComm Limited common stock with an average exercise
price of $10.70 per share were repriced to $.25, $.75 or $1.25 per share,
depending upon the original exercise price. In accordance with APB No. 25 and
related interpretations, we are accounting for the repriced options as a
variable plan. We will recognize non-cash compensation expense for the
difference between the quoted market price of CoreComm Limited's common stock
and the exercise price of the repriced options while the options remain
outstanding. CoreComm Limited's board of directors took this action to continue
to provide performance incentives to our employees.
In August 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", effective for us on January 1,
2002. This statement supercedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and other related
accounting guidance. We are in the process of evaluating the financial statement
impact of the adoption of SFAS No. 144.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," effective for us on January 1, 2003. This statement
addresses financial accounting and reporting for obligations associated with the
retirement of tangible fixed assets and the associated asset retirement costs.
We are in the process of evaluating the financial statement impact of the
adoption of SFAS No. 143.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations," and
No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001. Use of the pooling-of-interests method is no longer
permitted. SFAS No. 141 also includes guidance on the initial recognition and
measurement of goodwill and other intangible assets acquired in a business
combination that is completed after June 30, 2001. SFAS No. 142 ends the
amortization of goodwill and indefinite-lived intangible assets. Instead, these
assets must be reviewed annually, or more frequently under some conditions for
impairment in accordance with this statement. This impairment test uses a fair
value approach rather than the undiscounted cash flow approach previously
required by SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of". In addition, we are reviewing the
carrying value of our long-lived assets for impairment in accordance with SFAS
No. 121, although it is not currently possible to predict the outcome of this
review.
66
LIQUIDITY AND CAPITAL RESOURCES
We anticipate that we will have sufficient cash to execute our business
plan into 2003, by which time we anticipate that we will be generating enough
cash from our operations to fund our capital expenditures and debt service. If
we are unable to execute our business plan successfully, we may be required to
obtain additional financing. Our ability to raise additional capital in the
future will be dependent on a number of factors, such as general economic and
market conditions, which are beyond our control. If we are unable to obtain
additional financing or to obtain it on favorable terms, we may be required to
further reduce our operations, forego attractive business opportunities, or take
other actions which could adversely affect our business, results of operations
and financial condition.
We still have significant current liabilities even after the successful
completion of the Holdco Recapitalization. On a pro forma basis at September 30,
2001 our current liabilities exceed our current assets by approximately $82
million. An inability to generate cash from operations and/or raise additional
financing may effect our ability to meet our cash requirements, which may have
an adverse affect on us, and potentially our viability as an ongoing business.
Depending upon the success of the execution of our business plan,
additional financing may not be necessary in the foreseeable future. However, we
cannot assure you that: (a) actual costs will not exceed the amounts estimated
in our business plan or that additional funding will not be required, (b) we and
our subsidiaries will be able to generate sufficient cash from operations to
meet capital requirements, debt service and other obligations when required, (c)
we will be able to access this cash flow, (d) we will be able to sell assets or
businesses (75% or more of the net proceeds from a sale may be required to be
used to repay indebtedness) or (e) we will not be adversely affected by interest
rate fluctuations.
In October 2001, CoreComm Limited entered into agreements with numerous
holders of its 6% Convertible Subordinated Notes Due 2006 whereby the holders
agreed, among other things, to exchange their notes for approximately $5 million
in cash (the amount of the October 1, 2001 interest payment) and shares of our
common stock as part of a recapitalization plan. The exchange was completed in
December 2001, including the payment of the approximately $5 million by CoreComm
Limited.
On December 28, 2001, we completed the exchange of shares of our common
stock for substantial amounts of the outstanding indebtedness of CoreComm
Limited, substantial amounts of our outstanding indebtedness as co-obligors with
CoreComm Limited and all of the outstanding preferred stock of CoreComm Limited.
This exchange was completed pursuant to an exchange agreement with CoreComm
Limited and (1) holders of 10.75% Unsecured Convertible PIK Notes Due 2011 and
10.75% Senior Unsecured Convertible PIK Notes Due 2010, both of which were a
joint obligation of CoreComm Holdco and CoreComm Limited, in the initial
principal amounts of $10,000,000 and $16,100,000, respectively, together with
any interest paid thereon, (2) the holders of Senior Unsecured Notes due
September 29, 2003 of CoreComm Limited in the principal amount of $105.7
million, and (3) the holders of all of the preferred stock of CoreComm Limited
in the initial principal amount of $300 million together with any dividends paid
thereon.
We anticipate that we and our subsidiaries will not generate sufficient
cash flow from operations to repay at maturity the entire principal amount of
our outstanding indebtedness. Accordingly, we may be required to consider a
number of measures, including: (a) refinancing all or a portion of this
indebtedness, (b) seeking modifications to the terms of this indebtedness, (c)
seeking additional debt financing, which may be subject to obtaining necessary
lender consents, (d) seeking additional equity financing, or (e) a combination
of the foregoing.
We are a holding company with no significant assets other than cash and
securities and investments in and advances to our subsidiaries. We are therefore
likely to be dependent upon receipt of funds from our subsidiaries to meet our
own obligations. However, our subsidiaries' debt agreements prevent the payment
of dividends, loans or other distributions to us, except in limited
circumstances.
In December 2001, in connection with the Holdco Recapitalization, CoreComm
Limited and CoreComm Holdco were granted an exception by Nasdaq absent which,
CoreComm Limited and CoreComm Holdco would have had to obtain stockholder
approval prior to the completion of the Holdco Recapitalization. Accordingly,
following the consummation of the intended registered public exchange offers,
whereby holders of the CoreComm Limited common stock and of the remaining 6%
Convertible Subordinated Notes due October 1, 2006 will exchange their
securities for common stock of CoreComm Holdco, we anticipate, based on
conversations with Nasdaq, that CoreComm Holdco will become the Nasdaq listed
entity and will be subject to the continued inclusion requirements of the Nasdaq
National Market. If we fail to meet the continued inclusion requirements, we
believe that not being
67
listed on the Nasdaq National Market would have an adverse affect on the trading
prices of our common stock and would adversely affect the liquidity of the
shares of common stock held by our stockholders. In addition, not being listed
may cause future financing to be more difficult, more expensive or both.
In April 2001, we entered into a $156.1 million Amended and Restated Credit
Agreement with The Chase Manhattan Bank that amends and restates the term loan
facility and revolving credit facility that closed in September 2000. As of
January 25, 2002, there was $106.1 million outstanding under the term loan
facility and $50.0 million outstanding under the revolving credit facility. The
term loan facility will amortize in quarterly installments of principal
commencing on December 31, 2003 with a final maturity on September 22, 2008. The
revolving credit facility shall be automatically and permanently reduced in
increasing quarterly installments of principal commencing on December 31, 2003
with a termination date on September 22, 2008. In the event our remaining
approximately $4.75 million of 6% Convertible Subordinated Notes have not been
converted or refinanced on or prior to April 1, 2006, then the facilities become
payable in full on April 1, 2006. The interest rate on both the term loan
facility and the revolving credit facility is, at our option, either 3.5% per
annum plus the base rate, which is the higher of the prime rate or the federal
funds effective rate plus 0.5% per annum, or the reserve-adjusted London
Interbank Offered Rate plus 4.5% per annum. At September 30, 2001, the effective
interest rate on the amounts outstanding was 8.29%. Beginning October 12, 2001
and ending April 12, 2002, the interest rate is 6.86%. Interest is payable at
least quarterly. The commitment fee on the unused portion of the commitments is
1.25% per annum payable quarterly, subject to reduction to 1% per annum based
upon the amount borrowed under the facilities.
In April 2001, we issued to NTL Incorporated, referred to as "NTL," $15
million aggregate principal amount of unsecured convertible notes. These notes
will mature in April 2011. Interest on the notes is at an annual rate of 10.75%
payable semiannually on October 15 and April 15 of each year, commencing October
15, 2001. The interest is payable in kind by the issuance of additional
unsecured convertible notes in principal amount equal to the interest payment
that is then due. The additional notes issued for interest will have an initial
conversion price equal to 120% of the weighted average closing price of CoreComm
Limited common stock for a specified period. These notes are convertible into
CoreComm Limited common stock prior to maturity at a conversion price of $1.00
per share, subject to adjustment. However, the holder of these notes and
CoreComm Limited and CoreComm Holdco have entered into an agreement relating to
the conversion feature of the note following the Holdco Recapitalization.
Through that agreement, consistent with the original terms of the note, CoreComm
Limited and CoreComm Holdco have agreed to exercise their right under the note
such that, following the successful completion of our exchange offer to the
holders of CoreComm Limited common stock to exchange their shares of CoreComm
Limited common stock for shares of our common stock, the convertibility feature
of the note will be altered so that rather than the note being convertible into
shares of CoreComm Limited common stock, it will become convertible into shares
of our common stock. At that time, the conversion price of $1.00 will be
equitably adjusted by applying the exchange ratio in the exchange offers, which
results in a new conversion price of $116.70 per share of our common stock. The
holder has agreed not to exercise its rights to convert into CoreComm Limited
common stock for six months from February 5, 2002 (unless that right has
previously ceased as a result of the completion of the exchange offer and the
change in the convertibility feature). In the event that we are unsuccessful in
completing the exchange offer, the conversion feature would remain into CoreComm
Limited common stock. These notes are redeemable, in whole or in part, at our
option, at any time in April 2003, at a redemption price of 103.429% that
declines annually to 100% in April 2007, in each case together with accrued and
unpaid interest to the redemption date.
Some of our subsidiaries have various notes payable and capital leases
outstanding. The approximate amounts due for these notes and leases are as
follows: $10.5 million in 2002 and $268,000 in 2003.
In October 1999, CoreComm Limited issued $175 million principal amount of
6% Convertible Subordinated Notes due October 1, 2006, and received net proceeds
of $168.5 million. In April 2001, $10,250,000 aggregate principal amount of
these notes was converted into approximately 374,000 shares of CoreComm
Limited's common stock. As part of the Holdco Recapitalization, on December 17,
2001, $160 million principal amount of the 6% Convertible Subordinated Notes
were exchanged for 485,602 common shares of our common stock and the payment of
the October 2001 interest payment of approximately $4.8 million. We intend to
launch a public exchange offer for the remaining $4.75 million principal amount
of the 6% Convertible Subordinated Notes for an aggregate amount of
approximately 14,416 common shares of CoreComm Holdco and expect to pay the
remaining October 2001 interest payment of $142,500 to those holders.
In May 1999, we acquired MegsINet and the CLEC assets of USN
Communications. The USN acquisition included a potential contingent cash payment
to be paid in 2000, which was capped at $58.6 million. The contingent payment
was payable only if the USN assets met or exceeded operating performance
thresholds. We do not expect any contingent payment to be required.
68
CONSOLIDATED STATEMENT OF CASH FLOWS
For the nine months ended September 30, 2001, cash used in operating
activities decreased to $33,448,000 from $118,590,000 in the nine months ended
September 30, 2000 due to significant efforts to reduce expenses and other
efforts to conserve cash.
For the nine months ended September 30, 2001, cash used to purchase fixed
assets decreased to $4,243,000 from $43,484,000 in the nine months ended
September 30, 2000 which reflects the modifications to our business plan and the
efforts to conserve cash.
Proceeds from borrowings, net of financing costs, of $88,679,000 was from
the borrowings under the Chase facility in January and April 2001 and the
issuance of the 10.75% senior unsecured convertible notes in April 2001.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The SEC's rule related to market risk disclosure requires that we describe
and quantify our potential losses from market risk sensitive instruments
attributable to reasonably possible market changes. Market risk sensitive
instruments include all financial or commodity instruments and other financial
instruments, such as investments and debt, that are sensitive to future changes
in interest rates, currency exchange rates, commodity prices or other market
factors. We are not exposed to market risks from changes in foreign currency
exchange rates or commodity prices. We do not hold derivative financial
instruments nor do we hold securities for trading or speculative purposes. Under
our current policies, we do not use interest rate derivative instruments to
manage our exposure to interest rate changes.
The fair-market value of long-term fixed interest rate debt is subject to
interest rate risk. Generally the fair market value of fixed interest rate debt
will increase as interest rates fall and decrease as interest rates rise. In the
following table, the fair value of our convertible notes was determined from the
quoted market price. The carrying amount of the variable rate senior secured
credit facility approximates the fair value. The fair value of our other notes
payable are estimated using discounted cash flow analyses, based on our current
incremental borrowing rates for similar types of borrowing arrangements.
INTEREST RATE SENSITIVITY
AS OF SEPTEMBER 30, 2001, AS ADJUSTED FOR
THE HOLDCO RECAPITALIZATION AND OTHER TRANSACTIONS
PRINCIPAL AMOUNT BY EXPECTED MATURITY
AVERAGE INTEREST RATE
FOR THE ,
THREE
MONTHS
ENDING
DECEMBER FOR THE YEARS ENDING DECEMBER 31 FAIR
31, ------------------------------------------------------------- VALUE
2001 2002 2003 2004 2005 2006 THEREAFTER TOTAL 9/30/01
----------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
Long-term debt,
including
current
portion:
Fixed rate $3,266 $ - $ - $ - $ - $ - $15,752 $ 19,018 $ 18,266
Average interest 6.73%
rate 10.75%
Variable rate $ - $ - $1,950 $9,750 $25,350 $50,700 $68,350 $156,100 $156,100
Average interest Libor + Libor + Libor + Libor + Libor +
rate 4.5% or 4.5% or 4.5% or 4.5% or 4.5% or
base rate base rate base rate base rate base rate
+ 3. 5% + 3. 5% + 3.5% + 3.5% + 3.5%
69
CAPITALIZATION
The following table shows our cash and cash equivalents and capitalization
as of September 30, 2001, and as adjusted to give effect to the Holdco
Recapitalization, the other transactions to eliminate additional amounts of our
outstanding indebtedness that were entered into by December 31, 2001, the public
exchange offers of our common stock to CoreComm Limited's stockholders and to
the holders of CoreComm Limited's 6% Convertible Subordinated Notes due 2006 and
an estimated result of the fair value analysis of our net tangible assets as if
a purchase business combination occurred in connection with the recapitalization
and exchange transactions. The final determination of fair values will be made
upon the completion of a study to be undertaken to determine the fair value of
some of our assets and liabilities, including intangible assets. For additional
information with respect to the Holdco Recapitalization, without giving effect
to the public exchange offers, refer to the Unaudited Pro Forma Financial Data
included elsewhere in this prospectus. Our actual financial position and results
of operations will differ, perhaps significantly, from the amounts reflected in
this prospectus as a result of the completion of this fair value analysis. You
should read this table together with our consolidated financial statements and
related notes included in this prospectus and the information in "Unaudited Pro
Forma Financial Data," and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
AS OF SEPTEMBER 30, 2001
------------------------
ACTUAL AS ADJUSTED
------ -----------
(IN THOUSANDS)
Cash and cash equivalents.................................................... $ 46,713 $ 36,125
============= ============
Current portion of long-term debt............................................ $ 40,772 $ 11,165
============= ============
Long-term debt:
Capital lease obligations.................................................. $ 324 $ 324
Senior secured credit facility, less unamortized discount of $11,752,000 (as
adjusted).................................................................... 136,298 144,348
10.75% senior unsecured convertible PIK notes due 2010..................... 17,494 --
10.75% unsecured convertible PIK notes due 2011, less unamortized discount of
$377,000 (actual) and $377,000 (as adjusted)............................. 25,877 15,375
-------------- -------------
Total long-term debt..................................................... 179,993 160,047
Stockholders' equity:
Preferred stock, par value $0.01 per share, 10,000,000
shares authorized, none issued or outstanding........................... -- --
Common stock, par value $0.01 per share; 250,000,000
shares authorized;
9,514,000 (actual) and 10,000,000 (as adjusted) shares issued(1)........ 95 100
Additional paid-in capital................................................. 1,021,469 29,900
Deferred non-cash compensation............................................. (11,936) --
(Deficit).................................................................. (792,053) --
------------- ------------
217,575 30,000
Treasury stock, none (actual) and 98,000 (as adjusted) shares.......... -- (294)
------------- -------------
Total stockholders' equity.............................................. 217,575 29,706
------------- -------------
Total capitalization.................................................... $ 397,568 $ 189,753
============= ============
----------
(1) Excludes shares issuable upon the possible future conversion of Unsecured
Convertible Notes or upon the exercise of stock options and warrants.
- The 10.75% Unsecured Convertible PIK Notes due 2011 are convertible
into CoreComm Limited common stock at a conversion price of $1.00 per
share (subject to a potential one-time right to convert at $0.67 per
share in connection with the occurrence of a change of control).
However, the holder of these notes and CoreComm Limited and CoreComm
Holdco have entered into an agreement relating to the conversion
feature of the note following the Holdco Recapitalization. Through
that agreement, consistent with the original terms of the note,
CoreComm Limited and CoreComm Holdco have agreed to exercise their
right under the note such that, following the successful completion of
our exchange offer to the holders of CoreComm Limited common stock to
exchange their shares of CoreComm Limited common stock for shares of
our common stock, the convertibility feature of the note will be
altered so that rather than the note being convertible into shares of
CoreComm Limited common stock, it will become convertible into shares
of our common stock. At that time, the conversion price of $1.00 will
be equitably adjusted by applying the exchange ratio in the exchange
offers, which results in a new conversion price of $116.70 per share
of our common stock. The holder has agreed not to exercise its rights
to convert into CoreComm Limited common stock for six months from
February 5, 2002 (unless that right has previously ceased as a result
of the completion of the exchange offer and the change in the
convertibility feature). In the event that we are unsuccessful in
completing the exchange offer, the conversion feature would remain
into CoreComm Limited common stock. These
70
notes are redeemable, in whole or in part, at our option, at any time
in April 2003, at a redemption price of 103.429% that declines
annually to 100% in April 2007, in each case together with accrued and
unpaid interest to the redemption date.
- CoreComm Limited's warrants to purchase shares of CoreComm Limited's
Common Stock will be exercisable for common shares of CoreComm Holdco,
subject to any exchange ratio in the exchange offer, if the exchange
offer for CoreComm Limited's Common Stock is consummated.
- As of December 31, 2001, there were options to purchase approximately
22.1 million shares of CoreComm Limited common stock outstanding. In
December 2001, the CoreComm Limited board of directors, in connection
with the Holdco Recapitalization, accelerated all outstanding options
to acquire shares of CoreComm Limited common stock so that all are
presently fully vested and exercisable. However, based on the last
sales price for CoreComm Limited common stock on The Nasdaq Stock
Market on February 4, 2002 of $0.10, less than 1% of those options are
at exercise prices below the market price for CoreComm Limited common
stock. CoreComm Limited options are not exercisable for shares of
CoreComm Holdco common stock. In the event that we are successful in
consummating the exchange offers, CoreComm Limited would become a
subsidiary of CoreComm Holdco. Subsequent to that time, CoreComm
Holdco and CoreComm Limited may agree to effect a merger between
CoreComm Limited and a subsidiary of CoreComm Holdco which would have
the effect of converting holders of any remaining outstanding shares
of CoreComm Limited common stock not owned by us into shares of our
common stock at an exchange ratio identical to that being offered in
the exchange offers. Between now and that time, if holders of CoreComm
Limited options exercise their options, they would, at the time of a
merger, have the same rights as other holders of CoreComm Limited
common stock to have their shares of CoreComm Limited converted to
shares of CoreComm Holdco at that exchange ratio.
- In December 2001, CoreComm Holdco adopted a new stock option plan for
its employees. A total of 2.9 million shares of common stock were
reserved for issuance under the plan, which represents 22.5% of the
total fully diluted shares of CoreComm Holdco. In January 2002,
CoreComm Holdco's board of directors approved a grant of options to
purchase an aggregate of approximately 2.58 million shares of CoreComm
Holdco's common stock, representing approximately 20% of the total
fully diluted shares. The exercise price of these options is the
estimated fair market value on the date of grant of $3.00 per share.
The number of shares issuable under the plan and the number of shares
into which each outstanding option is exercisable is subject to
adjustment for stock splits and other similar transactions. For
example, if we effect a 3-for-1 stock split, a holder of 100 options
would automatically have 300 options following the split, at 1/3 the
original strike price.
71
OUR BUSINESS
We are an integrated communications provider that offers local and
toll-related telephone, Internet and high-speed data services to business and
residential customers in targeted markets throughout the Mid-Atlantic and
Midwest regions of the United States. We operate three business divisions:
business services (ATX), residential services (CoreComm Residential) and
Internet services (Voyager). We are exploiting the convergence of
telecommunications and information services through our network strategy, which
involves the ownership of telephone switching equipment and the leasing of the
local telephone lines that run directly to homes and businesses, combined with
the provisioning of a leased regional network that carries Internet traffic.
This configuration of locally and regionally owned and leased facilities allows
us to deliver a wide range of communications services over a wide geography
within our regions. We currently offer services to business and residential
customers located principally in Pennsylvania, Ohio, New Jersey, Michigan,
Wisconsin, Maryland, Illinois, New York, Virginia, Delaware, Massachusetts,
Washington, D.C. and Indiana. In local exchange services, we compete against the
established local telephone service provider that was the service provider in a
region prior to the opening of local telephone service to competition.
In 2001, we streamlined our strategy and operations to focus on our two
most successful and promising lines of business. The first is integrated
communications products and other high bandwidth/data/web-oriented services for
the business market. The second is bundled local telephony and Internet products
efficiently sold, serviced and provisioned via Internet-centric interfaces to
the residential market. Our strategy is to attractively bundle telephony and
data services in our target markets in order to compete with the incumbents and
gain market share.
As of September 30, 2001, we had more than 295,000 local telephone access
lines in service and more than 350,000 Internet customers. The following table
details our customer base:
SEPTEMBER 30, 2001
Residential Local Access Lines 54,400
Business Local Access Lines 241,500
Toll-related Access Line Equivalents 495,300
Internet Subscribers 351,600
Other Data Customers (1) 18,200
----------
(1) Other data customers included Point-to-Point data, Frame Relay, Web
Development, Web Hosting, E-Commerce, Collocation and other related
customers.
As of the third quarter ended September 30, 2001, our revenues were
attributable to the following service categories:
Q3 2001
Local Exchange Services 32%
Toll-related Telephony Services 26%
Internet, Data and Web-related Services 32%
Other Revenue 10%
Total 100%
We have engaged in significant efforts to capitalize on ways to increase
the profitability of our services. We have capitalized on opportunities such as
more profitable Unbundled Network Element - Platform (UNE-P) and Enhanced
Extended Loop (EEL) provisioning and pricing to reduce existing network costs
and capital expenditures, and enhance gross margins. In the last few months, a
large portion of our business and residential local access lines have been
converted to these more profitable services from total service resale, which we
expect to continue. We will also continue to provision telephony customers onto
our owned and leased networks where we have facilities in place, while also
taking advantage of UNE-P and EEL provisioning to expand our service areas.
The following is a description of our three business divisions, as well as
a description of our network technology and proprietary systems.
BUSINESS SERVICES (ATX)
Through our business services division, we offer customers a full range of
high-speed communications services including local and toll-related telephony
services, network services such as network data integration,
72
Internet access and Web consulting, development and hosting, and other related
services. In addition, we offer Advanced Communications Solutions products
tailored to meet the needs of our business customers, such as conference
calling, travel services, pre-paid calling, enhanced fax and PC-based billing.
Customers are billed on a single, consolidated invoice, delivered by traditional
means or near real time Web-based billing that allows the customer to sort the
information to detail calling patterns. Our target markets are the Mid-Atlantic
region throughout the New York-Virginia corridor, and Midwest markets,
including: Cleveland, Ohio; Columbus, Ohio; Chicago, Illinois; and other markets
in the Great Lakes region.
BUSINESS PRODUCTS AND SERVICES
Our business division offers our customers a full range of broadband
communications services, including:
- CORECONNECT. We offer a single, simple solution for all of a
customer's communications needs - local, long distance, toll, data and
Internet access services bundled over a multi-purpose broadband
connection. By combining all of a business' essential communications
over the same facilities, we are able to offer an integrated access
tool that enables higher speed, greater bandwidth, and significant
cost savings, all from a single source. Through this integrated
product, we are also able to offer custom-tailored bandwidth-intensive
data solutions such as WAN/LAN connectivity, dedicated point-to-point
circuits, frame relay to the Internet, and ATM for multimedia
applications. We also offer these products on a stand-alone basis.
- LOCAL TELEPHONY SERVICES. Local telephony services include local dial
tone and a set of custom calling features that business customers can
tailor to meet their local telephony needs. A sample of some of the
most popular local features include alternate answer, automatic
callback, busy line transfer, call blocking, call forwarding, call
trace, call waiting, caller ID with name, multi-ring service, repeat
dialing, remote access call forwarding, and speed calling.
- TOLL-RELATED TELEPHONY SERVICES. Toll-related telephony services
include inbound/outbound service, international, 800 or 888 service
and calling card telephone service. We currently provide intraLATA and
interstate long distance services nationwide and international
termination worldwide. We also offer a full line of Advanced
Communications Solutions along with our toll-related services, such as
Internet-based call management, traveling calling cards, fax
broadcasting, voice mail, conference calling and enhanced call routing
services.
- NETWORK SERVICES. We also offer complete high-speed network solutions
to our customers. These services include network data integration for
private line services, Internet services, Web design, development,
hosting and consulting services.
- INTERNET SERVICES. We utilize a state-of-the-art network to deliver
Internet access designed for business use, ensuring high-speed and
stable connectivity to a global resource of information. Our customers
are connected via high-speed dedicated lines, from 56K up to DS3.
- WEB SERVICES/E-COMMERCE. We are able to facilitate virtually every
aspect of establishing and maintaining an interactive global presence
in Web services. The various segments of Web services include Web
design, hosting, electronic commerce, Intranet development, database
integration, Internet marketing and Internet security.
- CONSULTING SERVICES, LOCAL AREA NETWORK/WIDE AREA NETWORK DATA
INTEGRATION. Our network services and integration unit assists
organizations in the design, construction, implementation and
management of practical local and wide area networks. This business
unit manages local area network/wide area network data integration for
private line services, Internet network and integrated services
digital network, as well as professional consulting services and
hardware/software sales. We develop solutions while educating clients
on specific business applications and the technology that make them
possible. Consulting services include wide area network architecture
and implementation, router and CSU configuration, local area network
switching, electronic commerce, cabling and VLAN design and set-up.
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- WIRELESS SERVICES. We also offer wireless services primarily as a
customer retention tool, consisting of both cellular and paging
service. We offer digital and analog cellular services as well as ESMR
service, which is two-way radio and digital cellular service, through
Nextel.
BUSINESS SALES AND MARKETING
Our sales model is based on our consultative sales approach, our
proprietary marketing and training tools, the experience of our sales force, our
"farm-team" training and career development program, and our shared vision and
incentive structure to reward individual and team performance objectives.
Each sale begins with an evaluative consultation that investigates the
telecom needs of the customer. The sales consultant then designs a tailored,
integrated and cost-effective telecom platform that addresses the specific
customer's communications needs. The level of the sales consultant's telecom and
customer knowledge necessary to sell successfully can be achieved only through
significant training, mentoring and devotion of corporate resources.
We have an experienced and long-tenured sales force. Over 25% of our senior
sales force professionals have been with us for more than five years, and 18 out
of 22 members of the sales management team have been promoted from within our
organization.
RESIDENTIAL SERVICES (CORECOMM RESIDENTIAL)
We offer residential customers voice, data and other telecommunications
services in Ohio, Illinois, Michigan, Wisconsin and Pennsylvania and Internet
access services over a wider footprint in the Midwest and Mid-Atlantic regions
of the United States. Customers are billed for their services with one,
consolidated bill. If they choose, customers can access their billing
information and pay their bills online, or they may elect automatic bill payment
via credit or debit card.
RESIDENTIAL PRODUCTS AND SERVICES
Our residential strategy is to bundle telephony and Internet products and
services in ways that are attractive to the customer, distinctive in the
marketplace, and offer convenience and simplicity. We typically offer a platform
of the most popular services and then create ways for customers to purchase
other services easily and conveniently according to their tastes.
For example, in the current residential offering, we combine a package of
local and long distance phone service with Internet access, which is called the
"CoreComm Unlimited Premium" service. Although the details of the offerings vary
somewhat by region, the service typically includes:
- Local dial tone;
- Local calls;
- Call waiting;
- Caller-ID with name;
- Personal "800" number;
- Premium Internet service;
- 56K unlimited access;
- 3 e-mail addresses;
- 10 MB of personal web space;
- Long distance service option at 10 cents per minute; and
- 100-200 minutes of long distance included with additional minutes
at 6-8 cents per minute.
Additional options and features, such as voice mail, three-way calling, an
additional line, and additional web site space, can be easily and flexibly added
to the service. The pricing for CoreComm Unlimited Premium varies by region, but
in all areas the price offers value and convenience when compared to offerings
from the incumbent telephony company and other providers of these services.
Although the specific components of the product offerings continually
change over time, we plan to continue our strategy of designing marketing
packages that give the customer flexibility and choice, with convenient ways to
subscribe to additional services.
In general, we currently offer the following voice, data and Internet
services to residential customers in our markets:
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- LOCAL TELEPHONY SERVICES - including standard dial tone, local
calling, Emergency 911 services, operator assisted calling, access to
the long distance network, and other related services.
- CUSTOM CALLING FEATURES - including call waiting, call forwarding,
caller ID, voice mail, conference calling, multi-ring, speed calling
and other enhanced features.
- TOLL-RELATED TELEPHONY SERVICES - including 1+ interLATA calls, which
are calls across Local Access and Transport Areas, intraLATA calls,
international calls, 800/888/877 toll free services, calling cards and
other related services.
RESIDENTIAL SALES AND MARKETING
We focus on a marketing approach that combines targeted direct marketing
with partnerships and local organizations. We utilize local media and partner
with civic organizations to develop the recognition of the brand and to create a
captive potential base of customers. We also target customers in our footprint
via direct mail, e-mail and telemarketing. All of our sales efforts are designed
to drive revenue growth by capitalizing on low cost opportunities in our current
markets.
In addition to efforts designed to acquire new customers, we continually
engage in efforts to sell additional services to existing customers. For
example, we are currently working on upselling our Internet-only customers to
bundled local and toll-related telephony and Internet products.
Our residential marketing efforts are intended to drive potential customers
to our website, www.core.com. At this website, customers can sign up for service
in a fully online process. Customers may also sign up for service by calling our
toll-free number. Our product offerings are designed to be simple and flexible,
so that potential customers can easily perceive their value.
INTERNET SERVICES (VOYAGER)
Our Internet services division provides Internet access and high-speed data
communications services and to residential and business subscribers. Services
include dial-up Internet access, dedicated telecommunications services to
business, cable modem access, Web-hosting, electronic commerce, and co-location
services. We operate one of the largest dial-up Internet networks in the Midwest
in terms of geographic coverage, with approximately 170 owned points of presence
in Michigan, Wisconsin, Ohio, Illinois, Indiana, Minnesota, Pennsylvania, New
York and California.
In April 2001, we announced that we are evaluating strategic alternatives
for our non-CLEC assets and businesses and we have retained advisors for the
purpose of conducting this review.
INTERNET PRODUCTS AND SERVICES
INTERNET ACCESS SERVICES
We offer Internet access services to residential subscribers and dedicated,
web hosting, and dial-up Internet access to business customers. By selecting
between the various types of access services and pricing plans available,
subscribers can select services that fit their specific needs.
- DIAL-UP ACCESS. Our residential access services are designed to
provide subscribers with reliable Internet access through standard
dial-up modems. The dial-up Internet access service includes:
- local access numbers;
- personal Web space;
- multiple e-mail accounts;
- toll-free customer support;
- light usage plans;
- optional content filters for parental or business use; and
- Internet chat and news groups.
We also offer prepaid plans for quarterly, semi-annual and annual access. A
majority of our residential subscribers pay their monthly fee automatically by a
pre-authorized monthly charge to their credit card. Additional service options
include Web content filter service, e-mail alias (forwarding) and national
toll-free roaming service.
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- DEDICATED ACCESS. We offer high-speed dedicated connections to both
business and residential subscribers at a range of speeds using
traditional telecommunications lines and frame relay communications
services for those customers requiring greater speed and reliability.
- CABLE MODEMS. Through a reseller arrangement with Millennium Digital
Media Systems, L.L.C., we offer high-speed Internet access in some
locations through the use of modems integrated with local cable
television networks and provides the technical and billing support to
this fast-growing segment of the Internet access business.
WEB SERVICES
Our Web services help organizations and individuals implement their Web
site and e-commerce goals. We offer various Web hosting and other services that
enable customers to establish a Web site presence without maintaining their own
Web servers and high-speed connectivity to the Internet.
- WEB HOSTING. We offer a diverse range of shared, dedicated and
co-location Web hosting services for small and medium businesses. The
Web hosting service includes state-of-the-art Web servers, high-speed
connections to the Internet at its network operations centers, and
registration of our customers' domain name and Internet address. We
also offer Web page design, development, maintenance and traffic
reporting and consulting services.
- CO-LOCATION. We offer co-location services, providing
telecommunications facilities for customer-owned Web servers, for
customers who prefer to own and have physical access to their servers
but require the reliability, security and performance of our on-site
facilities. Co-location customers house their equipment at our secure
network operating centers and receive direct high-speed connections to
the Internet.
- E-COMMERCE. We have launched a suite of Web hosting and e-commerce
solutions that enable businesses to easily and affordably create Web
sites and sell their products and services over the Internet. The
product suite includes EasyWeb, which allows a business to quickly
create a Web site online through a series of menu-driven screens and
templates, and EasyShop, a comprehensive e-commerce solution, which
allows businesses to accept real-time credit card purchases via their
Web site.
- LOCAL CONTENT. Our portal is a web site including personalized local
news and weather, sports, entertainment, finance, stock quotes,
shopping, classifieds and chat services for our customers. Content is
automatically tailored to individual customers using a database driven
process that presents customers with location-specific information.
Customers can also customize the layout and specific content options
available to them. Content is made available through revenue sharing
and co-branding agreements with organizations including CMGI Inc.'s
MyWay.com, Wizshop.com, Amazon.com, and local media. Customers access
the portal page at www.voyager.net.
OTHER SERVICES AND OFFERINGS
We also offer other enhanced communications services to meet the one-stop
shopping demands of residential and business customers.
- VIRTUAL PRIVATE NETWORKS. Our custom virtual private networks
solutions enable customers to deploy tailored, Internet protocol-based
mission-critical business applications for internal enterprise,
business-to-business and business-to-customer data communications on
its network while also affording high-speed access to the Internet. We
offer customers a secure network on which to communicate and access
information between an organization's geographically dispersed
locations, collaborate with external groups or individuals, including
customers, suppliers, and other business partners and use the Web to
access information on the Internet and communicate with other Web
users.
- LONG DISTANCE AND OTHER TELECOMMUNICATIONS. We currently resell long
distance telecommunications services as well as an 800 service,
calling cards and prepaid cards to its Internet customers through our
VoyagerLink operations. We currently offer this interstate and
intrastate long-distance service to our customers at a fixed rate per
minute, with no set-up or monthly charges.
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INTERNET SALES AND MARKETING
MARKETING. Our marketing philosophy is based on the belief that a
consumer's selection of an Internet service provider is often strongly
influenced by a personal referral. Accordingly, we believe that the customer
satisfaction of our subscriber base has led to significant word-of-mouth
referrals. Our referral incentive program awards subscribers one month of free
service for every customer referred. As a result, over 70% of new sign-ups come
from existing subscriber referrals. Our proprietary customer care and billing
system automatically tracks and credits the subscriber's account, thus providing
valuable marketing information and flexibility with this program. We also market
services through strategic relationships with value added resellers in the local
communities, such as trade associations, unions, Web development companies,
local area network administrators and retail stores which represent and promote
us on a commission basis. These relationships are a significant source of new
customers. We do not use mass marketing media as a major source of acquiring new
customers, but instead believe that by providing superior customer service and
developing strong relationships within local communities, particularly in small-
and medium-sized markets, we can continue to grow with very low costs per new
customer acquired.
FREE CDS AND DISKETTES. Upon the request of prospective customers, we
distribute free software via CD and diskettes that contain both the Netscape
browser software for Windows 2000/98/95, Windows 3.1 and Macintosh, as well as
Microsoft's Internet Explorer. The software is configured to facilitate
installation and connection to a point of presence. Individuals receiving the CD
or diskettes have the opportunity to obtain the free browser software contained
on the CD by opening an account with us, either online or via a toll-free
telephone number. New customers can be online in a matter of minutes after
opening an account online or by calling our toll-free telephone number.
BUSINESS SALES AND SUPPORT. We have a business sales and support team
dedicated to selling and providing customized support to our growing small- and
medium-sized business customers. The business teams include support personnel
located throughout its target region. This strong local presence allows it to
meet face-to-face with its business customers to evaluate their needs and
respond with customized solutions. Our locally-based sales and support teams are
supported by additional network engineers at our call centers for
trouble-shooting on specific problems.
NETWORK AND TECHNOLOGY
NETWORK STRATEGY. Our network strategy combines the ownership of telephone
switching equipment and the leasing of the local telephone lines that run
directly to homes and businesses, combined with the provisioning of a leased
regional network that carries Internet traffic. This configuration of locally
and regionally owned and leased facilities allows us to deliver a wide range of
communications services over a wide geography within our regions.
TELEPHONY NETWORK INFRASTRUCTURE. We currently have Class 5 switches
operating in Philadelphia, PA; Columbus, OH; Cleveland, OH; and Chicago, IL.
These switches are connected via leased local transport to collocations
throughout their respective markets where we have equipment collocated with the
incumbent local exchange carrier. We are able to reduce the number of
collocations we establish with the incumbent local exchange carrier, in each
market by utilizing Enhanced Extended Loops (EELs) that virtually allow us to
extend our local networks to service customers well outside of the collocation
footprint. Also, in areas where we do not have facilities in place, we utilize
Unbundled Network Element - Platform (UNE-P) and total service resale
provisioning to service their customers. We also operate five Class 4 switches
to handle our toll-related traffic.
INTERNET NETWORK INFRASTRUCTURE. We designed and built our Internet network
to specifically service Internet (data) traffic. The network is comprised
primarily of the latest Cisco Systems and Juniper Networks routing and switching
equipment, which provides a common platform for increased flexibility and
maintenance while allowing for the use of advanced routing protocols to quickly
and dependably deliver customer traffic. We have two Internet network operating
centers to oversee traffic flows and general network operations, as opposed to a
single network operating center as found in many national networks, which helps
create redundancy and ensures a secure and reliable network. We are continuously
improving our network infrastructure and connectivity costs through
relationships with incumbent local exchange carriers and competitive local
exchange carriers such as Brooks Fiber (MCI WorldCom), Phone Michigan
(McLeodUSA), Time Warner, Coast to Coast and Focal Communications.
Our Internet points of presence are linked to regional network points, or
hubs, which are our two Internet-dedicated network operating centers. These
network points are linked to the Internet by fiber optic connections and employ
asynchronous transfer mode, frame relay and other methods of handling traffic
efficiently. Interlinked network points allow Internet users to access sites
located on other network points. In the event that one of our
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subscribers wishes to access a Web site that is located on another service
provider's network, data is directed to a network access point where information
sharing is conducted under arrangements known as peering. The flow of
information across a network access point allows information to be downloaded
from one service provider's network to a subscriber on another service
provider's network.
INTERNET POINTS OF PRESENCE. Our approximately 170 dial-in points of
presence primarily utilize digital access servers manufactured by 3Com
Corporation and Lucent Technologies, Inc. These servers allow for a variety of
customer connections from standard dial-up to traditional telecommunications
lines, including integrated digital services network. Our network has been
reconfigured to include redundant data circuits, which will automatically route
customer traffic in the event of a failure, and our network topology offers high
levels of performance and security. Through various relationships with
competitive local exchange carriers, we have been able to reduce the overall
number of points of presence by consolidating several of them into "SuperPOPs"
with expanded calling areas. The SuperPOP allows us to consolidate equipment
into one large modem bank and eliminate various telecommunication links from its
points of presence back to the network operating center, thereby creating
enhanced network reliability and reducing telecommunication costs.
NETWORK OPERATIONS CENTERS (NOCS). We currently have 4 network operations
centers localized to manage traffic throughout our footprint. The NOCs are
located in Philadelphia, PA, Cleveland, OH, which monitors the Cleveland,
Columbus and Chicago networks, and East Lansing, MI, and New Berlin, WI. The
East Lansing and New Berlin NOCs house all of our internal Internet network
equipment, including servers, routers, mail, hosting and disk arrays, as well as
our main routing equipment and connection to the Internet. These two NOCs have
been interconnected to provide redundancy and to ensure the highest quality data
network. Each network operations center is monitored on a 24 hours per day,
seven days per week basis in order to provide the highest level of network
performance.
PEERING RELATIONSHIPS. Peering is the act of exchanging data across
networks, typically at specific, discrete locations. By allowing separate
networks to exchange data, users on a particular Internet service provider's
network are able to access information and communicate with users on another
provider's network. Many formal peering points exist where several dozen
Internet service providers and other providers exchange data, including network
access points. Internet service providers can also run connections to peer with
several different providers, known as multihoming. Multihoming allows an
Internet service provider to provide better service, as inbound and outbound
data can go over different routes if a particular network is overloaded. We have
relationships at multiple points with several different organizations, including
Verio, Inc. in Ann Arbor, Michigan, NAP.net in Chicago, Illinois and MCI and
Savvis in Kalamazoo, Michigan, thus building in network redundancy that allows
for better connectivity for its customers.
ELECTRONIC BONDING AND PROPRIETARY SYSTEMS
We are currently bonded electronically with Ameritech and Verizon. This
electronic interface allows for more timely and accurate service ordering and
provisioning of customers. We have real-time access to customer information
while order entry and confirmation are batched and transmitted several times a
day. We provide service to customers through our proprietary systems, which are
designed to interface with the incumbent local exchange carriers' systems
through a variety of delivery mechanisms. Our systems and processes have been
developed to decrease the risk of human error associated with provisioning
customers by manual keying or fax.
Our customer interface systems have been developed and continue to be
enhanced in a client/server environment that allows for flexibility to
accommodate an expanding customer base, efficient entry into new markets,
switch-based services, and rapid development of additional functionality. Our
proprietary systems handle all pre-ordering activities, including obtaining
customer service records (CSR), finding and reserving telephone numbers,
verifying customer addresses, validating due dates, searching the incumbent
local exchange carrier's switches for feature availability (COFA), and yellow
page listings.
Our recent and ongoing enhancements to our information systems include the
following:
- Rating and billing engines are being re-engineered for performance and
scalability using a multi-tiered architecture.
- Provisioning systems for the Ameritech region have been enhanced to
support Ameritech's five state region. Our service order management
system has been enhanced to validate in real time the incumbent local
exchange carrier feature availability, integrate the electronic
generation of service order data, and integrate automated switch
activation software for our Class 5 switches, all within a
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single system. The provisioning information is entered once, and it
flows through our internal systems, our switch, and the incumbent
local exchange carrier systems with minimal manual intervention.
- We have automated the migration processes to move customers from
resale to on-switch and resale to UNE-P via our service order
management system, which has been designed to minimize manual
processes with the incumbent local exchange carrier.
- We have purchased and installed a platform for our call centers which
has introduced skills-based routing of inbound calls with an automated
attendant. This allows us to service our customers better by ensuring
that a call is delivered to a customer service representative with the
skills necessary to handle the customer.
- We have integrated an auto-dialer with our collections system, which
has significantly increased collection agent productivity and
effectiveness.
We have invested in the construction of a series of proprietary software
applications and an extensive corporate Intranet in our efforts to achieve a
paperless work environment in which all job critical information is readily
available online. Our employees use the corporate Intranet to access detailed
product and corporate information, industry research and updates, competitive
intelligence files, online training and certification, calendars, a personnel
directory, community activities, philanthropic organizations, and other
important content from the convenience of their desktops. Online forms and
sophisticated e-mail applications have further increased productivity by
enhancing communications.
We currently utilize internally developed proprietary systems for
integrated order management and provisioning, as well as for customer relations
management. For billing, we use a combination of proprietary software and an
external service bureau.
We provide customer service and technical support through three call
centers located in Philadelphia, PA, Columbus, OH, and East Lansing, MI. We
provide 100% of our customer care internally and do not outsource any customer
operations to third party providers. We have upgraded our phone systems to route
calls, track important call-in data, automatically answer questions and move
customers quickly through the call-in process. Our comprehensive staff training
program and incentive compensation program linked to customer satisfaction has
led to significant improvements in the time required to move subscribers through
the various calling queues. In addition to using our call centers, customers can
also e-mail questions directly to technical support staff, as well as find
solutions online through the use of the tutorials found at our web site.
COMPETITION
The telecommunications industry and all of its segments are highly
competitive and many of our existing and potential competitors have greater
financial, marketing, technical and other resources than we do. Competition for
our products and services is based on price, quality, network reliability,
service features and responsiveness to customers' needs.
COMPETITIVE LOCAL EXCHANGE CARRIER
In each of our markets, we face competition from incumbent local exchange
carriers, including Verizon and Ameritech, as well as other providers of
telecommunications services, other competitive local exchange carriers and cable
television companies. In the local exchange markets, our principal competitor
will be the incumbent local exchange carriers. We also face competition or
prospective competition from one or more competitive local exchange carriers.
For example the following companies have each begun to offer local
telecommunications services in major U.S. markets using their own facilities or
by resale of the incumbent local exchange carrier's services or other providers'
services: AT&T, MCI WorldCom, McLeod USA, Choice One Communications, XO
Communications and Sprint.
Some of our competitors, including AT&T, MCI WorldCom and Sprint, have
entered into interconnection agreements with Verizon and Ameritech in states in
which we operate. These competitors either have begun or in the near future
likely will begin offering local exchange service in those states. In addition
to these long distance service providers and existing competitive local exchange
carriers, entities that currently offer or are potentially capable of offering
switched telecommunications services include:
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- wireless telephone system operators;
- large customers who build private networks;
- cable television companies; and
- other utilities.
Competition in our competitive local exchange carrier business will
continue to intensify in the future due to the increase in the size, resources
and number of market participants. Many facilities-based competitive local
exchange carriers have committed substantial resources to building their
networks or to purchasing competitive local exchange carriers or inter-exchange
carriers with complementary facilities. By building or purchasing a network or
entering into interconnection agreements or resale agreements with incumbent
local exchange carriers, including regional Bell operating companies and
inter-exchange carriers, a provider can offer single source local and long
distance services similar to those offered by us. Additional alternatives may
provide competitors with greater flexibility and a lower cost structure than
ours. Some of these competitive local exchange carriers and other
facilities-based providers of local exchange service are acquiring or being
acquired by inter-exchange carriers. These combined entities may provide a
bundled package of telecommunications products, including local and long
distance telephony, that is in direct competition with the products offered or
planned to be offered by us.
INTERNET
The Internet services market is also extremely competitive. We compete
directly or indirectly with the following categories of companies:
- established online services, such as America Online, the
Microsoft Network and Prodigy;
- local, regional and national Internet service providers, such as
Earthlink, United Online and Internet America;
- national telecommunications companies, such as AT&T and MCI;
- providers of Web hosting, co-location and other Internet-based
business services, such as Verio, Inc.;
- computer hardware and software and other technology companies
that provide Internet connectivity with their products, including
IBM and Microsoft Corporation;
- national long distance carriers such as AT&T Corporation, MCI
WorldCom and Sprint Corporation;
- regional Bell operating companies, such as Verizon and Ameritech,
and local telephone companies;
- cable operators, including AT&T Corporation, Comcast and Time
Warner Cable;
- nonprofit or educational Internet service providers;
- online cable services, such as Excite@Home and Roadrunner; and
- satellite-based online providers, such as DIRECTV and EchoStar.
We believe that the primary competitive factors determining success as an
Internet service provider are:
- accessibility and performance of service;
- quality customer support;
- price;
- access speed;
- brand awareness;
- ease of use; and
- scope of geographic coverage.
Many of the major cable companies and some other Internet access providers
offer Internet connectivity through the use of cable modems and wireless
terrestrial and satellite-based service technologies. In addition, several
competitive local exchange carriers and other Internet access providers have
launched national or regional digital subscriber line programs providing high
speed Internet access using the existing copper telephone infrastructure.
Several of these competitive local exchange carriers have announced strategic
alliances with local, regional and national Internet service providers to
provide broadband Internet access. We also believe that manufacturers of
computer hardware and software products, media and telecommunications companies
and others will continue to enter the Internet services market, which will also
intensify competition. Any of these developments could materially and adversely
affect our business, operating results and financial condition.
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Competition will increase as large diversified telecommunications and media
companies acquire Internet service providers and as Internet service providers
consolidate into larger, more competitive companies. Diversified competitors may
bundle other services and products with Internet connectivity services,
potentially placing us at a significant competitive disadvantage. As a result,
our businesses may suffer.
CUSTOMER DEPENDENCE AND SEASONALITY
We do not depend upon any single customer for any significant portion of
our business. Neither our business nor the telecommunications industry are
generally characterized as having a material seasonal element, and we do not
expect our business or the industry to become seasonal in the foreseeable
future.
EMPLOYEES
As of September 30, 2001, we had an aggregate of approximately 1,300
employees. None of our employees are represented by any labor organization. We
believe that our relationship with our employees is excellent.
PROPERTIES
Some of our subsidiaries lease switch buildings, ILEC collocations and
office space which we believe is adequate to serve our present business
operations and our needs for the foreseeable future. For information concerning
lease commitments, please refer to the Notes to the Consolidated Financial
Statements included in this prospectus.
LEGAL PROCEEDINGS
We purchase goods and services from a wide variety of vendors under
contractual and other arrangements that sometimes give rise to litigation in the
ordinary course of business. We also provide goods and services to a wide range
of customers under arrangements that sometimes lead to disputes over payment,
performance and other obligations. Some of these disputes, regardless of their
merit, could subject us to costly litigation and the diversion of our technical
and/or management personnel. Additionally, any liability from litigation that is
not covered by our insurance or exceeds our coverage could have a material
adverse effect on our business, financial condition and/or operating results.
Currently, we have the following outstanding matters which, if resolved
unfavorably to us, could have a material adverse effect on us:
- On or about September 14, 2001, a lawsuit was filed by WXIII/Far Yale
Gen-Par, LLC, as General Partner of WXIII/Far Yale Real Estate Limited
Partnership against CoreComm Communications, Inc. (our first tier
wholly owned subsidiary) and CoreComm Limited seeking approximately
$172,500 in unpaid rent, interest and other charges allegedly owed
under a commercial real estate lease between Yale and CoreComm
Communications as to which CoreComm Limited is the guarantor. On or
about February 5, 2002, Yale filed a motion with the court requesting
permission to amend the complaint to specify a revised figure of
$404,290.87 as the amount allegedly due under the lease and to add an
additional count asking the court to issue a preliminary injunction
preventing the defendants from transferring, selling, assigning,
encumbering or otherwise hypothecating any of their assets, including
any debt or equity interests in their subsidiaries, except for usual
and ordinary expenses paid in the usual and ordinary course of
business. We are currently defending ourselves in the litigation and
we do not believe that Yale's request for a preliminary injunction is
meritorious. However, we cannot predict the outcome of the litigation.
If Yale were to obtain the injunctive relief requested, it could
prevent us from closing the exchange offers and/or have a material
adverse effect on our business, financial condition and/or results of
operations. Even if the minimum condition is satisfied, before the
expiration date we may choose not to accept outstanding securities and
not to complete the exchange offers if any action, proceeding or
litigation seeking to enjoin, make illegal or delay completion of the
exchange offers or otherwise relating in any manner to the exchange
offers is or has been threatened or instituted or is pending or if any
order, stay, injunction or decree is issued by any court which would
or might restrain, prohibit or delay completion of the exchange
offers.
- We are currently in litigation with Ameritech Ohio, a supplier from
whom we purchase telecommunications products and services, over the
adequacy of Ameritech's performance under a 1998 contract between us
and Ameritech and related issues. This litigation began in June 2001
when Ameritech threatened to stop processing new orders following our
exercise of our right under the contract to withhold payments for
Ameritech's performance failures. In response to their threat, we
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sought, and on June 29, 2001 received, an order from an official of
the Public Utilities Commission of Ohio, which we refer to as "PUCO,"
barring Ameritech from refusing to process new CoreComm orders.
Ameritech has appealed that order to the PUCO and the appeal is still
pending.
On July 5, 2001, Ameritech filed a claim with the PUCO seeking payment
from us of approximately $8,600,000 allegedly owed under the contract.
On August 8, 2001, Ameritech filed a second claim against CoreComm in
Ohio state court, seeking an additional approximately $4,300,000 in
allegedly improperly withheld amounts. On August 28, 2001, we
exercised our right to remove the state court claim to the United
States District Court for the Northern District of Ohio, and the
parties then stipulated to a consolidation of both of Ameritech's
claims in the United States District Court. To consolidate the two
claims, on October 9, 2001, Ameritech filed an amended complaint in
the United States District Court, seeking a total of approximately
$14,400,000.
On December 26, 2001, we filed our answer to Ameritech's amended
complaint and simultaneously filed three counterclaims against
Ameritech and some of its affiliates, alleging breach of contract,
antitrust violations, and fraudulent or negligent misrepresentation.
Ameritech's response to our counterclaims is currently due on February
13, 2002. Although we believe that we have meritorious defenses to
Ameritech's amended complaint, and that the amount currently in
dispute is substantially less than the $14,400,000 claimed in
Ameritech's amended complaint, we cannot be certain how the matter
will be resolved. We also believe that to the extent that Ameritech
prevails with respect to any of its claims, Ameritech's award may be
offset in whole or in part by amounts that we are seeking to obtain
from Ameritech under its counterclaims. However, it is impossible at
this time to predict the outcome of the litigation.
- We have received correspondence from various operating subsidiaries of
Verizon Communications, Inc. ("Verizon") claiming that Verizon is owed
a total of approximately $14.4 million for services allegedly provided
in Delaware, Maryland, Virginia, Pennsylvania, District of Columbia,
Massachusetts and New York, and threatening to activate account
embargo and service suspension procedures in those states if payment
of the alleged amounts is not received by February 11, 2002 (as to the
amounts allegedly owed in Pennsylvania) and March 3, 2002 (as to the
amounts allegedly owed for the remaining states). We are currently
reviewing Verizon's claims against our own billing records, including
records reflecting unresolved disputed charges, and believe that the
amount at issue could be substantially less than the amount claimed by
Verizon. Moreover, we intend to vigorously defend against any effort
to implement any embargo or service suspension. However, we cannot
presently predict how the matter will be resolved and if Verizon were
to prevail on its claims and/or activate an account embargo or service
suspension, it could have a material adverse affect on our business,
financial condition and/or results of operations.
- On December 3, 2001, General Electric Capital Corp. filed a lawsuit in
the Circuit Court of Cook County, Illinois against CoreComm Limited
and our subsidiary, MegsINet, Inc. seeking approximately $8 million in
allegedly past due amounts under a capital equipment lease agreement
between Ascend and MegsINet. GECC is seeking all amounts allegedly
owed under the lease as well as repossession of the equipment. The
company's response to GECC's complaint is due February 20, 2002. A
finding in favor of GECC could adversely affect our financial
condition.
- On May 25, 2001, KMC Telecom, Inc. and some of its operating
subsidiaries filed an action in the Supreme Court of New York for New
York County against CoreComm Limited, Cellular Communications of
Puerto Rico, Inc., CoreComm New York, Inc. and MegsINet, Inc. On that
same date, KMC filed the same cause of action in the Circuit Court of
Cook County, IL. Upon defendant's Motion to Stay the New York action,
KMC voluntarily dismissed the Illinois litigation and the matter is
currently proceeding in New York. KMC contends that it is owed
approximately $2 million under a services agreement and a collocation
agreement with MegsINet. The defendants have denied KMC's claims and
have asserted that KMC failed to perform under the alleged contracts.
The defendants have served discovery and intend to defend themselves
in coordination with one of their insurance carriers. However, a
finding in favor of KMC in this litigation could have a material
adverse effect on our business, financial condition and/or results of
operations.
- On July 6, 2001, MCI initiated a compulsory arbitration action against
our subsidiary CoreComm Communications, Inc. in connection with a
dispute arising under a carrier services agreement between the
parties. The arbitration demand contends that MCI is owed in excess of
$1.9 million for circuits
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that were allegedly ordered by CoreComm Communications, Inc. under the
carrier agreement, and MCI has subsequently asserted that under one
theory of the case, its claims could exceed $10 million. We have
denied MCI's claims, asserting that the circuits were never ordered
under the contract and have been improperly billed by MCI and we do
not agree with MCI's various damages theories. Discovery in this
matter has been completed, and the case is currently scheduled for
trial before the arbitrator in April 2002. We are defending the suit
and pursuing all available claims and defenses. However, a finding in
favor of MCI in this arbitration could have a material adverse effect
on our business, financial condition and/or results of operations.
- We have received correspondence from a law firm on behalf of Weston
Telecommunications, L.L.C. asserting that Weston is the assignee of
certain rights of Easton Telecom Services, Inc. under an asset
purchase agreement approved as part of the bankruptcy disposition of
Teligent, Inc., and demanding payment of approximately $4.9 million
for telecommunications services purportedly provided under alleged
contracts between Easton and our subsidiary MegsINet, Inc. We have
investigated Weston's claims and do not believe they have any merit,
and we intend to defend ourselves vigorously and pursue all available
claims and defenses should the matter proceed to litigation. However,
a finding in favor of Weston in this matter could have a material
adverse effect on our business, financial condition and/or results of
operations.
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GOVERNMENT REGULATION OF THE TELECOMMUNICATIONS SERVICES BUSINESS
OVERVIEW
The telecommunications services we provide are subject to regulation by
federal, state and local government agencies. The following summary does not
purport to describe all current and proposed regulations and laws affecting the
telecommunications industry. Federal and state regulations and legislation are
the subject of judicial proceedings, legislative hearings and administrative
proposals, which could change in varying degrees the manner in which this
industry operates. Neither the outcome of these proceedings nor their impact on
the telecommunications industry or our business can be determined at this time.
Future federal or state regulations and legislation may be less favorable to us
than current regulation and legislation and therefore may have a material and
adverse impact on our business and financial prospects. In addition, we may
expend significant financial and managerial resources to participate in
proceedings setting rules at either the federal or state level, without
achieving a favorable result.
At the federal level, the FCC has jurisdiction over interstate and
international services. Interstate services are communications that originate in
one state and terminate in another. Intrastate services are communications that
originate and terminate in a single state and state public service commissions
exercise jurisdiction over intrastate services. Municipalities and other local
government agencies may also regulate limited aspects of our business, such as
use of government-owned rights-of-way and construction permits. Our networks are
also subject to numerous local regulations such as building codes, franchise and
right-of-way licensing requirements.
TELECOMMUNICATIONS ACT OF 1996
The federal Telecommunications Act, enacted in 1996, has resulted and will
continue to result in substantial changes in the marketplace for
telecommunications services. These changes include, at present, opening local
exchange services to competition and, in the future, a substantial increase in
the addressable services for us. Among its more significant provisions, the
Telecommunications Act:
- removes legal barriers to entry into some telecommunications services,
such as long distance and local exchange services;
- requires incumbent local exchange carriers such as Verizon or SBC,
which we refer to as "ILECs," to "interconnect" with and provide
services for resale by competitors;
- permits incumbent local exchange carriers, including Bell regional
operating companies in some circumstances to enter into new markets,
such as long distance and cable television;
- relaxes regulation of telecommunications services provided by
incumbent local exchange carriers and all other telecommunications
service providers; and
- directs the FCC to establish an explicit subsidy mechanism for the
preservation of universal service. The FCC was also directed by
Congress to revise and make explicit subsidies inherent in the access
charges paid by interexchange carriers for use of local exchange
carriers' services.
REMOVAL OF ENTRY BARRIERS
The provisions of the Telecommunications Act should enable us to provide a
full range of telecommunications services in any state. Although we may be
required to obtain certification from state public service commissions in almost
all cases, the Telecommunications Act should limit substantially the ability of
a state public service commission to deny a request for certification. The
provisions of the Telecommunications Act also reduce the barriers to entry by
other potential competitors and therefore increase the level of competition we
will likely face in all markets affected by the Act. Please refer to the section
of the prospectus entitled "Business-Competition."
INTERCONNECTION WITH LOCAL EXCHANGE CARRIER FACILITIES
A company may not be able to compete effectively with the ILECs in the
switched local telephone services market unless it is able to connect its
facilities with the ILEC's facilities and obtain access to some ILEC services
and resources under reasonable rates, terms and conditions. The
Telecommunications Act imposes a number of
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access and interconnection requirements on all local exchange providers,
including CLECs, with additional requirements imposed on non-rural ILECs. These
requirements are intended to provide access to some networks under reasonable
rates, terms and conditions. Specifically, ILECs must provide the following:
UNBUNDLING OF NETWORK ELEMENTS
ILECs must offer access to various unbundled elements of their network.
This requirement allows competitors to purchase at cost-based rates elements of
an ILEC's network that may be necessary to provide service to our customers.
DIALING PARITY
All local exchange carriers must provide dialing parity, which means that a
customer calling to or from a CLEC network cannot be required to dial more
digits than is required for a comparable call originating and terminating on the
ILEC's network.
TELEPHONE NUMBER PORTABILITY
Telephone number portability enables a customer to keep the same telephone
number when the customer switches local exchange carriers.
RECIPROCAL COMPENSATION
The duty to provide reciprocal compensation means that local exchange
carriers must terminate calls that originate on competing networks in exchange
for a given level of compensation and that they are entitled to termination of
calls that originate on their network, for which they must pay a given level of
compensation.
RESALE
All local exchange carriers generally may not prohibit or place
unreasonable restrictions on the resale of their services. In addition, ILECs
must offer local exchange services to resellers at a wholesale rate that is less
than the retail rate charged to end users.
COLLOCATION
Subject to space and equipment use limitations, ILECs must permit CLECs to
install and maintain some types of their own network equipment in ILECs' central
offices and remote terminals. The rates, terms and conditions are subject to
negotiation and, failing agreement, to arbitration before state public utility
commissions.
ACCESS TO RIGHTS OF WAY
All ILECs, CLECs and some other utilities must provide access to their
poles, ducts, conduits and rights-of-way on a reasonable, nondiscriminatory
basis to telecommunications carriers.
GOOD FAITH NEGOTIATIONS
ILECs are required to negotiate in good faith with other carriers that
request any or all of the arrangements discussed above. If a requesting carrier
is unable to reach agreement with the ILEC within a prescribed time, either
carrier may request arbitration by the applicable state commission.
RATES
The rates charged by incumbent local exchange carriers for interconnection
and unbundled network elements must be calculated using a forward-looking,
cost-based methodology, and may vary greatly from state to state. These rates
must be approved by state regulatory commissions, which often follows a lengthy
and expensive negotiation, arbitration, and review process. Recurring and
non-recurring charges for telephone lines and other unbundled network elements
may change based on the rates proposed by ILECs and approved by state regulatory
commissions from time to time, which creates uncertainty about how
interconnection and unbundled element rates will be determined in the future and
which could have an adverse effect on our operations. The ILECs have appealed
certain aspects of the methodology used to set these rates to the United States
Supreme Court. If the appeal is successful, it could result in higher prices for
interconnection and unbundled network elements.
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While the Telecommunications Act generally requires ILECs to offer
interconnection, unbundled network elements and resold services to CLECs,
ILEC-to-CLEC interconnection agreements have limited terms, requiring the CLEC
to renegotiate the agreements on a periodic basis. ILECs may not provide timely
provisioning or adequate service quality, thereby impairing a CLEC's reputation
with customers who can easily switch back to the ILEC.
CURRENT REGULATORY ISSUES
The following regulatory issues are currently before the FCC and various
courts and may impact our operations.
RECIPROCAL COMPENSATION
In March 2000, the U.S. Court of Appeals for the D.C. Circuit overturned
the FCC's previous determination that calls to Internet service providers, which
we refer to as "ISPs," are not local. The court found that the FCC had failed to
explain adequately its determination that a call does not "terminate" at an ISP
merely because the ISPs then originate further telecommunications that extend
beyond state boundaries. In response to this court ruling, in April 2001 the FCC
once again determined that calls to ISPs are jurisdictionally interstate, and
thus, not subject to reciprocal compensation under Section 251(b)(5) of the
Telecommunications Act. Instead, the FCC adopted an interim graduated rate
scheme for ISP-bound traffic in which the compensation rates for ISP-bound
traffic decrease on a yearly basis. In addition, the FCC initiated a proceeding
to comprehensively review all intercarrier compensation schemes, in which it
suggested moving to a bill-and-keep regime for all intercarrier payments. The
interim graduate rate regime for ISP-bound traffic will remain in place for the
next three years or until FCC concludes its review of all intercarrier
compensation schemes.
A number of parties have filed petitions for reconsideration of the FCC's
decision regarding compensation for ISP-bound traffic, but the FCC has yet to
act on those petitions. In addition, many competitive carriers and state public
utility commissions have appealed the FCC's determination to the U.S. Court of
Appeals for the D.C. Circuit. The court will hear oral arguments in February
2002. The outcome of this appeal could have an impact on the amount of
compensation we receive for ISP-bound traffic. As our existing interconnection
agreements expire and as we enter new markets, we must negotiate new reciprocal
compensation rates and traffic scope with each incumbent carrier. A reduction in
rates payable for Internet service provider reciprocal compensation could have
an adverse effect on our future revenues and business strategy.
COLLOCATION
The FCC has adopted rules requiring incumbent local exchange carriers to
provide collocation to competitive local exchange carriers for the purpose of
interconnecting their competing networks. In a July 2001 decision, the FCC
concluded that collocating equipment is "necessary" for interconnection or
access to unbundled network elements if "an inability to deploy that equipment
would, as a practical, economic, or operational matter, preclude the requesting
carrier from obtaining interconnection or access to unbundled network elements."
In addition, the FCC found that multifunction equipment satisfies the "necessary
standard" only if the equipment's primary purpose and function is to provide the
requesting carrier with "equal in quality" interconnection or "nondiscriminatory
access" to UNEs. Finally, the FCC determined that ILECs are no longer required
to permit competitors to construct and maintain cross-connects outside the
physical collocation space of the ILEC's premises. However, ILECs must provision
cross-connects between collocated carriers upon reasonable request. The ILECs
have appealed these findings to the U.S. Court of Appeals for the D.C. Circuit.
A successful appeal could provide incumbent carriers with a basis for refusing
to collocate multifunction equipment or provide collocation in a timely and
efficient manner. This could have a negative impact on our network deployment
plans.
LINE SHARING
On December 9, 1999, the FCC released its line sharing order that requires
ILECs to offer line sharing as an unbundled network element by June 6, 2000.
Line sharing permits CLECs to use a customer's existing line to provide DSL
services while the ILEC continues to use the same line to provide voice service.
Prices for line sharing will be set by the states based on a cost methodology
adopted by the FCC. In January 2001, the FCC clarified that line sharing applies
to the entire loop, even when a portion of the loop consists of fiber
facilities. Incumbent carriers must also permit competing carriers to
self-provision or partner with a data carrier. However, in a February 2001
Clarification Order, the FCC made clear that its prior ruling did not expand an
ILEC's obligation to provide access to unbundled packet switching capability.
The FCC is currently seeking comment on issues relating to line sharing on fiber
facilities.
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LOCAL EXCHANGE CARRIER ENTRY INTO NEW MARKETS
UNE ENTRY. The FCC has adopted rules that allow competitors to purchase at
cost-based rates elements of an ILEC's network that may be necessary to provide
service to our customers. The FCC is currently reviewing the framework under
which ILECs must make unbundled network elements available to competing
carriers. As a result of this review, the FCC may determine that ILECs no longer
need to unbundle certain network elements, which may impact our ability to
provide service to our customers. In addition, the FCC is currently considering
whether to adopt performance standards for ILECs' provision of unbundled network
elements. These standards would ensure that ILECs provision those elements on a
timely basis.
SECTION 271 ENTRY. Our principal competitor in each market we enter is the
ILEC. These of these carriers, the Regional Bell Operating Companies, which we
refer to as "RBOCs," are currently permitted to provide long distance services
to customers outside of their local service areas and in conjunction with their
mobile telephone services, but they are prohibited from providing long distance
services that originate in that states where they provide local telephone
service, which is referred to as "in-region long distance service." Section 271
of the Telecommunications Act established procedures under which RBOCs can
provide in-region long distance services in a state after receiving approval
from the FCC. To obtain approval, the RBOC must comply with a competitive
checklist that incorporates, among other things, the interconnection
requirements discussed above. Please refer to the section of the prospectus
entitled "- Interconnection with Local Exchange Carrier Facilities."
Approval from the FCC under Section 271 will enable a RBOC to provide
customers with a full range of local and long distance telecommunications
services. The provision of landline long distance services by RBOCs is expected
to reduce the market share of the major long distance carriers, which may be
significant customers of our services. Consequently, the entry of the RBOCs into
the long distance market may have adverse consequences on the ability of CLECs
both to generate access revenues from the IXCs and to compete in offering a
package of local and long distance services. Starting in December 1999, the FCC
has approved a number of 271 applications, including applications for New York,
Texas, Oklahoma, Kansas, Massachusetts, Connecticut, Pennsylvania, Arkansas, and
Missouri. We anticipate that the ILECs will soon initiate similar proceedings to
obtain long distance service authority in every other state in which we operate
or plan to operate.
ACCESS CHARGES
In addition to charging other carriers reciprocal compensation for
terminating local traffic, we also collect access charges from carriers for
originating and terminating inter-exchange traffic. Federal law requires that
these charges be just and reasonable. Some inter-exchange carriers have
challenged the switched access rates of some competitive local exchange
carriers, asserting that these competitive local exchange carriers' service
charges for switched access services are higher than those of the incumbent
local exchange carriers serving the same territory, and are therefore unjust and
unreasonable. These inter-exchange carriers have refused to pay competitive
local exchange carriers any originating access charges in excess of the
corresponding incumbent rate. In response, the FCC adopted an order in April
2001, which gradually aligns competitors' access charge rates more closely with
those of the ILECs. Specifically, the FCC established a benchmark rate of 2.5
cents per minute for the first year, at the end of which, the rate will drop to
1.8 cents per minute, or the ILEC rate, whichever is higher. At the beginning of
year three, the benchmark rate drops to 1.2 cents per minute, or the ILEC rate,
whichever is higher. At the end of the third year, the benchmark rate drops to
the switched access rate of the competing ILEC. On the effective date of these
rules, competitors have the option to tariff their access rates, for those areas
where they have previously offered service, at EITHER the benchmark rate OR the
rate of the corresponding ILEC in the study area of the relevant end-user
customer, whichever is higher. Any competitive carrier access charges above the
benchmark, will be mandatorily detariffed, although CLECs may negotiate higher
rates with inter-exchange carriers. These changes could impair our ability to
offer customers lower-cost access services. Moreover, because competitive local
exchange carrier access charges are reduced, our revenue could decrease.
In May 2000, the FCC issued an order adopting an integrated interstate
access reform and universal service proposal put forth by a coalition of
incumbent local exchange carriers and inter-exchange carriers. Specifically, the
FCC removed $650 million in universal service subsidies from interstate access
charges paid by long distance carriers and collects that sum through an
assessment on all carriers' interstate revenues. In September 2001, the U.S.
Court of Appeals for the Fifth Circuit remanded the FCC's decision, concluding
that the FCC failed to exercise sufficiently independent judgment in
establishing the $650 million amount. The FCC is currently seeking comment on
the remand. While these reforms are aimed primarily at price cap, or incumbent,
local exchange carriers, it is too early to assess what impact, if any, they
will have on CoreComm.
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UNIVERSAL SERVICE
Universal service obligations apply to all telecommunications carriers that
provide interstate telecommunications services. In May 1997, the FCC issued an
order implementing the provisions of the Telecommunications Act relating to the
preservation and advancement of universal telephone service. This order requires
all telecommunications carriers providing interstate telecommunications
services, including us, to contribute to universal service support for schools,
libraries and rural health care programs. Our contribution to the federal
support funds is calculated based on a percentage of our gross end-user
interstate and international telecommunications revenue. The amount of our
required contribution changes each quarter, but may be passed on to our end
users on a pro rata basis. The FCC is currently seeking comment on whether it
should change the manner in which it assesses contributions, such as moving from
revenue-based to flat-rate assessment, and the way in which carriers recover USF
costs from their customers. Furthermore, we may be eligible to directly or
indirectly receive subsidy funds for telecommunications services we provide to
some covered end users. Most state public service commissions have adopted rules
or are currently considering actions to preserve universal service and promote
the public interest. We are currently unable to quantify the amount of subsidy
payments that we will be required to make and the effect that these required
payments will have on our financial condition.
RELAXATION OF REGULATION
FORBEARANCE
The Telecommunications Act gives the FCC authority to decide to forebear
from regulating carriers if it believes regulation would not serve the public
interest. The FCC is charged with reviewing its regulations for continued
relevance on a regular basis. As a result of this mandate, a number of
regulations that apply to competitive local exchange carriers have been, and
others may in the future be, eliminated. We cannot, however, guarantee that any
regulations that are now or will in the future be applicable to us will be
eliminated.
DOMINANCE/NON-DOMINANCE
Through a series of proceedings, the FCC has established different levels
of regulation for "dominant carriers" and "non-dominant carriers." As a
non-dominant carrier, we are subject to relatively limited regulation by the
FCC. However, at a minimum, we must offer interstate services at just and
reasonable rates in a manner that is not unreasonably discriminatory. One goal
of the Telecommunications Act is to increase competition for telecommunications
services and thus reduce the need for regulation of these services. To this end,
the Telecommunications Act requires the FCC to streamline its regulation of
incumbent local exchange carriers and permits the FCC to forbear from regulating
particular classes of telecommunications services or providers. In fact, the FCC
is currently considering whether to deem ILECs non-dominant in the provision of
broadband services. Since we are a non-dominant carrier and, therefore, are not
heavily regulated by the FCC, the potential for regulatory forbearance likely
will be more beneficial to the incumbent local exchange carriers than to us in
the long run.
DETARIFFING
The Telecommunications Act requires all common carriers, including us, to
charge just and reasonable rates for their services and to file schedules of
these rates with the FCC. These schedules are known as "tariffs" and they
represent a contract between a carrier and its customers. The FCC has used its
forbearance authority to eliminate the filing of tariffs in several instances.
Most non-dominant carriers must detariff for their interstate inter-exchange
services. However, non-dominant carriers are permitted to continue to file
tariffs for 101-XXX dial-around type services. For international services,
non-dominant carriers may not file any new or revised contract tariffs or
tariffs for other long-term international service arrangements and most
non-dominant carriers must detariff by January 28, 2002. Rather, non-dominant
carriers must now post their rates, terms and conditions in a publicly available
form, such as on a website. Furthermore, as explained above, the FCC has
recently adopted permissive detariffing for the access charges competitive
carriers levy on interstate long distance carriers for completing calls to
competitive local exchange carriers' customers. The FCC's preclusion of
non-dominant interstate carriers from filing tariffs may increase our exposure
to litigation. Currently, tariffs contain provisions limiting the liability of
providers on a variety of issues. In the absence of filed tariffs, carriers must
rely on negotiated contracts with each customer to provide these liability
limitations.
In addition to requiring the incumbent local exchange carriers to open
their networks to competitors and reducing the level of regulation applicable to
competitive local exchange carriers, the Telecommunications Act also reduces the
level of regulation that applies to the incumbent local exchange carriers,
thereby increasing their ability
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to respond quickly in a competitive market. For example, the FCC has applied
"streamlined" tariff regulation of the incumbent local exchange carriers
introduction of new services, which shortens the requisite waiting period before
which tariff changes may take effect. These developments enable the incumbent
local exchange carriers to change rates more quickly in response to competitive
pressures. The FCC has also adopted heightened price flexibility for the
incumbent local exchange carriers, subject to specified caps. If exercised by
the incumbent local exchange carriers, this flexibility may decrease CoreComm's
ability to compete effectively with the incumbent local exchange carriers in its
markets.
LOCAL GOVERNMENT AUTHORIZATIONS
Many jurisdictions where we may provide services require license or
franchise fees based on a percentage of revenues. Because the Telecommunications
Act specifically allows municipalities to charge fees for use of the public
rights-of-way, it is likely that jurisdictions that do not currently impose fees
will seek to impose fees in the future. However, the amount and basis of these
fees have been successfully challenged by several telecommunications service
providers. Federal courts have struck down municipal ordinances that:
- do not relate the fees imposed under the ordinance to the extent of a
provider's use of the rights-of-way;
- do not relate the fees imposed under the ordinance to the costs
incurred by the local government in maintaining the rights-of-way; or
- seek to impose fees based on a concept of the "value" of the use to
the provider by relating the fees to provider revenues.
Additionally, because the Telecommunications Act requires jurisdictions to
charge non-discriminatory fees to all telecommunications providers,
telecommunications providers are challenging municipal fee structures that
excuse other companies, particularly the incumbent local exchange carriers, from
paying license or franchise fees, or allow them to pay fees that are materially
lower than those that are required from new competitors such as us. A number of
these decisions have been appealed and, in any event, it is uncertain how
quickly particular jurisdictions will respond to the court decisions without a
specific legal challenge initiated by us or another competitive local exchange
carrier to the fee structure at issue.
REGULATION OF RESELLERS
The FCC has defined resale as any activity in which a party, the reseller,
subscribes to the services or facilities of a facilities-based provider, or
another reseller, and then re-offers communications services to the public for
profit, with or without adding value. Resellers are common carriers generally
subject to all rules and regulations placed on providers of the underlying
services by either the FCC or the states in which they operate. The FCC has held
that prohibitions on the resale of common carrier services are unjust,
unreasonable, and unlawfully discriminatory in violation of the
Telecommunications Act. Accordingly, all common carriers must make their
services available for resale at rates, terms, and conditions that do not
unreasonably discriminate against resellers.
As to other telecommunications service providers, such as competitive local
exchange carriers and wireless providers, there is no regulation that requires
them to give discounts to resellers below the rates offered to end users of the
same quantities of similar services. The FCC's requirement that wireless
providers offer resale services is currently set to expire on November 24, 2002.
Because our cellular service offerings are resale-only, the termination of this
policy may adversely affect our ability to offer cellular services in the
future.
INTERNATIONAL OPERATIONS
We already provide international resale services and may ultimately expand
our operations to other countries. The FCC requires every carrier that
originates international telecommunications from within the U.S., either through
the use of its own facilities or on a resale basis, to secure in advance an
authorization from the FCC under Section 214 of the Telecommunications Act.
Additionally, these carriers must comply with other routine reporting
requirements. We hold a Section 214 Authorization for both facilities-based and
resale international services.
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INTERNET REGULATION
The FCC currently does not regulate the provision of Internet service,
although it does regulate common carriers that provide elements of the
"backbone" networks on which the Internet is based. Similarly, state public
utility commissions generally do not regulate Internet service, except in some
limited circumstances where incumbent local exchange carriers provide Internet
services. The FCC and some states, however, are reviewing the development of the
Internet and the types of services that are provided through it. For example, if
the FCC should determine that an Internet service provider offers a service that
is an exact substitute for long distance telephone service with the sole
distinction that it is based on a packet-switched network rather than a
circuit-switched network, the FCC may determine that it should impose similar
regulation on the new services.
STATE REGULATION GENERALLY
Most states require companies to be certified or authorized by the state's
public utility commission in order to provide intrastate common carrier or
telecommunications services. These certifications generally require a showing
that the carrier has adequate financial, managerial and technical resources to
offer the proposed services in a manner consistent with the public interest.
In addition to obtaining certification, in each state, we must negotiate
terms of interconnection with the incumbent local exchange carrier before we can
begin providing switched services. State public utility commissions are required
to approve interconnection agreements before they become effective and must
arbitrate disputes among the parties upon request. We have already entered into
interconnection agreements with Ameritech, which is now a part of SBC and
Verizon. Regulatory changes could require renegotiation of relevant portions of
existing interconnection agreements, or require additional court and regulatory
proceedings. We are not presently subject to state-initiated price regulation
based on costs or earnings. Most states require competitive local exchange
carriers to file tariffs setting forth the terms, conditions and prices for
intrastate services. Some states permit tariffs to list a rate range or set
prices on an individual case basis. Other state requirements may include filing
of periodic reports, the payment of regulatory fees and surcharges and
compliance with service standards and consumer protection rules. Please refer to
the section of the prospectus entitled "- Interconnection with Local Exchange
Carrier Facilities."
Several states provide incumbent local exchange carriers with flexibility
for their rates, special contracts (selective discounting) and tariffs,
particularly for services that are considered to be competitive. This pricing
flexibility increases the ability of the incumbent local exchange carrier to
compete with us and constrains the rates we may charge for our services. States
may grant incumbent local exchange carriers additional pricing flexibility. At
the same time, some incumbent local exchange carriers may request increases in
local exchange rates to offset revenue losses due to competition. Some states
require prior approvals or notification for some transfers of assets, customers
or ownership of a competitive local exchange carrier and for issuance of bonds,
notes or other evidence of indebtedness or securities of any nature. Delays in
receiving required regulatory approvals may occur.
90
MANAGEMENT AND EXECUTIVE COMPENSATION
DIRECTORS AND EXECUTIVE OFFICERS
The following table provides information about our directors and executive
officers:
NAME AGE TITLE
Barclay Knapp................ 45 Chairman of the Board
Thomas J. Gravina............ 40 President, Chief Executive Officer and Director
Michael A. Peterson.......... 32 Executive Vice President, Chief Operating Officer,
Chief Financial Officer and Director
Gregg N. Gorelick............ 43 Senior Vice President-- Controller and Treasurer
George S. Blumenthal......... 58 Chairman Emeritus and Director
Ralph H. Booth, II........... 48 Director
Alan J. Patricof............. 67 Director
Warren Potash................ 70 Director
Our charter provides for a classified board of directors consisting of
three classes as nearly equal in number as possible with the directors in each
class serving staggered three year terms. The term of the initial Class I
Directors which are comprised of Thomas J. Gravina, Ralph H. Booth, II and
Michael A. Peterson, shall terminate on the date of the 2002 annual meeting of
stockholders; the term of the initial Class II Directors which are comprised of
George S. Blumenthal and Warren Potash shall terminate on the date of the 2003
annual meeting of stockholders and the term of the initial Class III Directors
which are comprised of Barclay Knapp and Alan J. Patricof shall terminate on the
date of the 2004 annual meeting of stockholders. At each annual meeting of
stockholders, successors to the class of directors whose term expires at that
annual meeting shall be elected for a three-year term. The following is a brief
description of the present and past business experience of each of the persons
who serve as our directors and executive officers.
BARCLAY KNAPP is currently the Chairman of CoreComm Limited and CoreComm
Holdco and was the President, Chief Executive Officer, Chief Financial Officer
and director of CoreComm Limited and CoreComm Holdco from March 1998 until
January 2002. Mr. Knapp was appointed President of Cellular Communications of
Puerto Rico, Inc. in March 1994 and Chief Executive Officer in March 1998, and
remained in those positions until the 1999 sale of Cellular Communications of
Puerto Rico. Mr. Knapp was a director of Cellular Communications of Puerto Rico
from February 1992 and was Chief Financial Officer from that date to 1997. Mr.
Knapp was Executive Vice President, Chief Operating Officer and a director of
Cellular Communications International, Inc. from July 1991 until June 1998. Mr.
Knapp was also Executive Vice President, Chief Operating Officer, Chief
Financial Officer and a director of Cellular Communications, Inc. from its
founding in 1981 until its sale in 1996. He is currently President, Chief
Executive Officer and a director of NTL Incorporated. Mr. Knapp is also a
director of Bredbandsbolaget, a Swedish company in which NTL holds a 25%
interest.
THOMAS J. GRAVINA is currently the President and Chief Executive Officer
and a director of CoreComm Holdco and the President and Chief Executive Officer
of CoreComm Limited. Mr. Gravina was the Executive Vice President and Chief
Operating Officer of CoreComm Limited and CoreComm Holdco, until January 2002.
Mr. Gravina has been employed by each of CoreComm Limited and CoreComm Holdco
since the acquisition of ATX Telecommunications Services, Inc. (ATX) in
September 2000. Prior to the acquisition, Mr. Gravina served as Co-Chief
Executive Officer and a partner of ATX, a position he had held since 1987.
MICHAEL A. PETERSON is currently Executive Vice President, Chief Operating
Officer, Chief Financial Officer and a director of CoreComm Holdco and the
Executive Vice President, Chief Operating Officer and Chief Financial Officer of
CoreComm Limited, and had served as Vice President -- Corporate Development of
CoreComm Limited and CoreComm Holdco since June 2000 and, until that time, had
served as Director -- Corporate Development of CoreComm Limited and CoreComm
Holdco since our inception. He has worked for us and our related historical
affiliates since 1996. He is also Director -- Corporate Development at NTL.
Prior to joining NTL, he was in the investment banking division at Donaldson,
Lufkin & Jenrette, specializing in the communications industry.
GREGG N. GORELICK is currently Senior Vice President, Controller and
Treasurer of CoreComm Limited and CoreComm Holdco and has served as Vice
President, Controller and Treasurer since March 1998. Mr. Gorelick was Cellular
Communications of Puerto Rico's Vice President and Controller from February 1992
until its sale in 1999, held that position at Cellular Communications
International from July 1991 until its sale in 1999 and has held that
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position at NTL since its formation. From 1981 to 1986 he was employed by Ernst
& Whinney (now known as Ernst & Young LLP). Mr. Gorelick is a certified public
accountant and was Vice President and Controller of Cellular Communications from
1986 until its sale in 1996.
GEORGE S. BLUMENTHAL has been Chairman Emeritus of CoreComm Limited and
CoreComm Holdco since January 2002, a director of CoreComm Limited and CoreComm
Holdco since March 1998 and was the Chairman of CoreComm Limited and CoreComm
Holdco from March 1998 until January 2002. Mr. Blumenthal was Chairman,
Treasurer and a director of Cellular Communications of Puerto Rico from February
1992 until its sale in 1999 and was its Chief Executive Officer from March 1994
until March 1998. In addition, Mr. Blumenthal is Chairman, Treasurer and a
director of NTL. Mr. Blumenthal is also a director of Sotheby's Holdings, Inc.
RALPH H. BOOTH, II has been our director since January 2002, and has been
the Chairman and Chief Executive Officer of Booth American Company, a private
investment concern, since 1995. Prior to that time and beginning in 1981, he was
the President and Chief Financial Officer for Booth American Company when it
owned and operated both a cable television and a radio broadcasting division.
Mr. Booth is a co-founder of and principal in ECE Management International, LLC
since 1989. Mr. Booth is also a director of B/G Communications, LLC, B/G
Enterprises, LLC, B/G Properties, LLC and Grupo Clarin, S.A.
ALAN J. PATRICOF has been a director of CoreComm Limited and CoreComm
Holdco since March 1998. Mr. Patricof is Chairman of APAX Partners, formerly
known as Patricof & Co. Ventures, Inc., a venture capital firm he founded in
1969. Mr. Patricof serves as a director of NTL and Boston Properties, Inc.,
which are publicly held, and Johnny Rockets Group, Inc., which is a privately
held company.
WARREN POTASH has been a director of CoreComm Limited and CoreComm Holdco
since March 1998. Mr. Potash retired in 1991 as President and Chief Executive
Officer of the Radio Advertising Bureau, a trade association, a position he held
since 1989. Prior to that time, and beginning in 1986, he was President of New
Age Communications, Inc., a communications consultancy firm. Until his
retirement in 1986, Mr. Potash was a Vice President of Capital Cities/ABC
Broadcasting, Inc., a position he held since 1970. Mr. Potash is also a director
of NTL.
In addition to these individuals, our board of directors has approved the
expansion of the board and the nomination and appointment of three additional
directors to be designated by Michael Karp, which expansion and appointments are
to become effective once the board is informed of the identity of the nominees.
Michael Karp is currently our largest stockholder, and participated in the
Holdco Recapitalization by tendering notes and preferred stock he held in
exchange for shares of our common stock. Mr. Karp, together with the Florenece
Karp Trust, presently holds 34.0% of our common stock. The board has not yet
been informed of the individuals whom Mr. Karp intends to nominate. Mr. Karp's
right to nominate these directors was included in the exchange agreement that he
signed with CoreComm Limited and CoreComm Holdco as part of the Holdco
Recapitalization.
EXECUTIVE COMPENSATION
The following table discloses compensation received by CoreComm Holdco's
Chief Executive Officer and CoreComm Holdco's four other most highly paid
executive officers for the year ended December 31, 2001.
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CORECOMM HOLDCO
SUMMARY COMPENSATION TABLE*
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
-------------------------------------- COMMON
OTHER ANNUAL STOCK ALL OTHER
NAME AND PRINCIPAL SALARY BONUS COMPENSATION UNDERLYING COMPENSATION
POSITION IN 2001 YEAR ($) ($) ($) OPTIONS(#)(1) ($)
--------------------------- ------ ---------- ---------- ---------------- --------------- ---------------
Barclay Knapp.............. 2001 104,870 - - -
President and Chief 2000 121,917 - - -
Executive and 1999 51,667 - - -
Financial Officer
George S. Blumenthal....... 2001 104,870 - - -
Chairman 2000 121,917 - - -
1999 51,667 - - -
Richard J. Lubasch (2)..... 2001 88,390 100,000 - 100,000
Senior Vice President-- 2000 102,758 - - 75,000
General Counsel and 1999 39,583 - - 30,000
Secretary
Thomas J. Gravina(3)....... 2001 248,077 1,300,000 12,185(4) -
Executive Vice President
and Chief Operating
Officer
Michael A. Peterson........ 2001 2,400 750,000 - 225,000
Vice President - 2000 2,400 - - 100,000
Corporate Development
Patty J. Flynt(5)..........
Senior Vice President
and Chief 2001 58,700 50,615 - -
Operating 2000 223,149 117,742 38,161(6) 150,000
Officer 1999 206,250 100,435 - 450,001
----------
* Some employees of NTL provided management, financial, legal and
technical services to us. Amounts charged to us consist of
salaries and direct costs allocated to us. In 2000, 1999 and
1998, NTL charged us $919,000, $2,268,000 and $313,000
respectively, net of our charges to NTL. It is not practicable to
determine the amounts of these expenses that would have been
incurred had we operated without these services. However, in the
opinion of our management, the allocated method is reasonable.
The named executives, except for Mr. Gravina, receive salaries
from NTL and spend portions of their time providing executive
management to us.
(1) Amounts in this column are CoreComm Limited stock option grants.
In December 2001, the CoreComm Limited board of directors, in
connection with the Holdco Recapitalization, accelerated all
outstanding options to acquire shares of CoreComm Limited common
stock so that all are presently fully vested and exercisable.
CoreComm Limited options are not exercisable for shares of our
common stock. In the event that we are successful in consummating
the exchange offers, CoreComm Limited would become a subsidiary
of CoreComm Holdco. Subsequent to that time, CoreComm Holdco and
CoreComm Limited may agree to effect a merger between CoreComm
Limited and a subsidiary of CoreComm Holdco which would have the
effect of converting holders of any remaining outstanding shares
of CoreComm Limited common stock not owned by us into shares of
our common stock at an exchange ratio identical to that being
offered in the exchange offers. Between now and that time, if
holders of CoreComm Limited options exercise their options, they
would, at the time of a merger, have the same rights as other
holders of CoreComm Limited common stock to have their shares of
CoreComm Limited converted to shares of our common stock at that
exchange ratio.
(2) Effective February 4, 2002, Mr. Lubasch resigned from office as
our Senior Vice President--General Counsel and Secretary.
(3) Thomas J. Gravina became our Executive Vice President and Chief
Operating Officer effective
93
February 1, 2001, following the resignation of Patty J. Flynt as
Senior Vice President and Chief Operating Officer.
(4) Other annual compensation represents a car allowance.
(5) Effective February 1, 2001, Ms. Flynt resigned from office as our
Senior Vice President and Chief Operating Officer.
(6) Other annual compensation includes reimbursement for relocation
expenses and moving expenses of $12,800 and $24,900,
respectively.
EMPLOYMENT ARRANGEMENTS
The following represent the principal terms of employment arrangements
for Thomas J. Gravina, our President - Chief Executive Officer and a director,
and Michael A. Peterson, our Executive Vice President - Chief Operating Officer,
Chief Financial Officer and a director, that have been agreed in principal
between the compensation committee of the board of directors and the named
executive, but are subject to formalization in fully executed employment
contracts. Therefore, such contracts may contain different or additional
material terms when finalized and executed.
THOMAS J. GRAVINA:
Term: Three years, plus automatic one year renewals unless
six months notice of non-renewal by executive or
Holdco
Title: President and Chief Executive Officer
Base salary: $900,000
Bonuses: Quarterly bonus targets of $300,000 for 2002;
quarterly bonus targets of $225,000 for each calendar
year after 2002, in each case based on meeting
financial targets; bonus of $700,000 payable in
connection with successful completion of the Holdco
Recapitalization process; and additional bonuses
commensurate with position, performance and awards to
other senior executives
Options: Initial grant of options to purchase 350,000 shares
of our common stock(1)
Benefits: Appropriate for executive's position, including
401(k), savings, pension, profit sharing, life
insurance, disability and medical insurance; term
life insurance providing $3,000,000 death benefit;
and long-term disability insurance providing a
benefit of at least $300,000 per year
Termination
without cause: Up to two years bonus and salary payable upon
termination, plus two years option acceleration
Non-competition: Customary non-compete and non-solicitation provisions
MICHAEL A. PETERSON:
Term: Three years, plus automatic one year renewals unless
six months notice of non-renewal by executive or
Holdco
Title: Executive Vice President, Chief Operating Officer
and Chief Financial Officer
Base salary: $500,000
Bonuses: Quarterly bonus targets of $150,000 for 2002;
quarterly bonus targets of $112,500 for each calendar
year after 2002, in each case based on meeting
financial targets; bonus of $350,000 payable in
connection with successful completion of the Holdco
94
Recapitalization process; additional bonuses
commensurate with position, performance and awards to
other senior executives
Options: Initial grant of options to purchase 495,000 shares
of our common stock(1)
Benefits: Appropriate for executive's position, including
401(k), savings, pension, profit sharing, life
insurance, disability and medical insurance; term
life insurance providing $3,000,000 death benefit;
and long-term disability insurance providing a
benefit of at least $300,000 per year
Termination
without cause: Up to two years bonus and salary payable upon
termination, plus two years option acceleration
Non-competition: Customary non-compete and non-solicitation provisions
----------
(1) These options were granted to the named executive in January 2002.
OPTION EXERCISES AND YEAR-END VALUE TABLE
There were no options of CoreComm Holdco outstanding in 2001.
STOCK OPTION PLAN
On December 10, 2001, our board of directors adopted the CoreComm Holdco,
Inc. 2001 Stock Option Plan, reserving under this plan shares of common stock
for issuance to employees and non-employee directors.
The purpose of our stock option plan is to encourage stock ownership by our
employees and non-employee directors, and the employees and non-employee
directors of our divisions, subsidiary corporations and other affiliates, so as
to encourage these individuals to continue to put forth maximum efforts for the
success of our business. Under our stock option plan, grants may be made of
options to acquire shares of our common stock. The options may be "incentive
stock options" within the meaning of Section 422 of the Internal Revenue Code.
The terms of options granted under our stock option plan, including provisions
regarding vesting, exercisability, exercise price and duration, are generally
set by the compensation committee of our board of directors.
95
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table provides, as of February 6, 2002, information regarding
the beneficial ownership of our common stock by (a) each of our executive
officers and directors, (b) all those directors and executive officers as a
group and (c) each person known by us to be the beneficial owner of more than 5%
of any class of our voting securities as calculated in accordance with Rule
13d-3 of the Exchange Act.
AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP
--------------------------------------------------------------------------------------
PRESENTLY
EXERCISABLE
OPTIONS,
EXECUTIVE OFFICERS, DIRECTORS COMMON AND
AND PRINCIPAL STOCKHOLDERS (1) STOCK WARRANTS (2) TOTAL PERCENT(3)
------------------------------------------------------------------------------------------------------------------------------------
Barclay Knapp 347,578 0 347,578 3.48%
Thomas J. Gravina 1,087,588 116,667 1,204,255 11.90%
Michael A. Peterson 7,588 165,000 172,588 1.70%
Gregg N. Gorelick 0 13,333 13,333 *
George S. Blumenthal 195,337 0 195,337 1.95%
Ralph H. Booth, II (4) 2,080,000 (4) 0 2,080,000 (4) 20.80%(4)
Alan J. Patricof 0 5,333 5,333 *
Warren Potash 759 5,333 6,092 *
All directors and officers as a group 3,718,850 305,666 4,024,516 39.05%
(8 in number)
Michael Karp (5) 3,400,000 0 3,400,000 34.00%
University City Housing Company
1062 East Lancaster Avenue, Suite 30B
Rosemont, PA 19010
Booth American Company (4) 2,080,000 0 2,080,000 20.80%
333 West Fort Street, Suite 1230
Detroit, MI 48226
CoreComm Limited 1,314,416 0 1,314,416 13.14%
Debra Buruchian 1,080,000 8,333 1,088,333 10.87%
c/o CoreComm Limited
50 Monument Road
Bala Cynwyd, PA 19004
----------
* Represents less than one percent.
(1) Unless otherwise noted, the business address of each person is 110 East
59th Street, New York, New York 10022.
(2) Includes shares of common stock purchasable upon the exercise of options
which are exercisable or become so in the next 60 days and warrants.
(3) Includes common stock, exercisable options and warrants.
(4) Ralph H. Booth, II, our director, is an affiliate of Booth American
Company. Accordingly, Mr. Booth may claim beneficial ownership of all of
the shares held by Booth American Company. Booth American Company is the
record owner of all 2,080,000 shares set forth opposite Ralph H. Booth,
II's name in the table.
(5) Includes 197,101 shares of common stock held by the Florence Karp Trust, of
which shares Mr. Karp disclaims beneficial ownership.
96
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
NTL INCORPORATED
NTL provides us with management, financial, legal and technical services,
access to office space and equipment and use of supplies. Amounts charged to us
by NTL consist of salaries and direct costs allocated to us where identifiable
and a percentage of the portion of NTL's corporate overhead which cannot be
specifically allocated to NTL. Effective January 1, 2001, the percentage used to
allocate corporate overhead was reduced. NTL's charges to us commenced in
October 1998. It is not practicable to determine the amounts of these expenses
that would have been incurred had we operated as an unaffiliated entity. In the
opinion of management, this allocation method is reasonable. In 2000, 1999 and
1998, NTL charged us $1,186,000, $2,330,000 and $313,000 respectively, and in
the nine months ended September 30, 2001 and 2000, NTL charged us $340,000 and
$907,000 respectively, which is included in corporate expenses.
We provided NTL with access to office space at a separate location and
equipment and the use of supplies until August 2001. In the fourth quarter of
1999, we began charging NTL a percentage of our office rent and supplies
expense. It is not practicable to determine the amounts of these expenses that
would have been incurred had we operated as an unaffiliated entity. In the
opinion of management, this allocation method is reasonable. In 2000 and 1999,
we charged NTL $267,000 and $62,000 respectively, which reduced corporate
expenses.
On April 12, 2001, CoreComm Holdco and CoreComm Limited issued, as joint
and several obligors, a 10.75% Unsecured Convertible PIK Note due 2011 to NTL in
the principal amount of $15,000,000 for the purchase price of $15,000,000, which
was paid in cash. On February 5, 2002, CoreComm Holdco and CoreComm Limited
entered into an agreement regarding the convertibility feature of these notes.
The principal features of this note and the additional agreement are set forth
in "Description of Indebtedness -10.75% Unsecured Convertible PIK Note due
2011."
A subsidiary of ours provides billing and software development services to
subsidiaries of NTL. General and administrative expenses were reduced by
$1,400,000, $800,000, $275,000 and $138,000 for the years ended December 31,
2000 and 1999, for the period from April 1, 1998, the date operations commenced,
to December 31, 1998 and for the period from January 1, 1998 to May 31, 1998
respectively, as a result of these charges. General and administrative expenses
were reduced by $1,428,000 and $709,000 for the nine months ended September 30,
2001 and 2000 respectively, as a result of the charges for these services.
In October 2000, we billed NTL $6,674,000 for billing and software
development services to be rendered from January to September 2001. In March
2000, we and NTL announced that we had entered into an agreement to link our
networks in order to create an international Internet backbone. In November
2000, we billed NTL $9,128,000 primarily for usage of the network in 2001. The
$15,802,000 total is included in due from NTL and deferred revenue at December
31, 2000. In February 2001, the international Internet backbone commenced
operations and we recognized revenue of $225,000 for the network usage in the
nine months ended September 30, 2001.
In April 2001, we entered into a network and software agreement with NTL in
connection with the issuance of $15 million aggregate principal amount of 10.75%
Unsecured Convertible PIK Notes due April 2011. Pursuant to the network and
software agreement with NTL, we are obligated to provide U.S. network access for
U.K. Internet traffic from NTL's U.K. customers for three years, as well as a
royalty-free license to use certain provisioning software and know-how.
PROPERTIES AND FACILITIES OF THE BUSINESS FORMERLY OPERATED BY ATX
The former ATX headquarters and executive offices and primary technical
operations facility are leased from entities controlled by Michael Karp, the
former Chief Executive Officer and principal stockholder of ATX and our largest
stockholder who, together with The Florence Karp Trust, currently owns 34.0% of
our common stock. We currently pay approximately $1.0 million per year in rent
for these facilities and approximately $450,000 per year in rent for the former
primary technical operations facility. The lease for the former primary
technical operations facility currently expires in December 2002. In connection
with our acquisition of ATX, these leases were modified to reflect provisions
found in arm's length negotiations for these arrangements, including, without
limitation:
97
- the landlord is required to give consent to a reasonable sublease, and is
entitled to all profits from that sublease;
- there is a standard recapture right;
- there is a standard non-disturbance clause;
- we are no longer obligated to share facilities, employees and/or supplies
with the landlord;
- provisions regarding the purchase of telecommunications services by
landlord or other tenants from ATX have been eliminated; and
- arrangements granting the landlord a percentage of ATX's revenues have
been eliminated.
ATX LIABILITY INSURANCE PLANS
ATX's liability insurance plans were held jointly with University City
Housing, an entity owned by Michael Karp. In connection with our acquisition of
ATX, each of ATX's liability insurance plans were amended so that University
City Housing is not be entitled to participate in these plans.
EXCHANGE AGREEMENT BETWEEN CORECOMM LIMITED AND CORECOMM HOLDCO
On December 14, 2001, CoreComm Limited and CoreComm Holdco, as part of the
Holdco Recapitalization, entered into an exchange agreement whereby CoreComm
Limited agreed that from time to time, upon our request, it would deliver to us
shares of our common stock held by it. We agreed to
(1) waive our rights to interest payments pursuant to CoreComm Limited debt
securities and debt securities that were joint obligations of CoreComm Limited
and CoreComm Holdco that we hold,
(2) extend by twenty years the maturity dates of CoreComm Limited debt
securities and debt securities that were joint obligations of CoreComm Limited
and CoreComm Holdco that we hold,
(3) waive the right to convert into shares of CoreComm Limited common stock
the debt securities that were joint obligations of CoreComm Limited and CoreComm
Holdco that we hold,
(4) delete provisions contained in the Senior Unsecured Notes due September
29, 2003 of CoreComm Limited relating to scheduled prepayments, mandatory
prepayments and liens,
(5) delete provisions in the Note Purchase Agreement, dated as of September
29, 2000, related to the Senior Unsecured Notes due September 29, 2003 of
CoreComm Limited relating to accounting, financial statements, inspection
rights, insurance, payment of taxes, compliance with laws, corporate existence,
indebtedness incurred, refinancing, liens, liquidation and dissolution,
covenants restricting payment, transactions with affiliates, fees and events of
default, and
(6) waive our rights with respect to shares of preferred stock of CoreComm
Limited which we hold relating to receipt of dividends, mandatory redemption
rights, conversion rights and governing rights.
These waiver of rights, amendments and deletions are subject to equitable
adjustment, in our discretion, in the event that any of the recapitalization
transactions are not consummated or are otherwise compromised.
ARRANGEMENTS WITH INITIAL SELLING SECURITYHOLDERS
CoreComm Holdco and CoreComm Limited have entered into an exchange
agreement with some of the initial selling securityholders. CoreComm Holdco is
also subject to provisions contained in agreements entered into with the former
holders of CoreComm Limited's convertible notes. Please refer to the section of
the prospectus entitled "Description of Capital Stock - The Exchange Agreement"
and "Description of Capital Stock - The Convertible Notes."
98
EMPLOYMENT ARRANGEMENTS
A summary of the terms of employment arrangements between each of Thomas J.
Gravina, our President -- Chief Executive Officer and a director, and Michael A.
Peterson, our Executive Vice President -- Chief Operating Officer and Chief
Financial Officer and a director, are described in the section "Management and
Executive Compensation - Employment Arrangements."
99
INFORMATION ABOUT LIMITED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
LIQUIDITY AND CAPITAL RESOURCES
As a result of the first phase of transactions involved in the Holdco
Recapitalization, CoreComm Limited, which formerly owned 100% of our outstanding
capital stock, now only owns approximately 13% of our outstanding capital stock.
CoreComm Holdco owns 100% of the business operations which CoreComm Limited
formerly owned indirectly through CoreComm Holdco. Moreover, if the exchange
offers are successful, CoreComm Limited has agreed that it will surrender to
CoreComm Holdco the number of shares of Holdco common stock it presently owns
equal to the number issued in the exchange offers. That means that if the
exchange offers are completed, CoreComm Limited will own little or no common
stock of CoreComm Holdco, and thus will own little or no material assets, since
Holdco common stock is CoreComm Limited's only material asset. CoreComm Limited
also remains a party liable under our $156.1 million senior secured credit
facility, has no right to withdraw any additional money under that facility, and
does not contemplate raising any additional financing in the foreseeable future.
Also as a result of the first phase of transactions related to the Holdco
Recapitalization, CoreComm Holdco holds $160 million principal amount of
CoreComm Limited's public notes, approximately $105.7 million principal amount
of CoreComm Limited's Senior Unsecured Notes and all of CoreComm Limited's
outstanding preferred stock. CoreComm Limited does not have the financial
resources to meet the obligations under these notes and preferred stock if we
require it to do so. CoreComm Limited may lack the resources to meet the
long-term obligations of the $4.75 million principal amount of public notes that
are currently outstanding.
Pursuant to conversations with Nasdaq, we intend to transfer CoreComm
Limited's current listing to CoreComm Holdco following successful completion of
the exchange offers. If any remaining outstanding shares of Limited common stock
no longer meet the requirements for inclusion on the Nasdaq National Market, it
is possible that the shares of Limited common stock would be delisted and may
continue to trade in the Nasdaq Small Cap Market or the over-the-counter market
and that price quotations would be reported by other sources. The extent of the
public market for the shares of Limited common stock and the availability of
quotations for shares of Limited common stock would, however, depend upon the
number of holders of shares remaining at that time, the interest in maintaining
a market in shares of Limited common stock on the part of securities firms, the
possible termination of registration of the shares under the Securities Exchange
Act of 1934, as described above, and other factors. CoreComm Holdco cannot
predict whether the reduction in the number of shares of Limited common stock
that might otherwise trade publicly would have an adverse or beneficial effect
on the market price for, or marketability of, the shares of Limited common
stock.
CONSOLIDATED STATEMENT OF CASH FLOWS
For the nine months ended September 30, 2001, cash used in operating
activities decreased to $58,212,000 from $112,320,000 in the nine months ended
September 30, 2000 due to significant efforts to reduce expenses and other
efforts to conserve cash.
For the nine months ended September 30, 2001, cash used to purchase fixed
assets decreased to $4,384,000 from $43,573,000 in the nine months ended
September 30, 2000 which reflects the modifications to CoreComm Limited's
business plan and the efforts to conserve cash.
Proceeds from borrowings, net of financing costs, of $88,679,000 was from
the borrowings under the Chase facility in January and April 2001 and the
issuance of the 10.75% senior unsecured public notes in April 2001.
RESULTS OF OPERATIONS
In July 2001, CoreComm Limited finalized the streamlining of its operating
structure to focus on CoreComm Limited's two most successful and promising lines
of business. The first is integrated communications products and other high
bandwidth/data/web-oriented services for the business market and the second is
bundled local telephony and Internet products efficiently sold, serviced and
provisioned via Internet-centric interfaces to the residential market.
100
CoreComm Limited has engaged in significant efforts to reduce expenses in
all areas of its business, while maintaining its revenue initiatives. These
plans were implemented through a variety of means, including facility
consolidation, headcount reduction, efficiency improvements, vendor negotiations
and network optimization.
CoreComm Limited has also engaged in significant efforts to capitalize on
more profitable UNE, UNE-P and Enhanced Extended Loop provisioning and pricing
to reduce existing network costs and capital expenditures, and enhance gross
margins going forward. A large portion of CoreComm Limited's business and
residential local access lines have been converted to these more profitable
services, resulting in improved operating results on a going forward basis.
In addition, CoreComm Limited has made significant progress in improving
the operating efficiency of its networks, while also reducing network costs. The
associated cost savings and product enhancements have come from increased
overall efficiency, improved pricing terms, as well as the elimination of
duplicative or unneeded network facilities.
As a result of the significant enhancements to CoreComm Limited's business
plan, it had a 1.5% and 1.9% increase in revenues in the third quarter as
compared to second quarter and first quarter of 2001, respectively, and
operating, selling, general and administrative and corporate expenses were
reduced in the third quarter by 7.0%, 22.4% and 29.0% as compared to second
quarter of 2001, first quarter of 2001, and fourth quarter of 2000,
respectively.
As a result of the completion of the acquisitions of Voyager and ATX in
September 2000, CoreComm Limited consolidated the results of operations of these
businesses from the dates of acquisition. The results of these businesses are
not included in the 2000 results.
Some costs and expenses have been reclassified in the first quarter of 2001
to conform to the presentation in the current quarter.
The following discussion does not take into consideration the
recapitalization and exchange transactions.
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
The increase in revenues to $220,487,000 from $56,619,000 is due to
acquisitions in 2000, which accounted for $166,737,000 of the increase. This
increase is offset by a decline in revenue attributed to the customer base
associated with the USN assets to $17,093,000 from $20,642,000. The revenues
from the USN customer based peaked in the third quarter of 1999 after CoreComm
Limited's acquisition in May 1999 and, as expected, declined thereafter. USN
Communications, Inc. was a CLEC that operated on a resale basis. The underlying
operations, customer relationships and future revenue streams of the resale CLEC
business have declined since CoreComm Limited's acquisition. This trend will
affect future operations because, in accordance with CoreComm Limited's revised
business plan, CoreComm Limited is substantially reducing its resale business.
Operating costs include direct cost of sales, network costs and salaries
and related expenses of network personnel. Operating costs increased to
$175,942,000 from $77,446,000 due to acquisitions in 2000, which amounted to
$111,878,000 of the increase. This increase is offset by a decrease in costs as
a result of the implementation of CoreComm Limited's modified business plan as
described above.
Selling, general and administrative expenses increased to $75,847,000 from
$72,044,000 due to acquisitions in 2000, which amounted to $52,448,000 of the
increase. This increase is offset by a decrease in costs as a result of the
implementation of CoreComm Limited's modified business plan as described above.
Corporate expenses include the costs of CoreComm Limited's officers and
headquarters staff, the costs of operating the headquarters and costs incurred
for strategic planning and evaluation of business opportunities. Corporate
expenses decreased to $6,714,000 from $8,559,000 primarily as a result of the
implementation of CoreComm Limited's modified business plan as described above.
In accordance with APB Opinion No. 25, "Accounting for Stock Issued to
Employees," in April 2000, CoreComm Limited recorded a non-cash compensation
expense of approximately $29.0 million and a non-cash deferred expense of
approximately $31.3 million due to the issuance of options to employees at an
exercise price of $14.55 which was less than the fair value of Limited's common
stock on the date of the grant. From April 2000 to September 30, 2001, $19.4
million of the deferred non-cash compensation was charged to expense, including
$3.2
101
million and $9.7 million in the three and nine months ended September 30,
2001, respectively. CoreComm Limited will charge the deferred expense to
non-cash compensation expense over the vesting period of the stock options.
Reorganization charges of $37,395,000 in 2001 relate to CoreComm Limited's
announcements in May and July 2001 that it was taking additional actions to
reorganize, re-size and reduce operating costs and create greater efficiency in
various areas of CoreComm Limited. An aggregate of $21,497,000 of these costs
are for equipment and other assets that will not require any future cash
outlays. The employee severance and related costs in 2000 were for approximately
250 employees to be terminated, none of whom are still employed by CoreComm
Limited. These costs in 2001 are for approximately 630 employees to be
terminated of which approximately 40 employees are still employed by CoreComm
Limited as of September 30, 2001. The major actions involved in the 2001
reorganization include (1) consolidation of functions including network
operations, customer service and finance, (2) initiatives to increase gross
margins and (3) discussions with vendors to reduce or eliminate current payable
balances or purchase commitments. The consolidation of functions resulted in
employee terminations and the closing of offices. Employee severance and related
costs, lease exit costs and fixed assets and prepayment write-downs include
charges related to these actions. Initiatives to increase gross margins resulted
in consolidation of network assets and elimination of redundant and less
profitable facilities. Charges for these actions include lease exit costs and
fixed assets and prepayment write-downs. Finally, reductions or elimination of
purchase commitments resulted in agreement termination charges. All of these
actions are expected to be completed by June 30, 2002. Fixed assets and
prepayments written-off include $5.3 million related to vacated offices, $13.4
million for network assets in abandoned markets and $2.8 million for prepayments
in respect of ILEC facilities in abandoned markets. CoreComm Limited continues
to review its operations and may incur additional charges in the future related
to its operations.
The following table summarizes the reorganization charges incurred and
utilized in 2000 and 2001:
EMPLOYEE
SEVERANCE AND
RELATED LEASE EXIT AGREEMENT FIXED ASSETS AND
COSTS COSTS TERMINATIONS PREPAYMENTS TOTAL
------------- ---------- ------------ ---------------- --------
(in thousands)
Charged to expense $2,089 $1,917 $ $ - $4,006
Utilized (775) (1,396) - - (2,171)
------------- ---------- ------------ ---------------- --------
Balance, December 31, 2000 1,314 521 - - 1,835
Charged to expense 3,262 6,977 6,582 21,883 38,704
Adjustments (996) 73 - (386) (1,309)
Utilized (2,701) (4,137) (2,712) (21,497) (31,047)
------------- ---------- ------------ ---------------- --------
Balance, September 30, 2001 $879 $3,434 $3,870 $ - $8,183
============= ========== ============ ================ ========
Reorganization charges of $775,000 in 2000 relate to the March 2000
announcement of a reorganization of some of CoreComm Limited's operations.
At March 31, 2001, CoreComm Limited reduced the carrying amount of goodwill
related to the Voyager and MegsINet acquisitions by $167,599,000. In connection
with the reevaluation of its business plan and the decision to sell its non-CLEC
assets and businesses, CoreComm Limited was required to report all long-lived
assets and identifiable intangibles to be disposed of at the lower of carrying
amount or estimated fair value less cost to sell. The carrying amount of
goodwill related to these acquisitions is eliminated before reducing the
carrying amounts of the other assets. The estimated fair value of these
businesses was determined based on information provided by the investment bank
retained for the purpose of conducting this sale.
Depreciation expense increased to $34,652,000 from $19,494,000 primarily as
a result of an increase in fixed assets due to acquisitions in 2000.
Amortization expense increased to $75,392,000 from $9,812,000 due to the
amortization of goodwill from the acquisitions in 2000.
Interest income and other, net, decreased to $2,026,000 from $5,476,000
primarily due to the reduction of interest income resulting from lower cash
balances in 2001.
Interest expense increased to $35,422,000 from $11,434,000 primarily due to
increased borrowings to fund CoreComm Limited's acquisitions and operations.
102
The income tax benefit of $234,000 in 2001 is from state and local income
tax refunds net of payments, and the provision of $321,000 in 2000 is for state
and local income tax.
In September 2001, CoreComm Limited and the holder of the $3,016,000
principal amount 12.75% note payable for equipment agreed to a modification of
the note reducing the principal amount to $800,000 which was paid on October 1,
2001. CoreComm Limited recorded an extraordinary gain on the early
extinguishment of debt of $2,216,000 for the difference between the $3,016,000
obligation and the $800,000 liability.
YEAR ENDED DECEMBER 31, 2000 AND 1999
As a result of the completion of the acquisitions of Voyager and ATX in
September 2000, CoreComm Limited consolidated the results of operations of these
businesses from the dates of acquisition. The results of these businesses are
not included in the 1999 results.
The increase in revenues to $132,122,000 from $58,151,000 is primarily due
to acquisitions in 2000, which accounted for $59,164,000 of the increase. The
remainder of the increase is primarily due to an increase in CLEC and ISP
revenues from an increase in customers. The revenues from the USN customer base
peaked in the third quarter of 1999 after CoreComm Limited's acquisition in May
1999 and declined thereafter. Additionally, prepaid cellular debit card and
cellular long distance revenues declined as a result of CoreComm Limited's
termination of these services in the third quarter of 1999. CoreComm Limited had
revenues of $2,379,000 in 1999 from the provision of these services.
Operating costs include direct cost of sales, network costs and salaries
and related expenses of network personnel. Operating costs increased to
$142,323,000 from $58,561,000 primarily due to acquisitions in 2000, which
accounted for $41,650,000 of the increase. The remainder of the increase is
primarily due to an increase in the fixed component of operating expenses due to
CoreComm Limited's migration to a facilities-based infrastructure. In 1999,
operating costs included $2,211,000 related to the prepaid cellular debit card
and cellular long distance services.
Selling, general and administrative expenses increased to $111,010,000 from
$74,185,000 primarily due to acquisitions in 2000, which accounted for
$21,432,000 of the increase. The remainder of the increase is a result of
increased selling and marketing costs and increased customer service costs.
Corporate expenses include the costs of CoreComm Limited's officers and
headquarters staff, the costs of operating the headquarters and costs incurred
for strategic planning and evaluation of business opportunities. Corporate
expenses increased to $12,884,000 from $7,996,000 primarily due to increased
strategic planning activities.
Non-cash compensation in 2000 of $43,440,000 includes $38,652,000 from the
grant of options at an exercise price below fair market value, and $4,788,000
from the rescission of stock option exercises. In April 2000, the Compensation
and Option Committee of CoreComm Limited's Board of Directors approved the
issuance of options to purchase approximately 2.7 million shares of Limited's
common stock to various employees at an exercise price of $14.55, which was less
than the fair market value of its common stock on the date of the grant. In
accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees,"
in April 2000, CoreComm Limited recorded a non-cash compensation expense of
approximately $29.0 million and a non-cash deferred expense of approximately
$31.3 million. From April 2000 to December 31, 2000, $9.7 million of the
deferred non-cash compensation was charged to expense. In November 2000,
CoreComm Limited's Board of Directors approved the rescission of previously
exercised employee stock options. CoreComm Limited issued notes to employees for
the repurchase of the 671,000 shares of common stock for an aggregate of
$6,803,000, which exceeded the fair market value of its common stock on the date
of repurchase. The notes earned interest at a rate of 4.5% and were redeemed in
December 2000. CoreComm Limited recorded non-cash compensation of $4.7 million
from these transactions.
The non-cash compensation charge of $1,056,000 in 1999 was recorded in
accordance with APB Opinion No. 25, related to a change in employee stock option
agreements.
Other charges of $12,706,000 in 2000 include a reserve of $8,700,000 for
notes receivable from former officers of Voyager, and restructuring costs of
$4,006,000. The restructuring costs relate to CoreComm Limited's announcements
in March and December 2000 of reorganizations of CoreComm Limited's operations.
The charge consisted of employee severance and related costs of $2,089,000 for
approximately 250 employees to be terminated and lease exit costs of $1,917,000.
As of December 31, 2000, $2,171,000 of these provisions had been used, including
$775,000 for employee severance and related costs and $1,396,000 for lease exit
costs. As of December
103
31, 2000, none of the employees to be terminated were still employed by CoreComm
Limited. The remaining provision for leases will be used through 2003.
The write-down of intangibles in 2000 of $35,920,000 is comprised of
$14,784,000 related to business combinations and $21,136,000 related to our LMDS
licenses. At December 31, 2000, CoreComm Limited wrote-off the carrying amount
of intangible assets from business combinations including goodwill of
$6,690,000, workforce of $577,000 and customer lists of $7,517,000. These assets
were primarily related to CoreComm Limited's resale CLEC business, which was
acquired in 1999. The underlying operations, customer relationships and future
revenue streams had deteriorated significantly since the acquisition. These were
indicators that the carrying amount of these resale-related assets was not
recoverable. CoreComm Limited estimated that the fair value of these assets was
zero due to the lack of potential buyers, the overall deterioration of the
resale CLEC business environment and because of the negative cash flow of these
resale businesses for the foreseeable future. In connection with the
reevaluation of our business plan, CoreComm Limited reduced the carrying amount
of the LMDS licenses at December 31, 2000 by $21,136,000 to reflect their
estimated fair value. The estimated fair value was determined based on an
analysis of sales of other LMDS licenses.
Depreciation expense increased to $30,746,000 from $10,945,000 primarily as
a result of an increase in fixed assets.
Amortization expense increased to $42,420,000 from $8,633,000 due to the
amortization of goodwill from the acquisitions in 2000.
Interest income and other, net, increased to $6,223,000 from $5,773,000
primarily due to interest income on CoreComm Limited's cash, cash equivalents
and marketable securities.
Interest expense increased to $20,457,000 from $5,341,000 primarily due to
interest on the 6% Convertible Subordinated Notes issued in October 1999, the
senior secured credit facility beginning in September 2000, the senior unsecured
notes due 2003 issued in September 2000 and the senior unsecured notes due 2010
issued in December 2000.
The income tax provisions of $250,000 in 2000 and $731,000 in 1999 are for
state and local income tax.
YEAR ENDED DECEMBER 31, 1999 AND THE PERIOD FROM APRIL 1, 1998 (DATE OPERATIONS
COMMENCED) TO DECEMBER 31, 1998
As a result of the completion of the acquisitions of 100% of the stock of
MegsINet Inc. and the CLEC assets of USN Communications, Inc. in May 1999,
CoreComm Limited consolidated the results of operations of these businesses from
the dates of acquisition. The results of these businesses are not included in
the 1998 results.
The increase in revenues to $58,151,000 from $6,713,000 is primarily due to
acquisitions in 1999, which accounted for $40,909,000 of the increase. The
remainder of the increase is primarily due to an increase in CLEC and ISP
revenues from an increase in customers, offset by the decline in cellular long
distance revenue as a result of customers switching to other long distance
providers. In the third quarter of 1999, CoreComm Limited sold most of its
prepaid cellular debit card business and CoreComm Limited terminated its
cellular long distance business in some markets. CoreComm Limited had revenues
in 1999 of $2,379,000 from the prepaid cellular debit card business and from the
cellular long distance business in these markets.
Operating costs increased to $58,561,000 from $5,584,000 primarily due to
acquisitions in 1999, which accounted for $43,315,000 of the increase. The
remainder of the increase is primarily due to the increase in revenues.
Operating costs as a percentage of revenues increased to 101% from 83%. The
increase in percentage terms is the result of an increase in the fixed component
of operating expenses due to the migration toward a facilities-based
infrastructure. In 1999, operating costs were $2,211,000 from the prepaid
cellular debit card business and from the cellular long distance business in the
terminated markets.
Selling, general and administrative expenses increased to $74,185,000 from
$11,940,000 primarily due to acquisitions in 1999, which accounted for
$33,184,000 of the increase. The remainder of the increase is a result of
increased selling and marketing costs and increased customer service costs.
Corporate expenses include the costs of CoreComm Limited's officers and
headquarters staff, the costs of operating the headquarters and costs incurred
for strategic planning and evaluation of business opportunities. Corporate
expenses increased to $7,996,000 from $2,049,000 because the 1998 expenses did
not represent a full period of results due to the fact that the spin-off from
CCPR occurred on September 2, 1998, at which time corporate expenses commenced.
In addition, allocated charges from NTL Incorporated (a company that has some of
104
the same officers and directors as CoreComm Limited) increased due to the sales
in 1999 of other affiliated companies.
The non-cash compensation charge of $1,056,000 in 1999 was recorded in
accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees,"
related to a change in employee stock option agreements. The non-cash
compensation charge of $4,586,000 in 1998 was recorded in accordance with APB
Opinion No. 25, as a one time charge related to the issuance of CoreComm
Limited's warrants and stock options to holders of CCPR's stock options in
connection with its distribution to CCPR's stockholders.
Depreciation expense increased to $10,945,000 from $749,000 as a result of
acquisitions in 1999, which accounted for $7,176,000 of the increase and an
increase in fixed assets.
Amortization expense increased to $8,633,000 from $231,000 due to the
amortization of goodwill and other intangibles from the acquisitions in 1999.
Interest income and other, net, increased to $5,773,000 from $2,632,000
primarily due to interest income on CoreComm Limited's cash, cash equivalents
and marketable securities.
Interest expense increased to $5,341,000 from $21,000 primarily due to
interest on the public notes issued in October 1999 and interest on notes
payable and capital leases of acquired businesses.
OTHER RESULTS OF OPERATIONS MATTERS
In August 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", effective for us on January 1,
2002. This statement supercedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and other related
accounting guidance. We are in the process of evaluating the financial statement
impact of the adoption of SFAS No. 144.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," effective for us on January 1, 2003. This statement
addresses financial accounting and reporting for obligations associated with the
retirement of tangible fixed assets and the associated asset retirement costs.
We are in the process of evaluating the financial statement impact of the
adoption of SFAS No. 143.
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards, which we refer to as "SFAS," No. 141, "Business
Combinations," and No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001. Use of the pooling-of-interests
method is no longer permitted. SFAS No. 141 also includes guidance on the
initial recognition and measurement of goodwill and other intangible assets
acquired in a business combination that is completed after June 30, 2001. SFAS
No. 142 ends the amortization of goodwill and indefinite-lived intangible
assets. Instead, these assets must be reviewed annually, or more frequently
under some conditions, for impairment in accordance with this statement. This
impairment test uses a fair value approach rather than the undiscounted cash
flow approach previously required by SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
Intangible assets that do not have indefinite lives will continue to be
amortized over their useful lives and reviewed for impairment in accordance with
SFAS No. 121. CoreComm Limited is required to adopt SFAS No. 142 as of January
1, 2002. In addition, CoreComm Limited is reviewing the carrying value of its
long-lived assets for impairment in accordance with SFAS No. 121, although it is
not currently possible to predict the outcome of this review.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The SEC's rule related to market risk disclosure requires that CoreComm
Limited describe and quantify its potential losses from market risk sensitive
instruments attributable to reasonably possible market changes. Market risk
sensitive instruments include all financial or commodity instruments and other
financial instruments, such as investments and debt, that are sensitive to
future changes in interest rates, currency exchange rates, commodity prices or
other market factors. CoreComm Limited is not exposed to market risks from
changes in foreign currency exchange rates or commodity prices. CoreComm Limited
does not hold derivative financial instruments nor does CoreComm Limited hold
securities for trading or speculative purposes. Under CoreComm Limited's current
policies, it does not use interest rate derivative instruments to manage its
exposure to interest rate changes.
105
The fair-market value of long-term fixed interest rate debt is subject to
interest rate risk. Generally the fair market value of fixed interest rate debt
will increase as interest rates fall and decrease as interest rates rise. In the
following table, the fair value of our public notes was determined from the
quoted market price. The carrying amount of the variable rate senior secured
credit facility approximates the fair value. The fair value of CoreComm
Limited's other notes payable are estimated using discounted cash flow analyses,
based on CoreComm Limited's current incremental borrowing rates for similar
types of borrowing arrangements.
INTEREST RATE SENSITIVITY
AS OF SEPTEMBER 30, 2001
PRINCIPAL AMOUNT BY EXPECTED MATURITY
AVERAGE INTEREST RATE
FOR THE
THREE
MONTHS ENDING
DECEMBER 31, FOR THE YEARS ENDING DECEMBER 31, FAIR VALUE
--------------------------------- ----------
2001 2002 2003 2004 2005 2006 THEREAFTER TOTAL 9/30/01
---------------------------------------------------------------------------------------- -------------
(in thousands)
Long-term debt,
including current
portion
Fixed rate $2,091 $19,906 $102,939 $ - $ - $ - $208,498 $333,434 $171,209
Average interest rate 5.15% 8.75% 6.47% 7.00%
Variable rate $ - $15,000 $ 1,950 $ 9,750 $25,350 $119,050 $ - $ 171,10 $171,100
Average interest rate Libor+ Libor+ Libor+ Libor+ Libor+
4.5% or 4.5% or 4.5% or 4.5% or 4.5% or
base base base base base
rate+ rate+ rate+ rate+ rate+
3.5% 3.5% 3.5% 3.5% 3.5%
The above does not give effect to the Holdco Recapitalization or exchange
offers.
106
CAPITALIZATION
The following table shows our cash and cash equivalents and capitalization
of CoreComm Limited as of September 30, 2001, and as adjusted to give effect to
the Holdco Recapitalization. For additional information with respect to the
Holdco Recapitalization, without giving effect to the public exchange offers,
refer to the Unaudited Pro Forma Financial Data included elsewhere in this
prospectus. Actual financial position and results of operations will differ,
perhaps significantly, from the amounts reflected in this prospectus. You should
read this table together with CoreComm Limited's consolidated financial
statements and related notes included in this prospectus and the information in
"Unaudited Pro Forma Financial Data," and "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
AS OF SEPTEMBER 30, 2001
------------------------
ACTUAL AS ADJUSTED
------ -----------
(IN THOUSANDS)
Cash and cash equivalents....................................................... $ 46,953 $ 240
============ ==========
Current portion of long-term debt............................................... $ 43,511 $ 2,739
============ ==========
Long-term debt:
Capital lease obligations..................................................... $ 324 $ --
6% Convertible Subordinated Notes due 2006.................................... 164,750 164,750
Senior secured credit facility, less unamortized discount..................... 136,298 --
Senior Unsecured Notes due 2003, less unamortized discount.................... 92,936 92,936
10.75% senior unsecured convertible PIK notes due 2010........................ 17,494 --
10.75% unsecured convertible PIK notes due 2011, less unamortized discount.... 25,877 --
------------ ----------
Total long-term debt........................................................ 437,679 257,686
Stockholders' equity:
Preferred stock, par value $0.01 per share, liquidation preference
$315,937,000, 5,000,000 shares authorized, 301,000 issued and outstanding.. 3 3
Common stock, par value $0.01 per share; 600,000,000
shares authorized; 98,371,000 shares issued(1)............................. 984 984
Additional paid-in capital.................................................... 788,911 563,300
Deferred non-cash compensation................................................ (11,936) --
(Deficit)..................................................................... (827,292) (827,292)
------------ -----------
(49,330) (263,005)
Treasury stock at cost 1,329,000.......................................... (10,574) (10,574)
------------- ----------
Total stockholders' deficiency............................................. (59,904) (273,579)
------------ ----------
Total capitalization....................................................... $ 377,775 $ 15,893
============ ==========
----------
(1) Excludes shares issuable upon the possible future conversion of Unsecured
Convertible Notes or upon the exercise of stock options and warrants.
107
OUR BUSINESS
CoreComm Limited's only material business is its ownership of approximately
13% of the outstanding capital stock of CoreComm Holdco.
Currently, CoreComm Limited has the following outstanding litigation
matters which, if resolved unfavorably to CoreComm Limited, could have a
material adverse effect on CoreComm Limited:
- On December 3, 2001, General Electric Capital Corp. filed a lawsuit in the
Circuit Court of Cook County, Illinois against CoreComm Limited and CoreComm
Holdco's subsidiary, MegsINet, Inc. seeking approximately $8 million in
allegedly past due amounts under a capital equipment lease agreement between
Ascend and MegsINet. GECC is seeking all amounts allegedly owed under the
lease as well as repossession of the equipment. CoreComm Limited's response
to GECC's complaint is due February 20, 2002 and we intend to defend the suit
vigorously. A finding in favor of GECC could adversely affect CoreComm
Limited's financial condition.
- On May 25, 2001, KMC Telecom, Inc. and some of its operating subsidiaries
filed an action in the Supreme Court of New York for New York County against
CoreComm Limited, Cellular Communications of Puerto Rico, Inc., CoreComm New
York, Inc. and MegsINet, Inc. On that same date, KMC filed the same cause of
action in the Circuit Court of Cook County, IL. Upon defendant's Motion to
Stay the New York action, KMC voluntarily dismissed the Illinois litigation
and the matter is currently proceeding in New York. KMC contends that it is
owed approximately $2 million under a services agreement and a collocation
agreement with MegsINet. The defendants have denied KMC's claims and have
asserted that KMC failed to perform under the alleged contracts. The
defendants have served discovery and intend to defend themselves in
coordination with one of their insurance carriers. However, a finding in
favor of KMC in this litigation could have a material adverse effect on
CoreComm Limited's business, financial condition and/or results of
operations.
OPTIONS
- As of December 31, 2001, there were options to purchase approximately 22.1
million shares of CoreComm Limited common stock outstanding, including
options held by executive officers and directors of CoreComm Holdco. In
December 2001, the CoreComm Limited board of directors, in connection with
Holdco Recapitaliztion, accelerated all outstanding options to acquire shares
of CoreComm Limited common stock so that all are presently fully vested and
exercisable. However, based on the last sales price for CoreComm Limited
common stock on the Nasdaq Stock Market on February 4, 2002 of $.10, less
than 1% of those options are at exercise prices below the market price for
CoreComm Limited common stock.
108
COMPARATIVE STOCK PRICES AND DIVIDENDS
CORECOMM LIMITED
The following table sets forth, for the periods indicated, the high and low
last sale prices as reported on the Nasdaq Stock Market's National Market after
giving retroactive effect to the 3-for-2 stock split by way of stock dividend
paid in September 1999 and the 3-for-2 stock split by way of stock dividend paid
in February 2000.
LAST SALE PRICE
---------------
HIGH LOW
---- ---
1999
First Quarter $17.39 $ 7.28
Second Quarter $22.00 $ 16.11
Third Quarter $25.50 $ 20.53
Fourth Quarter $39.58 $ 23.83
2000
First Quarter $49.31 $ 32.17
Second Quarter $42.81 $ 14.81
Third Quarter $20.44 $ 7.88
Fourth Quarter $ 8.13 $ 2.06
2001
First Quarter $ 4.75 $ 0.11
Second Quarter $ 0.65 $ 0.13
Third Quarter $ 0.22 $ 0.06
Fourth Quarter $ 0.21 $ 0.07
2002
First Quarter, through January 30, 2002 $ 0.17 $ 0.10
On December 17, 2001, the last full day of trading before the public
announcement CoreComm Holdco's intention to commence the exchange offers, the
last sales price for Limited common stock on The Nasdaq Stock Market National
Market was $0.17.
As of February 5, 2002, there were approximately 540 record holders of
Limited common stock and 3 record holders of public notes. This figure does not
reflect beneficial ownership of shares held in nominee names.
CoreComm Limited has never declared or paid any cash dividends on the
Limited common stock. CoreComm Limited does not anticipate paying any cash
dividends in the foreseeable future.
If CoreComm Limited's board of directors declares a dividend on the Limited
common stock after commencement of the exchange offers but before the expiration
date, it is possible that the record date for determining holders of Limited
common stock entitled to receive the dividend would be a date before the
expiration date. Tendering your shares of Limited common stock in the exchange
offers will not change your status as a record holder of Limited common stock,
except with respect to those of your shares of Limited common stock that are
accepted for exchange upon completion of the exchange offers. This means that,
if you tender shares of Limited common stock before the record date for a
dividend, you will continue to be the record holder of those shares of Limited
common stock on the record date and you will be entitled to receive payment of
the dividend if the record date is a date before the expiration date. In this
event, the dividend would be paid to you in the normal manner and would be
separate from any shares of Holdco common stock issued to you in the exchange
offers.
Stockholders that exchange shares of Limited common stock pursuant to the
exchange offers will not be entitled to any dividends on those shares of Limited
common stock with a record date after the date on which CoreComm Holdco accepts
those tendered shares. Stockholders will continue to receive any dividends
declared with respect to any shares of Limited common stock that are not
exchanged pursuant to the exchange offers.
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CORECOMM HOLDCO
Currently no public market exists for the shares of our common stock. As of
January 25, 2002, there were approximately 43 record holders, one of which is
CoreComm Limited, of Holdco common stock. This figure does not reflect
beneficial ownership of shares held in nominee names. CoreComm Limited's
outstanding common stock is currently listed on the Nasdaq National Market under
the symbol "COMM." Pursuant to conversations with the Nasdaq National Market, we
intend to transfer the listing of Limited common stock on the Nasdaq National
Market to Holdco common stock upon successful completion of the exchange offers.
Please refer to the section of the prospectus entitled "Risk Factors - Risk
factors relating to our common stock and corporate control - Our common stock
may not be listed on the Nasdaq National Market, which could have a negative
impact on the trading activity and price of your common stock, and could make it
more difficult for us to raise capital."
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DESCRIPTION OF CAPITAL STOCK
AUTHORIZED CAPITAL STOCK
Our authorized capital stock consists of 250,000,000 shares of common
stock, par value $0.01 per share, and 10,000,000 shares of preferred stock, par
value $0.01 per share. As of February 1, 2002, we had (a) 10,000,018 shares of
common stock issued and outstanding, which were held of record by approximately
43 stockholders, including CoreComm Limited and (b) no shares of preferred stock
issued or outstanding. The currently outstanding shares of common stock are
validly issued, fully paid and non-assessable. The number of authorized shares
of any of our preferred stock or our common stock may be increased or decreased,
but not below the then number of shares outstanding, by the vote of the holders
of a majority of our voting power and no vote of the holders of any of our
preferred stock or our common stock voting separately as a class is required.
The following description is qualified in all respects by reference to our
charter and our amended by-laws.
COMMON STOCK
The holders of our common stock are entitled to one vote for each share
held of record on all matters submitted to a vote of our stockholders and do not
have cumulative voting rights in the election of directors. The holders of our
common stock are not entitled to vote on any amendment to our charter that
relates solely to the terms of one or more outstanding series of preferred stock
if the holders of the affected series are entitled, either separately or
together with the holders of one or more other series, to vote thereon pursuant
to our charter or pursuant to the Delaware General Corporation Law. Holders of
our common stock are entitled to receive proportionately dividends as may from
time to time be declared by our board of directors out of funds legally
available for the payment of dividends. In the event of our liquidation,
dissolution or winding up, holders of our common stock would be entitled to
share proportionately in all of our assets available for distribution to holders
of our common stock remaining after payment of liabilities and liquidation
preference of any outstanding preferred stock. Holders of our common stock have
no preemptive rights and have no rights to convert our common stock into any
other securities, and there are no redemption provisions with respect to the
common stock.
Currently no public market exists for the shares of our common stock.
Pursuant to discussions with Nasdaq, we intend to transfer CoreComm Limited's
Nasdaq listing to our common stock following successful completion of the
planned public exchange offer for holders of CoreComm Limited Common Stock to
exchange their shares for our common stock. CoreComm Limited's outstanding
common stock currently trades under the symbol "COMM" on the Nasdaq National
Market.
PREFERRED STOCK
Our charter authorizes the board of directors to issue one or more series
of preferred stock and determine, with respect to any series, the rights, if
any, and their qualifications, limitations or restrictions, as are stated in
resolutions adopted by the board of directors providing for the issue of the
series and as are permitted by the Delaware General Corporation Law.
The ability of the board of directors to issue one or more series of
preferred stock provides increased flexibility in structuring possible future
financings and acquisitions and in meeting other corporate needs which might
arise. The authorized shares of preferred stock, as well as shares of our common
stock, are available for issuance without further action by our stockholders,
unless any action is required by applicable law or the rules of any stock
exchange or automated quotation system on which our securities may be listed or
applicable rules of any self-regulatory organization. If the approval of our
stockholders is not required for the issuance of shares of preferred stock or
common stock, the board of directors does not intend to seek stockholder
approval. The board of directors will make any determination to issue the shares
based on its judgment as to our best interests and the best interests of our
stockholders. The board of directors, in so acting, could issue preferred stock
having terms that could discourage an acquisition attempt or other transaction
that some or a majority of the stockholders might believe to be in their best
interests or in which stockholders might receive a premium for their shares over
the then current market price of our shares.
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
In connection with the adoption of our stockholder rights plan, which is
described below, our board of directors designated and reserved for issuance
Series A Junior Participating Preferred Stock. A total of 1,000,000 shares of
Series A preferred stock are authorized. No shares are issued or outstanding.
When issued and paid for in
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accordance with the stockholder rights plan, the Series A preferred stock will
be fully paid and nonassessable. We will appoint a transfer agent for the Series
A preferred stock if any shares are issued.
DIVIDENDS AND RANKING. Each share of Series A preferred stock entitles its
holders to receive dividends out of our funds legally available for the payment
of dividends when, as and if declared by our board of directors. With respect to
those dividends, the Series A preferred stock will rank:
- senior to all classes of our common stock and to each other class of
capital stock or series of preferred stock that is designated to rank
junior to the Series A preferred stock;
- junior to all classes of preferred stock that is designated to rank
senior to the Series A preferred stock; and
- equal to all classes of preferred stock that is designated to rank
equally with the Series A preferred stock.
Dividends are payable quarterly in cash on the fifteenth day of March,
June, September and December of each year, in an amount per share equal to the
greater of:
- $0.01; and
- 1,000 times the aggregate per-share amount of all dividends declared on
our common stock since the immediately preceding dividend payment date,
subject to adjustment for subdivision or combination of our common
stock.
LIQUIDATION, DISSOLUTION OR WINDING UP. Upon our liquidation, dissolution
or winding up, the holders of outstanding shares of Series A preferred stock
will be entitled to paid out of the assets available for distribution to our
stockholders after payment of any liquidation values of any securities senior in
liquidation rights to the Series A preferred stock.
After payment of the liquidation values of senior securities, the holders
of the Series A preferred stock will be entitled to receive $1.00 for each share
of Series A preferred stock they hold, plus any accrued and unpaid dividends or
distributions on those shares. If, upon any liquidation, dissolution or winding
up of our company, the remaining assets available for distribution are
insufficient to pay the holders of the Series A preferred stock and all other
securities ranking equally with the Series A preferred stock with respect to
liquidation the full amount to which they are entitled, the holders of Series A
preferred stock will share those remaining assets ratably, together with the
holders of the securities ranking equally with the Series A preferred stock.
Following the initial payment with respect to each share of Series A
preferred stock, no additional distributions will be made to the holders of the
Series A preferred stock until the holders of shares of common stock have
received an amount per share equal to the amount distributed with respect to
each share of Series A preferred stock divided by 1,000, subject to adjustment
for splits and combinations of our common stock. After the payment with respect
to our common stock, the holders of the Series A preferred stock and the holders
of the common stock will share ratably in any remaining assets and funds, based
on one share of Series A preferred stock equaling 1,000 shares of common stock,
subject to adjustment for splits and combinations of our common stock.
VOTING RIGHTS. Subject to adjustments for splits and combinations of our
common stock, each share of Series A preferred stock will entitle the holder to
1,000 votes on all matters submitted to a vote of our stockholders. The holders
of the Series A preferred stock will vote as a single class with the holders of
our common stock.
If dividends on the Series A preferred stock are in arrears in an amount
equal to six quarterly dividends, all holders of our preferred stock whose
dividends are in arrears with respect to six quarterly periods will, voting as a
single class, be entitled to elect two new directors to our board of directors.
The directors will serve until successors to them have been elected or until
dividends on the Series A preferred stock are no longer in arrears.
REDEMPTION. The Series A preferred stock is not redeemable.
CONVERSION. The Series A preferred stock is not convertible.
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THE CONVERTIBLE NOTE AGREEMENTS
In connection with the Holdco Recapitalization, CoreComm Limited entered
into binding agreements for transactions that allowed it to exchange
approximately $160 million principal amount of its 6% Convertible Subordinated
Notes due 2006. Under the terms of the agreements, in exchange for tendering the
notes, CoreComm Limited paid each holder that signed such an agreement: (1) a
cash payment equal to the October 2001 interest payment due to that holder, and
(2) shares of CoreComm Holdco common stock, equal in the aggregate to
approximately 5% of our common stock. These agreements also contain a mutual
release of claims whereby CoreComm Limited released each holder who was a party
to one of these agreements, and each of these holders released CoreComm Limited,
of all claims arising from occurrences taking place on or prior to the date of
these respective agreements.
CoreComm Limited and CoreComm Holdco provided notices of closing of the
transactions under these agreements. Each notice of closing contained an
agreement by CoreComm Holdco to file a shelf registration statement under the
Securities Act covering the shares of our common stock issued under these
agreements. This prospectus is part of that registration statement.
THE EXCHANGE AGREEMENT
In connection with the Holdco Recapitalization, CoreComm Limited and
CoreComm Holdco entered into an exchange agreement with holders of preferred
stock of CoreComm Limited, holders of debt securities of CoreComm Limited and
holders of debt securities which were joint obligations of CoreComm Limited and
CoreComm Holdco. The transactions contemplated by the Exchange Agreement closed
in December 2001. Pursuant to that agreement:
- the security holders would exchange their securities for shares of
CoreComm Holdco common stock as part of the Holdco Recapitalization
plan;
- We would file a shelf registration statement under the Securities Act
covering the shares of our common stock issued under the exchange
agreement;
- none of the security holders, together with their affiliates and their
associates, would acquire any shares of our voting securities, subject
to an allowed annual increase in percent ownership of our outstanding
common shares equal to 0.0735 times their original percent ownership of
our common stock, capped at a maximum of 39%;
- if a securityholder, or any of their affiliates or associates, were to
acquire ownership of our voting securities in contravention of the
restrictions set forth in the exchange agreement, we would have the
right to either (1) purchase, or cause a designee to purchase, any or
all of these securities so acquired at the price paid by the
securityholder or its affiliates or associates or (2) require the
security holder, or its affiliates or associates, to dispose of these
securities within 30 days;
- the following additional restrictions apply to each security holder
that, together with its affiliates and associates, owns at least 15% of
our common stock, provided that these restrictions will not apply to any
of these security holders (1) after the nine month anniversary of the
SEC declaring the registration statement of which this prospectus forms
a part effective and (2) at any time when a security holder, together
with its affiliates, its associates and specified transferees to which
they transfer our voting securities own less than 10% of the voting
power of all our voting securities. These securities holders are:
- prohibited from subjecting any of our voting securities to any voting
agreements or arrangements or depositing them into a voting trust;
- prohibited from soliciting proxies in opposition to the
recommendation of our board of directors;
- in any election contest, required to vote all of our voting
securities held by it (1) in the same proportion as the votes cast by
all other holders of our voting securities or (2) in the manner
recommended by our board of directors if the election contest
involves a proposed change of control;
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- prohibited from acting with any other person or entity for the
purpose of affecting or influencing control of CoreComm Holdco or
acquiring, holding or disposing of our voting securities;
- prohibited from proposing, soliciting or otherwise participating in
any transaction relating to an acquisition of, a business combination
or similar transaction with, or a change of control of, CoreComm
Holdco or encouraging another person or entity to make a tender offer
for our voting securities;
- shares of our common stock issued under the exchange agreement
to these security holders and their affiliates and associates
may only be transferred:
- pursuant to a bona fide public offering;
- pursuant to unsolicited open market sales on any national
securities exchange or automated inter-dealer quotation system
on which the shares are listed;
- pursuant to a tender offer made to our stockholders which our
board of directors has recommended;
- pursuant to a privately-negotiated transaction with a person or
entity that, together with its affiliates and associates, does
not own at least 15% of our common stock;
- pursuant to a will or the laws of descent and distribution;
- pursuant to a bequest or similar gift or transfer to any person
or entity that, together with its affiliates and associates,
does not own at least 15% of our common stock; or
- as a result of any pledge or hypothecation to a bona fide
financial institution to secure a bona fide loan, guaranty or
other financial accommodation or as a result of any foreclosure
with respect thereto;
- if we enter into a definitive agreement with a third party or accept,
approve or recommend an offer from a third party to acquire greater than
50% of our voting securities, each security holder would have the right,
on a pro-rata basis commensurate with its then level of ownership of our
voting securities, to offer to acquire the number of our securities that
is equal to or greater than the number of our voting securities that is
contemplated to be acquired pursuant to the third party offer, and we
would not take any action that would confer a timing advantage to the
third party;
- any security holder, together with its associates and affiliates, may
make a bona fide written offer to acquire or purchase 100% of our
capital stock so long as the offer is definitive in nature or provides
for a make-whole premium or similar significant penalty payable to our
other stockholders in the event that the transaction is not completed;
- each security holder granted an irrevocable proxy to members of our
board of directors and officers to vote all of the shares of our stock
which he, she or it would be entitled to vote in favor of (1) a stock
split of shares of our common stock upon a determination by our board of
directors that a stock split is advisable and in our best interest to
more accurately reflect our capitalization pursuant to the restructuring
plan and an amendment to our charter to effect this stock split and/or
(2) a change in our corporate name to a suitable corporate name upon a
determination by our board of directors that a corporate name change is
advisable and in our best interest and an amendment to our charter to
effect this corporate name change;
- each of Michael Karp and Booth American Company also have a contractual
right to designate directors to CoreComm Holdco's board of directors
whereby:
- so long as Michael Karp, together with his affiliates and associates,
owns at least 15% of our outstanding common stock, Michael Karp has
the right to designate that number of directors to our board of
directors so that his representation on our board of directors is
proportionate to his, together with his affiliates' and associates',
ownership percentage of our common stock; and
- so long as Booth American Company, together with its affiliates and
associates, owns at least 15% of CoreComm Holdco's outstanding common
stock, Booth American Company has the right to designate one director
to our board of directors;
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- each security holder agreed (1) that it had not commenced any action
against CoreComm Limited or CoreComm Holdco, (2) to release CoreComm
Limited and CoreComm Holdco from all claims arising from occurrences
taking place on or prior to the closing date and (3) that it would not
assist in any action commenced by or on behalf of the holders of 6%
Convertible Subordinated Notes due 2006 of CoreComm Limited; and
- each of CoreComm Limited and CoreComm Holdco agreed (1) that it had not
commenced any action against any security holder and (2) to release each
security holder from all claims arising from occurrences taking place on
or prior to the closing date.
SPECIAL CHARTER PROVISIONS
Our charter contains the provisions described below. These charter
provisions may have the effect, alone or in combination with each other or with
the existence of authorized but unissued common stock and any series of
preferred stock, of precluding or rendering more difficult a hostile takeover,
making it more difficult to remove or change the composition of our incumbent
board of directors and our officers, being adverse to stockholders who desire to
participate in a tender offer and depriving stockholders of possible
opportunities to sell their shares at temporarily higher prices.
CLASSIFIED BOARD AND FILLING OF VACANCIES ON THE BOARD OF DIRECTORS. The
charter provides that the directors shall be divided into three classes, each of
which shall serve a staggered three-year term, and that vacancies on our board
of directors that may occur between annual meetings may be filled by our board
of directors. In addition, this provision specifies that any director elected to
fill a vacancy on our board of directors will serve for the balance of the term
of the replaced director. At each annual meeting of stockholders, successors to
the class of directors whose term expires at that annual meeting shall be
elected for a three-year term.
QUALIFICATION OF DIRECTORS. The charter provides that, subject to the
contractual board representation rights set forth in the exchange agreement, it
is a qualification of at least 81% of the directors that they not be (1)
beneficial owners of 15% or more of our common stock, (2) affiliates or
associates of any beneficial owner of 15% or more of our common stock or (3)
persons whose beneficial ownership of securities would be required to be
aggregated on any Schedule 13D or Schedule 13G required to be filed under the
Exchange Act by any beneficial owner of 15% or more of our common stock.
REMOVAL OF DIRECTORS. The charter provides that directors can be removed
only by the stockholders for cause and then only by the affirmative vote of the
holders of not less than two-thirds of the combined voting power of the voting
stock.
VOTING REQUIREMENT FOR SOME BUSINESS COMBINATIONS. The charter also
provides that, in addition to any affirmative vote required by law, the
affirmative vote of holders of two-thirds of the voting power of the voting
stock will be necessary to approve any "business combination," proposed by an
"interested stockholder." The additional voting requirements will not apply,
however, if:
- the business combination was approved by not less than a majority of the
continuing directors;
- a series of conditions are satisfied requiring, in summary, the
following:
(A) that the consideration to be paid to stockholders in the business
combination must be at least equal to the higher of:
(1) the highest per-share price paid by the interested stockholder
in acquiring any shares of common stock during the two years prior to
the announcement date of the business combination or in the transaction
in which it became an interested stockholder, this date is referred to
as the "determination date," whichever is higher; or
(2) the fair market value per share of common stock on the
announcement date or determination date, whichever is higher, in either
case appropriately adjusted for any stock dividend, stock split,
combination of shares or similar events with non-cash consideration
treated similarly; and
(B) various "procedural" requirements are complied with, including
the consent solicitation of proxies according to the rules of the SEC and
no decrease in regular dividends, if any, after the
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interested stockholder became an interested stockholder, except as approved
by a majority of the continuing directors.
An "interested stockholder" is defined as anyone who is the beneficial
owner of more than 15% of the voting power of the voting stock, other than
CoreComm Holdco and any employee stock plans sponsored by us, and includes any
person who is an assignee of or has succeeded to any shares of voting stock in a
transaction not involving a public offering that were at any time within the
prior two-year period beneficially owned by an interested stockholder. The term
"beneficial owner" includes persons directly and indirectly owning or having the
right to acquire or vote the stock. Interested stockholders participate fully in
all stockholder voting.
A "business combination" includes the following transactions:
- merger or consolidation of us or any subsidiary of ours with an
interested stockholder or with any other corporation or entity which is,
or after the merger or consolidation would be, an affiliate, associate
or a Schedule 13D Related Party of an interested stockholder;
- the sale or other disposition by us or a subsidiary of ours of assets
having a fair market value of $10,000,000 or more if an interested
stockholder, or an affiliate, an associate or a Schedule 13D Party of an
interested stockholder is a party to the transaction;
- the adoption of any plan or proposal for our liquidation or dissolution
proposed by or on behalf of an interested stockholder, or an affiliate,
an associate or a Schedule 13D Party of an interested stockholder; or
- any reclassification of securities, recapitalization, merger with a
subsidiary, or other transaction which has the effect, directly or
indirectly, of increasing the proportionate share of any class of our
outstanding stock, or securities convertible into stock, or a subsidiary
owned by an interested stockholder, or an affiliate, an associate or a
Schedule 13D Party of an interested stockholder.
Determinations of the fair market value of non-cash consideration are made
by a majority of the continuing directors.
The term "continuing directors" means any member of our board of directors,
while that person is a member of our board of directors, who is not an
affiliate, associate, Schedule 13D Party or representative of the interested
stockholder and was a member of our board of directors prior to the time that
the interested stockholder became an interested stockholder, and any successor
of a continuing director while that successor is a member of our board of
directors, who is not an affiliate, associate, Schedule 13D Party or
representative of the interested stockholder and is recommended or elected to
succeed the continuing director by a majority of continuing directors.
The term "Schedule 13D Related Party" means an individual or entity whose
beneficial ownership of securities would be required to be aggregated on any
Schedule 13D or Schedule 13G required to be filed by an interested stockholder.
VOTING REQUIREMENTS FOR SOME AMENDMENTS TO THE CHARTER. The charter
provides that the provisions set forth in this section under the heading
"Special Charter Provisions" may not be repealed or amended in any respect,
unless that action is approved by the affirmative vote of the holders of not
less than two-thirds of the voting power of the voting stock. The requirement of
an increased stockholder vote is designed to prevent a stockholder who controls
a majority of the voting power of the voting stock from avoiding the
requirements of the provisions discussed above by simply amending or repealing
those provisions.
SPECIAL BY-LAWS PROVISIONS
ADVANCE NOTIFICATION OF BUSINESS TO BE TRANSACTED AT STOCKHOLDER MEETINGS.
Our amended by-laws provide that to be properly brought before the annual or any
special stockholders' meeting, business must be either
(1) specified in the notice of meeting, or any supplement or amendment
thereto, given by or at the direction of our board of directors,
(2) otherwise properly brought before the meeting by or at the direction of
our board of directors, or
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(3) otherwise properly brought before the meeting by a stockholder by
giving timely notice in writing to us.
To be timely, a stockholder's notice must be delivered to or mailed and received
at our principal executive offices not less than 75 days nor more than 90 days
prior to the meeting; provided, that in the event that less than 90 days' notice
or prior public disclosure of the date of the meeting is given or made to
stockholders, notice by the stockholder to be timely must be received by us not
later than the close of business on the fifteenth day following the day on which
the notice of the date of the meeting was mailed or the public disclosure was
made, whichever first occurs.
ELECTION OF DIRECTORS. Our amended by-laws provide that our board of
directors consists of between three and 15 directors, the exact number as fixed
from time to time by the board of directors.
STOCKHOLDER NOMINATIONS. Except for the right of Michael Karp and Booth
American Company to designate directors in accordance with the exchange
agreement, a stockholder may nominate directors only if the stockholder delivers
written notice to us not less than 75 days nor more than 90 days prior to an
annual meeting of our stockholders; provided, however, that in the event that
less than 90 days' notice or prior public disclosure of the date of the meeting
is given or made to stockholders, notice by the stockholder to be timely must be
received by us not later than the close of business on the fifteenth day
following the day on which the notice of the date of the meeting was mailed or
the public disclosure was made, whichever first occurs.
THE STOCKHOLDER RIGHTS PLAN
We adopted a stockholder rights plan on December 17, 2001. In connection
with the stockholder rights plan, our board of directors declared and paid a
dividend of one preferred share purchase right for each share of our common
stock outstanding on December 17, 2001. Each right entitles the holder, under
some circumstances, to purchase from us one one-thousandth of a share of our
Series A Junior Participating Preferred Stock, par value $0.01 per share, at an
exercise price of initially four times the average closing price of our common
stock over the first five days of trading following the SEC declaring this
registration statement effective, subject to adjustment. There are 1,000,000
shares of Series A preferred stock authorized for issuance under the plan.
Initially, the rights are attached to outstanding certificates representing
our common stock, and no separate certificates representing the rights are
distributed. The rights will separate from our common stock, be represented by
separate certificates and will become exercisable upon the earlier of:
- ten business days following a public announcement that a person or group
has acquired or has obtained the right to acquire 15% or more of our
outstanding common stock; or
- ten business days, or a later date as may be determined by the action of
the board of directors prior to the time that any person or group
becomes an acquiring person, after the commencement of, or announcement
of an intention to make, a tender offer or exchange offer for 15% or
more of our outstanding common stock.
If after the rights become exercisable we agree to merge into another
entity, another entity merges into us or we sell or transfer more than 50% of
our assets, each right will entitle the holder to purchase a number of shares of
common stock of the resulting entity at a discount.
If after someone has acquired 15% or more of our common stock or our board
of directors declares any person to be an adverse person upon a determination
that a person has become the beneficial owner of a substantial amount of our
common stock, which shall in no event be less than 5% of the outstanding common
stock, each holder of a right will be entitled to receive shares of our common
stock at a discount. Any rights that are or were owned by an acquirer of more
than 15% of our outstanding common stock or any person that the board of
directors declares to be an adverse person will be null and void.
We may exchange the rights at a ratio of one share of common stock for each
right at any time after someone acquires 15% or more of our common stock but
before that person acquires 50% or more of our common stock. We may also redeem
the rights at our option at a price of $0.01 per right, subject to adjustment,
at any time before the tenth day following the announcement that someone has
acquired 15% or more of our common stock. The rights expire on the earliest of
December 17, 2011, an exchange or redemption of the rights as described above,
or the completion of a merger as described above. The rights distribution is not
taxable to stockholders.
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The stockholder rights plan is intended to encourage a potential acquirer
to negotiate directly with the board of directors, but may have anti-takeover
effects. The stockholder rights plan could significantly dilute the ownership
interests of an acquirer in CoreComm Holdco and therefore may have the effect of
delaying, deterring or preventing a change in control of CoreComm.
For further description, please refer to the stockholder rights plan, which
was filed with the SEC as Exhibit 4.2 to the registration statement of which
this prospectus forms a part.
TRANSFER AGENT AND REGISTRAR
Our transfer agent and registrar for our common stock is Continental Stock
Transfer & Trust Company.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
Generally, Section 203 of the Delaware General Corporation Law prohibits a
publicly held Delaware corporation from engaging in any business combination
with an interested stockholder for a period of three years following the time
that a stockholder becomes an interested stockholder, unless:
- prior to that time either the business combination or the transaction
which resulted in the stockholder becoming an interested stockholder is
approved by the board of directors of the corporation;
- upon consummation of the transaction which resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding, for purposes of determining the
number of shares outstanding, those shares held by persons who are both
directors and officers and employee stock plans; or
- at or after that time the business combination is approved by the board
and authorized at an annual or special meeting of stockholders, and not
by written consent, by the affirmative vote of at least two-thirds of
the outstanding voting stock which is not owned by the interested
stockholder.
A business combination includes mergers, consolidations, asset sales,
transfers and other transactions resulting in a financial benefit to the
interested stockholder. An interested stockholder is a person who, together with
affiliates and associates, owns 15% or more of the corporation's voting stock.
INDEMNIFICATION PROVISIONS
Section 145 of the Delaware General Corporation Law authorizes a
corporation to indemnify its directors, officers, employees and agents against
expenses, including attorneys' fees, judgments, fines and amounts paid in
settlement reasonably incurred, including liabilities under the Securities Act,
provided they act in good faith and in a manner reasonably believed to be in or
not opposed to the best interests of the corporation, although in the case of
proceedings brought by or on behalf of the corporation, indemnification is
limited to expenses and is not permitted if the individual is adjudged liable to
the corporation, unless the court determines otherwise. Our charter and amended
by-laws require us to indemnify our officers and directors to the full extent
permitted by Delaware law.
Section 102(b)(7) of the Delaware General Corporation Law authorizes a
corporation to limit or eliminate its directors' liability to the corporation or
its stockholders for monetary damages for breaches of fiduciary duties, other
than for
(1) breaches of the duty of loyalty,
(2) acts or omissions not in good faith or that involve intentional
misconduct or knowing violations of law,
(3) unlawful payments of dividends, stock purchases or redemptions, or
(4) transactions from which a director derives an improper personal
benefit.
Section 145 of the Delaware General Corporation Law authorizes a
corporation to purchase and maintain insurance on behalf of any person who is or
was a director, officer, employee or agent of the corporation against any
liability asserted against him or her and incurred by him or her in his or her
capacity as a director, officer, employee or agent of the corporation, or
arising out of his or her status as a director, officer, employee or agent of
the
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corporation. Our charter and amended by-laws provide that we may, to the full
extent permitted by law, purchase and maintain insurance on behalf of any of our
directors, officers, employees or agents against any liability that may be
asserted against him or her and we currently maintain this insurance. We have
liability insurance covering our directors and officers for claims asserted
against them or incurred by them in their capacity as directors and officers,
including claims brought under the Securities Act.
Insofar as indemnification for liabilities arising from the Securities Act
may be permitted to directors, officers or persons controlling the registrant
pursuant to the foregoing provisions, the registrant has been informed that in
the opinion of the SEC, this indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
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DESCRIPTION OF OUR INDEBTEDNESS
OTHER INDEBTEDNESS
As of September 30, 2001, as adjusted for the Holdco Recapitalization, some
of our other indirect subsidiaries have $11.5 million of indebtedness in capital
leases and other notes. For more information, please refer to our historical
financial statements and the related notes. In addition, our subsidiaries may
incur substantial indebtedness in the future.
SENIOR SECURED CREDIT FACILITY
On September 28, 2000, we entered into a senior secured credit facility
with The Chase Manhattan Bank as lender, administrative agent and collateral
agent that was amended and restated on April 11, 2001. Our senior secured credit
facility provides for both a term loan facility and a revolving credit facility.
Our term loan facility is for an initial aggregate amount of $106.1 million and
has a final maturity of April 1, 2006 that, subject to the satisfaction of
conditions, may be extended to September 22, 2008. At December 31, 2001, we had
$106.1 million outstanding under our term loan facility. Our revolving credit
facility is for a total of $50.0 million and has a termination date of April 1,
2006 that, subject to the satisfaction of conditions, may be extended to
September 22, 2008. At December 31, 2001, we had $50.0 million outstanding under
our revolving credit facility.
The interest rate on both our term loan facility and our revolving credit
facility is initially, at our option, either:
- 3.50% per annum plus the base rate, which is the higher of:
- the rate as publicly announced from time to time by The Chase
Manhattan Bank as its "prime rate", or
- the federal funds effective rate plus 0.50% per annum; or
- the reserve-adjusted London Interbank Offered Rate (Adjusted LIBOR) plus
4.50% per annum.
The applicable margin for our facilities will be subject to reductions
based on the ratio of our consolidated total debt to annualized EBITDA.
At December 31, 2001, the interest rate on our term loan facility was
6.86%. At December 31, 2001, the interest rate on our revolving credit facility
was 6.86%. We are able to repay and reborrow on our revolving credit facility.
Availability under our revolving credit facility is subject to a commitment fee
equal to 1.50%, subject to reduction to 1.00% per annum based upon the rate of
utilization of our facilities. This commitment fee is payable quarterly in
arrears until termination of the lender's commitment.
We pay a letter of credit fee for the pro rata account of each lender in an
amount equal to the dollar equivalent of the daily amount available to be drawn
or outstanding under letters of credit, if any are outstanding, at a per annum
rate equal to the interest rate applicable to the revolving credit facility. In
addition, we pay a per annum fronting fee equal to 0.25% of the daily amount
available to be drawn down under any letters of credit.
The loans under our term loan facility are subject to quarterly
amortization payments over the life of the facility. In addition, we will have
to make partial repayments of our term loans, subject to exceptions for:
- net proceeds from a sale of assets;
- net proceeds from an issuance of debt or equity;
- net proceeds from insurance following a casualty event; and
- excess cash flow.
Once the term loans have been repaid, the term loans will not be permitted
to be reborrowed.
We and all of our present and future direct and indirect subsidiaries
(other than subsidiaries that we may designate as unrestricted subsidiaries)
unconditionally guarantee payment under our senior secured credit facility.
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These guarantees are secured by a pledge of and a perfected security interest in
all of the assets of these entities, including 100% of the stock of our
subsidiaries.
Our senior secured credit facility contains customary covenants and
restrictions on our ability and the ability of our subsidiaries to engage in
some activities, including, but not limited to:
- issuing new indebtedness;
- creating liens;
- incurring capital expenditures;
- making investments;
- declaring dividends, repurchasing or redeeming capital stock and
prepaying subordinated debt;
- entering into any merger, consolidation, acquisition, sale of assets or
lease; and
- entering into hedging transactions.
Our senior secured credit facility also requires us and our subsidiaries to
observe the following customary financial covenants:
- a minimum active access lines and minimum on-net access lines
requirement;
- a minimum consolidated services revenue requirement;
- a maximum consolidated total secured debt to total capital ratio and a
maximum consolidated total debt to total capital ratio;
- a positive EBITDA requirement;
- a maximum consolidated total secured debt to annualized EBITDA ratio and
a maximum consolidated total debt to annualized EBITDA ratio;
- a minimum consolidated EBITDA to consolidated cash interest expense;
- a minimum consolidated EBITDA to consolidated fixed charge ratio; and
- a maximum capital expenditures requirement.
Our senior secured credit facility contains customary events of default,
including payment defaults, breach of representations and warranties, covenant
defaults, cross-defaults on other indebtedness, events of bankruptcy and
insolvency, ERISA defaults, judgment defaults, failure of any guaranty or
security agreement supporting our senior secured credit facility to be in full
force and effect, and change in control of us.
10.75% UNSECURED CONVERTIBLE PIK NOTE DUE 2011
On April 12, 2001, CoreComm Holdco and CoreComm Limited issued, as joint
and several obligors, a 10.75% Unsecured Convertible PIK Note due 2011 to NTL
Incorporated in the principal amount of $15,000,000, referred to as the "2011
PIK Note," for the purchase price of $15,000,000, which was paid in cash. The
principal features of the 2011 PIK Note are as follows:
- RANKING. The 2011 PIK Note ranks as a senior debt obligation of CoreComm
Holdco and as a subordinated debt obligation of CoreComm Limited.
- INTEREST. The 2011 PIK Note accrues interest at a rate of 10.75% per
annum, to be paid semiannually on October 15 and April 15 of each year,
commencing October 15, 2001. Interest on the 2011 PIK Note is to be paid
in kind through the issuance of additional notes in principal amounts
equal to the interest payments then due, referred to as the "PIK Notes."
The terms of the PIK Notes will be substantially identical to the 2011
PIK Note, except that:
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(1) the conversion rate of each PIK Note will reflect that the conversion
price of CoreComm Limited common stock to be issued upon conversion is the
greater of:
(a) a 20% premium to the 25-day average market price of the CoreComm
Limited common stock on the date of issuance of the PIK Note; and
(b) $1.00;
(2) the maturity date of each PIK Note will be April 12, 2011; and
(3) the special conversion price of each PIK Note will be the greater of:
(a) 66 2/3% of the 25-day average market price of the CoreComm Limited
common stock immediately preceding the record date for the issuance of the PIK
Note; and
(b) the change of control price as determined in the 2011 PIK Note. To
the extent that there exists any accrued and unpaid interest attributable to the
principal amount of the 2011 PIK Note to be converted at the time of conversion,
the number of shares of CoreComm Limited common stock to be delivered by
CoreComm Limited will be increased in an amount equal to the quotient of the
accrued and unpaid interest as of the conversion date divided by 120% of the
25-day average market price of the CoreComm Limited common stock on the
conversion date.
On December 31, 2001, the aggregate principal amount outstanding of the 2011 PIK
Note and the PIK Note paid as interest on October 15, 2001, together with
accrued and unpaid interest thereon was $16,173,982.
- MATURITY DATE. The 2011 PIK Note and all PIK Notes mature on April 12, 2011.
- REDEMPTION. Beginning on April 12, 2003, CoreComm Holdco and CoreComm Limited
have the option, as joint and several obligors, to redeem the 2011 PIK Note
in whole or in part upon thirty days prior written notice to a holder of the
2011 PIK Note, at the redemption prices set forth in the 2011 PIK Note along
with any accrued and unpaid interest. Any redemption initiated by CoreComm
Holdco or CoreComm Limited will be tolled for up to 90 days, solely for the
purpose of allowing the holder of the 2011 PIK Note to satisfy any applicable
legal or regulatory approvals required to effect the conversion into shares
of CoreComm Limited common stock. The tolling period may be extended if
CoreComm Holdco or CoreComm Limited do not comply with their obligations
under the 2011 PIK Note to assist in effecting conversion.
- CONVERSION. The holder of the 2011 PIK Note may convert the 2011 PIK Note
into shares of CoreComm Limited common stock at the conversion rate of one
share for every $1 in principal amount, subject to adjustment in the
circumstances set forth in the 2011 PIK Note. However, the holder of these
notes and CoreComm Limited and CoreComm Holdco have entered into an agreement
relating to the conversion feature of the note following the Holdco
Recapitalization. Through that agreement, consistent with the original terms
of the note, CoreComm Limited and CoreComm Holdco have agreed to exercise
their right under the note such that, following the successful completion of
our exchange offer to the holders of CoreComm Limited common stock to
exchange their shares of CoreComm Limited common stock for shares of our
common stock, the convertibility feature of the note will be altered so that
rather than the note being convertible into shares of CoreComm Limited common
stock, it will become convertible into shares of our common stock. At that
time, the conversion price of $1.00 will be equitably adjusted by applying
the exchange ratio in the exchange offers, which results in a new conversion
price of $116.70 per share of our common stock. The holder has agreed not to
exercise its rights to convert into CoreComm Limited common stock for six
months from February 5, 2002 (unless that right has previously ceased as a
result of the completion of the exchange offer and the change in the
convertibility feature). In the event that we are unsuccessful in completing
the exchange offer, the conversion feature would remain into CoreComm Limited
common stock. These notes are redeemable, in whole or in part, at our option,
at any time in April 2003, at a redemption price of 103.429% that declines
annually to 100% in April 2007, in each case together with accrued and unpaid
interest to the redemption date.
- CHANGE OF CONTROL. If a change of control occurs, as determined under the
terms of the 2011 PIK Note, a holder of the 2011 PIK Note has a one-time
option, for a period of 30 days following written notice
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from CoreComm Limited, which written notice must be given at least 15 days
prior to the expected date of the change of control, to convert the principal
amount of the 2011 PIK Note, including any accrued and unpaid interest, into
shares of CoreComm Limited common stock at the change of control conversion
rate set forth in the 2011 PIK Note. If the holder of the 2011 PIK Note fails
to convert at this special conversion rate, then following the change of
control transaction the holder may convert the 2011 PIK Note into the type of
consideration received by the CoreComm Limited common stock holders in the
change of control transaction, in an amount that reflects the number of
shares of CoreComm Limited common stock into which the 2011 PIK Note was
convertible immediately prior to the change of control transaction.
- TRANSFER RESTRICTIONS. The 2011 PIK Note was issued in a transaction exempt
from the registration requirements of the Securities Act, and so cannot be
transferred except by way of a valid registration statement or an exemption
from, or in a transaction not subject to, the registration requirements of
the Securities Act.
- OTHER MATTERS. The 2011 PIK Note does not contain any provisions relating to:
(1) establishment or maintenance of a sinking fund;
(2) restrictions on liens to secure indebtedness and issuance of
disqualified preferred stock;
(3) restrictions on incurring additional indebtedness or refinancing
existing indebtedness;
(4) events of default;
(5) restrictions on the declaration or payment of dividends on CoreComm
Holdco capital stock; and
(6) covenants with respect to
(a) maintenance of cash-flow to interest expense,
(b) asset ratio,
(c) restricted payments,
(d) transactions with affiliates, and
(e) use of proceeds from an asset sale.
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COMPARISON OF RIGHTS OF HOLDERS OF
HOLDCO COMMON STOCK AND THE OUTSTANDING SECURITIES
We summarize below the material differences between the rights of holders
of outstanding securities and holders of Holdco common stock. First, we compare
the material differences between the rights of a CoreComm Holdco stockholder
under the current CoreComm Holdco restated certificate of incorporation, which
we refer to as the "Holdco charter," and amended by-laws (left column) and the
rights of a CoreComm Limited stockholder under the current CoreComm Limited
restated certificate of incorporation, which we refer to as the "Limited
charter," and by-laws (right column). Then, we summarize the material provisions
of the rights of the holders of public notes. We do not intend for this summary
to be a complete statement of the rights of holders of shares of Holdco common
stock or a comprehensive comparison with the rights of the holders of
outstanding securities, or a complete description of the specific provisions
referred to in this summary. For more information on the Holdco common stock,
please refer to the section of the prospectus entitled "Description of Capital
Stock - Common Stock."
This summary is qualified in its entirety by reference to the documents
governing the outstanding securities and the Holdco common stock, copies of
which have been filed as exhibits to the registration statement of which this
prospectus is a part.
COMPARISON OF COMMON STOCK OF HOLDCO AND LIMITED
GENERAL
CoreComm Holdco CoreComm Limited
The rights of CoreComm Holdco stockholders are governed by The rights of CoreComm Limited stockholders are governed by
the CoreComm Holdco charter amended by-laws, in addition to CoreComm Limited's restated certificate of incorporation and
Delaware law. by-laws, in addition to Delaware law.
AUTHORIZED CAPITAL
CoreComm Holdco CoreComm Limitied
The authorized capital stock of CoreComm Holdco consists of: The authorized capital stock of CoreComm Holdco consists of:
250,000,000 shares of Holdco common stock, with a par 600,000,000 shares of Limited common stock, with a par
value of $0.01 per share; there were 10,000,018 shares value of $0.01 per share; there were 140,326,706 shares
of common stock outstanding as of January 25, 2002; and of common stock outstanding as of January 25, 2002; and
10,000,000 shares of preferred stock, with a par value 5,000,000 shares of preferred stock, with a par value
of $0.01 per share; there were no issued or outstanding of $0.01 per share; there were 50,000 shares of Series
shares of preferred stock as of January 25, 2002. A, 1,086 shares of Series A-1 and 250,000 shares of
Series B preffered stock issued and outstanding as of
January 25, 2002, all of which were held by CoreComm
Holdco.
AMENDMENT OF GOVERNING DOCUMENTS
CHARTER
CoreComm Holdco CoreComm Limited
Except for the matters specified in the following section, Except for the matters specified in the following section,
an authorization of the CoreComm Holdco board, followed by an authorization of the CoreComm Limited board, followed by
the vote of a majority of the outstanding shares of Holdco the vote of a majority of the outstanding shares of Limited
common stock is required for an amendment to the CoreComm common stock is required for an amendment to the CoreComm
Holdco charter. Limited charter.
An amendment to the CoreComm Holdco charter with respect to An amendment to the CoreComm Limited charter with respect to
the following provisions requires the affirmative vote of the following provisions requires the affirmative vote of
the holders of at least 2/3 of the combined voting the holders of at least 2/3 of the combined voting
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powers of all of the then-outstanding shares of CoreComm powers of all of the then-outstanding shares of CoreComm
Holdco entitled to vote: Limited entitled to vote:
- The board of directors; - The board of directors;
- Removal of directors; - Prohibition of stockholder action by written consent
without a meeting;
- Prohibition of stockholder action by written consent
without a meeting; - Special meetings of stockholders;
- Special meetings of stockholders; - Business combinations with interested parties;
- Business combinations with interested parties; - Limitation on liability of directors; and
- Limitation on liability of directors; - Action with respect to the amended by-laws.
- Action with respect to the amended by-laws; and
- Modifications of specified provisions of the charter.
BYLAWS
CoreComm Holdco CoreComm Limited
CoreComm Holdco's amended by-laws may be adopted, amended or CoreComm Limited by-laws may be adopted, amended or repeated
repeated by: the board of directors or the affirmative vote by: the board of directors or the affirmative vote of
of holders of at least 2/3 of the combined voting power of holders of at least 2/3 of the combined voting power of all
all of the then-outstanding shares of CoreComm Holdco of the then-outstanding shares of CoreComm Limited entitled
entitled to vote. to vote.
NUMBER OF DIRECTORS
CoreComm Holdco CoreComm Limited
CoreComm Holdco's amended by-laws provide that the board of The CoreComm Limited by-laws provide that the board of
directors shall consist of between three and 15 directors directors shall consist of between three and 15 directors
which number is fixed by the board of directors from time to which number is fixed by the board of directors from time to
time. The current number of directors is seven. time. The current number of directors is four.
CLASSIFICATION OF DIRECTORS
CoreComm Holdco CoreComm Limited
The board of directors is divided into three classes, each The board of directors is divided into three classes, each
as nearly equal in number as possible, with one class being as nearly equal in number as possible, with one class being
elected annually to a three-year term. elected annually to a three-year term.
DIRECTOR NOMINATIONS
CoreComm Holdco CoreComm Limited
Except for the right of Michael Karp and Booth American A stockholder must make any nomination for a director in
Company to designate directors in accordance with the writing to the secretary of CoreComm Limited not less than
exchange agreement, a stockholder must make any nomination 75 days nor more than 90 days prior to an annual meeting of
for a director in writing to the secretary of CoreComm CoreComm Limited's stockholders; provided, however, that in
Holdco not less than 75 days nor more than 90 days prior to the event that less than 90 days' notice or prior public
an annual meeting of CoreComm Holdco's stockholders; disclosure of the date of the meeting is given or made to
provided, however that in the event that less than 90 days' stockholders, notice by the stockholder to be timely must be
notice or prior public disclosure of the date of received by the secretary of CoreComm Limited not later
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the meeting is given or made to stockholders, notice by the than the close of business on the fifteenth day following
stockholder to be timely must be received by the secretary the day on which the notice of the date of the meeting was
on the fifteenth day following the day on which the notice mailed or the public disclosure was made, whichever first
of the date of the meeting was mailed or the public occurs.
disclosure was made, whichever first occurs.
DIRECTOR QUALIFICATIONS
CoreComm Holdco CoreComm Limited
The CoreComm Holdco charter provides that, subject to the None.
contractual board representation rights set forth in the
exchange agreement, it is a qualification of at least 81% of
the directors that they not be (1) beneficial owners of 15%
or more of Holdco's common stock, (2) affiliates or
associates of any beneficial owner of 15% or more of
CoreComm Holdco's common stock or (3) persons whose
beneficial ownership of secrurities would be required to be
aggregated on any Schedule 13D or Schedule 13G required to
be filed under the Securities Exchange Act by any beneficial
owner of 15% or more of CoreComm Holdco's common stock.
REMOVAL OF DIRECTORS
CoreComm Holdco CoreComm Limited
CoreComm Holdco directors may be removed at any time, but CoreComm Limited directors may be removed at any time, but
only for cause and only by holders of at least 2/3 of the only for cause and only by holders of at least 2/3 of the
combined voting power of all of the then-outstanding shares combined voting power of all of the then-outstanding shares
of CoreComm Holdco entitled to vote at an election of of CoreComm Limited entitled to vote at an election of
directors. However, so long as holders of preferred stock directors.
are entitled to elect one or more directors, with respect to
removal for cause of director so elected, the vote of the
holders of that class or series of preferred stock and not
the vote of the outstanding shares as a whole is required.
ANNUAL MEETINGS OF STOCKHOLDERS
CoreComm Holdco CoreComm Limited
The annual meeting of stockholders must be held on a date The annual meeting of stockholders must be held on a date
and at a place within or without Delaware as may be and at a place within or without Delaware as may be
designated by resolution of the board of directors. designated by resolution of the board of directors.
SPECIAL MEETINGS OF STOCKHOLDERS
CoreComm Holdco CoreComm Limited
Special meetings of the stockholders, for any purposes, may Special meetings of the stockholders, for any purposes, may
be called at any time by the board of directors, by the be called at any time by the board of directors, by the
chairman of the board or by the president. chairman of the board or by the president.
STOCKHOLDER PROPOSALS
CoreComm Holdco CoreComm Limited
A CoreComm Holdco stockholder wishing to bring business A CoreComm Limited stockholder wishing to bring business
before the annual or special stockholders' meeting must before the annual or special stockholders' meeting must
provide written notice to the corporation's secretary. The provide written notice to the corporation's secretary. The
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notice must be received not less than 75 days nor more than notice must be received not less than 75 days nor more than
90 days prior to the meeting; provided, however, that in the 90 days prior to the meeting; provided, however, that in the
event that less than 90 days' notice or prior public event that less than 90 days' notice or prior public
disclosure of the date of the meeting is given or made to disclosure of the date of the meeting is given or made to
stockholders, notice by the stockholder to be timely must be stockholders, notice by the stockholder to be timely must be
received by the secretary of CoreComm Holdco not later than received by the secretary of CoreComm Limited not later than
the close of business on the fifteenth day following the day the close of business on the fifteenth day following the day
on which the notice of the date of the meeting was mailed or on which the notice of the date of the meeting was mailed or
the public disclosure was made, whichever first occurs. the public disclosure was made, whichever first occurs.
STOCKHOLDERS RIGHTS PLANS
CoreComm Holdco CoreComm Limited
CoreComm Holdco entered into a Rights Agreement dated as of CoreComm Limited entered into a Rights Agreement dated as of
December 17, 2001 between CoreComm Holdco and Continental September 29, 2000 between CoreComm Limited and Continental
Stock Transfer & Trust Company as rights agent. Rights will Stock Transfer & Trust Company as rights agent. Rights will
separate from CoreComm Holdco's common stock and become separate from CoreComm Limited's common stock and become
exercisable following the earlier of (a) the tenth business exercisable following the earlier of (a) the tenth business
day following a public announcement that a person or group day following a public announcement that a person or group
has acquired or has obtained the right to acquire 15% or has acquired or has obtained the right to acquire 18% or
more of CoreComm Holdco's outstanding common stock or (b) more of CoreComm Limited's outstanding common stock or (b)
the tenth business day, or a later date as may be determined the tenth business day, or a later date as may be determined
by the action of CoreComm Holdco's board of directors prior by the action of CoreComm Limited's board of directors prior
to the time that any person or group becomes an acquiring to the time that any person or group becomes an acquiring
person, after the commencement of, or announcement of an person, after the commencement of, or announcement of an
intention to make, a tender offer or exchange offer for 15% intention to make, a tender offer or exchange offer for 18%
or more of CoreComm Holdco's outstanding common stock. There or more of CoreComm Limited's outstanding common stock.
is an exception for (1) an acquisition of shares of Holdco There is an exception for beneficial owners of Limited
common stock pursuant to or as permitted by the Exchange common stock that, together with their affiliates and
Agreement and (2) beneficial owners of Holdco common stock associates, won 18% or more of the outstanding Limited
that, together with their affiliates and associates, won 15% common stock on the date of the rights agreement unless and
or more of the outstanding Holdco common stock immediately an additional 1% of CoreComm Limited's outstanding common
after the consummation of the transactions contemplated by stock.
the exchange agreement unless and until that person or
entity becomes the beneficial owner of an additional 1% of
CoreComm Holdco's outstanding common stock other than as
permitted by the Exchange Agreement.
After the distribution date, each right will entitle the After the distribution date, each right will entitle the
holder, other than the acquiring person or group, to holder, other than the acquiring person or group, to
purchase shares of Holdco common stock at a 50% discount to purchase shares of Limited common stock at a 50% discount to
its market price as of the purchase date. its market price as of the purchase date.
If after the rights become exercisable CoreComm Holdco If after the rights become exercisable CoreComm Limited
agrees to merge into another entity, another entity merges agrees to merge into another entity, another entity merges
into CoreComm Holdco or CoreComm Holdco sells or transfers into CoreComm Limited or CoreComm Limited sells or transfers
more than 50% of its assets, each right will entitle the more than 50% of its assets, each right will entitle the
holder to purchase a number of shares of common stock of the holder to purchase a number of shares of common stock of the
resulting entity at a discount. resulting entity at a discount.
If after someone has acquired 15% or more of CoreComm If after someone has acquired 15% or more of CoreComm
Holdco's common stock or CoreComm Holdco's board of Limited's common stock or CoreComm Limited's board of
directors declares any person to be an adverse person upon a directors declares any person to be an adverse person upon a
determination that a person has become the beneficial owner determination that a person has become the beneficial owner
of a substantial amount of CoreComm Holdco's common stock, of a substantial amount of CoreComm Limited's common stock,
which shall in no event be less than 5% of the outstanding which shall in no event be less than 5% of the outstanding
common stock, each holder of a right will be entitled to common stock, each holder of a right will be entitled to
receive shares of Holdco common stock at a receive shares of Limited common stock at a
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discount. Any rights that are or were owned by an acquirer discount. Any rights that are or were owned by an acquirer
of more than 15% of CoreComm Holdco's outstanding common of more than 18% of CoreComm Limited's outstanding common
stock or any person that CoreComm Holdco's board of stock or any person that CoreComm Limited's board of
directors declares to be an adverse person will be null and directors declares to be an adverse person will be null and
void. void.
CoreComm Holdco may exchange the rights at a ratio of one CoreComm Limited may exchange the rights at a ratio of one
share of common stock for each right at any time after share of common stock for each right at any time after
someone acquires 15% or more of CoreComm Holdco's common someone acquires 18% or more of CoreComm Limited's common
stock but before that person acquires 50% or more of stock but before that person acquires 50% or more of
CoreComm Holdco's common stock. CoreComm Holdco may also CoreComm Limited's common stock. CoreComm Limited may also
redeem the rights at its option at a price of $0.01 per redeem the rights at its option at a price of $0.01 per
right, subject to adjustment, at any time before the tenth right, subject to adjustment, at any time before the tenth
day following the announcement that someone has acquired 15% day following the announcement that someone has acquired 18%
or more of CoreComm Holdco's common stock. The rights expire or more of CoreComm Limited's common stock. The rights
on the earliest of December 17, 2011, an exchange or expire on the earliest of October 16, 2010, an exchange or
redemption of the rights as described above, or the redemption of the rights as described above, or the
completion of a merger as described above. The rights completion of a merger as described above. The rights
distribution is not taxable to stockholders. distribution is not taxable to stockholders.
CERTAIN BUSINESS COMBINATIONS
CoreComm Holdco CoreComm Limited
The CoreComm Holdco charter provides that, in addition to The CoreComm Limited charter provider that, in addition to
any affirmative vote required by law, the affirmative vote any affirmative vote required by law, the affirmative vote
of holders of two-thirdsof the voting power of the CoreComm of holders of two-thirds of the voting power of the CoreComm
Holdco voting stock will be necessary to approve any Limited voting stock will be necessary to approve any
"business combination," proposed by an "interested "business combination," proposed by an "interested
stockholder" in specified circumstances. stockholder" in specified circumstances.
An "interested stockholder" is defined as anyone who is the An "interested stockholder" is defined as anyone who is the
beneficial owner of more than 15% of the voting power of the beneficial owner of more than 15% of the voting power of the
voting stock, other than CoreComm Holdco and any employee voting stock, other than CoreComm Limited and any employee
stock plans sponsored by CoreComm Holdco, and includes any stock plans sponsored by CoreComm Limited, and includes any
person who is an assignee of or has succeeded to any shares person who is an assignee of or has succeeded to any shares
of voting stock in a transaction not involving a public of voting stock in a transaction not involving a public
offering that were at any time within the prior two-year offering that were at any time within the prior two-year
period beneficially owned by an interested stockholder. The period beneficially owned by an interested stockholder. The
term "beneficial owner" includes persons directly and term "beneficial owner" includes persons directly and
indirectly owning or having the right to acquire or vote the indirectly owning or having the right to acquire or vote the
stock. Interested stockholders participate fully in all stock. Interested stockholders participate fully in all
stockholder voting. stockholder voting.
A "business combination" includes the following A "business combination" includes the following
transactions: transactions:
- merger or consolidation of CoreComm Holdco or any - merger or consolidation of Corecomm Limited or any
subsidiary of CoreComm Holdco with an interested stockholder subsidiary or CoreComm Limited with an interested
or with any other corporation or entity which is, or after stockholder or with any other corporation or entity which
the merger or consolidation would be, an affiliate, is, or after the merger or consolidation would be, an
associate or a Schedule 13D Related Party of an interested affiliate or associate of an interested stockholder;
stockholder.
- the salary or other disposition by CoreComm Limited
- the sale or other disposition by CoreComm Holdco or a or a subsidiary of CoreComm Limited of assets having a fair
subsidiary of CoreComm Holdco of assets having a fair market market value of $5,000,000 or more if an interested
value of $10,000,000 or more if an interested stockholder, stockholder, or an affiliate or an associate of an
or an affiliate, an associate or a Schedule 13D Party of an interested stockholder is a party to the transaction;
interested stockholder is a party to the transaction;
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- the adoption of any plan or proposal for CoreComm - the adoption of any plan or proposal for CoreComm
Holdco's liquidation or dissolution proposed by or on behalf Limited's liquidation or dissolution proposed by or on
of an interested stockholder, or an affiliate, an associate behalf of an interested stockholder, or an affiliate or an
or an Schedule 13D Party of an interested stockholder; or associate of an interested stockholder; or
- any reclassification of securities, recapitalization, - any reclassification of securities, recapitalization,
merger with a subsidiary, or other transaction which has the merger with a subsidiary, or other transaction which has the
effect, directly or indirectly, of increasing the effect, directly or indirectly, of increasing the
proportionate share of any class of CoreComm Holdco's proportionate share of any class of CoreComm Limited's
outstanding stock, or securities convertible into stock, or outstanding stock, or securities convertible into stock, or
a subsidiary owned by an interested stockholder, or an a subsidiary owned by an interested stockholder, or an
affiliate, an associate or a Schedule 13D Party of an affiliate or an associate of an interested stockholder.
interested stockholder.
The term "Schedule 13D Related Party" means an individual or
entity whose beneficial ownership of securities would be
required to be aggregated on any Schedule 13D or Schedule
13G required to be filed by an interested stockholder.
STATE ANTI-TAKEOVER LAW
CoreComm Holdco CoreComm Limited
CoreComm Holdco is subject to Section 203 of the Delaware CoreComm Limited is subject to Section 203 of the Delaware
General Corporation Law which prohibits a publicly held General Corporation Law which prohibits a publicly held
Delaware corporation from engaging in any business Delaware corporation from engaging in any business
combination with an interested stockholder for a period of combination with an interested stockholder for a period of
three years following the time that a stockholder becomes an three years following the tie that a stockholder becomes an
interested stockholder unless specified conditions are met. interested stockholder unless specified conditions are met.
Please refer to the section of the prospectus entitled Please refer to the section of the prospectus entitled
"Description of Capital Stock - Section 203 of the Delaware "Description of Capital Stock - Section 203 of the Delaware
General Corporation Law." General Corporation Law."
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DESCRIPTION OF PUBLIC NOTES
By exchanging your public notes for shares of Holdco common stock, you will
be investing in a different type of security, in a different entity. The
following sets forth a brief description of the terms of the public notes. This
is not a complete description of the terms, for which you are encouraged to read
the indenture governing the public notes. Please refer to the section of the
prospectus entitled "Where You Can Find More Information."
PRINCIPAL, MATURITY AND INTEREST
CoreComm Limited issued public notes with a maximum aggregate principal
amount of $175.0 million. As a result of the Holdco Recapitalization and prior
conversions of public notes into shares of Limited common stock, $4.75 million
principal amount remains outstanding. The public notes will mature on October 1,
2006. Interest on the public notes accrues at a rate of 6% per annum from the
date of original issuance and is payable semiannually on April 1 and October 1,
commencing on April 1, 2000. CoreComm Limited is required to make each interest
payment to the holders of record of the public notes on the immediately
preceding March 15 and September 15. Interest is computed on the basis of a
360-day year comprised of twelve 30-day months. As a result of the Holdco
Recapitalization and other factors, CoreComm Limited may not be able to pay the
principal amount of any outstanding public notes when it becomes due and
payable. Please refer to the section of the prospectus entitled "Risk Factors -
Risk factors relating to failure to tender outstanding securities in the
exchange offers - CoreComm Limited currently holds only an approximately 13%
interest in CoreComm Holdco, and following successful completion of the exchange
offers, would hold virtually no material assets."
CONVERSION
The holder of any public note has the right, exercisable at any time after
90 days following the date of original issuance of the note and prior to its
maturity, to convert the principal amount thereof (or any portion thereof that
is an integral multiple of $1,000) into shares of common stock of CoreComm
Limited at $27.39, originally $41.09, subject to adjustment, except that if a
public note is called for redemption, the conversion right will terminate at the
close of business on the business day immediately preceding the date fixed for
redemption.
SUBORDINATION OF PUBLIC NOTES
The public notes are subordinate in right of CoreComm Limited's senior
debt. The indenture does not restrict the amount of senior debt or other
indebtedness of CoreComm Limited or any subsidiary of CoreComm Limited. The
payment of the principal of, interest on or any other amounts due on the public
notes is subordinated in right of payment to the prior payment in full of all
senior debt of CoreComm Limited.
No payment on account of principal of, redemption of, interest on or any
other amounts due on the public notes, and no redemption, purchase or other
acquisition of the public notes may be made unless
(a) full payment of amounts then due on all senior debt have been made or duly
provided for pursuant to the terms of the instrument governing senior debt;
and
(b) at the time for, or immediately after giving effect to, any payment,
redemption, purchase or other acquisition, there does not exist under any
senior debt or any agreement pursuant to which any senior debt has been
issued, any default which has not been cured or waived and which has
resulted in the full amount of senior debt being declared due and payable.
In addition, the indenture provides that if any of the holders of any issue
of senior debt notify CoreComm Limited and the trustee that a default has
occurred giving the holders of senior debt the right to accelerate its
maturity, referred to as a "Payment Blockage Notice," no payment on account
of principal, redemption, interest, special interest, if any, or any other
amounts due on the public notes and no purchase, redemption or other
acquisition of the public notes will be made for the period, referred to as
the "Payment Blockage Period," commencing on the date notice is received
and ending on the earlier of (A) the date on which the event of default is
cured or waived, or (B) 180 days from the date notice is received.
Notwithstanding the foregoing, only one Payment Blockage Notice with
respect to the same event of default or any other events of default
existing and unknown to the person giving notice at the time of notice on
the same issue of senior debt may be given during any period of 360
consecutive days unless that event of default or those other events of
default have been cured or waived for a period of not less than 90
consecutive days. No new Payment Blockage Period may be commenced by the
holders of senior debt during any period of 360 consecutive days unless all
events of default which triggered the preceding Payment Blockage Period
have been cured or waived. Presently, CoreComm Limited is a party
130
under our senior secured credit facility, under which $156.1 million is
outstanding, all of which is considered senior debt.
Upon any distribution of its assets in connection with any dissolution,
winding-up, liquidation or reorganization of CoreComm Limited or acceleration of
the principal amount due on the public notes because of any event of default,
all senior debt must be paid in full before the holders of the public notes are
entitled to any payments whatsoever.
In the event the exchange offers are completed successfully, CoreComm
Limited will own little or no material assets. Accordingly, in the event of
CoreComm Limited's subsequent insolvency, holders of the public notes may not
recover their investment.
In the event that the trustee or any holder of public notes receives any
payment or distribution of assets of CoreComm Limited of any kind in
contravention of any of the terms of the indenture, whether in cash, property or
securities, including, by way of set-off or otherwise, in respect of the public
notes before all senior debt is paid in full, then payment or distribution will
be held by the recipient in trust for the benefit of holders of senior debt, and
will be immediately paid over or delivered to the holders of senior debt or
their representative or representatives to the extent necessary to make payment
in full of all senior debt remaining unpaid, after giving effect to any
concurrent payment or distribution, or provision therefor, to or for the holder
of senior debt.
The public notes are obligations exclusively of CoreComm Limited. Since
CoreComm Limited's only material asset is its ownership of approximately 13% of
the outstanding capital stock of CoreComm Holdco, and as a result of covenants
in our senior secured credit facility, CoreComm Limited is not able to receive
cash from us or our subsidiaries, CoreComm Limited has a reduced ability to
service the public notes.
Any right of CoreComm Limited to receive assets of any of its subsidiaries
upon their liquidation or reorganization, and the consequent right of the
holders of the public notes to participate in those assets, will be effectively
subordinated to the claims of that subsidiary's creditors, including trade
creditors, except to the extent that CoreComm Limited is itself recognized as a
creditor of that subsidiary, in which case the claims of CoreComm Limited would
still be subordinate to any security interests in the assets of that subsidiary
and any indebtedness of that subsidiary senior to that held by CoreComm Limited.
OPTIONAL REDEMPTION
Except as set forth under "- Optional Tax Redemption," the public notes are
not redeemable at CoreComm Limited's option prior to October 1, 2002.
Thereafter, the public notes will be subject to redemption at the option of
CoreComm Limited, in whole or in part, upon not less than 30 nor more than 60
days' notice, at the redemption prices set forth below, expressed as percentages
of principal amount plus accrued and unpaid interest, in each case, to the
applicable redemption date, if redeemed during the twelve-month period beginning
on October 1 of the years indicated below:
YEAR PERCENTAGE
---- ----------
2002................................................. 103.429%
2003................................................. 102.571%
2004................................................. 101.714%
2005................................................. 100.857%
2006................................................. 100.000%
In each case of a redemption of any public notes referred to under "--
Optional Tax Redemption," redemption of public notes shall be made at the
principal amount thereof together with accrued and unpaid interest and special
interest, if any, to the applicable redemption date.
MANDATORY REDEMPTION AND REPURCHASE
CoreComm Limited is not required to make mandatory redemption or sinking
fund payments with respect to the public notes.
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CHANGE OF CONTROL
As a result of the amendments to the indenture agreed to by holders of
97.1% of the formerly outstanding public notes, in an earlier phase of the
Holdco Recapitalization, the indenture does not contain any other provision that
permits the holders of the public notes to require that CoreComm Limited
repurchase or redeem the public notes in the event of a takeover,
recapitalization or similar restructuring.
SELECTION AND NOTICE
If less than all of the public notes are to be redeemed at any time,
selection of public notes for redemption will be made by the trustee in
compliance with the requirements of any securities exchange on which the public
notes are listed. In the absence of any requirements of any securities exchange
or if the public notes are not listed, selection of the public note to be
redeemed will be made on a pro rata basis, provided that no public notes of
$1,000 or less will be redeemed in part. Notice of redemption will be mailed by
first class mail at least 30 but not more than 60 days before the redemption
date to each holder of public notes to be redeemed at its registered address. If
any public note is to be redeemed in part only, the notice of redemption that
relates to that public note will state the portion of the principal amount to be
redeemed. A new public note in principal amount equal to the unredeemed portion
will be issued in the name of the holder upon cancellation of the original
public note. On and after the redemption date, interest ceases to accrue on
public notes or portions of them called for redemption.
COVENANTS
As a result of the amendments to the indenture agreed to by holders of
97.1% of the formerly outstanding public notes, in an earlier phase of the
Holdco Recapitalization, the indenture does not contain any substantial negative
covenants regarding either change of control or sales of assets of CoreComm
Limited.
LIMITATION ON STATUS AS INVESTMENT COMPANY
The indenture provides that CoreComm Limited will not, and will not permit
any subsidiary to, conduct its business in a fashion that would cause CoreComm
Limited to be required to register as an "investment company" pursuant to the
Investment Company Act of 1940, as amended.
EVENTS OF DEFAULT AND REMEDIES
The indenture provides that each of the following constitutes an event of
default in addition to other events listed in the indenture:
(1) default for 30 days in the payment when due of interest on the public
notes;
(2) a default in the payment of principal of any public when due at its stated
maturity;
(3) default under any mortgage, indenture or instrument under which there may
be issued or by which there may be secured or evidenced any indebtedness
for money borrowed by CoreComm Limited or its subsidiaries, or the payment
of which is guaranteed by CoreComm Limited or any of its subsidiaries which
default:
- is caused by a failure to pay when due principal or interest on that
indebtedness within the grace period provided in that indebtedness,
which payment default continues beyond any applicable grace period;
or
- results in the acceleration of that indebtedness prior to its express
maturity and, in each case, the principal amount of any indebtedness,
together with the principal amount of any other indebtedness under
which there has been a payment default or the maturity of which has
been so accelerated, aggregates $20.0 million or more;
(4) failure by CoreComm Limited or subsidiaries of CoreComm Limited to pay
final judgments for the payment of money, other than any judgment as to
which a reputable insurance company has accepted liability subject to
customary terms, aggregating in excess of $10.0 million, which judgments
are not paid, wired, discharged or stayed within 60 days after their entry;
and
(5) events of bankruptcy or insolvency with respect to CoreComm Limited or its
subsidiaries.
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If any event of default occurs and is continuing, the trustee or the
holders of at least 25% in principal amount of the then outstanding public notes
may declare all the public notes to be due and payable immediately, subject to
the provisions limiting payment described in "--Subordination of Public Notes."
Notwithstanding the foregoing, in the case of an event of default arising from
events of bankruptcy or insolvency, with respect to CoreComm Limited or its
subsidiaries, all outstanding public notes will become due and payable without
further action or notice. Holders of the public notes may not enforce the
indenture or the public notes except as provided in the indenture. Subject to
limitations, holders of a majority in principal amount of the then outstanding
public notes may direct the trustee in its exercise of any trust or power. The
trustee may withhold from holders of the public notes notice of any continuing
default or event of default, except a default or event of default relating to
the payment of principal or interest, if it determines that withholding notice
is in their interest.
In the event of a declaration of acceleration of the public notes because
an event of default has occurred and is continuing as a result of the
acceleration of any indebtedness described in clause (3) above, the declaration
of acceleration of the public notes will be automatically annulled if:
(1) the holders of any indebtedness described in clause (3) have rescinded
the declaration of acceleration in respect of that indebtedness within
30 days after the date of declaration;
(2) the annulment of the acceleration of the public notes would not
conflict with any judgment or decree of a court of competent
jurisdiction; and
(3) all existing events of default, except for nonpayment of principal of
or interest on the public notes that became due solely because of the
acceleration of the public notes, have been cured or waived.
The holders of a majority in aggregate principal amount of the then
outstanding public notes by notice to the trustee may on behalf of all of the
holders waive any existing default or event of default and its consequences
under the indenture except a continuing default or event of default in the
payment of interest on or the principal of the public notes.
CoreComm Limited is required to deliver to the trustee annually a statement
regarding compliance with the indenture, and CoreComm Limited is required, upon
becoming aware of any default or event of default, to deliver to the trustee a
statement specifying the default or event of default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of CoreComm
Limited has liability for any obligations of CoreComm Limited under the public
notes or the indenture or for any claim based on, in respect of, or by reason
of, these obligations or their creation. Each holder of the public notes by
accepting a public note waives and releases all of this liability. The waiver
and release are part of the consideration for issuance of the public notes. This
waiver may not be effective to waive liabilities under the federal securities
laws, and it is the view of the SEC that a waiver of liabilities is against
public policy.
GOVERNING LAW AND JUDGMENTS
The public notes and the indenture are governed exclusively by the laws of
the State of New York without giving effect to applicable principles of
conflicts of laws.
CoreComm Limited will submit to the jurisdiction of the United States
federal and New York state courts located in the Borough of Manhattan, City and
State of New York for purposes of all legal actions and proceedings instituted
in connection with the public notes and the indenture. CoreComm Limited has
appointed National Registered Agents, Inc. as its authorized agent upon which
process may be served in any action.
CONCERNING THE TRUSTEE
The indenture contains limitations on the rights of the trustee, should it
become a creditor of CoreComm Limited, to obtain payment of claims in specified
cases, or to realize on property received in respect of any claim as security or
otherwise. The trustee will be permitted to engage in other transactions;
however, if it acquires any conflicting interest it must eliminate that conflict
within 90 days, apply to the SEC for permission to continue or resign.
133
The holders of the majority in aggregate principal amount of the then
outstanding public notes will have the right to direct the time, method and
place of conducting any proceeding for exercising any remedy available to the
trustee under the indenture, subject to exceptions. The indenture provides that
in case an event of default occurs, which is not be cured or waived, the trustee
will be required, in the exercise of its power, to use the degree of care of a
prudent man in the conduct of his own affairs. Subject to these provisions, the
trustee will be under no obligation to exercise any of its rights or powers
under the indenture at the request of any holder of public notes, unless that
holder shall have offered to the trustee security and indemnity satisfactory to
it against any loss, liability or expense.
134
MATTERS RELATING TO OUTSTANDING SECURITIES
The following details the ownership of outstanding securities of CoreComm
Limited by executive officers, directors and control persons of CoreComm Holdco
and the affiliates thereof:
Shares
Of Limited Common
Aggregate Principal
Stock Beneficially Amount of Public
NAME OWNED(1) PERCENTAGE NOTES HELD PERCENTAGE
---- ----- ---------- ---------- ----------
Barclay Knapp 3,158,090 2.22% 0 0%
Thomas J. Gravina(2) 6,141,000 4.37% 0 0%
Michael A. Peterson 331,254 0.24% 0 0%
Gregg N. Gorelick 395,052 0.28% 0 0%
George S. Blumenthal(3) 2,450,082 1.73% 0 0%
Ralph H. Booth, II(4) 424,000 0.30% 0 0%
Alan J. Patricof 170,435 0.12% 0 0%
Warren Potash 255,290 0.18% 0 0%
CoreComm Holdco, Inc.(5) 60,841,077 30.24% $160,000,000 97.12%
Michael Karp 0 0% 0 0%
---------------
(1) Includes shares of Common Stock purchased upon the exercise of options which
are exercisable or become so in the next 60 days ("Presently Exercisable
Options"), Warrants and shares of Common Stock purchased upon the conversion
of the Company's 6% Convertible Subordinated Notes due 2006 (the "6%
Notes"), 10.75% Senior Unsecured Convertible PIK Notes, 10.75% Unsecured
Convertible PIK Notes, Series A and A-1 Preferred Stock and Series B
Preferred Stock.
(2) Based solely upon Schedule 13-D (Amendment No. 3), filed with the SEC on
January 8, 2002, by Thomas J. Gravina. Includes 96,000 shares of Common
Stock held by Mr. Gravina's minor children, as to which shares Mr. Gravina
disclaims beneficial ownership.
(3) Includes 4,455 shares of Common Stock owned by trusts for the benefit of Mr.
Blumenthal's children. An additional 6,750 shares of Common Stock are owned
by Mr. Blumenthal's wife, as to which shares Mr. Blumenthal disclaims
beneficial ownership. In addition, 336,201 options are held by Grantor
Retained Annuity Trusts.
(4) Based upon Schedule 13-D, filed with the SEC on April 23, 2001, by Ralph H.
Booth II and Booth American Company. Also based upon Form 4's filed by Ralph
H. Booth II since April 23, 2001.
(5) Includes $17,036,300 in 10.75% Senior Unsecured Convertible PIK Notes,
convertible into 5,892,569 shares of Common Stock; $10,546,458 in 10.75%
Unsecured Convertible PIK Notes, convertible into 10,546,458 shares of
Common Stock; $160,000,000 in 6% Convertible Subordinated Notes due 2006,
convertible into 5,841,548; 51,086 shares of Series A and A-1 Preferred
Stock, convertible into 30,774,765 shares of Common Stock; and 250,000
shares of Series B Preferred Stock, convertible into 7,785,737 shares of
Common Stock.
135
The following is a summary of all transactions in outstanding securities of
CoreComm Limited consummated during the past 60 days by CoreComm Holdco, any of
CoreComm Holdco's directors or executive officers, any person that controls
CoreComm Holdco, any associate or majority owned subsidiaries of CoreComm
Limited or CoreComm Holdco, and between CoreComm Limited and any executive
officer or director of any subsidiary of CoreComm Limited or CoreComm Holdco:
LIMITED COMMON STOCK
Name of Person Number of Price Where & How
Involved Date Shares Per Share Transaction Effected
-------- ---- ------ --------- --------------------
THOMAS J. GRAVINA
CoreComm Limited 12/26/2001 500,000 $0.1600 Sale/Brokerage Transaction
12/26/2001 516,415 $0.1600 Sale/Brokerage Transaction
12/26/2001 900,000 $0.1600 Sale/Brokerage Transaction
MICHAEL A. PETERSON
CoreComm Limited 01/25/2002 76,332 $0.1100 Sale/Brokerage Transaction
PUBLIC NOTES
Aggregate Price Per $1,000
Name of Person Principal in Aggregate Where & How TRANSACTION
Involved Date Amount Principal Amount Effected
-------- ---- ------ ---------------- --------
GEORGE S. BLUMENTHAL 12/17/2001 $7,250,000 $39.10(1) Tendered into the Holdco
Recapitalization
BARCLAY KNAPP 12/17/2001 $ 300,000 $39.10(1) Tendered into the Holdco
Recapitalization
WARREN POTASH 12/17/2001 $ 250,000 $39.10(1) Tendered into the Holdco
Recapitalization
(1) $39.10 represents $30.00 in cash and 3.0349 shares of our common stock
based upon an estimated fair market value of $3.00 per share.
136
MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of U.S. federal income tax consequences to
persons who exchange outstanding securities for Holdco common stock pursuant to
the exchange offers. The discussion is based upon the Internal Revenue Code of
1986, as amended, Treasury Regulations, judicial authorities, published
positions of the Internal Revenue Service and other applicable authorities, all
as in effect on the date hereof and all of which are subject to change or
differing interpretations (possibly with retroactive effect). The discussion
does not address all of the tax consequences that may be relevant to a
particular person subject to special treatment under federal income tax laws.
This discussion is limited to persons who hold outstanding securities and any
Holdco common stock as capital assets. No ruling has been or will be sought from
the IRS regarding any matter discussed herein. Counsel to CoreComm Holdco will
not be rendering any legal opinion regarding any tax consequences relating to
CoreComm Holdco, the exchange offers or an investment in CoreComm Holdco. No
assurance can be given that the IRS would not assert, or that a court would not
sustain, a position contrary to any of the tax aspects set forth below.
PROSPECTIVE INVESTORS MUST CONSULT THEIR OWN TAX ADVISORS AS TO THE FEDERAL
INCOME TAX CONSEQUENCES OF ACQUIRING, HOLDING AND DISPOSING OF HOLDCO COMMON
STOCK, AS WELL AS THE EFFECTS OF STATE, LOCAL AND NON-U.S. TAX LAWS.
For purposes of this discussion, "U.S. holder" means a beneficial owner of
outstanding securities who is:
- a citizen or resident of the United States,
- a corporation, partnership, or other entity created or organized in the
United States or under the laws of the United States or of any political
subdivision of the United States,
- an estate, the income of which is includible in gross income for United
States federal income tax purposes regardless of its source, or
- a trust, the administration of which is subject to the primary supervision
of the U.S. courts and that has one or more U.S. persons who have the
authority to control all substantial decisions of the trust, or that was in
existence on August 20, 1996 and properly elected to continue to be treated
as a U.S. person.
For purposes of this discussion, "non-U.S. holder" means a beneficial owner of
outstanding securities who is not a U.S. holder.
U.S. HOLDERS. We expect that U.S. holders who exchange Limited common stock
for Holdco common stock pursuant to the exchange offer will not be subject to
United States federal income tax and that such exchanging U.S. holders will have
the same tax basis and holding period in the Holdco common stock as they had
immediately prior to the exchange in the Limited common stock exchanged
therefor.
In general, we expect U.S. holders of public notes who exchange their
public notes for Holdco common stock pursuant to the exchange offer will
recognize capital gain, but not loss, to the extent of the cash received in the
exchange. A U.S. holder's gain is generally based upon the difference between
such holder's adjusted tax basis in public notes and the fair market value of
the Holdco common stock, as of the date of the exchange, and cash received
therefor. Although the issue is not free from doubt, we expect a U.S. holder who
would otherwise recognize gain as a result of the receipt of cash in the
exchange will be required to report such recognized gain as ordinary interest
income to the extent of the accrued market discount. A U.S. holder will
generally have the same holding period and tax basis (increased by the amount of
any income or gain recognized in the exchange and decreased by the amount of
cash received) in the Holdco common stock received as such holder had
immediately prior to the exchange in the public notes exchanged therefor.
If, contrary to our expectation, the exchange of outstanding securities for
Holdco common stock were held to be a taxable exchange for U.S. federal income
tax purposes, exchanging U.S. holders and CoreComm Holdco potentially could
incur material tax liabilities. If the exchange were held to be taxable,
exchanging security holders would generally be required to recognize capital
gain or loss on the exchange of outstanding securities based upon the difference
between the holder's adjusted tax basis therein and the fair market value of the
Holdco common stock, as of the date of the exchange, and any cash received
therefor. If the outstanding securities exchanged were held for more than one
year, any resulting capital gain or loss should be long-term capital gain or
loss. In a taxable exchange, a new holding period would commence on the date of
the exchange and the tax basis of Holdco common stock received would be its fair
market value as of that date.
137
NON-U.S. HOLDERS. The following is a summary of U.S. federal income tax
consequences to non-U.S. holders of outstanding securities who exchange their
outstanding securities for Holdco common stock pursuant to the exchange offers.
A non-U.S. holder who exchanges outstanding securities for Holdco common
stock pursuant to the exchange offers will generally not be subject to U.S.
federal income tax in respect of any gain recognized on exchange of outstanding
securities, unless:
- the gain is effectively connected with the conduct of a trade or
business of the non-U.S. holder within the United States or, if a tax
treaty applies, is attributable to a U.S. permanent establishment of the
non-U.S. holder;
- in the case of a non-U.S. holder who is an individual and holds
outstanding securities as capital assets, the holder is present in the
United States for 183 or more days in the taxable year of the exchange
and other tests are met; or
- the non-U.S. holder is subject to tax under the provisions of U.S.
federal income tax law applicable to some U.S. expatriates.
Gain derived by a non-U.S. holder from a taxable exchange of outstanding
securities that are effectively connected with the conduct of a trade or
business within the United States by the non-U.S. holder is generally taxed at
the graduated rates that are applicable to U.S. holders. In the case of a
non-U.S. holder that is a corporation, this effectively connected income may
also be subject to the U.S. branch profits tax. Any individual non-U.S. holder
described under the second-to-last bullet point of the preceding paragraph will
be subject to a flat 30% tax on the gain derived in a taxable exchange, which
may be offset by U.S. source capital losses recognized within the same taxable
year as the exchange. NON-U.S. HOLDERS ARE URGED TO CONSULT THEIR U.S. TAX
ADVISORS REGARDING THE TAX CONSEQUENCES OF INVESTING IN OUR STOCK.
138
LEGAL MATTERS
The legality of the common stock offered in these exchange offers will be
passed upon for us by Skadden, Arps, Slate, Meagher & Flom LLP New York, New
York.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements and schedules at December 31, 2000 and 1999 and for the
years ended December 31, 2000 and 1999 and for the period from April 1, 1998 to
December 31, 1998, as set forth in their reports. Our financial statements are
included in this prospectus in reliance on Ernst & Young LLP's report, given on
their authority as experts in accounting and auditing.
Ernst & Young LLP, independent auditors, have audited the consolidated
financial statements and schedule of our predecessor, OCOM Corporation Telecoms
Division, for the period from January 1, 1998 to May 31, 1998, as set forth in
their reports. We have included these financial statements in this prospectus in
reliance on Ernst & Young LLP's report, given on their authority as experts in
accounting and auditing.
Ernst & Young LLP, independent auditors, have audited CoreComm Limited's
consolidated financial statements and schedules at December 31, 2000 and 1999
and for the years ended December 31, 2000 and 1999 and for the period from April
1, 1998 to December 31, 1998, as set forth in their reports. CoreComm Limited's
financial statements are included in this prospectus in reliance on Ernst &
Young LLP's report, given on their authority as experts in accounting and
auditing.
BDO Seidman, LLP, independent auditors, have audited the combined financial
statements of ATX Telecommunications Services Group as of December 31, 1999 and
for each of the two years in the period ended December 31, 1999 as set forth in
their report. ATX's financial statements have been included in this prospectus
in reliance on BDO Seidman, LLP's report, given on their authority as experts in
accounting and auditing.
PricewaterhouseCoopers LLP, independent auditors, have audited the
consolidated financial statements of Voyager.net, Inc. as of December 31, 1999
and 1998, and for the years ended December 31, 1999, 1998 and 1997, as set forth
in their report. Voyager's financial statements have been included in this
prospectus in reliance on PricewaterhouseCoopers LLP's report, given on their
authority as experts in accounting and auditing.
139
WHERE YOU CAN FIND MORE INFORMATION
CoreComm Limited files annual, quarterly and special reports, prospectuses
and other information with the SEC. This prospectus constitutes a part of a
registration statement on Form S-4 (together with all amendments, supplements,
schedules and exhibits to the registration statement, referred to as the
registration statement) which we have filed with the SEC, under the Securities
Act, with respect to the common stock offered in these exchange offers. This
prospectus does not contain all of the information included in the registration
statement. Certain parts of the registration statement are omitted as allowed by
the rules and regulations of the SEC. We refer you to the registration statement
for further information about our company and the securities offered in this
prospectus.
References in this prospectus to any of our contracts or other documents
are not necessarily complete, and you should refer to the exhibits attached to
the registration statement for copies of the actual contract or document. In
addition, we also filed with the SEC a statement on Schedule TO under the
Exchange Act to furnish certain information about the exchange offers, and we
may also file amendments to the Schedule TO. You may read and copy the
registration statement and the Schedule TO (and any amendments to those
documents), related exhibits and the other materials we file, or that CoreComm
Limited has filed, with the SEC at the public reference facilities the SEC
maintains at:
Judiciary Plaza
Room 1024
450 Fifth Street, N.W.
Washington, D.C. 20549
233 Broadway
New York, NY 10279
Citicorp Center
500 West Madison Street
Suite 1400
Chicago, IL 60661
Upon the effectiveness of the registration statement, we will become
subject to the information requirements of the Exchange Act. We will then file
reports, proxy statements and other information under the Exchange Act with the
SEC. Copies of these materials can also be obtained by mail at prescribed rates
from the Public Reference Section of the SEC, 450 Fifth Street, N.W.,
Washington, D.C. 20549 or by calling the SEC at 1-800-SEC-0330. The SEC
maintains a website that contains reports, proxy statements and other
information regarding us. The address of the SEC Web site is http://www.sec.gov.
Currently no public market exists for the shares of Holdco common stock.
CoreComm Limited's outstanding common stock is currently listed on the Nasdaq
National Market under the symbol "COMM." Pursuant to conversations with the
Nasdaq National Market, we intend to transfer the listing of Limited common
stock on the Nasdaq National Market to Holdco common stock upon successful
completion of the exchange offers. All reports, proxy statements and other
information concerning CoreComm Limited may be inspected at:
The National Association of
Securities Dealers
1735 K Street, N.W.
Washington, D.C. 20006
Upon the effectiveness of the registration statement, we will become
subject to the information requirements of the Exchange Act. We will then file
reports, proxy statements and other information of our company at the locations
set forth above or download those reports from the SEC's website.
140
INDEX TO FINANCIAL STATEMENTS
CORECOMM HOLDCO, INC.
Reports of Independent Auditors ...............................................................................F-3
Consolidated Balance Sheets - September 30, 2001 (unaudited), December 31, 2000 and 1999 ......................F-5
Consolidated Statements of Operations - Nine months ended September 30, 2001
and 2000 (unaudited).......................................................................................F-6
Consolidated Statements of Operations - Years Ended December 31, 2000 and 1999,
for the Period from April 1, 1998 (date operations commenced)
to December 31, 1998 and for the Period from January 1, 1998 to
May 31, 1998 .............................................................................................F-7
Consolidated Statement of Shareholder's Equity - Nine months ended September 30, 2001
(unaudited),Years Ended December 31, 2000 and 1999 and for the Period from
April 1, 1998 (date operations commenced) to December 31, 1998 ...........................................F-8
Statement of Parent's Investment - For the Period from January 1, 1998 to May 31, 1998........................F-9
Condensed Consolidated Statements of Cash Flows - Nine months ended September 30, 2001
and 2000 (unaudited)........................................................................................F-10
Consolidated Statements of Cash Flows - Years Ended December 31, 2000
and 1999, for the Period from April 1, 1998 (date operations commenced) to
December 31, 1998 and for the Period from
January 1, 1998 to May 31, 1998 .........................................................................F-11
Notes to Consolidated Financial Statements ...................................................................F-13
VOYAGER.NET, INC.
Condensed Consolidated Balance Sheet - June 30, 2000 (unaudited)..............................................F-36
Condensed Consolidated Statements of Operations - Six Months ended June 30, 1999 and 2000 (unaudited).........F-37
Condensed Consolidated Statement of Stockholders' Equity - Six Months ended June 30, 2000 (unaudited).........F-38
Condensed Consolidated Statements of Cash Flows - Six Months ended June 30, 1999 and 2000 (unaudited).........F-39
Notes to Condensed Consolidated Financial Statements (unaudited)..............................................F-40
Report of Independent Accountants.............................................................................F-42
Consolidated Balance Sheets - December 31, 1998 and 1999......................................................F-43
Consolidated Statements of Operations - Years ended December 31, 1997, 1998 and 1999..........................F-44
Consolidated Statements of Stockholders' Equity (Deficit) - Years ended December 31, 1997, 1998 and 1999......F-45
Consolidated Statements of Cash Flows - Years ended December 31, 1997, 1998 and 1999..........................F-47
Notes to Consolidated Financial Statements....................................................................F-48
ATX TELECOMMUNICATIONS SERVICES, INC.
Financial Statements
Balance Sheet - June 30, 2000 (unaudited).................................................................F-57
Statements of Operations - Six Months ended June 30, 2000 and 1999 (unaudited)............................F-58
Changes in Equity/Partners' Capital - Six Months ended June 30, 2000 and 1999 (unaudited).................F-59
Cash Flows - Six Months ended June 30, 2000 and 1999 (unaudited)..........................................F-60
Notes to Unaudited Financial Statements.......................................................................F-61
Auditors' Report of Independent Certified Public Accountants..................................................F-63
Combined Financial Statements
Balance Sheets - December 31, 1999........................................................................F-64
Statements of Operations - Years ended December 31, 1999 and 1998 ........................................F-65
Changes in Partners' Capital - Years ended December 31, 1999 and 1998 ....................................F-66
Statements of Cash Flows - Years ended December 31, 1999 and 1998 ........................................F-67
Notes to Combined Financial Statements........................................................................F-68
F-1
CORECOMM LIMITED
Condensed Consolidated Balance Sheets -September 30, 2001.....................................................F-73
Condensed Consolidated Statements of Operations -Three and nine months ended September 30,
2001 and 2000............................................................................................F-74
Condensed Consolidated Statement of Shareholders' (Deficiency) - Nine months ended
September 30, 2001.......................................................................................F-75
Condensed Consolidated Statements of Cash Flows - Nine months ended September 30, 2001 and
2000.....................................................................................................F-76
Notes to Condensed Consolidated Financial Statements..........................................................F-77
Reports of Independent Auditors...............................................................................F-87
Consolidated Balance Sheets - December 31, 2000 and 1999......................................................F-89
Consolidated Statements of Operations - Years Ended December 31, 2000 and 1999, for the
Period from April 1, 1998 (date operations commenced) to December 31, 1998 and for
the Period from January 1, 1998 to May 31, 1998..........................................................F-90
Consolidated Statement of Shareholders' Equity - Years Ended December 31, 2000 and 1999
and for the Period from April 1, 1998 (date operations commenced) to December 31, 1998...................F-91
Statement of Parent's Investment - For the Period from January 1, 1998 to May 31, 1998.......................F-92
Consolidated Statements of Cash Flows - Years Ended December 31, 2000 and 1999, for the
Period from April 1, 1998 (date operations commenced) to December 31, 1998 and for
the Period from January 1, 1998 to May 31, 1998..........................................................F-93
Notes to Consolidated Financial Statements....................................................................F-95
F-2
REPORT OF INDEPENDENT AUDITORS
Shareholder and Board of Directors
CoreComm Holdco, Inc.
We have audited the consolidated balance sheets of CoreComm Holdco, Inc.
and Subsidiaries as of December 31, 2000 and 1999, and the related consolidated
statements of operations, shareholder's equity and cash flows for the years
ended December 31, 2000 and 1999 and for the period from April 1, 1998 (date
operations commenced) to December 31, 1998. 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 in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audits to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
CoreComm Holdco, Inc. and Subsidiaries at December 31, 2000 and 1999, and the
consolidated results of their operations and their cash flows for the years
ended December 31, 2000 and 1999 and for the period from April 1, 1998 (date
operations commenced) to December 31, 1998 in conformity with accounting
principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP
New York, New York
March 12, 2001
F-3
REPORT OF INDEPENDENT AUDITORS
Shareholder
OCOM Corporation Telecoms Division
We have audited the statements of operations, parent's investment and cash
flows of OCOM Corporation Telecoms Division ("OCOM") for the period from January
1, 1998 to May 31, 1998. 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 audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects the results of operations and the cash flows of OCOM
Corporation Telecoms Division for the period from January 1, 1998 to May 31,
1998 in conformity with accounting principles generally accepted in the United
States.
/s/ ERNST & YOUNG LLP
New York, New York
February 26, 1999
F-4
CORECOMM HOLDCO, INC. AND SUBSIDIARIES
AND ITS PREDECESSOR OCOM CORPORATION TELECOMS DIVISION
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
2001 2000 1999
----------------------------------------------------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 46,713,000 $ 22,773,000 $ 11,248,000
Marketable securities - 2,686,000 -
Accounts receivable-trade, less allowance for doubtful accounts of
36,337,000 34,148,000 7,658,000
Due from affiliates 480,000 638,000 439,000
Due from NTL Incorporated - 17,345,000 195,000
Other 3,693,000 9,038,000 5,186,000
----------------------------------------------------------
Total current assets 87,223,000 86,628,000 24,726,000
Fixed assets, net 120,464,000 179,379,000 90,347,000
Goodwill, net of accumulated amortization of $98,333,000 (2001),
$42,028,000 (2000) and $7,262,000 (1999) 355,448,000 600,859,000 57,888,000
Intangible assets, net 5,790,000 6,092,000 38,388,000
Other, net of accumulated amortization of $837,000 (2001), $211,000
(2000) and $22,000 (1999) 14,105,000 23,648,000 5,528,000
----------------------------------------------------------
$ 583,030,000 $ 896,606,000 $ 216,877,000
==========================================================
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable $ 43,687,000 $ 72,876,000 $ 13,736,000
Equipment payable - - 4,702,000
Accrued expenses 71,029,000 64,558,000 29,040,000
Due to NTL Incorporated 78,000 - -
Current portion of long-term debt, notes payable
and capital lease obligations 40,772,000 20,182,000 19,127,000
Deferred revenue 29,896,000 29,696,000 1,400,000
----------------------------------------------------------
Total current liabilities 185,462,000 187,312,000 68,005,000
Long-term debt 146,800,000 91,127,000 4,318,000
Notes payable to related parties 32,869,000 16,170,000 -
Capital lease obligations 324,000 2,693,000 14,564,000
Commitments and contingent liabilities
Shareholder's equity:
Series preferred stock - $.01 par value, authorized 10,000,000
shares; issued and outstanding none - - -
Common stock - $.01 par value; authorized 250,000,000 shares;
issued and outstanding 9,514,000 shares 95,000 95,000 95,000
Additional paid-in capital 1,021,469,000 1,039,083,000 246,890,000
Deferred non-cash compensation (11,936,000) (21,638,000) -
(Deficit) (792,053,000) (418,236,000) (116,995,000)
----------------------------------------------------------
217,575,000 599,304,000 129,990,000
----------------------------------------------------------
$ 583,030,000 $ 896,606,000 $ 216,877,000
==========================================================
See accompanying notes.
F-5
CORECOMM HOLDCO, INC. AND SUBSIDIARIES
AND ITS PREDECESSOR OCOM CORPORATION TELECOMS DIVISION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
2001 2000
---------------------------------------
REVENUES $ 220,055,000 $ 56,155,000
COSTS AND EXPENSES
Operating 175,942,000 77,321,000
Selling, general and administrative 75,021,000 70,783,000
Corporate 3,854,000 7,465,000
Non-cash compensation 9,702,000 35,420,000
Reorganization charges 37,395,000 775,000
Write-down of intangibles 167,599,000 -
Depreciation 34,626,000 19,416,000
Amortization 75,390,000 9,793,000
----------------------------------------
579,529,000 220,973,000
----------------------------------------
Operating (loss) (359,474,000) (164,818,000)
OTHER INCOME (EXPENSE)
Interest income and other, net 1,875,000 589,000
Interest expense (18,467,000) (2,767,000)
----------------------------------------
(Loss) before income taxes and extraordinary item (376,066,000) (166,996,000)
Income tax benefit (provision) 33,000 (154,000)
----------------------------------------
(Loss) before extraordinary item (376,033,000) (167,150,000)
Gain from extinguishment of debt 2,216,000 -
----------------------------------------
Net (loss) $ (373,817,000) $(167,150,000)
========================================
Basic and diluted net loss per common share:
(Loss) before extraordinary item $ (39.52) $ (17.57)
Gain from extinguishment of debt .23 -
----------------------------------------
Net (loss) $ (39.29) $ (17.57)
========================================
Weighted average number of shares 9,514,000 9,514,000
========================================
In the nine months ended September 30, 2001, non-cash compensation expense
includes $1.5 million that would have been included in operating expense, $6.2
million that would have been included in selling, general and administrative
expense and $2.0 million that would have been included in corporate expense had
the compensation been paid in cash. In the nine months ended September 30, 2000,
non-cash compensation expense includes $5.4 million that would have been
included in operating expense, $22.6 million that would have been included in
selling, general and administrative expense and $7.4 million that would have
been included in corporate expense had the compensation been paid in cash.
See accompanying notes.
F-6
CORECOMM HOLDCO, INC. AND SUBSIDIARIES
AND ITS PREDECESSOR OCOM CORPORATION TELECOMS DIVISION
CONSOLIDATED STATEMENTS OF OPERATIONS
THE PREDECESSOR
FOR THE PERIOD (OCOM)
FROM APRIL 1, --------------------
1998 (DATE FOR THE PERIOD
OPERATIONS FROM JANUARY 1,
COMMENCED) TO 1998 TO
YEAR ENDED DECEMBER 31, DECEMBER 31, MAY 31,
2000 1999 1998 1998
-----------------------------------------------------------------------------------
REVENUES $ 131,526,000 $ 57,151,000 $ 6,713,000 $ 1,452,000
COSTS AND EXPENSES
Operating 142,323,000 57,551,000 5,584,000 772,000
Selling, general and administrative 109,197,000 72,821,000 11,940,000 3,205,000
Corporate 11,224,000 6,686,000 2,049,000 -
Non-cash compensation 43,440,000 1,056,000 - -
Other charges 12,706,000 - - -
Write-down of intangibles 35,920,000 - - -
Depreciation 30,641,000 10,916,000 749,000 255,000
Amortization 42,396,000 8,630,000 231,000 2,000
-----------------------------------------------------------------------------------
427,847,000 157,660,000 20,553,000 4,234,000
-----------------------------------------------------------------------------------
Operating (loss) (296,321,000) (100,509,000) (13,840,000) (2,782,000)
OTHER INCOME (EXPENSE)
Interest income and other, net 1,134,000 55,000 46,000 -
Interest expense (5,929,000) (2,624,000) (21,000) -
-----------------------------------------------------------------------------------
(Loss) before income taxes (301,116,000) (103,078,000) (13,815,000) (2,782,000)
Income tax provision (125,000) (102,000) - -
-----------------------------------------------------------------------------------
Net (loss) $ (301,241,000) $ (103,180,000) $ (13,815,000) $ (2,782,000)
===================================================================================
Basic and diluted net (loss)
per common share $ (31.66) $ (10.85) $ (1.45) $ (.29)
===================================================================================
Weighted average number of shares 9,514,000 9,514,000 9,514,000 9,514,000
===================================================================================
In the year ended December 31, 2000, non-cash compensation expense includes
$5.9 million that would have been included in operating expense, $25.0 million
that would have been included in selling, general and administrative expense and
$12.5 million that would have been included in corporate expense had the
compensation been paid in cash. In the year ended December 31, 1999, non-cash
compensation expense includes $345,000 that would have been included in
operating expense and $711,000 that would have been included in selling, general
and administrative expense had the compensation been paid in cash.
See accompanying notes.
F-7
CORECOMM HOLDCO, INC. AND SUBSIDIARIES
AND ITS PREDECESSOR OCOM CORPORATION TELECOMS DIVISION
CONSOLIDATED STATEMENT OF SHAREHOLDER'S EQUITY
FOR THE PERIOD FROM APRIL 1, 1998 (DATE
OPERATIONS COMMENCED) TO DECEMBER 31, 1998, FOR THE
YEARS ENDED DECEMBER 31, 1999 AND 2000
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 (UNAUDITED)
ADDITIONAL DEFERRED
COMMON STOCK PAID-IN NON-CASH
------------------------- CAPITAL COMPENSATION (DEFICIT)
SHARES PAR ------- ------------ ---------
Initial contribution 9,514,000 $ 95,000 $ 22,090,000
Capital contributions 27,908,000
Net (loss) for the period from April 1,
1998 (date operations commenced) to
December 31, 1998 $ (13,815,000)
-----------------------------------------------------------------------------
Balance, December 31, 1998 9,514,000 95,000 49,998,000 (13,815,000)
Capital contributions 196,892,000
Net (loss) for the year ended December
31, 1999 (103,180,000)
-----------------------------------------------------------------------------
Balance, December 31, 1999 9,514,000 95,000 246,890,000 (116,995,000)
Capital contributions 792,193,000
Deferred non-cash compensation $ (31,338,000)
Non-cash compensation expense 9,700,000
Net (loss) for the year ended December
31, 2000 (301,241,000)
-----------------------------------------------------------------------------
Balance, December 31, 2000 9,514,000 95,000 1,039,083,000 (21,638,000) (418,236,000)
Capital distributions (unaudited) (17,614,000)
Non-cash compensation expense
(unaudited) 9,702,000
Net (loss) for the nine months
ended September 30, 2001 (unaudited) (373,817,000)
-----------------------------------------------------------------------------
Balance, September 30, 2001
(unaudited) 9,514,000 $ 95,000 $1,021,469,000 $ (11,936,000) $ (792,053,000)
=============================================================================
See accompanying notes.
F-8
CORECOMM HOLDCO, INC. AND SUBSIDIARIES
AND ITS PREDECESSOR OCOM CORPORATION TELECOMS DIVISION
STATEMENT OF PARENT'S INVESTMENT
OF OCOM CORPORATION TELECOMS DIVISION (THE PREDECESSOR)
FOR THE PERIOD FROM JANUARY 1, 1998 TO MAY 31, 1998
Balance, December 31, 1997 $ 321,000
Capital contributions 4,261,000
Net (loss) for the five months ended May 31, 1998 (2,782,000)
---------------
Balance, May 31, 1998 $ 1,800,000
===============
See accompanying notes.
F-9
CORECOMM HOLDCO, INC. AND SUBSIDIARIES
AND ITS PREDECESSOR OCOM CORPORATION TELECOMS DIVISION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
2001 2000
--------------------------------------------
Net cash (used in) operating activities $ (33,448,000) $ (118,590,000)
INVESTING ACTIVITIES
Purchase of fixed assets (4,243,000) (43,484,000)
Acquisitions, net of cash acquired - (92,320,000)
Proceeds from sales of marketable securities 2,737,000 -
--------------------------------------------
Net cash (used in) investing activities (1,506,000) (135,804,000)
FINANCING ACTIVITIES
Capital contributions (distributions) (23,064,000) 211,659,000
Proceeds from borrowing, net of financing costs 88,679,000 71,266,000
Principal payments (1,001,000) (4,217,000)
Principal payments of capital lease obligations (5,720,000) (11,766,000)
---------------------- ---------------------
Net cash provided by financing activities 58,894,000 266,942,000
---------------------- ---------------------
Increase in cash and cash equivalents 23,940,000 12,548,000
Cash and cash equivalents at beginning of period 22,773,000 11,248,000
---------------------- ---------------------
Cash and cash equivalents at end of period $ 46,713,000 $ 23,796,000
====================== =====================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $ 10,195,000 $ 3,398,000
Income taxes paid - 154,000
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING ACTIVITIES
Capital contributions of non-cash net assets $ 5,450,000 $ 702,288,000
Liabilities incurred to acquire fixed assets 6,450,000 37,529,000
See accompanying notes.
F-10
CORECOMM HOLDCO, INC. AND SUBSIDIARIES
AND ITS PREDECESSOR OCOM CORPORATION TELECOMS DIVISION
CONSOLIDATED STATEMENTS OF CASH FLOWS
THE PREDECESSOR
(OCOM)
FOR THE PERIOD FROM -----------------
APRIL 1, 1998 (DATE FOR THE PERIOD
OPERATIONS FROM JANUARY 1,
COMMENCED) TO 1998 TO
YEAR ENDED DECEMBER 31, DECEMBER 31, MAY 31,
2000 1999 1998 1998
-------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net (loss) $ (301,241,000) $ (103,180,000) $ (13,815,000) $ (2,782,000)
Adjustments to reconcile net (loss) to
net cash (used in) operating
activities:
73,037,000 19,546,000 980,000 257,000
Non-cash compensation 43,440,000 1,056,000 - -
Provision for losses on accounts
receivable 7,130,000 3,241,000 501,000 92,000
Write-down of intangible assets 35,920,000 - - -
Accretion of interest on marketable
securities 24,000 - - -
Other 996,000 19,000 5,000 -
Changes in operating assets and
liabilities, net of effect from
business acquisitions:
Accounts receivable (7,405,000) 3,333,000 (480,000) (262,000)
Due from affiliates (17,349,000) 1,193,000 (1,826,000) -
Other current assets 576,000 (3,152,000) (218,000) (179,000)
Other assets (1,249,000) (3,447,000) (2,010,000) -
Accounts payable 17,574,000 5,275,000 1,261,000 (311,000)
Accrued expenses (5,078,000) 3,388,000 2,814,000 (453,000)
Deferred revenue 17,213,000 (61,000) 93,000 -
-------------------------------------------------------------------------------
Net cash (used in) operating activities (136,412,000) (72,789,000) (12,695,000) (3,638,000)
INVESTING ACTIVITIES
Purchase of fixed assets (65,211,000) (20,296,000) (2,341,000) (623,000)
Acquisitions, net of cash acquired (98,613,000) (47,056,000) - -
Purchase of marketable securities (2,710,000) - - -
-------------------------------------------------------------------------------
Net cash (used in) investing activities (166,534,000) (67,352,000) (2,341,000) (623,000)
F-11
CORECOMM HOLDCO, INC. AND SUBSIDIARIES
AND ITS PREDECESSOR OCOM CORPORATION TELECOMS DIVISION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE PERIOD THE PREDECESSOR
FROM APRIL 1, 1998 (OCOM)
(DATE OPERATIONS FOR THE PERIOD FROM
COMMENCED) TO JANUARY 1, 1998 TO
YEAR ENDED DECEMBER 31, DECEMBER 31, MAY 31,
2000 1999 1998 1998
-------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Capital contributions 232,472,000 151,885,000 19,912,000 4,261,000
Proceeds from borrowings, net of
financing costs 103,503,000 480,000 - -
Principal payments (5,936,000) (3,469,000) - -
Principal payments of capital lease
obligations (15,568,000) (2,379,000) (4,000) -
-------------------------------------------------------------------------------------
Net cash provided by financing
activities 314,471,000 146,517,000 19,908,000 4,261,000
-------------------------------------------------------------------------------------
Increase in cash and cash 11,525,000 6,376,000 4,872,000 -
equivalents
Cash and cash equivalents at beginning of
period 11,248,000 4,872,000 - -
-------------------------------------------------------------------------------------
Cash and cash equivalents at end of
period $ 22,773,000 $ 11,248,000 $ 4,872,000 $ -
=====================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid for interest $ 4,008,000 $ 2,032,000 $ 4,000 $ -
Income taxes paid 159,000 185,000 - -
SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING ACTIVITIES
Capital contributions of non-cash net
Assets $ 559,721,000 $ 45,007,000 $ 30,181,000 $ -
Liabilities incurred to acquire fixed
Assets 35,626,000 19,621,000 175,000 -
See accompanying notes.
F-12
CORECOMM HOLDCO, INC. AND SUBSIDIARIES
AND ITS PREDECESSOR OCOM CORPORATION TELECOMS DIVISION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED WITH RESPECT TO THE NINE MONTHS
ENDED SEPTEMBER 30, 2001 AND 2000)
1. ORGANIZATION AND BUSINESS
CoreComm Holdco, Inc. (the "Company") was formed in May 1998 as a Bermuda
corporation. It was a wholly-owned subsidiary of CoreComm Limited until December
2001. In July 1999, the Company was domesticated under the laws of Delaware.
CoreComm Limited, formerly a wholly-owned subsidiary of Cellular
Communications of Puerto Rico, Inc. ("CCPR"), was formed in March 1998 in order
to succeed to the businesses and assets that were operated by OCOM Corporation
and as an appropriate vehicle to pursue new telecommunications opportunities
outside of Puerto Rico and the U.S. Virgin Islands. Operations commenced in
April 1998. In September 1998, CCPR made a cash contribution to Limited of
$150,000,000 and distributed 100% of the outstanding shares of Limited on a
one-for-one basis to CCPR's shareholders.
The Company's competitive local exchange carrier ("CLEC"), cellular long
distance, landline long distance and cellular resale businesses were formerly
owned and operated by OCOM Corporation Telecoms Division ("OCOM"). CCPR acquired
the operating assets and related liabilities of these businesses from OCOM on
June 1, 1998. OCOM is the predecessor business to the Company.
The Company provides integrated telephone, Internet and high-speed data
services to business and residential customers in targeted markets throughout
the United States. As of December 31, 2000, the Company's customers are located
throughout the United States, although much of the Company's business is
conducted in Pennsylvania, Ohio and Michigan.
2. RECAPITALIZATION PLAN
In April 2001, the Company completed a reevaluation of its business plan in
light of current market conditions and made significant modifications to its
plans. The Company is devoting its resources to the more profitable areas of its
business and is substantially reducing its operations and related costs in the
other areas of its business. The Company is currently engaged in a process to
potentially sell its non-CLEC assets and businesses, and retained advisors for
the purpose of conducting this sale.
In July 2001, the Company finalized the streamlining of its operating
structure to focus on its two most successful and promising lines of business.
The first is integrated communications products and other high
bandwidth/data/web-oriented services for the business market and the second is
bundled local telephony and Internet products efficiently sold, serviced and
provisioned via Internet-centric interfaces to the residential market.
In October 2001, the Company and CoreComm Limited commenced the Holdco
Recapitalization. In the first phase, CoreComm Limited entered into agreements
with numerous holders of its 6% Convertible Subordinated Notes Due 2006 whereby
the holders agreed, among other things, to exchange their notes for
approximately $5 million in cash (representing the October 1, 2001 interest
payment that had not been paid) and shares of the Company's common stock as part
of a recapitalization plan. The exchange was completed in December 2001,
including the payment of the approximately $5 million by CoreComm Limited.
On December 28, 2001, the Company completed the next phase of the Holdco
Recapitalization, which was the exchange of shares of its common stock for
substantial amounts of the outstanding indebtedness of CoreComm Limited,
substantial amounts of the outstanding indebtedness of CoreComm Limited and the
Company as co-obligors and all of the outstanding preferred stock of CoreComm
Limited. This exchange was completed pursuant to an exchange agreement with
CoreComm Limited and (1) holders of 10.75% Unsecured Convertible PIK Notes due
2011 and 10.75% Senior Unsecured Convertible PIK Notes due 2010, both of which
were a joint obligation of CoreComm Limited and the Company, in the initial
principal amounts of $10,000,000 and $16,100,000, respectively, together with
any interest paid thereon, (2) the holders of Senior Unsecured Notes due
September 29, 2003 of CoreComm Limited in the principal amount of $105.7
million, and (3) the holders of all of the preferred stock of CoreComm Limited
in the initial principal amount of $300 million together with any dividends paid
thereon.
F-13
CORECOMM HOLDCO, INC. AND SUBSIDIARIES
AND ITS PREDECESSOR OCOM CORPORATION TELECOMS DIVISION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED) (UNAUDITED WITH RESPECT TO THE NINE MONTHS
ENDED SEPTEMBER 30, 2001 AND 2000)
2. RECAPITALIZATION PLAN (CONTINUED)
The following summarizes the indebtedness and preferred stock that was
exchanged for shares of the Company's common stock in December 2001:
-------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT OR
DESCRIPTION DATE ISSUED ISSUER STATED VALUE WHEN ISSUED
-------------------------------------------------------------------------------------------------------------------------------
10.75% Unsecured Convertible PIK Notes CoreComm Limited and
due 2011 April 2001 the Company $10.0 million
-------------------------------------------------------------------------------------------------------------------------------
10.75% Senior Unsecured Convertible PIK CoreComm Limited and
Notes Due 2010 December 2000 the Company $16.1 million
-------------------------------------------------------------------------------------------------------------------------------
Senior Unsecured Notes Due
September 29, 2003 September 2000 CoreComm Limited $108.7 million
-------------------------------------------------------------------------------------------------------------------------------
6% Convertible Subordinated
Notes Due 2006 October 1999 CoreComm Limited $175.0 million (1)
-------------------------------------------------------------------------------------------------------------------------------
Series A and Series A-1 Preferred Stock September 2000 CoreComm Limited $51.1 million
-------------------------------------------------------------------------------------------------------------------------------
Series B Preferred Stock September 2000 CoreComm Limited $250.0 million
-------------------------------------------------------------------------------------------------------------------------------
----------
(1) $164.75 million was outstanding as of September 30, 2001, of
which $160 million was exchanged.
As a result of the completed exchanges in December 2001, approximately 87%
of the Company's outstanding shares, or 8,685,602 shares, are owned by the
former holders of indebtedness of CoreComm Limited and the Company and the
former holders of preferred stock of CoreComm Limited, and approximately 13% of
the Company's outstanding shares, or 1,314,416 shares, continue to be held by
CoreComm Limited. The Company holds $160 million principal amount of CoreComm
Limited's 6% Convertible Subordinated Notes due 2006, approximately $105.7
million principal amount of CoreComm Limited's Senior Unsecured Notes due
September 29, 2003, approximately 51,000 shares of CoreComm Limited's Series A
preferred stock and 250,000 shares of CoreComm Limited's Series B preferred
stock as a result of the exchanges. In addition, the Company exchanged the
approximately $10.8 million principal and accrued interest of 10.75% Unsecured
Convertible PIK Notes due 2011 and the approximately $18.0 million principal and
accrued interest of 10.75% Senior Unsecured Convertible PIK Notes due 2010 for
shares of its common stock. The Company entered into an agreement with CoreComm
Limited modifying or waiving several of the material terms of these instruments.
See "Certain Relationships and Related Transactions -- Exchange Agreement
Between CoreComm Limited and CoreComm Holdco."
The Company will determine the gain on restructuring of its indebtedness
and the carrying value of its investment in CoreComm Limited's notes and
preferred stock based on the fair value of its shares issued in the
recapitalization. As a result of the issuance of over 80% of its outstanding
shares to new shareholders, the Company is performing an analysis of the fair
value of its net tangible assets as if a purchase business combination occurred.
The Company intends to offer its common stock to CoreComm Limited's
stockholders through a registered public exchange offer. This offer will also be
made to solicit any remaining holders of CoreComm Limited's 6% Convertible
Subordinated Notes, who will be offered a pro rata share in the aggregate equity
consideration described above. The Company has adopted a new stock option plan
for its employees. The Company has agreed to file a shelf registration statement
under the Securities Act of 1933, as amended, to permit the sale of the
Company's common stock that was issued in the Holdco Recapitalization.
In connection with the Holdco Recapitalization, CoreComm Limited and the
Company were granted an exception by Nasdaq, absent which, CoreComm Limited and
the Company would have had to obtain stockholder approval prior to the
completion of the Holdco Recapitalization. Following the consummation of the
registered public exchange offer, based upon discussions with Nasdaq, the
Company expects to become the Nasdaq listed entity and to be subject to the
continued inclusion requirements of the Nasdaq National Market.
F-14
CORECOMM HOLDCO, INC. AND SUBSIDIARIES
AND ITS PREDECESSOR OCOM CORPORATION TELECOMS DIVISION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED) (UNAUDITED WITH RESPECT TO THE NINE MONTHS
ENDED SEPTEMBER 30, 2001 AND 2000)
2. RECAPITALIZATION PLAN (CONTINUED)
The Company anticipates that it will have sufficient cash to execute its
revised business plan. However, there can be no assurance that: (1) actual costs
will not exceed the amounts estimated or that additional funding will not be
required, (2) the Company and its subsidiaries will be able to generate
sufficient cash from operations to meet capital requirements, debt service and
other obligations when required, (3) the Company will be able to access such
cash flow, (4) the Company will be able to sell assets or businesses, or (5) the
Company will not be adversely affected by interest rate fluctuations.
The Company does not anticipate that it and its subsidiaries will generate
sufficient cash flow from operations to repay at maturity the entire principal
amount of its outstanding indebtedness. Accordingly, the Company may be required
to consider a number of measures, including: (1) refinancing all or a portion of
such indebtedness, (2) seeking modifications to the terms of such indebtedness,
(3) seeking additional debt financing, which may be subject to obtaining
necessary lender consents, (4) seeking additional equity financing, or (5) a
combination of the foregoing.
The Company's ability to raise additional capital in the future will be
dependent on a number of factors, such as general economic and market
conditions, which are beyond its control. If the Company is unable to obtain
additional financing or obtain it on favorable terms, it may be required to
further reduce its operations, forego attractive business opportunities, or take
other actions which could adversely affect its business, results of operations
and financial condition.
3. SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Such estimates and assumptions impact, among others, the
following: the amount of uncollectible accounts receivable, the amount to be
paid to terminate certain agreements included in reorganization costs, the
amount to be paid to settle certain toll and interconnection liabilities, the
amount to be paid as a result of certain sales and use tax audits, potential
liabilities arising from other sales tax matters and estimates related to the
value of goodwill and other intangible assets. Actual results could differ from
those estimates.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company,
its wholly-owned subsidiaries and those entities where the Company's interest is
greater than 50%. Significant intercompany accounts and transactions have been
eliminated in consolidation.
CASH EQUIVALENTS
Cash equivalents are short-term highly liquid investments purchased with a
maturity of three months or less. Cash equivalents were approximately $22
million and none at December 31, 2000 and 1999, respectively, and consisted of
corporate commercial paper.
F-15
CORECOMM HOLDCO, INC. AND SUBSIDIARIES
AND ITS PREDECESSOR OCOM CORPORATION TELECOMS DIVISION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED) (UNAUDITED WITH RESPECT TO THE NINE MONTHS
ENDED SEPTEMBER 30, 2001 AND 2000)
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
MARKETABLE SECURITIES
Marketable securities are classified as available-for-sale, which are
carried at fair value. Unrealized holding gains and losses on securities, net of
tax, are carried as a separate component of shareholder's equity. The amortized
cost of debt securities is adjusted for amortization of premiums and accretion
of discounts to maturity. Such amortization is included in interest income.
Realized gains and losses and declines in value judged to be other than
temporary will be included in interest income. The cost of securities sold or
matured is based on the specific identification method. Interest on securities
is included in interest income.
Marketable securities at December 31, 2000 consisted of corporate
commercial paper. During the nine months ended September 30, 2001, the years
ended December 31, 2000 and 1999 and for the period from April 1, 1998 (date
operations commenced) to December 31, 1998, there were no realized gains or
losses on sales of securities. All of the marketable securities as of December
31, 2000 had a contractual maturity of less than one year.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company records an estimate of uncollectible accounts receivable based
on the current aging of its receivables and its prior collection experience.
FIXED ASSETS
Fixed assets are stated at cost. Depreciation is computed by the
straight-line method over the estimated useful lives of the assets. Estimated
useful lives are as follows: operating equipment - 3 to 15 years, computer
hardware and software - 3 or 5 years and other equipment - 2 to 7 years, except
for leasehold improvements for which the estimated useful lives are the term of
the lease.
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. If the
sum of the expected future undiscounted cash flows is less than the carrying
amount of the asset, a loss is recognized for the difference between the fair
value and carrying value of the asset.
GOODWILL
Goodwill is the excess of the purchase price over the fair value of net
assets acquired in business combinations accounted for as purchases. Goodwill is
amortized on a straight-line basis over the period benefited, which is estimated
to be 5 or 7 years. The Company continually evaluates whether events and
circumstances warrant revised estimates of useful lives or recognition of a
charge-off of carrying amounts. The Company continually reviews the
recoverability of goodwill, including enterprise level goodwill. The
recoverability of goodwill is assessed by determining whether the amortization
of the goodwill balance over its remaining life can be recovered through
undiscounted cash flows. The carrying value of goodwill would be adjusted to the
present value of the future operating cash flows if the undiscounted cash flows
analysis indicates it cannot be recovered over its remaining life. The present
value of the future operating cash flows would be calculated using a discount
rate that is equivalent to the rate that would be required for a similar
investment with like risks. If a portion or separable group of assets of an
acquired company is being disposed of, goodwill would be allocated to the assets
to be disposed of based on the relative fair values of those assets at the date
of acquisition, unless another method of allocation is more appropriate.
LMDS LICENSE COSTS
The costs incurred to acquire the Local Multipoint Distribution Service
("LMDS") licenses from the Federal Communications Commission (the "FCC") were
deferred and will be amortized on a straight-line basis over the term of the
licenses upon the commencement of operations. The Company continually reviews
the recoverability of the carrying value of LMDS licenses using the same
methodology that it uses for the evaluation of its other long-lived assets.
F-16
CORECOMM HOLDCO, INC. AND SUBSIDIARIES
AND ITS PREDECESSOR OCOM CORPORATION TELECOMS DIVISION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED) (UNAUDITED WITH RESPECT TO THE NINE MONTHS
ENDED SEPTEMBER 30, 2001 AND 2000)
3. SIGNIFICANT ACCOUNT POLICIES (CONTINUED)
INTANGIBLE ASSETS
Intangible assets include workforce and customer lists. These are
acquisition-related assets which are stated at their estimated fair value as of
the date acquired in a business combination accounted for as a purchase, less
accumulated amortization. Amortization is recorded on a straight-line basis over
estimated useful lives of 2 and 7 years. The Company continually reviews the
recoverability of the carrying value of the intangible assets using the same
methodology that it uses for the evaluation of its other long-lived assets.
OTHER ASSETS
Other assets include deferred financing costs and notes receivable from
former officers of an acquired business. Deferred financing costs were incurred
in connection with the issuance of debt and are charged to interest expense over
the term of the related debt. The notes receivable earn interest at 5% per annum
and are due in 2002 and 2003.
NET (LOSS) PER SHARE
The Company reports its basic and diluted net (loss) per share in
accordance with SFAS No. 128, "Earnings Per Share." The weighted average shares
used for the computation of net (loss) per share reflects the stock split in
2001 on a retroactive basis.
REVENUE RECOGNITION AND CERTAIN COST CLASSIFICATIONS
Revenues are recognized at the time the service is rendered to the customer
or the performance of the service has been completed. Charges for services that
are billed in advance are deferred and recognized when earned.
Operating costs includes direct costs of sales and network costs. Direct
cost of sales includes the costs directly incurred primarily with other
telecommunications carriers in order to render services to customers. Network
costs include the costs of fiber and access, points of presence, repairs and
maintenance, rent, utilities and property taxes of the telephone, Internet and
data network, as well as salaries and related expenses of network personnel.
ADVERTISING EXPENSE
The Company charges the cost of advertising to expense as incurred.
Advertising costs for the years ended December 31, 2000 and 1999, for the period
from April 1, 1998 (date operations commenced) to December 31, 1998 and for the
period from January 1, 1998 to May 31, 1998 were $8,683,000, $4,407,000,
$812,000 and $79,000, respectively.
STOCK-BASED COMPENSATION
The Company's employees participate in the CoreComm Limited stock option
plans. CoreComm Limited has adopted the disclosure-only provisions of SFAS No.
123, "Accounting for Stock-Based Compensation". CoreComm Limited applies APB
Opinion No. 25, "Accounting for Stock Issued to Employees" and related
interpretations in accounting for its stock option plans. The Company's
financial statements include amounts for stock-based compensation charged by
CoreComm Limited to the Company.
F-17
CORECOMM HOLDCO, INC. AND SUBSIDIARIES
AND ITS PREDECESSOR OCOM CORPORATION TELECOMS DIVISION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED) (UNAUDITED WITH RESPECT TO THE NINE MONTHS
ENDED SEPTEMBER 30, 2001 AND 2000)
4. RECENT ACCOUNTING PRONOUNCEMENTS
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," effective for the Company on
January 1, 2002. This Statement supercedes SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and
other related accounting guidance. The Company is in the process of evaluating
the financial statement impact of the adoption of SFAS No. 144.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," effective for the Company on January 1, 2003. This
Statement addresses financial accounting and reporting for obligations
associated with the retirement of tangible fixed assets and the associated asset
retirement costs. The Company is in the process of evaluating the financial
statement impact of the adoption of SFAS No. 143.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations," and
No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001. Use of the pooling-of-interests method is no longer
permitted. SFAS No. 141 also includes guidance on the initial recognition and
measurement of goodwill and other intangible assets acquired in a business
combination that is completed after June 30, 2001.
SFAS No. 142 ends the amortization of goodwill and indefinite-lived
intangible assets. Instead, these assets must be reviewed annually (or more
frequently under certain conditions) for impairment in accordance with this
statement. This impairment test uses a fair value approach rather than the
undiscounted cash flow approach previously required by SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." The Company is required to adopt SFAS No. 142 as of January 1, 2002. In
addition, the Company is reviewing the carrying value of its long-lived assets
for impairment in accordance with SFAS No. 121, although it is not currently
possible to predict the outcome of this review.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB
101"), "Revenue Recognition in Financial Statements." SAB 101 provides guidance
on the recognition, presentation and disclosure of revenue in financial
statements. SAB 101 was adopted retroactive to January 1, 2000. The adoption of
SAB 101 had no significant effect on revenues or results of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended by SFAS Nos. 137 and 138. This
new accounting standard was required to be adopted by the Company effective
January 1, 2001. The adoption of this new standard had no significant effect on
the results of operations, financial condition or cash flows of the Company.
In 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income"
and SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information," both of which had no effect on the consolidated financial
statements. The Company operates in a single business segment.
F-18
CORECOMM HOLDCO, INC. AND SUBSIDIARIES
AND ITS PREDECESSOR OCOM CORPORATION TELECOMS DIVISION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED) (UNAUDITED WITH RESPECT TO THE NINE MONTHS
ENDED SEPTEMBER 30, 2001 AND 2000)
5. CERTAIN RISKS AND UNCERTAINTIES
The Company's performance is affected by, among other things, its ability
to implement expanded interconnection and collocation with the facilities of
incumbent local exchange carriers ("ILECs") and develop efficient and effective
working relationships with the ILECs and other carriers. The Company has
installed its own switches and related equipment in certain of its markets. The
Company will continue to lease the unbundled local loop needed to connect its
customers to its switches. The Company purchases capacity from the ILECs on a
wholesale basis pursuant to contracts and sells it at retail rates to its
customers. The Company depends upon the ILECs to maintain the quality of their
service to the Company's customers. Also, except for CLEC customers who are
connected to one of the Company's switches and Internet services customers, the
Company depends upon the ILECs for accurate and prompt billing information in
order for the Company to bill its customers.
The Company's business is highly competitive which results in pricing
pressure and increasing customer acquisition costs. The competition in the local
exchange business includes the larger, better capitalized ILECs as well as other
CLECs, other providers of telecommunications services and cable television
companies. The competition in the Internet services market includes established
online services, such as AOL, the ILECs, cable television companies and other
local, regional and national Internet service providers. The competitive
environment may result in price reductions in the Company's fees for services,
increased spending on marketing and product development, a reduction in the
Company's ability to increase revenues and gross margin from its core
businesses, a limit on the Company's ability to grow its customer base or
attrition in the Company's customer base. The Company's operating results and
cash flows would be negatively impacted by any of these events.
6. REVENUES
The following is the revenues from external customers for each of the
Company's communication services:
NINE MONTHS ENDED SEPTEMBER 30,
2001 2000
--------------------------------------
(UNAUDITED)
Local Exchange Services $ 71,026,000 $ 39,058,000
Toll-related Telephony Services 60,876,000 6,919,000
Internet, Data and Web-related Services 69,240,000 9,324,000
Other (a) 18,913,000 854,000
--------------------------------------
$ 220,055,000 $ 56,155,000
======================================
(a) Other includes wireless, paging and information services.
THE PREDECESSOR
(OCOM)
-------------------------------------------------------------------------------------
FOR THE PERIOD FROM FOR THE
APRIL 1, 1998 (DATE PERIOD FROM
OPERATIONS COMMENCED) JANUARY 1, 1998
YEAR ENDED DECEMBER 31, TO DECEMBER 31, TO MAY 31,
2000 1999 1998 1998
-------------------------------------------------------------------------------------
Telecommunications $ 102,033,000 $ 47,456,000 $ 2,993,000 $ 217,000
Internet and Data 28,788,000 6,996,000 155,000 -
Other (a) 705,000 2,699,000 3,565,000 1,235,000
-------------------------------------------------------------------------------------
$ 131,526,000 $ 57,151,000 $ 6,713,000 $ 1,452,000
=====================================================================================
(a) Other includes cellular long distance, wireless and paging revenue.
F-19
CORECOMM HOLDCO, INC. AND SUBSIDIARIES
AND ITS PREDECESSOR OCOM CORPORATION TELECOMS DIVISION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED) (UNAUDITED WITH RESPECT TO THE NINE MONTHS
ENDED SEPTEMBER 30, 2001 AND 2000)
7. INTANGIBLE ASSETS
Intangible assets consist of:
SEPTEMBER 30, DECEMBER 31,
2001 2000 1999
------------------------------------------------------------
(UNAUDITED)
LMDS license costs $ 4,230,000 $ 4,230,000 $ 25,366,000
Workforce, net of accumulated amortization of
$250,000 (2001), $198,000 (2000) and $310,000 (1999) - 52,000 1,160,000
Customer lists, net of accumulated amortization of
$780,000 (2001), $530,000 (2000) and $1,478,000 (1999)
1,560,000 1,810,000 11,862,000
------------------------------------------------------------
$5,790,000 $6,092,000 $38,388,000
============================================================
On September 29, 2000, CoreComm Limited completed two significant
acquisitions. CoreComm Limited acquired ATX Telecommunications Services, Inc.
("ATX"), a CLEC providing integrated voice and high-speed data services,
including long distance, local, wireless and network services through the use of
telephone switching equipment and other physical facilities in the New York -
Virginia corridor. ATX was acquired for approximately $39.4 million in cash,
approximately $108.7 million principal amount of CoreComm Limited's senior
unsecured notes due 2003, 12,398,000 shares of CoreComm Limited's common stock
and 250,000 shares of CoreComm Limited's Series B preferred stock with a stated
value of $250.0 million. The common stock was valued at $178.7 million, the fair
value at the time of the third amendment to the ATX merger agreement on July 31,
2000. The senior unsecured notes and the Series B preferred stock were valued at
$94.0 million and $67.3 million, respectively, the fair value on the date of
issuance. In addition, CoreComm Limited incurred acquisition related costs of
approximately $12.4 million.
CoreComm Limited also acquired Voyager.net, Inc. ("Voyager"), a large
independent Internet communications company focused on the Midwestern United
States. Voyager was acquired for approximately $36.1 million in cash and
19,435,000 shares of CoreComm Limited's common stock. The common stock was
valued at $154.6 million, the fair value at the time of the closing of the
transaction. In addition, CoreComm Limited incurred acquisition related costs of
approximately $9.4 million and repaid approximately $24.0 million of Voyager
debt including accrued interest.
The assets of ATX and Voyager were contributed to subsidiaries of the
Company.
These acquisitions have been accounted for as purchases, and, accordingly
the net assets and results of operations of the acquired businesses have been
included in the consolidated financial statements from the date of acquisition.
The aggregate purchase price of $615.9 million exceeded the estimated fair value
of net tangible assets acquired by $588.5 million, which was allocated to
goodwill.
The pro forma unaudited consolidated results of operations for the nine
months ended September 30, 2000 assuming consummation of the acquisitions as of
January 1, 2000 are as follows:
Total revenue $ 222,479,000
Net (loss) (257,185,000)
Basic and diluted net (loss) per share (27.03)
F-20
CORECOMM HOLDCO, INC. AND SUBSIDIARIES
AND ITS PREDECESSOR OCOM CORPORATION TELECOMS DIVISION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED) (UNAUDITED WITH RESPECT TO THE NINE MONTHS
ENDED SEPTEMBER 30, 2001 AND 2000)
7. INTANGIBLE ASSETS (CONTINUED)
In May 1999, CoreComm Limited acquired 100% of the stock of MegsINet Inc.,
a national Internet Service Provider ("ISP") in Chicago for a total
consideration of $16.8 million in cash and 3,245,000 shares of CoreComm
Limited's common stock. In addition, CoreComm Limited exchanged MegsINet stock
options for options to purchase 444,000 shares of CoreComm Limited's common
stock, repaid $2.0 million of MegsINet debt and incurred acquisition related
costs of $1.2 million. The common stock portion of the consideration was valued
at $30.8 million, the fair value on the date prior to the announcement. The
stock options were valued at $4.0 million using the Black-Scholes option pricing
model.
Also in May 1999, CoreComm Limited acquired the wireline assets of USN
Communications, Inc., which was a CLEC that operated on a resale basis, for a
cash payment of $26.4 million, warrants to purchase 563,000 shares of CoreComm
Limited's common stock at a price of $13.33 per share and 225,000 shares at a
price of $22.22 per share, and a potential contingent cash payment which was
capped at $58.6 million. The contingent payment was payable only if the USN
assets met or exceeded operating performance thresholds. A contingent payment is
not expected to be required. The warrants were valued at $9.1 million, the fair
value on the date of issuance. In addition, CoreComm Limited incurred
acquisition related costs of $1.0 million.
The assets of MegsINet and USN were contributed to subsidiaries of the
Company.
These acquisitions have been accounted for as purchases, and, accordingly,
the net assets and results of operations of the acquired businesses have been
included in the consolidated financial statements from the dates of acquisition.
The aggregate purchase price of $91.3 million exceeded the fair value of the net
tangible assets acquired by $75.6 million, which was allocated as follows: $13.3
million to customer lists, $1.5 million to workforce and $60.8 million to
goodwill.
The pro forma unaudited consolidated results of operations for the years
ended December 31, 2000 and 1999 assuming consummation of the acquisitions as of
January 1, 1999 are as follows:
YEAR ENDED DECEMBER 31,
2000 1999
--------------------------------------
Total revenue $ 297,850,000 $ 296,873,000
Net (loss) (419,707,000) (270,076,000)
Basic and diluted net (loss) per share (44.11) (28.39)
A significant component of the 1999 pro forma results is associated with
the acquisition of certain assets of USN. Although USN quickly developed a large
customer list and revenue base in 1997 and 1998, it had difficulties under its
previous management providing services, including billing, customer care and
other operational areas, and filed for bankruptcy in February 1999. The revenues
from the USN customer base peaked in the third quarter of 1999 after our
acquisition in May 1999 and, as expected, declined thereafter.
F-21
CORECOMM HOLDCO, INC. AND SUBSIDIARIES
AND ITS PREDECESSOR OCOM CORPORATION TELECOMS DIVISION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED) (UNAUDITED WITH RESPECT TO THE NINE MONTHS
ENDED SEPTEMBER 30, 2001 AND 2000)
7. INTANGIBLE ASSETS (CONTINUED)
In accordance with our accounting policy, at December 31, 2000 the Company
wrote-off the carrying amount of intangible assets from certain business
combinations. The aggregate write-off of $14,784,000 included goodwill of
$6,690,000, workforce of $577,000 and customer lists of $7,517,000. These assets
were primarily related to the Company's resale CLEC business, which was acquired
in 1999. The underlying operations, customer relationships and future revenue
streams had deteriorated significantly since the acquisition. These were
indicators that the carrying amount of these resale-related assets was not
recoverable. The Company estimated that the fair value of these assets was zero
due to the lack of potential buyers, the overall deterioration of the resale
CLEC business environment and because of the negative cash flow of these resale
businesses for the foreseeable future. The goodwill had useful lives of 5 and 10
years, and the other intangibles had useful lives of 3 and 5 years.
At March 31, 2001, the Company reduced the carrying amount of goodwill
related to the Voyager and MegsINet acquisitions by $167,599,000. In connection
with the reevaluation of its business plan and the decision to sell its non-CLEC
assets and business announced in April 2001, the Company was required to report
all long-lived assets and identifiable intangibles to be disposed of at the
lower of carrying amount or estimated fair value less cost to sell. The carrying
amount of goodwill related to these acquisitions is eliminated before reducing
the carrying amounts of other assets. The estimated fair value of these
businesses was determined based on information provided by the investment bank
retained for the purpose of conducting this sale.
8. LMDS LICENSE COSTS
Cortelyou Communications Corp. ("Cortelyou"), a wholly-owned subsidiary of
the Company, was the successful bidder for 15 Block A LMDS licenses in Ohio. The
LMDS licenses were acquired for an aggregate of $25.4 million, which includes
costs incurred of $125,000. LMDS frequencies are used for the provision of voice
and data services to businesses and homes in competition with ILECs and/or cable
television operators. The FCC has allocated two blocks of frequencies to be
licensed in each of the 493 Basic Trading Areas in the United States and its
territories based on an auction that ended in March 1998. In connection with the
reevaluation of its business plan announced in April 2001, at December 31, 2000,
the Company reduced the carrying amount of the LMDS licenses by $21,136,000 to
reflect their estimated fair value. The estimated fair value was determined
based on an analysis of sales of other LMDS licenses.
9. FIXED ASSETS
Fixed assets consist of:
SEPTEMBER 30, DECEMBER 31,
2001 2000 1999
--------------------------------------------------------------------
(UNAUDITED)
Operating equipment $ 122,526,000 $ 124,335,000 $ 50,290,000
Computer hardware and software 52,851,000 53,092,000 17,183,000
Other equipment 13,905,000 21,182,000 9,292,000
Construction-in-progress 2,201,000 22,097,000 24,681,000
--------------------------------------------------------------------
191,483,000 220,706,000 101,446,000
Accumulated depreciation (71,019,000) (41,327,000) (11,099,000)
--------------------------------------------------------------------
$ 120,464,000 $ 179,379,000 $ 90,347,000
====================================================================
F-22
CORECOMM HOLDCO, INC. AND SUBSIDIARIES
AND ITS PREDECESSOR OCOM CORPORATION TELECOMS DIVISION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED) (UNAUDITED WITH RESPECT TO THE NINE MONTHS
ENDED SEPTEMBER 30, 2001 AND 2000)
10. ACCRUED EXPENSES
Accrued expenses consist of:
SEPTEMBER 30, DECEMBER 31,
2001 2000 1999
----------------------------------------------------------------------
(UNAUDITED)
Payroll and related $ 7,156,000 $ 5,032,000 $ 2,903,000
Professional fees 1,013,000 2,331,000 1,710,000
Taxes, including income taxes 12,486,000 13,730,000 5,995,000
Accrued equipment purchases 180,000 14,460,000 13,455,000
Toll and interconnect 37,982,000 20,628,000 637,000
Reorganization costs 8,183,000 1,835,000 -
Other 4,029,000 6,542,000 4,340,000
----------------------------------------------------------------------
$ 71,029,000 $ 64,558,000 $ 29,040,000
======================================================================
11. LONG-TERM DEBT
Long-term debt consists of:
SEPTEMBER 30, DECEMBER 31,
2001 2000 1999
--------------------------------------------------------
(UNAUDITED)
Senior secured credit facility, less unamortized discount of
$9,164,000 (2001) $ 146,936,000 $ 91,100,000 $ -
10.75% unsecured convertible notes plus accrued interest 10,502,000 - -
Equipment payable, less unamortized discount of $1,134,000 16,032,000 - -
Working capital promissory note, interest at 8.5% 1,225,000 1,496,000 3,077,000
Note payable for equipment, interest at 12.75% 800,000 3,331,000 6,238,000
Other 66,000 160,000 283,000
--------------------------------------------------------
175,561,000 96,087,000 9,598,000
Less current portion 28,761,000 4,960,000 5,280,000
--------------------------------------------------------
$ 146,800,000 $ 91,127,000 $ 4,318,000
========================================================
In September 2000, subsidiaries of the Company entered into a senior
secured credit facility with The Chase Manhattan Bank as lender, administrative
agent and collateral agent. The facility was amended and restated in April 2001.
The senior secured credit facility provides for both a term loan facility and a
revolving credit facility. The aggregate amount available was amended to $156.1
million of which the term loan facility is $106.1 million and the revolving
credit facility is $50 million. As of April 2001 the Company had borrowed the
entire amount available under the senior secured credit facility.
The term loan facility will amortize in quarterly installments of principal
commencing on December 31, 2003 with a final maturity on September 22, 2008. In
the event our remaining approximately $4.75 million of 6% Convertible Senior
Notes have not been converted or refinanced on or prior to April 1, 2006, then
the facilities become payable in full on April 1, 2006. At December 31, 2000,
the Company had $50.0 million outstanding under the term loan facility. The
revolving credit facility shall be automatically and permanently reduced in
increasing quarterly installments of principal commencing on December 31, 2003
with a termination date on September 22, 2008. At December 31, 2000, the Company
had $41.1 million outstanding under the revolving credit facility.
F-23
CORECOMM HOLDCO, INC. AND SUBSIDIARIES
AND ITS PREDECESSOR OCOM CORPORATION TELECOMS DIVISION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED) (UNAUDITED WITH RESPECT TO THE NINE MONTHS
ENDED SEPTEMBER 30, 2001 AND 2000)
11. LONG-TERM DEBT (CONTINUED)
The interest rate on both the term loan facility and the revolving credit
facility was initially, at the Company's option, either 3.25% per annum plus the
base rate, which is the higher of the prime rate or the federal funds effective
rate plus 0.5% per annum; or the reserve-adjusted London Interbank Offered Rate
(Adjusted LIBOR) plus 4.25% per annum. At December 31, 2000, the effective
interest rate on the amounts outstanding was 10.982%. In April 2001 the interest
rate was amend to, at the Company's option, either 3.5% per annum plus the base
rate, which is the higher of the prime rate or the federal funds effective rate
plus 0.5% per annum, or the reserve-adjusted London Interbank Offered Rate plus
4.5% per annum. Interest is payable at least quarterly. The unused portion of
the facility is subject to a commitment fee equal to 1.25% per annum payable
quarterly, subject to reduction to 1.00% per annum based upon the amount
borrowed under the facility. At September 30, 2001, the effective interest rate
on the amounts outstanding was 8.29%. Beginning October 12, 2001 and ending
April 12, 2002, the interest rate is 6.86%.
America Online, Inc. ("AOL") is a lender in the amended credit facility. In
connection with the financing in April 2001, the Company entered into a
marketing agreement with AOL to market a joint CoreComm/AOL bundled package in
the Company's market areas. In addition, in connection with the financing in
April 2001, CoreComm Limited issued warrants to purchase shares of its common
stock. The estimated value of the warrants plus the excess of the advertising
commitment over its estimated fair value to the Company aggregating $12,454,000
was recorded as a debt discount in April 2001.
MegsINet originally borrowed $4,000,000 under a working capital promissory
note dated August 1998. MegsINet was required to make monthly principal and
interest payments of $148,000 through January 2002. The Company ceased making
payments in 2001, and in December 2001, the holder of the note agreed to accept
cash of $400,000 in full settlement of all amounts due under the note and
certain capital leases.
In 1998, MegsINet entered into an agreement whereby MegsINet could purchase
operating equipment under a promissory note. Monthly payments of principal and
interest commenced in 1999. MegsINet was required to make monthly principal and
interest payments that decline each month from $366,000 beginning in January
2000 through September 2001. In September 2001, the Company and the holder of
the note agreed to a modification of the note such that the principal amount was
reduced to $800,000 which was paid on October 1, 2001. The Company recorded an
extraordinary gain on the extinguishment of debt of $2,216,000 for the
difference between the $3,016,000 obligation and the $800,000 liability.
The Company issued a note payable in the amount of $362,000 in connection
with an acquisition. Interest on the note accrues at 5.542% per annum. The note
is payable in twelve consecutive quarterly payments of principal and interest of
$33,000 which commenced in May 1999. The note is collateralized by the acquired
assets.
The senior secured credit facility restricts the payment of cash dividends
and loans to the Company. At December 31, 2000, restricted net assets were
approximately $600 million.
As of December 31, 2000, the aggregate principal amounts of notes payable
scheduled for repayment are as follows:
Year Ending December 31,
2001 $ 4,960,000
2002 27,000
2003 1,139,000
2004 5,694,000
2005 14,804,000
Thereafter 69,463,000
------------------
$ 96,087,000
==================
F-24
CORECOMM HOLDCO, INC. AND SUBSIDIARIES
AND ITS PREDECESSOR OCOM CORPORATION TELECOMS DIVISION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED) (UNAUDITED WITH RESPECT TO THE NINE MONTHS
ENDED SEPTEMBER 30, 2001 AND 2000)
11. LONG-TERM DEBT (CONTINUED)
In April 2001, CoreComm Limited and the Company issued to Booth American
Company as co-obligators $10 million aggregate principal amount of 10.75%
Unsecured Convertible PIK Notes Due April 2011. Interest on the notes was at an
annual rate of 10.75% payable semiannually on October 15 and April 15 of each
year, commencing October 15, 2001. The interest was payable in kind by the
issuance of additional 10.75% Unsecured Convertible PIK Notes Due April 2011 in
such principal amount as shall equal the interest payment that was then due. The
notes were convertible into CoreComm Limited common stock prior to maturity at a
conversion price of $1.00 per share, subject to adjustment. Additional notes
issued for interest had an initial conversion price equal to 120% of the
weighted average closing price of CoreComm Limited common stock for a specified
period. All of the outstanding 10.75% Unsecured Convertible PIK Notes Due April
2011 were exchanged for shares of the Company in December 2001.
In May 2001, the Company entered into an agreement with one of its
equipment vendors whereby $17,166,000 due to the vendor would be paid in three
payments in January, May and August 2002. Based on the imputed interest rate of
9.11% per annum, a discount of $1,612,000 was recorded as a reduction to fixed
assets in May 2001. In December 2001, the Company and the vendor agreed to a
modification of this arrangement in which the Company paid $2 million and
returned certain of the equipment in full settlement of the amount due.
12. OTHER CHARGES
Other charges include a reserve of $8,700,000 for notes receivable from
former officers of Voyager, and restructuring costs of $4,006,000. The
restructuring costs relate to the Company's announcements in March and December
2000 of reorganizations of certain of its operations. The charge consisted of
employee severance and related costs of $2,089,000 for approximately 250
employees to be terminated and lease exit costs of $1,917,000. As of December
31, 2000, $2,171,000 of these provisions had been used, including $775,000 for
employee severance and related costs and $1,396,000 for lease exit costs. As of
December 31, 2000, none of the employees to be terminated were still employed by
the Company. The remaining provision for leases will be used through 2003.
13. REORGANIZATION CHARGES
Reorganization charges of $37,395,000 in 2001 relate to the Company's
announcements in May and July 2001 that it was taking additional actions to
reorganize, re-size and reduce operating costs and create greater efficiency in
various areas of the Company. An aggregate of $21,497,000 of these costs are for
equipment and other assets that will not require any future cash outlays. The
employee severance and related costs in 2000 were for approximately 250
employees to be terminated, none of whom are still employed by the Company.
These costs in 2001 are for approximately 630 employees to be terminated of
which approximately 40 employees are still employed by the Company as of
September 30, 2001. The major actions involved in the 2001 reorganization
include (1) consolidation of functions such as network operations, customer
service and finance, (2) initiatives to increase gross margins and (3)
discussions with vendors to reduce or eliminate current payable balances or
purchase commitments. The consolidation of functions resulted in employee
terminations and the closing of offices. Employee severance and related costs,
lease exit costs and fixed assets and prepayment write-downs include charges
related to these actions. Initiatives to increase gross margins resulted in
consolidation of network assets and elimination of redundant and less profitable
facilities. Charges for these actions include lease exit costs and fixed assets
and prepayment write-downs. Finally, reductions or elimination of purchase
commitments resulted in agreement termination charges. All of these actions are
expected to be completed by June 30, 2002. Fixed assets and prepayments
written-off include $5.3 million related to vacated offices, $13.4 million for
network assets in abandoned markets and $2.8 million for prepayments in respect
of ILEC facilities in abandoned markets.
F-25
CORECOMM HOLDCO, INC. AND SUBSIDIARIES
AND ITS PREDECESSOR OCOM CORPORATION TELECOMS DIVISION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE NINE MONTHSENDED SEPTEMBER 30, 2001 AND 2000)
13. REORGANIZATION CHARGES (CONTINUED)
The following table summarizes the reorganization charges incurred and
utilized in 2000 and 2001:
EMPLOYEE FIXED
SEVERANCE LEASE ASSETS
AND RELATED EXIT AGREEMENT AND
COSTS COSTS TERMINATIONS PREPAYMENTS TOTAL
-------------------------------------------------------------------------------------
(IN THOUSANDS)
Charged to expense $ 2,089 $ 1,917 $ - $ - $ 4,006
Utilized (775) (1,396) - - (2,171)
----------------------------------------------------------------------------------
Balance, December 31, 2000 1,314 521 - - 1,835
Charged to expense 3,262 6,977 6,582 21,883
38,704
Adjustments (996) 73 - (386)
(1,309)
Utilized (2,701) (4,137) (2,712) (21,497) (31,047)
----------------------------------------------------------------------------------
Balance, September 30, 2001 $ 879 $ 3,434 $3,870 $ - $ 8,183
==================================================================================
14. FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
CASH AND CASH EQUIVALENTS: The carrying amounts reported in the
consolidated balance sheets approximate fair value.
LONG-TERM DEBT: The carrying amount of the variable rate senior secured
credit facility approximates the fair value. The fair value of the
Company's notes payable are estimated using discounted cash flow analyses,
based on the Company's incremental borrowing rates for similar types of
borrowing arrangements as of December 31, 2000 and 1999.
The carrying amounts and fair values of the Company's financial
instruments are as follows:
DECEMBER 31, 2000 DECEMBER 31, 1999
--------------------------------------------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
--------------------------------------------------------------------
(IN THOUSANDS)
Cash and cash equivalents $ 22,773 $ 22,733 $ 11,248 $ 11,248
Long-term debt:
Working capital promissory note 1,496 1,392 3,077 2,721
Equipment note 3,331 2,496 6,238 5,561
Senior secured credit facility 91,100 91,100 - -
Notes payable to related parties 16,170 15,355 - -
Other 160 138 283 248
F-26
CORECOMM HOLDCO, INC. AND SUBSIDIARIES
AND ITS PREDECESSOR OCOM CORPORATION TELECOMS DIVISION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000)
15. LEASES
The Company has capital leases for certain of its operating equipment.
Leased property included in operating equipment consists of:
DECEMBER 31,
2000 1999
----------------------------------------
Operating equipment $41,859,000 $33,941,000
Accumulated depreciation 14,699,000 5,901,000
----------------------------------------
$27,160,000 $28,040,000
========================================
Future minimum annual payments under these leases at December 31, 2000
are as follows:
Year Ending December 31,
2001 $16,611,000
2002 3,719,000
2003 231,000
----------------
Total minimum lease payments 20,561,000
Less amount representing interest (at rates ranging from 8.5% to 26.44%) 2,646,000
----------------
Present value of net minimum obligations 17,915,000
Current portion 15,222,000
----------------
$ 2,693,000
================
As of December 31, 2000, the Company had leases for office space and
equipment which extend through 2013. Total rent expense for the years ended
December 31, 2000 and 1999, for the period from April 1, 1998 (date
operations commenced) to December 31, 1998 and for the period from January
1, 1998 to May 31, 1998 under operating leases was $7,764,000, $5,151,000,
$354,000 and $98,000, respectively.
Future minimum annual lease payments under noncancellable operating
leases at December 31, 2000 are as follows: $10,748,000 (2001); $9,877,000
(2002); $9,193,000 (2003); $7,492,000 (2004); $6,963,000 (2005) and
$17,306,000 thereafter.
As a result of the cancellation of certain of these leases in 2001, the
future minimum annual lease payments under noncancellable operating leases
at December 31, 2000, after giving effect to the cancellations, are as
follows (unaudited): $8,632,000 (2001); $7,725,000 (2002); $7,021,000
(2003); $5,261,000 (2004); $5,058,000 (2005) and $10,868,000 thereafter.
16. RELATED PARTY TRANSACTIONS
Notes payable to related parties consists of:
SEPTEMBER 30, DECEMBER 31,
2001 2000
---------------------------------------
(UNAUDITED)
10.75% Senior Unsecured Convertible PIK Notes Due December
2010, plus accrued interest $17,494,000 $16,170,000
10.75% Unsecured Convertible PIK Notes Due April 2011, plus
accrued interest, less unamortized discount of $377,000 15,375,000 -
---------------------------------------
$32,869,000 $16,170,000
=======================================
F-27
CORECOMM HOLDCO, INC. AND SUBSIDIARIES
AND ITS PREDECESSOR OCOM CORPORATION TELECOMS DIVISION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000)
16. RELATED PARTY TRANSACTIONS (CONTINUED)
In December 2000, the Company issued $16,100,000 aggregate principal
amount of 10.75% Senior Unsecured Convertible PIK Notes Due December 2010,
which were a joint obligation of CoreComm Limited and the Company, to
officers and directors of CoreComm Limited and the Company. Interest on the
notes was at an annual rate of 10.75% payable semiannually on January 1 and
July 1 of each year, commencing July 1, 2001. The interest was payable in
kind by the issuance of additional Senior Unsecured Convertible PIK Notes
Due December 2010 in such principal amount as shall equal the interest
payment that is then due. The notes were convertible into CoreComm Limited
common stock prior to maturity at a conversion price of $5.00 per share,
subject to adjustment. The additional notes issued for interest had an
initial conversion price equal to 120% of the weighted average closing
price of CoreComm Limited's common stock for a specified period. All of the
outstanding 10.75% Senior Unsecured Convertible PIK Notes Due December 2010
were exchanged for shares of the Company in December 2001.
Some of the officers and directors of the Company are also officers or
directors of NTL Incorporated ("NTL"). In April 2001, CoreComm Limited and
the Company as co-obligors issued to NTL $15 million aggregate principal
amount of 10.75% Unsecured Convertible PIK Notes Due April 2011. In
addition, in April 2001, CoreComm Limited issued warrants to NTL, and
CoreComm Limited and the Company entered into a network and software
agreement with NTL. The estimated value of the warrants of $397,000 was
recorded as a debt discount in April 2001. Pursuant to the network and
software agreement with NTL, the Company will provide U.S. network access
for U.K. Internet traffic from NTL's U.K. customers for three years, as
well as a royalty free license to use certain provisioning software and
know-how.
Interest on the notes is at an annual rate of 10.75% payable
semiannually on October 15 and April 15 of each year, commencing October
15, 2001. The interest is payable in kind by the issuance of additional
10.75% Unsecured Convertible PIK Notes Due April 2011 in such principal
amount as shall equal the interest payment that is then due. Additional
notes issued for interest will have an initial conversion price equal to
120% of the weighted average closing price of the CoreComm Limited common
stock for a specified period. The notes are convertible into CoreComm
Limited common stock prior to maturity at a conversion price of $1.00 per
share, subject to adjustment. However, the holder of these notes and
CoreComm Limited and CoreComm Holdco have entered into an agreement
relating to the conversion feature of the note following the Holdco
Recapitalization. Through that agreement, consistent with the original
terms of the note, CoreComm Limited and CoreComm Holdco have agreed to
exercise their right under the note such that, following the successful
completion of our exchange offer to the holders of CoreComm Limited common
stock to exchange their shares of CoreComm Limited common stock for shares
of our common stock, the convertibility feature of the note will be altered
so that rather than the note being convertible into shares of CoreComm
Limited common stock, it will become convertible into shares of our common
stock. At that time, the conversion price of $1.00 will be equitably
adjusted by applying the exchange ratio in the exchange offers, which
results in a new conversion price of $116.70 per share of our common stock.
The holder has agreed not to exercise its rights to convert into CoreComm
Limited common stock for six months from February 5, 2002 (unless that
right has previously ceased as a result of the completion of the exchange
offer and the change in the convertibility feature). In the event that we
are unsuccessful in completing the exchange offer, the conversion feature
would remain into CoreComm Limited common stock. These notes are
redeemable, in whole or in part, at our option, at any time in April 2003,
at a redemption price of 103.429% that declines annually to 100% in April
2007, in each case together with accrued and unpaid interest to the
redemption date.
NTL provides the Company with management, financial, legal and technical
services, access to office space and equipment and use of supplies. Amounts
charged to the Company by NTL consist of salaries and direct costs
allocated to the Company where identifiable, and a percentage of the
portion of NTL's corporate overhead which cannot be specifically allocated
to NTL. Effective January 1, 2001, the percentage used to allocate
corporate overhead was reduced. NTL's charges to the Company commenced in
October 1998. It is not practicable to determine the amounts of these
expenses that would have been incurred had the Company operated as an
unaffiliated entity. In the opinion of management, this allocation method
is reasonable. In 2000, 1999 and 1998, NTL charged the Company $1,186,000,
$2,330,000 and $313,000, respectively, and in the nine months ended
September 30, 2001 and 2000, NTL charged the Company $340,000 and $907,000,
respectively, which is included in corporate expenses.
F-28
CORECOMM HOLDCO, INC. AND SUBSIDIARIES
AND ITS PREDECESSOR OCOM CORPORATION TELECOMS DIVISION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000)
16. RELATED PARTY TRANSACTIONS (CONTINUED)
The Company provided NTL with access to office space and equipment and
the use of supplies until August 2001. In the fourth quarter of 1999, the
Company began charging NTL a percentage of the Company's office rent and
supplies expense. It is not practicable to determine the amounts of these
expenses that would have been incurred had the Company operated as an
unaffiliated entity. In the opinion of management, this allocation method
is reasonable. In 2000 and 1999, the Company charged NTL $267,000 and
$62,000, respectively, which reduced corporate expenses.
A subsidiary of the Company provides billing and software development
services to subsidiaries of NTL. General and administrative expenses were
reduced by $1,400,000, $800,000, $275,000 and $138,000 for the years ended
December 31, 2000 and 1999, for the period from April 1, 1998 (date
operations commenced) to December 31, 1998 and for the period from January
1, 1998 to May 31, 1998, respectively, as a result of these charges.
General and administrative expenses were reduced by $1,428,000 and $709,000
for the nine months ended September 30, 2001 and 2000, respectively, as a
result of the charges for these services.
In October 2000, the Company billed NTL $6,674,000 for billing and
software development services to be rendered from January to September
2001. In March 2000, the Company and NTL announced that they had entered
into an agreement to link their networks in order to create an
international Internet backbone. In November 2000, the Company billed NTL
$9,128,000 primarily for usage of the network in 2001. The $15,802,000
total is included in due from NTL and deferred revenue at December 31,
2000. In February 2001, the international Internet backbone commenced
operations and the Company recognized revenue of $255,000 for the network
usage in the nine months ended September 30, 2001.
17. 401(k) PLAN
The Company sponsors a 401(k) Plan in which all full-time employees who
have completed 90 days of employment and are 21 years of age may
participate. The Company's matching contribution is determined annually by
the board of directors. Participants may make salary deferral contributions
of 1% to 15% of their compensation not to exceed the maximum allowed by
law. The expense for the years ended December 31, 2000 and 1999, for the
period from April 1, 1998 (date operations commenced) to December 31, 1998
and for the period from January 1, 1998 to May 31, 1998 was $486,000,
$350,000, $103,000 and $29,000, respectively.
18. STOCKHOLDER'S EQUITY
STOCK SPLIT
The Company declared a 6,342.944 to 1 stock split which was effective on
December 17, 2001. The Company's outstanding shares increased from 1,500 to
9,514,416 as a result of this stock split. The consolidated financial
statements and the notes thereto give retroactive effect to the stock
split.
NON-CASH COMPENSATION
In April 2000, the compensation and option committee of the CoreComm
Limited board of directors approved the issuance of options to purchase
approximately 2,747,000 shares of CoreComm Limited's common stock to
employees of the Company at an exercise price of $14.55, which was less
than the fair market value of CoreComm Limited's common stock on the date
of the grant. In accordance with APB Opinion No.25, "Accounting for Stock
Issued to Employees," in April 2000, the Company recorded a non-cash
compensation expense of approximately $29.0 million and a non-cash deferred
expense of approximately $31.3 million. From April 2000 to December 31,
2000, $9.7 million of the deferred non-cash compensation was charged to
expense. The Company will charge the deferred expense to non-cash
compensation expense over the vesting period of the CoreComm Limited stock
options.
F-29
CORECOMM HOLDCO, INC. AND SUBSIDIARIES
AND ITS PREDECESSOR OCOM CORPORATION TELECOMS DIVISION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000)
18. STOCKHOLDER'S EQUITY (CONTINUED)
In November 2000, the board of directors of CoreComm Limited approved
the rescission of certain previously exercised employee stock options.
CoreComm Limited issued notes to employees of the Company for the
repurchase of the 671,000 shares of CoreComm Limited's common stock for an
aggregate of $6,803,000, which exceeded the fair market value of its common
stock on the date of repurchase. The notes earned interest at a rate of
4.5% and were redeemed by the Company in December 2000. The Company
recorded non-cash compensation of $4.7 million from these transactions.
The non-cash compensation charge of $1.1 million in 1999 was recorded in
accordance with APB Opinion No. 25, related to a change in CoreComm Limited
employee stock option agreements of certain of the Company's employees.
In June 2001, CoreComm Limited's board of directors approved the
repricing of certain CoreComm Limited stock options granted to employees of
the Company. George Blumenthal, the then Chairman of the board of directors
of CoreComm Limited, Barclay Knapp, the then President of CoreComm Limited,
and the board of directors of CoreComm Limited did not participate in the
repricing. Options to purchase an aggregate of approximately 10.2 million
shares of CoreComm Limited's common stock with an average exercise price of
$10.70 per share were repriced to $.25, $.75 or $1.25 per share, depending
upon the original exercise price. In accordance with APB No. 25 and related
interpretations, the Company is accounting for the repriced options as a
variable plan. The Company will recognize non-cash compensation expense for
the difference between the quoted market price of the common stock and the
exercise price of the repriced options while the options remain
outstanding. The CoreComm Limited board of directors has taken this action
to continue to provide the appropriate performance incentives to those
affected.
STOCKHOLDER RIGHTS PLAN
The Company adopted a stockholder rights plan in December 2001. In
connection with the stockholder rights plan, the Board of Directors
declared and paid a dividend of one preferred share purchase right for each
share of common stock outstanding on December 17, 2001. Each right entitles
the holder, under certain potential takeover events, to purchase from the
Company one one-thousandth of a share of Series A Junior Participating
Preferred Stock ("Series A Preferred Stock") at an exercise price of
initially four times the average closing price of the Company's common
stock over the first five days of trading, subject to adjustment. The
rights expire on December 17, 2011 unless an exchange or redemption or a
completion of a merger occurs first. There are 1,000,000 shares of Series A
Preferred Stock authorized for issuance under the plan. No shares of Series
A Preferred Stock are issued or outstanding.
The Series A Preferred Stock will be entitled to a minimum preferential
quarterly dividend payment of an amount equal to the greater of $.01 per
share or 1,000 times the aggregate per share amount of all dividends
declared on the Company's common stock since the immediately preceding
dividend payment date. In the event of liquidation, the holders of Series A
Preferred Stock will be entitled to liquidation payment of $1 per share
plus accrued and unpaid dividends. Each share of Series A Preferred Stock
will have 1,000 votes on all matters and will vote as a single class with
the holders of the Company's common stock.
WARRANTS
CoreComm Limited had the following warrants outstanding as of December
31, 2000: (1) warrants to purchase an aggregate of 29,000 shares of common
stock at $13.75 per share issued in 1999 that expire in August 2008, (2)
warrants to purchase an aggregate of 225,000 shares of common stock at
$22.22 per share issued in 1999 that expire in May 2004, (3) warrants to
purchase an aggregate of 563,000 shares of common stock at $13.33 per share
issued in 1999 that expire in May 2002 and (4) warrants to purchase an
aggregate of 403,000 shares of common stock at $3.39 per share issued in
2000 that expire in December 2010. In connection with the amendment and
restatement of the senior secured credit facility in April 2001, CoreComm
Limited issued to lenders warrants to purchase approximately 10.6 million
shares of common stock at an exercise price of $.01 per share that expire
in April 2011. Warrants issued in 2000 to purchase an aggregate of 1.4
million shares of common stock were canceled upon the issuance of these new
warrants.
F-30
CORECOMM HOLDCO, INC. AND SUBSIDIARIES
AND ITS PREDECESSOR OCOM CORPORATION TELECOMS DIVISION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTs (continued)
(UNAUDITED WITH RESPECT TO THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000)
18. STOCKHOLDER'S EQUITY (CONTINUED)
The Company intends to offer its common stock to CoreComm Limited's
stockholders through a registered public exchange offer. If this exchange
offer is consummated, CoreComm Limited's warrants will be exercisable into
common shares of the Company on an as-converted basis, subject to any
exchange ratio in the exchange offer.
STOCK OPTIONS
In December 2001, the Company adopted a new stock option plan for its
employees. A total of 2.9 million shares of common stock were reserved for
issuance under the plan, which represents 22.5% of the total fully diluted
shares of the Company. In January 2002, the Board of Directors approved a
grant of options to purchase an aggregate of approximately 2.58 million
shares of the Company's common stock, representing approximately 20% of the
total fully diluted shares. The exercise price of these options is $3.00
per share, the estimated fair market value on the date of grant. The number
of shares available under the plan and the number of shares into which each
option is exercisable are subject to adjustment in the event of stock
splits and other similar transactions.
The Company's option plan provides that incentive stock options be
granted at the fair market value of the Company's common stock on the date
of grant, and nonqualified stock options be granted at a price determined
by the compensation and option committee of CoreComm Holdco's board of
directors. Options are generally exercisable as to 33.34% of the shares
subject thereto on the date of grant and become exercisable as to an
additional 33.34% of the shares subject thereto on each January 1
thereafter, while the optionee remains an employee of CoreComm Holdco or
its affiliates. Options will expire ten years after the date of the grant.
As of December 31, 2000, there were approximately 33,051,000 shares of
Limited common stock reserved for issuance under the CoreComm Limited stock
option plans (the "Limited Plans"), and there were approximately 11.3
million shares available for issuance. As of December 31, 2001, there were
options to purchase approximately 22.1 million shares of CoreComm Limited
common stock outstanding. In December 2001, the CoreComm Limited board of
directors, in connection with the Holdco Recapitalization, accelerated all
outstanding options to acquire shares of CoreComm Limited common stock so
that all are presently fully vested and exercisable. CoreComm Limited
options are not exercisable for shares of CoreComm Holdco's common stock.
In the event that CoreComm Holdco is successful in consummating the
exchange offers, CoreComm Limited would become a subsidiary of CoreComm
Holdco. Subsequent to that time, CoreComm Holdco and CoreComm Limited may
agree to effect a merger between CoreComm Limited and a subsidiary of
CoreComm Holdco which would have the effect of converting holders of any
remaining outstanding shares of CoreComm Limited common stock not owned by
CoreComm Holdco into shares of CoreComm Holdco at an exchange ratio
identical to that being offered in the exchange offers. Between now and
that time, if holders of CoreComm Limited options exercise their options,
they would, at the time of a merger, have the same rights as other holders
of CoreComm Limited common stock to have their shares of CoreComm Limited
converted to shares of CoreComm Holdco at that exchange ratio. CoreComm
Holdco may be required to record non-cash compensation upon the ultimate
resolution of the CoreComm Limited Stock options.
The Limited Plans provide that incentive stock options be granted at the
fair market value of CoreComm Limited's common stock on the date of grant,
and nonqualified stock options be granted at a price determined by the
compensation and option committee of the CoreComm Limited board of
directors. Options are generally exercisable as to 20% of the shares
subject thereto on the date of grant and become exercisable as to an
additional 20% of the shares subject thereto on each January 1 thereafter,
while the optionee remains an employee of CoreComm Limited or its
affiliates. Options will expire ten years after the date of the grant.
In connection with the distribution of CoreComm Limited to CCPR's
shareholders, CoreComm Limited issued warrants to purchase shares of its
common stock to holders of CCPR stock options who elected to receive
warrants. Otherwise, CoreComm Limited issued stock options to holders of
CCPR stock options. All of these warrants were exercised by December 31,
2000. These warrants are included in the following disclosures of warrants
and stock options.
Pro forma information regarding net loss and net loss per share is
required by SFAS No. 123, and has been determined as if CoreComm Limited
had accounted for its employee warrants and stock options under the fair
value method of that Statement. The fair value for these warrants and
options was estimated at the date of grant using the Black-Scholes
F-31
CORECOMM HOLDCO, INC. AND SUBSIDIARIES
AND ITS PREDECESSOR OCOM CORPORATION TELECOMS DIVISION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000)
18. STOCKHOLDER'S EQUITY (CONTINUED)
option pricing model with the following weighted-average assumptions for
2000, 1999 and 1998: risk-free interest rate of 5.30%, 6.81% and 5.02%,
respectively, dividend yield of 0%, volatility factor of the expected
market price of CoreComm Limited's common stock of .804, .465 and .810,
respectively, and a weighted-average expected life of the warrants and
options of 10 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because CoreComm Limited's distribution
warrants and stock options have characteristics significantly different
from those of traded options and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its distribution warrants and stock options.
For purposes of pro forma disclosures, the estimated fair value of the
distribution warrants and options is amortized to expense over the options'
vesting periods. Following is the Company's pro forma information as if the
Company and not CoreComm Limited had issued the distribution warrants and
stock options:
FOR THE PERIOD FROM APRIL
1, 1998 (DATE OPERATIONS
YEAR ENDED DECEMBER 31, COMMENCED) TO
2000 1999 DECEMBER 31, 1998
------------------------------------------------------------------
Pro forma net (loss) $(376,557,000) $(128,451,000) $(45,575,000)
Pro forma net (loss) per share - basic and diluted $(39.58) $(13.50) $(4.79)
A summary of CoreComm Limited's distribution warrants and stock option
activity and related information, as if the Company and not CoreComm
Limited had issued the distribution warrants and stock options, for the
years ended December 31, 2000 and 1999 and for the period from April 1,
1998 (date operations commenced) to December 31, 1998 follows:
2000 1999 1998
--------------------------------------------------------------------------------------------
NUMBER OF WEIGHTED- NUMBER OF WEIGHTED- NUMBER OF WEIGHTED-AVERAGE
WARRANTS AND AVERAGE WARRANTS AND AVERAGE WARRANTS AND EXERCISE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS PRICE
---------------------------------------------------------------------------------------------
Outstanding - beginning
of period 10,754,000 $15.37 9,765,000 $ 5.51 - $ -
Granted 10,404,000 10.98 7,925,000 19.56 9,767,000 5.51
Exercised 1,640,000 7.61 5,606,000 6.27 2,000 5.86
Forfeited 169,000 14.09 1,330,000 6.27 - -
------------- -------------- -------------
Outstanding - end of 19,349,000 $13.69 10,754,000 $15.37 9,765,000 $ 5.51
period
============= ============== =============
Exercisable at end of 10,112,000 $12.51 3,438,000 $10.11 7,747,000 $ 5.42
period
============= ============== =============
Weighted-average fair value of distribution warrants and options,
calculated using the Black-Scholes option pricing model, granted during
2000, 1999 and 1998 is $14.04, $14.28 and $4.33, respectively.
F-32
CORECOMM HOLDCO, INC. AND SUBSIDIARIES
AND ITS PREDECESSOR OCOM CORPORATION TELECOMS DIVISION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000)
18. STOCKHOLDER'S EQUITY (CONTINUED)
The following table summarizes the status of the CoreComm Limited
distribution warrants and stock options outstanding and exercisable at
December 31, 2000, as if the Company and not CoreComm Limited had issued
the distribution warrants and stock options:
WARRANTS AND
WARRANTS AND STOCK OPTIONS OUTSTANDING STOCK OPTIONS EXERCISABLE
------------------------------------------------------ -------------------------------------
NUMBER OF WEIGHTED- WEIGHTED- NUMBER OF WEIGHTED-
RANGE OF EXERCISE WARRANTS AND REMAINING AVERAGE WARRANTS AND AVERAGE
PRICES OPTIONS CONTRACTUAL LIFE EXERCISE PRICE OPTIONS EXERCISE PRICE
---------------------------------------------------------------------------------------------------------------------
$0.02 to $3.36 3,146,000 9.0 Years $ 2.085 2,803,000 $ 1.988
$5.28 to $8.13 4,346,000 8.9 Years $ 7.197 1,294,000 $ 6.814
$11.94 to $14.78 3,373,000 9.4 Years $ 14.205 1,950,000 $ 14.005
$15.63 to $18.95 901,000 8.6 Years $ 18.185 487,000 $ 17.756
$19.18 to $22.45 7,156,000 8.7 Years $ 20.759 3,394,000 $ 20.621
$24.92 to $27.13 185,000 8.7 Years $ 25.115 77,000 $ 25.200
$30.00 to $33.75 28,000 9.3 Years $ 31.168 16,000 $ 31.239
$34.33 to $37.33 5,000 9.1 Years $ 36.889 3,000 $ 36.889
$38.07 to $41.75 182,000 9.1 Years $ 39.480 74,000 $ 39.536
$45.75 to $46.00 27,000 9.2 Years $ 45.826 14,000 $ 45.806
---------------------------------------------------------------------------------------------------------------------
Total 19,349,000 10,112,000
=====================================================================================================================
19. INCOME TAXES
The provision for income taxes consists of the following:
FOR THE PERIOD FROM
APRIL 1, 1998 (DATE
OPERATIONS
COMMENCED) TO
YEAR ENDED DECEMBER 31, DECEMBER 31,
2000 1999 1998
------------------------------------------------------------
Current:
Federal $ - $ - $ -
State and local 125,000 102,000 -
------------------------------------------------------------
Total current 125,000 102,000 -
------------------------------------------------------------
Deferred:
Federal - - -
State and local - - -
------------------------------------------------------------
Total deferred - - -
------------------------------------------------------------
$ 125,000 $ 102,000 $ -
============================================================
F-33
CORECOMM HOLDCO, INC. AND SUBSIDIARIES
AND ITS PREDECESSOR OCOM CORPORATION TELECOMS DIVISION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000)
19. INCOME TAXES (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax assets are as follows:
DECEMBER 31,
2000 1999
-----------------------------------------------
Deferred tax assets:
Depreciation $ 1,214,000 $ 875,000
Net operating losses 107,220,000 35,168,000
Allowance for doubtful accounts 4,414,000 1,599,000
Amortization of goodwill 7,405,000 653,000
Accrued expenses 35,820,000 10,359,000
Asset impairments 8,546,000 -
Other 174,000 200,000
-----------------------------------------------
164,793,000 48,854,000
Valuation allowance for deferred tax assets (164,793,000) (48,854,000)
-----------------------------------------------
Net deferred tax assets $ - $ -
===============================================
The deferred tax assets have been fully offset by a valuation allowance
due to the uncertainty of realizing such tax benefit. The deferred tax
assets include $39 million which, if realized, would be accounted for as a
reduction of goodwill or an increase in equity.
At December 31, 2000, the Company had net operating loss carryforwards of
approximately $245 million for federal income tax purposes that begin to
expire in 2018, of which $38 million and $68 million may be limited
pursuant to separate return limitation rules and change in ownership rules,
respectively.
The reconciliation of income taxes computed at U.S. federal statutory rates
to income tax expense is as follows:
FOR THE PERIOD FROM
APRIL 1, 1998 (DATE
OPERATIONS
COMMENCED) TO
YEAR ENDED DECEMBER 31, DECEMBER 31,
2000 1999 1998
----------------------------------------------------------------
Benefit at federal statutory rate (35%) $(105,391,000) $(36,077,000) $(4,835,000)
State and local income taxes 125,000 102,000 -
Expenses not deductible for tax purposes 33,619,000 2,160,000 1,623,000
Foreign income not subject to U.S. tax - (362,000) -
U.S. losses with no benefit 71,772,000 34,279,000 3,212,000
----------------------------------------------------------------
$ 125,000 $ 102,000 $ -
================================================================
F-34
CORECOMM HOLDCO, INC. AND SUBSIDIARIES
AND ITS PREDECESSOR OCOM CORPORATION TELECOMS DIVISION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000)
20. COMMITMENTS AND CONTINGENT LIABILITIES
As of December 31, 2000, the Company had purchase commitments of
approximately $52,000,000 outstanding, which includes approximately
$18,000,000 pursuant to a contract that ends in January 2009.
As of September 30, 2001, the Company had purchase commitments of
approximately $5,000,000 outstanding. The Company significantly reduced the
amount of outstanding commitments through cancellations and renegotiations
during 2001.
The Company is involved in various disputes and litigation arising in
the ordinary course of its business None of these matters are expected to
have a material adverse effect on the Company's financial position, results
of operations or cash flows.
F-35
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 shares 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.
F-36
VOYAGER.NET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ---------------------------
2000 1999 2000 1999
------------- ------------- ------------- ------------
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
=========== =========== ============ ===========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
F-37
VOYAGER.NET, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
RECEIVABLES
FOR
PREFERRED
COMMON STOCK ADDITIONAL AND NOTES AND TOTAL
-------------------- PAID-IN COMMON INTEREST DEFERRED ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL STOCK RECEIVABLE COMPENSATION DEFICIT EQUITY
--------- -------- ------------ ----------- ----------- ----------- ------------ -------------
Balance January 1,
2000 31,650,108 $ 2,712 $ 112,129,038 $(6,291,935) $(5,630,418) $ 111,420 $(27,221,126) $ 73,099,691
Interest on
receivables.... -- -- -- (150,000) (138,000) -- -- (288,000)
Exercise of stock
options........ 4,650 -- 22,506 -- -- -- -- 22,506
Deferred
compensation... -- -- -- -- -- 50,000 -- 50,000
Net loss -- -- -- -- -- -- (13,794,735) (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) $ 59,089,462
========== ======= ============ ========== ========== ========= ============ ============
The accompanying notes are an integral part of the condensed
consolidated financial statements.
F-38
VOYAGER.NET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
------------------------------
2000 1999
-------------- -------------
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 50,000 2,509,000
options...........................................
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
============ ============
The accompanying notes are an integral part of the condensed
consolidated financial statements.
F-39
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 SEC. 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 SEC 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.
(IN THOUSANDS EXCEPT
PER SHARE DATA)
SIX MONTHS ENDED
JUNE 30,
--------
2000 1999
--------- ---------
Revenues.................... $ 37,060 $ 31,223
Net loss.................... (13,900) (15,925)
Basic and diluted loss per (0.44) (0.70)
share.......................
The pro forma results above include amortization of intangibles and
interest expense on debt assumed issued to finance the acquisitions. The pro
forma results are not necessarily indicative of what actually would have
occurred if the acquisitions had been completed as of the beginning of each of
the fiscal periods presented, nor are they necessarily indicative of future
consolidated results.
3. DEBT:
The Company has a revolving available credit facility with a bank group in
the amount of $60 million, with the option to extend to $70 million, on similar
terms and conditions. The credit facility matures on June 30, 2005. The
revolving credit facility agreement allows the Company to elect an interest rate
as of 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.
F-40
VOYAGER.NET, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
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:
SIX MONTHS ENDED
JUNE 30,
----------------------------
2000 1999
------------- -------------
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
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.
Although the Company is still in the process of reviewing SAB 101, it
believes that its revenue recognition practices are in substantial compliance
with SAB 101 for the year ending December 31, 2000 or that adoption of its
provisions would not be material to its annual or quarterly results of
operations.
8. MERGER AGREEMENT:
On March 12, 2000, the Company entered into an agreement to merge with
CoreComm Limited in a stock and cash transaction. The transaction is subject to
stockholder approval, certain regulatory approvals and other conditions.
F-41
VOYAGER.NET, INC
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.
/s/ PricewaterhouseCoopers LLP
Grand Rapids, Michigan
February 10, 2000, except for Note 18,
for which the date is March 12, 2000
F-42
VOYAGER.NET, INC
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
----------------------------
1998 1999
------------- -------------
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
============ =============
The accompanying notes are an integral part of the consolidated financial
statements.
F-43
VOYAGER.NET, INC
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
-------------------------------------------
1997 1998 1999
------------- ------------- -------------
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
========== =========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
F-44
VOYAGER.NET, INC
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
PREFERRED STOCK COMMON STOCK
--------------- ------------ ADDITIONAL
PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
------ ------ ------ ------ -------
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 loans 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
====== =========== ========== ======= =============
The accompanying notes are an integral part of the consolidated financial
statements.
F-45
VOYAGER.NET, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) - (CONTINUED)
RECEIVABLE
FOR
PREFERRED TOTAL
AND NOTES AND STOCKHOLDERS'
COMMON INTEREST DEFERRED ACCUMULATED EQUITY
STOCK RECEIVABLE COMPENSATION DEFICIT (DEFICIT)
----- ---------- ------------ ------- ---------
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 loans 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
=========== =========== =========== ============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
F-46
VOYAGER.NET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
------------------------
1997 1998 1999
------------- ------------- ---------
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
========== ============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
F-47
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.
F-48
VOYAGER.NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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:
PURCHASE
ACQUISITION DATE ACQUIRED ASSETS PRICE
----------------- ------------------------------------------ ---------
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
============
The aforementioned acquisitions were accounted for using the purchase
method of accounting. The operations of the entities are included in the income
statement of Voyager.net from the acquisition date forward. For each
acquisition, the excess of cost of the acquired assets less liabilities assumed
resulted in a substantial portion of the purchase price being allocated to the
acquired customer base (see Note 4).
F-49
VOYAGER.NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. BUSINESS COMBINATIONS (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.
YEAR ENDED DECEMBER 31,
-----------------------
1997 1998 1999
----------- ----------- --------
Revenue........................ $ 14,120 $ 43,296 $ 62,858
Net Loss....................... (12,590) (37,656) (24,918)
Basic and diluted net loss per (1.43) (2.13) (0.91)
share..........................
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:
DEPRECIABLE
1998 1999 LIFE-YEARS
------------ ------------ -----------
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 1,178,525 5,365,475 5
lease.............................
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
============ ============
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
============ ============
F-50
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 $ 272,654 $ 983,197
expenses.........................
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, 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:
F-51
VOYAGER.NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. DEBT (CONTINUED)
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:
1997 1998 1999
------ ------ -----
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%
===== ===== =====
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:
1997 1998 1999
------------ ------------ -----------
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..... $ -- $ -- $ --
=========== =========== ===========
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.
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.
F-52
VOYAGER.NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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.
F-53
VOYAGER.NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. STOCK-BASED COMPENSATION PLAN (CONTINUED)
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:
WEIGHTED
NUMBER AVERAGE
OF EXERCISE
OPTIONS PRICE
-------- ---------
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
========= ==========
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.
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:
1998 1999
------------ ---------
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)
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:
1998 1999
---- ----
Risk free rate..... 5.7% 4.6%
Expected dividends. -- --
Expected life...... 5 years 4 years
Volatility assumption 76% 75%
F-54
VOYAGER.NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
YEARS ENDED DECEMBER 31
1997 1998 1999
---------- ------------ -------------
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)
========== ============ =============
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.
14. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
The following is the supplemental cash flow information for all periods
presented:
YEARS ENDED DECEMBER 31
-----------------------
1997 1998 1999
------------ ------------- ---------
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....................... $ -- $ -- $ --
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.
F-55
VOYAGER.NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
17. QUARTERLY FINANCIAL DATA (UNAUDITED)
FOR THE THREE MONTHS ENDED
-----------------------------------------------------
1999
-----------------------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
------------ ------------ ------------ -----------
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
1998
------------------------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
------------ ------------ ------------ -------------
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
18. SUBSEQUENT EVENTS (UNAUDITED)
On February 11, 2000, the Company purchased assets from Valley Business
Equipment, Inc. for approximately $4,100,000 of which approximately $3,700,000
was remitted to Valley Business Equipment, Inc. and the remainder was deposited
in an escrow account. Approximately $4,000,000 was allocated to the acquired
customer base cost as a result of this transaction.
On March 12, 2000, the Company entered into an agreement to merge with
CoreComm Limited in a stock and cash transaction. The transaction is subject to
stockholder approval, certain regulatory approvals and other conditions.
F-56
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....................... 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.
F-57
ATX TELECOMMUNICATIONS SERVICES, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, 2000 JUNE 30, 1999 JUNE 30, 2000 JUNE 30, 1999
------------- ------------- ------------- -------------
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.
F-58
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.
F-59
ATX TELECOMMUNICATIONS SERVICES, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 2000 JUNE 30, 1999
-------------- -------------
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
========== ==========
See accompanying notes to unaudited financial statements.
F-60
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.
In July 2001, the Company finalized the streamlining of its operating
structure to focus on its two most successful and promising lines of business.
The first is integrated communications products and other high
bandwidth/data/web-oriented services for the business market and the second is
bundled local telephony and Internet products efficiently sold, serviced and
provisioned via Internet-centric interfaces to the residential market.
3. BASIS OF PRESENTATION
In the opinion of management, all adjustments which have been made are
necessary to present fairly the financial position of the Company as of June 30,
2000 and 1999 and the results of operations for the six month periods ended June
30, 2000 and 1999. The results of operations for the six month period ending
June 30, 2000 are not necessarily indicative of the results to be experienced
for the fiscal year ending December 31, 2000.
The Statements and related notes herein have been prepared
pursuant to the rules and regulations of the Securities and Exchange
Commission. Accordingly, certain information and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been omitted pursuant to such
rules and regulations. The accompanying notes should therefore be read in
conjunction with the Company's December 31, 1999 financial statements
included elsewhere herein.
F-61
ATX TELECOMMUNICATIONS SERVICES, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS (CONTINUED)
4. 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.
5. 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.
6. SUPPLEMENTAL CASH FLOW INFORMATION
Prior to the merger into ATX, Inc. distributions were made to the former
partners of ATX of approximately $4.3 million to satisfy their loan balances.
Additionally, loans to an officer of the Company were forgiven of approximately
$1.9 million and shown as a contribution to equity.
F-62
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, and the related
combined statements of operations, changes in partners' capital, and cash flows
for each of the two years in the period ended December 31, 1999. 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, and the results of
their operations and their cash flows for each of the two years in the period
ended December 31, 1999 in conformity with generally accepted accounting
principles.
/s/ BDO Seidman, LLP
Philadelphia, Pennsylvania
March 10, 2000
F-63
ATX TELECOMMUNICATIONS SERVICES, INC.
COMBINED BALANCE SHEETS
DECEMBER 31,
1999
------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents............... $ 3,188,375
Accounts receivable, net of allowances for
doubtful accounts and credits of 20,639,086
$1,909,000...........................
Other current assets.................... 101,176
Receivables, related parties............ --
-----------
Total current assets...................... 23,928,637
Property and equipment, net............... 8,359,873
Intangible assets, net.................... 727,496
Other assets.............................. 261,864
Receivables, partners..................... 4,265,685
-----------
Total assets.............................. $ 37,543,555
===========
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES
Accounts payable........................ $ 12,340,460
Accrued expenses........................ 1,066,180
Accrued payroll and related expenses.... 4,700,882
Accrued partners' distributions......... --
Sales and excise taxes payable.......... 2,256,516
Current portion of long-term debt....... --
Payables, related parties............... 1,750,835
-----------
TOTAL CURRENT LIABILITIES................. 22,114,873
Long-term debt............................ --
Payables, related parties................. 1,864,560
-----------
Total liabilities......................... 23,979,433
COMMITMENTS AND CONTINGENCIES
Phantom Unit Compensation................. 1,400,000
Partners' capital......................... 12,164,122
-----------
Total liabilities and partners' capital... $ 37,543,555
===========
See accompanying notes to combined financial statements.
F-64
ATX TELECOMMUNICATIONS SERVICES, INC.
COMBINED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
----------------------------
1999 1998
------------- ------------
REVENUES.............................. $ 135,020,849 $113,654,155
------------- ------------
EXPENSES
Cost of revenues.................... 85,477,119 68,435,883
Selling, general and administrative 51,213,416 43,280,185
------------- ------------
TOTAL EXPENSES........................ 136,690,535 111,716,068
------------- ------------
(LOSS) INCOME FROM OPERATIONS......... (1,669,686) 1,938,087
INTEREST INCOME, NET................. 71,844 115,042
------------- ------------
NET (LOSS) INCOME.................... $ (1,597,842) $ 2,053,129
============= ============
See accompanying notes to combined financial statements.
F-65
ATX TELECOMMUNICATIONS SERVICES, INC.
COMBINED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
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.
F-66
ATX TELECOMMUNICATIONS SERVICES, INC.
COMBINED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
--------------------------
1999 1998
------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income................................. $(1,597,842) $ 2,053,129
Adjustments to reconcile net (loss) income to
net cash
provided by operating activities 1,820,453 1,947,830
Depreciation and amortization................
Provision for allowances..................... 196,000 301,000
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)
Other current assets...................... 1,166,620 (343,569)
Other assets.............................. (261,864) --
Increase (decrease) in liabilities
Accounts payable.......................... 2,630,645 3,173,463
Accrued expenses.......................... (6,475) 141,155
Accrued payroll and related expenses...... 181,913 4,043,422
Sales and excise taxes payable............ 347,932 (620,294)
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES........... 99,653 8,330,442
----------- -----------
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)
Purchase of intangible assets..................... -- --
Decrease (increase) in receivables and payable,
related parties................................ 1,072,042 5,296,898
Increase in loans to partners..................... (2,228,065) (117,178)
----------- -----------
NET CASH (USED IN) PROVIDED BY INVESTING
ACTIVITIES........................................ (4,853,413) 376,485
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Payment of long-term debt......................... (562,500) (275,000)
Partners' contributions........................... 4,847,739 2,000,000
Partners' distributions........................... (1,410,419) (8,595,978)
----------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES........................................ 2,874,820 (6,870,978)
----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS....................................... (1,878,940) 1,835,949
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR...... 5,067,315 3,231,366
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR............ $ 3,188,375 $ 5,067,315
=========== ===========
See accompanying notes to combined financial statements.
F-67
ATX TELECOMMUNICATIONS SERVICES, INC.
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.
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.
F-68
ATX TELECOMMUNICATIONS SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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.
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.
F-69
ATX TELECOMMUNICATIONS SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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:
DECEMBER 31
-----------
1999
-----------
Computer and switching equipment.. $19,964,627
Furniture and fixtures............ 1,150,108
Automobiles....................... 352,113
Leasehold improvements............ 79,492
-----------
21,546,340
Less accumulated depreciation and
Amortization.................... 13,186,467
-----------
$ 8,359,873
===========
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 and 1998 was $1,619,083 and $1,444,456,
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 and $1,182,515 to these partnerships for the years ended December 31,
1999 and 1998, respectively.
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
==========
F-70
ATX TELECOMMUNICATIONS SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
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 and 1998. 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 and 1998 of $176,166 and $127,670,
respectively.
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.
F-71
ATX TELECOMMUNICATIONS SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
11. PHANTOM UNIT PLAN (CONTINUED)
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.
F-72
CORECOMM LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30,
2001
-------------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 46,953,000
Accounts receivable-trade, less allowance for doubtful accounts of $9,251,000 36,337,000
Other 4,748,000
-------------------
Total current assets 88,038,000
Fixed assets, net of accumulated depreciation of $71,051,000 120,532,000
Goodwill, net of accumulated amortization of $98,333,000 355,448,000
Intangible assets, net 5,790,000
Other, net of accumulated amortization of $2,836,000 22,700,000
-------------------
$ 592,508,000
===================
LIABILITIES AND SHAREHOLDERS' (DEFICIENCY) Current liabilities:
Accounts payable $ 44,785,000
Accrued expenses 96,254,000
Due to NTL Incorporated 287,000
Current portion of long-term debt, notes payable and capital lease obligations 43,511,000
Deferred revenue 29,896,000
-------------------
Total current liabilities 214,733,000
Long-term debt 404,486,000
Notes payable to related parties, less unamortized discount 32,869,000
Capital lease obligations 324,000
Commitments and contingent liabilities
Shareholders' (deficiency):
Series preferred stock - $.01 par value, authorized 5,000,000 shares: Series
A, liquidation preference $54,413,000; issued and outstanding 51,000
shares -
Series B, liquidation preference $261,524,000; issued and outstanding
250,000 shares 3,000
Series C, none issued or outstanding -
Common stock - $.01 par value, authorized 600,000,000 shares; issued and
outstanding 98,371,000 shares 984,000
Additional paid-in capital 788,911,000
Deferred non-cash compensation (11,936,000)
(Deficit) (827,292,000)
-------------------
(49,330,000)
Treasury stock at cost, 1,329,000 shares (10,574,000)
-------------------
(59,904,000)
-------------------
$592,508,000
===================
See accompanying notes.
F-73
CORECOMM LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------- -----------------------------------
2001 2000 2001 2000
------------------ ----------------- ---------------- ---------------
REVENUES $ 74,307,000 $ 18,263,000 $ 220,487,000 $ 56,619,000
COSTS AND EXPENSES
Operating 54,760,000 25,746,000 175,942,000 77,446,000
Selling, general and administrative 20,879,000 23,123,000 75,847,000 72,044,000
Corporate 1,194,000 3,363,000 6,714,000 8,559,000
Non-cash compensation 3,234,000 3,234,000 9,702,000 35,420,000
Reorganization charges 3,910,000 (243,000) 37,395,000 775,000
Write-down of intangibles - - 167,599,000 -
Depreciation 11,006,000 7,389,000 34,652,000 19,494,000
Amortization 20,784,000 3,477,000 75,392,000 9,812,000
--------------------------------------- -----------------------------------
115,767,000 66,089,000 583,243,000 223,550,000
--------------------------------------- -----------------------------------
Operating (loss) (41,460,000) (47,826,000) (362,756,000) (166,931,000)
OTHER INCOME (EXPENSE)
Interest income and other, net 570,000 1,626,000 2,026,000 5,476,000
Interest expense (13,353,000) (3,900,000) (35,422,000) (11,434,000)
--------------------------------------- -----------------------------------
(Loss) before income taxes and
extraordinary item (54,243,000) (50,100,000) (396,152,000) (172,889,000)
Income tax benefit (provision) 82,000 (49,000) 234,000 (321,000)
--------------------------------------- -----------------------------------
(Loss) before extraordinary item (54,161,000) (50,149,000) (395,918,000) (173,210,000)
Gain from early extinguishment of debt 2,216,000 - 2,216,000 -
--------------------------------------- -----------------------------------
Net (loss) $(51,945,000) $(50,149,000) $(393,702,000) $(173,210,000)
======================================= ===================================
Basic and diluted net (loss) per common share:
(Loss) before extraordinary item $(0.59) $(1.24) $(4.70) $(4.35)
Extraordinary item 0.02 - 0.03 -
---------------------------------------- -----------------------------------
Net (loss) per common share $(0.57) $(1.24) $(4.67) $(4.35)
======================================== ===================================
See accompanying notes.
F-74
CORECOMM LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIENCY)
(UNAUDITED)
SERIES A SERIES B
PREFERRED STOCK PREFERRED STOCK COMMON STOCK ADDITIONAL DEFERRED TREASURY STOCK
--------------- --------------- ------------------ PAID-IN NON-CASH ------------------------
SHARES PAR SHARES PAR SHARES PAR CAPITAL COMPENSATION (DEFICIT) SHARES AMOUNT
------- ------ ------- ------ ---------- -------- ------------ ------------- -------------- ---------- -------------
Balance, December
31, 2000 51,000 $- 250,000 $3,000 72,029,000 $720,000 $781,357,000 $(21,638,000) $(433,590,000)(1,329,000) $(10,574,000)
Exercise of stock
options 3,000 - 4,000
Common stock
issued for
dividend on
preferred stock 542,000 6,000 1,869,000
Accreted
dividends on
preferred stock (13,321,000)
Common stock
issued for
interest on
senior
unsecured notes 25,423,000 254,000 3,305,000
Conversion of 6%
convertible
subordinated
notes 374,000 4,000 10,246,000
Warrants issued
in connection
with financing 5,451,000
Non-cash
compensation
expense 9,702,000
Net (loss) for
the nine months
ended September
30, 2001 (393,702,000)
------------------------------------------------------------------------------------------------------------------
Balance,
September 30,
2001 51,000 $- 250,000 $3,000 98,371,000 $984,000 $788,911,000 $(11,936,000) $(827,292,000)(1,329,000) $(10,574,000)
==================================================================================================================
See accompanying notes.
F-75
CORECOMM LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------
2001 2000
-------------- --------------
Net cash (used in) operating activities $(58,212,000) $(112,320,000)
INVESTING ACTIVITIES
Purchase of fixed assets (4,384,000) (43,573,000)
Acquisitions, net of cash acquired - (92,320,000)
Purchase of marketable securities - (36,021,000)
Proceeds from sales of marketable securities 4,775,000 114,870,000
-------------- --------------
Net cash provided by (used in) investing activities 391,000 (57,044,000)
FINANCING ACTIVITIES
Proceeds from borrowing, net of financing costs 88,679,000 71,161,000
Proceeds from issuance of preferred stock - 50,000,000
Proceeds from exercise of stock options and warrants 4,000 12,462,000
Principal payments (3,991,000) (4,217,000)
Principal payments of capital lease obligations (5,720,000) (11,766,000)
-------------- --------------
Net cash provided by financing activities 78,972,000 117,640,000
-------------- --------------
Increase (decrease) in cash and cash equivalents 21,151,000 (51,724,000)
Cash and cash equivalents at beginning of period 25,802,000 86,685,000
-------------- --------------
Cash and cash equivalents at end of period $ 46,953,000 $34,961,000
============== ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $ 15,465,000 $13,752,000
Income taxes paid - 364,000
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING ACTIVITIES
Liabilities incurred to acquire fixed assets $ 6,450,000 $37,529,000
Common stock, preferred stock and warrants issued for acquisitions - 400,665,000
Notes issued for acquisitions - 94,015,000
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES
Common stock issued for dividend on preferred stock $ 1,875,000 $ -
Common stock issued for interest on senior unsecured notes 3,559,000 -
Conversion of convertible notes 10,250,000 -
Warrants issued in connection with financing 5,451,000 -
See accompanying notes.
F-76
CORECOMM LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three and nine months
ended September 30, 2001 are not necessarily indicative of the results that may
be expected for the year ending December 31, 2001.
Some amounts have been reclassified to conform to the 2001 presentation.
The accompanying unaudited condensed consolidated financial statements do
not take into consideration or give effect to the Holdco Recapitalization. For
more information on the effect of the Holdco Recapitalization , please refer to
the section of this prospectus entitled "Unaudited Pro Forma Financial Data of
Holdco and Unaudited Pro Forma Financial Data of Limited."
NOTE 2. RECAPITALIZATION PLAN
In April 2001, CoreComm Limited completed a reevaluation of its business
plan in light of current market conditions and made significant modifications to
its plans. CoreComm Limited is devoting its resources to the more profitable
areas of its business and is substantially reducing its operations and related
costs in the other areas of its business. CoreComm Limited is currently engaged
in a process to potentially sell its non-CLEC assets and businesses, and
retained advisors for the purpose of conducting this sale.
In July 2001, CoreComm Limited finalized the streamlining of its operating
structure to focus on its two most successful and promising lines of business.
The first is integrated communications products and other high
bandwidth/data/web-oriented services for the business market and the second is
bundled local telephony and Internet products efficiently sold, serviced and
provisioned via Internet-centric interfaces to the residential market.
In October 2001, CoreComm Limited and CoreComm Holdco commenced the Holdco
Recapitalization. In the first phase, CoreComm Limited entered into agreements
with numerous holders of its 6% Convertible Subordinated Notes Due 2006 whereby
the holders agreed, among other things, to exchange their notes for
approximately $5 million in cash (representing the October 1, 2001 interest
payment that had not been paid) and shares of CoreComm Holdco common stock as
part of a recapitalization plan. The exchange was completed in December 2001,
including the payment of the approximately $5 million by CoreComm Limited.
On December 28, 2001, CoreComm Holdco completed the next phase of the
Holdco Recapitalization, which was the exchange of shares of its common stock
for substantial amounts of the outstanding indebtedness of CoreComm Holdco,
substantial amounts of the outstanding indebtedness of CoreComm Limited and
CoreComm Holdco as co-obligors and all of the outstanding preferred stock of
CoreComm Limited. This exchange was completed pursuant to an exchange agreement
with CoreComm Limited and (1) holders of 10.75% Unsecured Convertible PIK Notes
due 2011 and 10.75% Senior Unsecured Convertible PIK Notes due 2010, both of
which were a joint obligation of CoreComm Limited and CoreComm Holdco, in the
initial principal amounts of $10,000,000 and $16,100,000, respectively, together
with any interest paid thereon, (2) the holders of Senior Unsecured Notes due
September 29, 2003 of CoreComm Limited in the principal amount of $105.7
million, and (3) the holders of all of the preferred stock of CoreComm Limited
in the initial principal amount of $300 million together with any dividends paid
thereon.
F-77
CORECOMM LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2. RECAPITALIZATION PLAN (CONTINUED)
The following summarizes the indebtedness and preferred stock that was
exchanged for shares of CoreComm Holdco's common stock in December 2001:
-------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT OR
DESCRIPTION DATE ISSUED ISSUER STATED VALUE WHEN ISSUED
-------------------------------------------------------------------------------------------------------------------------------
10.75% Unsecured Convertible PIK Notes CoreComm Limited and
due 2011 April 2001 CoreComm Holdco $10.0 million
-------------------------------------------------------------------------------------------------------------------------------
10.75% Senior Unsecured Convertible PIK CoreComm Limited and
Notes Due 2010 December 2000 CoreComm Holdco $16.1 million
-------------------------------------------------------------------------------------------------------------------------------
Senior Unsecured Notes Due
September 29, 2003 September 2000 CoreComm Limited $108.7 million
-------------------------------------------------------------------------------------------------------------------------------
6% Convertible Subordinated
Notes Due 2006 October 1999 CoreComm Limited $175.0 million (1)
-------------------------------------------------------------------------------------------------------------------------------
Series A and Series A-1 Preferred Stock September 2000 CoreComm Limited $51.1 million
-------------------------------------------------------------------------------------------------------------------------------
Series B Preferred Stock September 2000 CoreComm Limited $250.0 million
-------------------------------------------------------------------------------------------------------------------------------
----------
(1) $164.75 million was outstanding as of September 30, 2001, of which $160
million was exchanged.
As a result of the completed exchanges in December 2001, approximately 87%
of CoreComm Holdco's outstanding shares, or 8,685,602 shares, are owned by the
former holders of indebtedness of CoreComm Limited and CoreComm Holdco and the
former holders of preferred stock of CoreComm Limited, and approximately 13% of
CoreComm Holdco's outstanding shares, or 1,314,416 shares, continue to be held
by CoreComm Limited. CoreComm Limited holds $160 million principal amount of
CoreComm Limited's 6% Convertible Subordinated Notes due 2006, approximately
$105.7 million principal amount of CoreComm Limited's Senior Unsecured Notes due
September 29, 2003, approximately 51,000 shares of CoreComm Limited's Series A
preferred stock and 250,000 shares of CoreComm Limited's Series B preferred
stock as a result of the exchanges. In addition, CoreComm Holdco exchanged the
approximately $10.8 million principal and accrued interest of 10.75% Unsecured
Convertible PIK Notes due 2011 and the approximately $18.0 million principal and
accrued interest of 10.75% Senior Unsecured Convertible PIK Notes due 2010 for
shares of its common stock. CoreComm Holdco entered into an agreement with
CoreComm Limited modifying or waiving several of the material terms of these
instruments. See "Certain Relationships and Related Transactions -- Exchange
Agreement Between CoreComm Limited and CoreComm Holdco."
CoreComm Holdco will determine the gain on restructuring of its
indebtedness and the carrying value of its investment in CoreComm Limited's
notes and preferred stock based on the fair value of its shares issued in the
recapitalization. As a result of the issuance of over 80% of its outstanding
shares to new shareholders, CoreComm Holdco is performing an analysis of the
fair value of its net tangible assets as if a purchase business combination
occurred.
CoreComm Holdco intends to offer its common stock to CoreComm Limited's
stockholders through a registered public exchange offer. This offer will also be
made to solicit any remaining holders of CoreComm Limited's 6% Convertible
Subordinated Notes, who will be offered a pro rata share in the aggregate equity
consideration described above. CoreComm Holdco has adopted a new stock option
plan for its employees. CoreComm Holdco has agreed to file a shelf registration
statement under the Securities Act of 1933, as amended, to permit the sale of
CoreComm Holdco's common stock that was issued in the Holdco Recapitalization.
In connection with the Holdco Recapitalization, CoreComm Limited and
CoreComm Holdco were granted an exception by Nasdaq, absent which, CoreComm
Limited and CoreComm Holdco would have had to obtain stockholder approval prior
to the completion of the Holdco Recapitalization. Following the consummation of
the registered public exchange offer, based upon discussions with Nasdaq,
CoreComm Holdco expects to become the Nasdaq listed entity and to be subject to
the continued inclusion requirements of the Nasdaq National Market.
CoreComm Holdco anticipates that it will have sufficient cash to execute
its revised business plan. However, there can be no assurance that: (1) actual
costs will not exceed the amounts estimated or that additional funding will not
be required, (2) CoreComm Holdco and its subsidiaries will be able to generate
sufficient cash from operations to meet capital requirements, debt service and
other
F-78
CORECOMM LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 2. RECAPITALIZATION PLAN (CONTINUED)
obligations when required, (3) CoreComm Holdco will be able to access such cash
flow, (4) CoreComm Holdco will be able to sell assets or businesses, or (5)
CoreComm Holdco will not be adversely affected by interest rate fluctuations.
CoreComm Holdco does not anticipate that it and its subsidiaries will
generate sufficient cash flow from operations to repay at maturity the entire
principal amount of its outstanding indebtedness. Accordingly, CoreComm Holdco
may be required to consider a number of measures, including: (1) refinancing all
or a portion of such indebtedness, (2) seeking modifications to the terms of
such indebtedness, (3) seeking additional debt financing, which may be subject
to obtaining necessary lender consents, (4) seeking additional equity financing,
or (5) a combination of the foregoing.
CoreComm Holdco's ability to raise additional capital in the future will be
dependent on a number of factors, such as general economic and market
conditions, which are beyond its control. If CoreComm Holdco is unable to obtain
additional financing or obtain it on favorable terms, it may be required to
further reduce its operations, forego attractive business opportunities, or take
other actions which could adversely affect its business, results of operations
and financial condition.
NOTE 3. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards ("SFAS") No. 141, "Business Combinations," and
No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001. Use of the pooling-of-interests method is no longer
permitted. SFAS No. 141 also includes guidance on the initial recognition and
measurement of goodwill and other intangible assets acquired in a business
combination that is completed after June 30, 2001. SFAS No. 142 ends the
amortization of goodwill and indefinite-lived intangible assets. Instead, these
assets must be reviewed annually, or more frequently under some conditions, for
impairment in accordance with this statement. This impairment test uses a fair
value approach rather than the undiscounted cash flow approach previously
required by SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of." Intangible assets that do not have
indefinite lives will continue to be amortized over their useful lives and
reviewed for impairment in accordance with SFAS No. 121. The Company is required
to adopt SFAS No. 142 as of January 1, 2002. It is likely that Limited will
write-down a significant portion of its goodwill upon the adoption of SFAS No.
142, although Limited has not completed its analysis. As of September 30, 2001,
the carrying value of goodwill is $355.4 million, and the annual amortization
expense is $87.7 million. In addition, Limited is reviewing the carrying value
of its long-lived assets for impairment in accordance with SFAS No. 121,
although it is not currently possible to predict the outcome of this review.
NOTE 4. REVENUES
The following is the revenues from external customers for each of Limited's
communication services:
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
2001 2000 2001 2000
------------------------------------------- -----------------------------------------
(in thousands)
Local Exchange Services $23,604 $12,134 $ 71,026 $39,058
Toll-related Telephony
Services 19,254 2,494 60,876 6,919
Internet, Data and
Web-related Services 23,879 3,135 69,240 9,324
Other (a) 7,570 500 19,345 1,318
--------------------- --------------------- -------------------- --------------------
$74,307 $18,263 $220,487 $56,619
===================== ===================== ==================== ====================
(a) Other includes wireless, paging and information services.
F-79
CORECOMM LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5. INTANGIBLE ASSETS
Intangible assets consist of:
SEPTEMBER 30,
2001
--------------------
(Unaudited)
LMDS license costs $4,230,000
Workforce, net of accumulated amortization of $250,000 -
Customer lists, net of accumulated amortization of $780,000 1,560,000
-------------------
$5,790,000
===================
On September 29, 2000, Limited completed two significant acquisitions. The
Company acquired Voyager.net, Inc. ("Voyager"), a large independent Internet
communications company focused on the Midwestern United States, and ATX
Telecommunications Services, Inc. ("ATX"), a CLEC providing integrated voice and
high-speed data services, including long distance, local, wireless and network
services through the use of telephone switching equipment and other physical
facilities in the New York - Virginia corridor. These acquisitions were
accounted for as purchases, and, accordingly the net assets and results of
operations of the acquired businesses were included in the consolidated
financial statements from the date of acquisition. The aggregate purchase price
of $615.9 million exceeded the estimated fair value of net assets acquired by
$585.9 million, which was allocated to goodwill.
The pro forma unaudited consolidated results of operations for the nine
months ended September 30, 2000 assuming consummation of the acquisitions as of
January 1, 2000 are as follows:
Total revenue $222,943,000
Net (loss) (263,245,000)
Basic and diluted net (loss) per share (3.98)
At March 31, 2001, Limited reduced the carrying amount of goodwill related
to the Voyager and MegsINet acquisitions by $167,599,000. In connection with the
reevaluation of its business plan and the decision to sell its non-CLEC assets
and businesses, Limited was required to report all long-lived assets and
identifiable intangibles to be disposed of at the lower of carrying amount
F-80
CORECOMM LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 5. INTANGIBLE ASSETS (CONTINUED)
or estimated fair value less cost to sell. The carrying amount of goodwill
related to these acquisitions is eliminated before reducing the carrying amounts
of the other assets. The estimated fair value of these businesses was determined
based on information provided by the investment bank retained for the purpose of
conducting this sale.
NOTE 6. FIXED ASSETS
Fixed assets consist of:
SEPTEMBER 30,
2001
------------------------
(Unaudited)
Operating equipment $122,526,000
Computer hardware and software 52,949,000
Other equipment 13,907,000
Construction-in-progress 2,201,000
------------------------
191,583,000
Accumulated depreciation (71,051,000)
------------------------
$120,532,000
========================
NOTE 7. ACCRUED EXPENSES
Accrued expenses consist of:
SEPTEMBER 30,
2001
------------------------
(Unaudited)
Payroll and related $ 7,156,000
Professional fees 1,013,000
Taxes, including income taxes 12,878,000
Accrued equipment purchases 180,000
Toll and interconnect 37,982,000
Interest 9,049,000
Dividends 14,850,000
Acquisition costs 1,360,000
Reorganization costs 8,183,000
Other 3,603,000
------------------------
$96,254,000
========================
F-81
CORECOMM LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 8. LONG-TERM DEBT
Long-term debt consists of:
SEPTEMBER 30,
2001
-----------------------
(Unaudited)
6% Public Notes $164,750,000
Senior secured credit facility, less
unamortized discount of $9,164,000 146,936,000
Senior unsecured notes due 2003, less unamortized discount of
$10,003,000 95,676,000
10.75% unsecured convertible notes plus accrued interest 10,502,000
Equipment payable, less unamortized discount of $1,134,000 16,032,000
Working capital promissory note, interest at 8.5% 1,225,000
Note payable for equipment, interest at 12.75% 800,000
Other 66,000
-----------------------
435,987,000
Less current portion 31,501,000
-----------------------
$404,486,000
=======================
In September 2000, subsidiaries of Limited entered into a senior secured
credit facility with The Chase Manhattan Bank as lender, administrative agent
and collateral agent. The senior secured credit facility provides for both a
term loan facility and a revolving credit facility. In April 2001, the facility
was amended and restated. The aggregate amount available was amended to $156.1
million of which the term loan facility is $106.1 million and the revolving
credit facility is $50 million. In addition, the interest rate was amended to,
at Limited's option, either 3.5% per annum plus the base rate, which is the
higher of the prime rate or the federal funds effective rate plus 0.5% per
annum, or the reserve-adjusted London Interbank Offered Rate plus 4.5% per
annum. At September 30, 2001, the effective interest rate on the amounts
outstanding was 8.29%. Beginning October 12, 2001 and ending April 12, 2002, the
interest rate is 6.86%.
America Online, Inc. ("AOL") is a lender in the amended credit facility. In
connection with the financing in April 2001, Limited entered into a marketing
agreement with AOL to market a joint CoreComm/AOL bundled package in Limited's
market areas. The Company also committed to purchase $22.5 million in
advertising from AOL of which $7.5 million was paid in April 2001 for
advertising to be utilized in 2001. The remainder is for advertising to be
utilized in 2002. In addition, in connection with the financing in April 2001,
Limited issued warrants to purchase shares of Limited's common stock. The
estimated value of the warrants plus the excess of the advertising commitment
over its estimated fair value to Limited aggregating $12,454,000 was recorded as
a debt discount in April 2001.
In April 2001, Limited issued to Booth American Company $10 million
aggregate principal amount of 10.75% unsecured Public Notes. These notes will
mature in April 2011. Interest on the notes is at an annual rate of 10.75%
payable semiannually on October 15 and April 15 of each year, commencing October
15, 2001. The interest is payable in kind by the issuance of additional
unsecured convertible notes in such principal amount as shall equal the interest
payment that is then due. These notes are convertible into common stock prior to
maturity at a conversion price of $1.00 per share, subject to adjustment. The
additional notes issued for interest will have an initial conversion price equal
to 120% of the weighted average closing price of Limited's common stock for a
specified period. These notes are redeemable, in whole or in part, at Limited's
option, at any time on or after April 12, 2003, at a redemption price of
103.429% that declines annually to 100% in April 2007, in each case together
with accrued and unpaid interest to the redemption date.
In April 2001, $10,250,000 aggregate principal amount of the Public Notes
was converted into approximately 374,000 shares of Limited's common stock.
In May 2001, Limited entered into an agreement with one of its equipment
vendors whereby $17,166,000 due to the vendor will be paid in three payments in
January, May and August 2002. Based on the imputed interest rate of 9.11% per
annum, a discount of $1,612,000 was recorded as a reduction to fixed assets in
May 2001.
F-82
CORECOMM LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 8. LONG TERM DEBT (CONTINUED)
In September 2001, Limited and the holder of the $3,016,000 principal
amount 12.75% note payable for equipment agreed to a modification of the note
reducing the principal amount to $800,000 which was paid on October 1, 2001. The
Company recorded an extraordinary gain on the early extinguishment of debt of
$2,216,000 for the difference between the $3,016,000 obligation and the $800,000
liability.
In October 2001, Limited announced that it had signed binding agreements
for transactions that would allow Limited to retire approximately $146 million
principal amount of the Public Notes. Under the terms of the agreements, if
Limited determines to close the transactions, in exchange for retiring their
Notes, Limited will pay each holder that has signed the agreement: (1) a cash
payment equal to the October 1, 2001 interest payment due to that holder, and
(2) shares of common stock of Limited, which will equal in the aggregate 5% of
the outstanding equity of the recapitalized Company on the basis of 100% of the
current outstanding principal amount of the Notes being exchanged. The
agreements terminate on December 15, 2001 if Limited has not determined to close
the transactions by that time. If the agreements terminate, each holder that has
signed the agreement will receive 50% of the October 1, 2001 interest payment
due to that holder. The agreements include a waiver of interest currently due
under the Notes, as well as an agreement not to take any action with respect to
the Notes at least through December 15, 2001. The Company announced that these
agreements are part of a larger program to recapitalize a significant portion of
its other debt. The Company's decision whether to close the transactions on the
Notes will be based, in part, on agreements reached with respect to Limited's
other debt.
NOTE 9.RELATED PARTY TRANSACTIONS
Notes payable to related parties consists of:
SEPTEMBER 30,
2001
-----------------------
(Unaudited)
10.75% senior unsecured convertible notes, plus accrued interest
due 2010 $17,494,000
10.75% unsecured convertible notes, plus accrued interest due
2011, less unamortized discount of $377,000 15,375,000
-----------------------
$32,869,000
=======================
Some of the officers and directors of Limited are also officers or
directors of NTL Incorporated ("NTL"). In April 2001, Limited issued to NTL $15
million aggregate principal amount of 10.75% unsecured convertible notes. In
addition, in April 2001, Limited issued warrants to NTL, and entered into a
network and software agreement with NTL. The estimated value of the warrants of
$397,000 was recorded as a debt discount in April 2001. Pursuant to the network
and software agreement with NTL, Limited will provide U.S. network access for
U.K. Internet traffic from NTL's U.K. customers for three years, as well as a
royalty free license to use provisioning software and know-how.
The 10.75% unsecured convertible notes will mature in April 2011. Interest
on the notes is at an annual rate of 10.75% payable semiannually on October 15
and April 15 of each year, commencing October 15, 2001. The interest is payable
in kind by the issuance of additional unsecured convertible notes in principal
amount equal to the interest payment that is then due. These notes are
convertible into common stock prior to maturity at a conversion price of $1.00
per share, subject to adjustment. The additional notes issued for interest will
have an initial conversion price equal to 120% of the weighted average closing
price of Limited's common stock for a specified period. These notes are
redeemable, in whole or in part, at Limited's option, at any time on or after
April 12, 2003, at a redemption price of 103.429% that declines annually to 100%
in April 2007, in each case together with accrued and unpaid interest to the
redemption date.
NTL provides Limited with management, financial, legal and technical
services, access to office space and equipment and use of supplies. Amounts
charged to Limited by NTL consist of salaries and direct costs allocated to
Limited where identifiable, and a percentage of the portion of NTL's corporate
overhead which cannot be specifically allocated to NTL. Effective January 1,
2001, the percentage used to allocate corporate overhead was reduced. It is not
practicable to determine the amounts of these expenses that would have been
incurred had Limited operated as an unaffiliated entity. In the opinion of
management, this allocation method is reasonable. For the nine months ended
September 30, 2001 and 2000, NTL charged Limited $340,000 and $907,000,
respectively, which is included in corporate expenses.
F-83
CORECOMM LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 9. RELATED PARTY TRANSACTIONS (CONTINUED)
A subsidiary of Limited provides billing and software development services
to subsidiaries of NTL. General and administrative expenses were reduced by
$1,428,000 and $709,000 for the nine months ended September 30, 2001 and 2000,
respectively as a result of the charges for these services.
In March 2000, Limited and NTL announced that they had entered into an
agreement to link their networks in order to create an international Internet
backbone which commenced operations in February 2001. The Company recognized
revenue of $255,000 for the network usage in the nine months ended September 30,
2001.
NOTE 10. OPTIONS, WARRANTS AND PREFERRED STOCK
In June 2001, the Board of Directors approved the repricing of stock
options granted to employees. George Blumenthal, the Chairman of the Board,
Barclay Knapp, the President, and the Board of Directors did not participate in
the repricing. Options to purchase an aggregate of approximately 10.2 million
shares of Limited's common stock with an average exercise price of $10.70 per
share were repriced to $.25, $.75 or $1.25 per share, depending upon the
original exercise price. In accordance with APB No. 25 and related
interpretations, Limited is accounting for the repriced options as a variable
plan. The Company will recognize non-cash compensation expense for the
difference between the quoted market price of Limited's common stock and the
exercise price of the repriced options while the options remain outstanding. The
Board of Directors has taken this action to continue to provide the appropriate
performance incentives to those affected.
In connection with the amendment and restatement of the senior secured
credit facility in April 2001, Limited issued to lenders warrants to purchase
approximately 10.6 million shares of its common stock at an exercise price of
$.01 per share that expire in April 2011. Warrants to purchase an aggregate of
approximately 1.4 million shares of common stock issued in December 2000 and
January 2001 were canceled upon the issuance of these new warrants.
In addition, in connection with the issuance of 10.75% unsecured
convertible notes in April 2001, Limited amended the conversion price of the
Series A preferred stock issued in September 2000 to Booth American Company to
$1.75 from $14.36. Effective July 2001, the conversion price of the Series A
preferred stock was reduced by 5% to $1.66 upon Limited's failure to declare and
pay dividends on the Series A preferred stock for two consecutive periods. The
conversion price will continue to be reduced by 5% for each succeeding period of
two dividend periods as to which dividends shall not be declared and paid, up to
an aggregate reduction of $1.00.
NOTE 11. REORGANIZATION CHARGES
Reorganization charges of $37,395,000 in 2001 relate to Limited's
announcements in May and July 2001 that it was taking additional actions to
reorganize, re-size and reduce operating costs and create greater efficiency in
various areas of Limited. An aggregate of $21,497,000 of these costs are for
equipment and other assets that will not require any future cash outlays. The
employee severance and related costs in 2000 were for approximately 250
employees to be terminated, none of whom are still employed by Limited. These
costs in 2001 are for approximately 630 employees to be terminated of which
approximately 40 employees are still employed by Limited as of September 30,
2001. The major actions involved in the 2001 reorganization include (1)
consolidation of functions such as network operations, customer service and
finance, (2) initiatives to increase gross margins and (3) discussions with
vendors to reduce or eliminate current payable balances or purchase commitments.
The consolidation of functions resulted in employee terminations and the closing
of offices. Employee severance and related costs, lease exit costs and fixed
assets and prepayment write-downs include charges related to these actions.
Initiatives to increase gross margins resulted in consolidation of network
assets and elimination of redundant and less profitable facilities. Charges for
these actions include lease exit costs and fixed assets and prepayment
write-downs. Finally, reductions or elimination of purchase commitments resulted
in agreement termination charges. All of these actions are expected to be
completed by June 30, 2002. Fixed assets and prepayments written-off include
$5.3 million related to vacated offices, $13.4 million for network assets in
abandoned markets and $2.8 million for prepayments in respect of ILEC facilities
in abandoned markets.
F-84
CORECOMM LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 11. REORGANIZATION CHARGES (CONTINUED)
The following table summarizes the reorganization charges incurred and
utilized in 2000 and 2001:
EMPLOYEE FIXED
SEVERANCE LEASE ASSETS
AND RELATED EXIT AGREEMENT AND
COSTS COSTS TERMINATIONS PREPAYMENTS TOTAL
-------------------------------------------------------------------------------------------
(in thousands)
Charged to expense $2,089 $1,917 $ - $ - $ 4,006
Utilized (775) (1,396) - - (2,171)
-------------------------------------------------------------------------------------------
Balance, December 31, 2000 1,314 521 - - 1,835
Charged to expense 3,262 6,977 6,582 21,883 38,704
Adjustments (996) 73 - (386) (1,309)
Utilized (2,701) (4,137) (2,712) (21,497) (31,047)
-------------------------------------------------------------------------------------------
Balance, September 30, 2001 $ 879 $3,434 $3,870 $ - $ 8,183
===========================================================================================
NOTE 12. NON-CASH COMPENSATION
In April 2000, the Compensation and Option Committee of the Board of
Directors approved the issuance of options to purchase approximately 2,747,000
shares of Limited's common stock to various employees at an exercise price of
$14.55, which was less than the fair market value of Limited's common stock on
the date of the grant. These options are included in the repricing of options to
purchase an aggregate of approximately 10.2 million shares of Limited's common
stock described in Note 10. In accordance with APB Opinion No. 25, "Accounting
for Stock Issued to Employees," in April 2000, Limited recorded a non-cash
compensation expense of approximately $29.0 million and a non-cash deferred
expense of approximately $31.3 million. From April 2000 to September 30, 2001,
$19.4 million of the deferred non-cash compensation was charged to expense,
including $9.7 million in 2001. The Company will charge the deferred expense to
non-cash compensation expense over the vesting period of the stock options as
follows: $3.2 million in the fourth quarter of 2001, $7.5 million in 2002 and
$1.2 million in 2003.
F-85
CORECOMM LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 13. NET LOSS PER COMMON SHARE
The following table sets forth the computation of basic and diluted net
loss per common share:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2001 2000 2001 2000
----------------------------------------------------------------------------------------
Numerator:
Net loss $(51,945,000) $(50,149,000) $(393,702,000) $(173,210,000)
Preferred stock dividend (4,487,000) (98,000) (13,321,000) (98,000)
Preferred stock accretion to
redemption value (1,154,000) (6,000) (3,407,000) (6,000)
----------------------------------------------------------------------------------------
Net loss available to common
shareholders before extraordinary
item (57,586,000) (50,253,000) (410,430,000) (173,314,000)
Extraordinary item 2,216,000 - 2,216,000 -
----------------------------------------------------------------------------------------
Net loss available to common
shareholders $(55,370,000) $(50,253,000) $(408,214,000) $(173,314,000)
----------------------------------------------------------------------------------------
Denominator for basic net loss per
common share 97,042,000 40,502,000 87,390,000 39,837,000
Effect of dilutive securities - - - -
----------------------------------------------------------------------------------------
Denominator for diluted net loss per
common share 97,042,000 40,502,000 87,390,000 39,837,000
----------------------------------------------------------------------------------------
Basic and diluted net (loss) per common share:
(Loss) before extraordinary item $ (0.59) $ (1.24) $ (4.70) $ (4.35)
Extraordinary item 0.02 - 0.03 -
----------------------------------------------------------------------------------------
Net (loss) per common share $ (0.57) $ (1.24) $ (4.67) $ (4.35)
========================================================================================
The shares issuable upon the exercise of stock options and warrants and
upon the conversion of convertible securities are excluded from the calculation
of net loss per common share as their effect would be antidilutive. At September
30, 2001, Limited had 102.8 million shares issuable upon the exercise of stock
options and warrants and the conversion of convertible securities.
NOTE 14. COMMITMENTS AND CONTINGENT LIABILITIES
As of September 30, 2001, Limited had purchase commitments of approximately
$5,000,000 outstanding.
Fiberstream, Inc. ("FiberCo"), a wholly-owned subsidiary of Limited, has an
obligation under an agreement with the City of New York to pay an annual
franchise fee in the amount of the greater of (a) 5% of gross revenue (as
defined in the agreement) or (b) $200,000. Estimated quarterly payments begin
the earlier of (a) the date that FiberCo completes construction of its initial
backbone or (b) November 2002. Additionally, FiberCo has an obligation to
provide equipment, cash or services to the City of New York with a value of not
more than $100,000 over 15 years.
The Company is involved in various disputes and litigation arising in the
ordinary course of its business. None of these matters are expected to have a
material adverse effect on Limited's financial position, results of operations
or cash flows.
F-86
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Directors
CoreComm Limited
We have audited the consolidated balance sheets of CoreComm Limited and
Subsidiaries as of December 31, 2000 and 1999, and the related consolidated
statements of operations, shareholders' equity and cash flows for the years
ended December 31, 2000 and 1999 and for the period from April 1, 1998 (date
operations commenced) to December 31, 1998. Our audits also included the
financial statement schedules listed in the Index. These financial statements
and schedules are the responsibility of Limited's management. Our responsibility
is to express an opinion on these financial statements and schedules based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
CoreComm Limited and Subsidiaries at December 31, 2000 and 1999, and the
consolidated results of their operations and their cash flows for the years
ended December 31, 2000 and 1999 and for the period from April 1, 1998 (date
operations commenced) to December 31, 1998 in conformity with accounting
principles generally accepted in the United States. Also, in our opinion, the
related financial statement schedules, when considered in relation to the basic
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.
ERNST & YOUNG LLP
New York, New York
March 12, 2001, except
for Note 1 as to which
the date is April 11, 2001
F-87
REPORT OF INDEPENDENT AUDITORS
Shareholder
OCOM Corporation Telecoms Division
We have audited the statements of operations, parent's investment and cash flows
of OCOM Corporation Telecoms Division ("OCOM") for the period from January 1,
1998 to May 31, 1998. Our audit also included the financial statement schedule
listed in the Index. These financial statements and schedule are the
responsibility of Limited's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatements. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects the results of operations and the cash flows of OCOM
Corporation Telecoms Division for the period from January 1, 1998 to May 31,
1998 in conformity with accounting principles generally accepted in the United
States. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
New York, New York
February 26, 1999
F-88
CORECOMM LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
2000 1999
----------------------------------
ASSETS:
Current assets:
Cash and cash equivalents $ 25,802,000 $ 86,685,000
4,715,000 92,041,000
Marketable securities:
Accounts receivable - trade, less allowance for doubtful accounts
of $11,034,000 (2000) and $3,949,000 (1999) 34,344,000 7,875,000
Due from NTL Incorporated 17,206,000 195,000
Other 10,289,000 5,791,000
----------------------------------
Total current assets 92,356,000 192,587,000
Fixed assets, net 179,651,000 90,619,000
Goodwill, net of accumulated amortization of $42,028,000 (2000) and
$7,262,000 (1999) 600,859,000 57,888,000
Intangible assets, net 6,092,000 38,388,000
Other, net of accumulated amortization of $1,480,000 (2000) and $414,000 (1999) 30,805,000 12,621,000
---------------------------------
$ 909,763,000 $ 392,103,000
=================================
LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities:
Current liabilities:
Accounts payable $ 73,133,000 $ 13,851,000
Accrued expenses 90,313,000 32,215,000
Equipment payable - 4,702,000
Current portion of long-term debt and capital lease obligations 22,921,000 19,127,000
Deferred revenue 29,701,000 1,400,000
---------------------------------
Total current liabilities 216,068,000 71,295,000
Long-term debt 358,624,000 179,318,000
Notes payable to related parties 16,100,000 -
Capital lease obligations 2,693,000 14,564,000
Commitments and contingent liabilities
Shareholders' equity:
Series preferred stock - $.01 par value, authorized 5,000,000 shares:
Series A, liquidation preference $51,086,000; issued and outstanding 51,000 (2000) and
none (1999) shares - -
Series B, liquidation preference $253,405,000; issued and outstanding 250,000 (2000) and
none (1999) shares 3,000 -
Series C, none issued or outstanding - -
Common stock - $.01 par value; authorized 200,000,000 shares; issued and outstanding
72,029,000 (2000) and 38,556,000 (1999) shares 720,000 386,000
Additional paid-in capital 781,357,000 246,319,000
Deferred non-cash compensation (21,638,000) -
(Deficit) (433,590,000) (119,779,000)
---------------------------------
326,852,000 126,926,000
Treasury stock at cost, 1,329,000 shares (10,574,000) -
---------------------------------
316,278,000 126,926,000
---------------------------------
$909,763,000 $ 392,103,000
=================================
See accompanying notes
F-89
CORECOMM LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THE PREDECESSOR
FOR THE PERIOD (OCOM)
FROM APRIL 1, --------------------
1998 (DATE FOR THE PERIOD
OPERATIONS FROM JANUARY 1,
COMMENCED) TO 1998 TO
YEAR ENDED DECEMBER 31, DECEMBER 31, MAY 31,
2000 1999 1998 1998
-----------------------------------------------------------------------------------
REVENUES $ 132,122,000 $ 58,151,000 $ 6,713,000 $ 1,452,000
COSTS AND EXPENSES
Operating 142,323,000 58,561,000 5,584,000 772,000
Selling, general and administrative 111,010,000 74,185,000 11,940,000 3,205,000
Corporate 12,884,000 7,996,000 2,049,000 -
Non-cash compensation 43,440,000 1,056,000 4,586,000 -
Other charges 12,706,000 - - -
Write-down of intangibles 35,920,000 - - -
Depreciation 30,746,000 10,945,000 749,000 255,000
Amortization 42,420,000 8,633,000 231,000 2,000
-----------------------------------------------------------------------------------
431,449,000 161,376,000 25,139,000 4,234,000
-----------------------------------------------------------------------------------
Operating (loss) (299,327,000) (103,225,000) (18,426,000) (2,782,000)
OTHER INCOME (EXPENSE)
Interest income and other, net 6,223,000 5,773,000 2,632,000 -
Interest expense (20,457,000) (5,341,000) (21,000) -
-----------------------------------------------------------------------------------
(Loss) before income taxes (313,561,000) (102,793,000) (15,815,000) (2,782,000)
Income tax provision (250,000) (731,000) (440,000) -
-----------------------------------------------------------------------------------
Net (loss) $ (313,811,000) $ (103,524,000) $ (16,255,000) $(2,782,000)
===================================================================================
Basic and diluted net (loss) per
share $ (6.73) $ (3.03) $ (.55) $ (.09)
===================================================================================
See accompanying notes.
F-90
CORECOMM LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE PERIOD FROM APRIL 1, 1998 (DATE OPERATIONS COMMENCED)
TO DECEMBER 31, 1998 AND FOR THE YEARS ENDED DECEMBER 31, 1999 AND 2000
SERIES A SERIES B ADDITIONAL DEFERRED
PREFERRED STACK PREFERRED STACK COMMON STACK PAID-IN NON-CASH
--------------- --------------- ------------
SHARES PAR SHARES PAR SHARES PAR CAPITAL COMPENSATION (DEFICIT)
------------------------------------------------------------------------------------------------
Initial contribution 2,700,000 $ 27,000 $ 22,158,000
Capital contributions 26,994,000 270,000 158,508,000
Issuance of stock options 4,586,000
Exercise of warrants 3,000 3,000
Net (loss) for the period from
April 1, 1998 (date operations
commenced) to December 31,
1998 $ (16,255,000)
------------------------------------------------------------------------------------------------
Balance, December 31, 1998 29,697,000 297,000 185,255,000 (16,255,000)
------------------------------------------------------------------------------------------------
Exercise of stock options 804,000 8,000 5,232,000
Exercise of warrants 4,810,000 48,000 10,857,000
Common stock issued for 3,245,000 33,000 30,792,000
acquisition
Stock options issued for
acquisition 4,027,000
Warrants issued for acquisition 9,100,000
Non-cash compensation expense 1,056,000
Net (loss) for the year ended
December 31, 1999 (103,524,000)
------------------------------------------------------------------------------------------------
Balance, December 31, 1999 38,556,000 386,000 246,319,000 (119,779,000)
------------------------------------------------------------------------------------------------
Exercise of stock options 2,276,000 23,000 18,967,000
Exercise of warrants 35,000 - 276,000
Common stock issued for 31,833,000 318,000 333,049,000
acquisitions
Preferred stock issued for an
acquisition 250,000 $3,000 67,295,000
Preferred stock issued for cash 50,000 $ - 50,000,000
Accreted dividends on preferred
stock (4,491,000)
Preferred stock issued for
dividends 1,000 - 1,086,000
Deferred non-cash compensation 60,290,000 $(31,338,000)
Non-cash compensation expense 9,700,000
Repurchase of common stock
underlying rescinded options (671,000) (7,000) (6,796,000)
Expense from rescission of stock
options 4,788,000
Common stock issued for
acquisition and returned to
treasury, at cost 10,574,000
Net (loss) for the year ended
December 31, 2000 (313,811,000)
-------------------------------------------------------------------------------------------------
Balance, December 31, 2000 51,000 $ - 250,000 $3,000 72,029,000 $720,000 $ 781,357,00 $(21,638,000) $(433,590,000
=================================================================================================
TREASURY STOCK
---------------------------
SHARES AMOUNT
---------------------------
Initial contribution
Capital contributions
Issuance of stock options
Exercise of warrants
Net (loss) for the period from
April 1, 1998 (date operations
commenced) to December 31,
1998
----------------------------
Balance, December 31, 1998
----------------------------
Exercise of stock options
Exercise of warrants
Common stock issued for
acquisition
Stock options issued for
acquisition
Warrants issued for acquisition
Non-cash compensation expense
Net (loss) for the year ended
December 31, 1999
------------------------------
Balance, December 31, 1999
------------------------------
Exercise of stock options
Exercise of warrants
Common stock issued for
acquisitions
Preferred stock issued for an
acquisition
Preferred stock issued for cash
Accreted dividends on preferred
stock
Preferred stock issued for
dividends
Deferred non-cash compensation
Non-cash compensation expense
Repurchase of common stock
underlying rescinded options
Expense from rescission of stock
options
Common stock issued for
acquisition and returned to
treasury, at cost (1,329,000) $(10,574,000)
Net (loss) for the year ended
December 31, 2000
----------------------------
Balance, December 31, 2000 (1,329,000 $(10,574,000)
============================
The Consolidated Statement of Shareholders' Equity reflects on a
retroactive basis the 3-for-2 stock split by way of a stock dividend paid
on September 2, 1999 and the 3-for-2 stock split by way of a stock dividend
paid on February 2, 2000.
See accompanying notes.
F-91
CORECOMM LIMITED AND SUBSIDIARIES
STATEMENT OF PARENT'S INVESTMENT
OF OCOM CORPORATION TELECOMS DIVISION (THE PREDECESSOR)
FOR THE PERIOD FROM JANUARY 1, 1998 TO MAY 31, 1998
Balance, December 31, 1997 $ 321,000
Capital contributions 4,261,000
Net (loss) for the five months ended May 31, 1998 (2,782,000)
------------------------
Balance, May 31, 1998 $1,800,000
========================
See accompanying notes.
F-92
CORECOMM LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THE PREDECESSOR
(OCOM)
FOR THE PERIOD FROM -------------------
APRIL 1, 1998 (DATE FOR THE PERIOD
OPERATIONS FROM JANUARY 1,
COMMENCED) TO 1998 TO
YEAR ENDED DECEMBER 31, DECEMBER 31, MAY 31,
2000 1999 1998 1998
-------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net (loss) $(313,811,000) $(103,524,000) $(16,255,000) $(2,782,000)
Adjustments to reconcile net (loss) to
net cash (used in) operating
activities:
73,166,000 19,578,000 980,000 257,000
Non-cash compensation 43,440,000 1,056,000 4,586,000 -
Provision for losses on accounts
receivable 7,130,000 3,241,000 501,000 92,000
Write-down of intangible assets 35,920,000 - - -
Accretion of interest on marketable
securities (2,440,000) (3,053,000) (639,000) -
Amortization of original issue
discount 1,221,000 - - -
Other 2,043,000 239,000 (119,000) -
Changes in operating assets and
liabilities, net of effect from
business acquisitions:
Accounts receivable (7,383,000) 3,115,000 (480,000) (262,000)
Due from affiliates (17,011,000) 1,759,000 (1,954,000) -
Other current assets (70,000) (3,488,000) (287,000) (179,000)
Other assets (2,238,000) (2,783,000) (2,824,000) -
Accounts payable 17,716,000 5,390,000 1,261,000 (311,000)
Accrued expenses 14,097,000 6,114,000 2,814,000 (453,000)
Deferred revenue 17,218,000 (61,000) 94,000 -
-------------------------------------------------------------------------------
Net cash (used in) operating activities (131,002,000) (72,417,000) (12,322,000) (3,638,000)
INVESTING ACTIVITIES
Purchase of fixed assets (65,321,000) (20,575,000) (2,341,000) (623,000)
Acquisitions, net of cash acquired (98,613,000) (47,056,000) - -
Purchase of marketable securities (38,730,000) (142,922,000) (110,079,000) -
Proceeds from sale of marketable
securities 128,496,000 164,652,000 - -
-------------------------------------------------------------------------------
Net cash (used in) investing activities (74,168,000) (45,901,000) (112,420,000) (623,000)
F-93
CORECOMM LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
THE PREDECESSOR
FOR THE PERIOD (OCOM)
FROM APRIL 1, 1998 ---------------------
(DATE OPERATIONS FOR THE PERIOD FROM
COMMENCED) TO JANUARY 1, 1998 TO
YEAR ENDED DECEMBER 31, DECEMBER 31, MAY 31,
2000 1999 1998 1998
--------------------------------------------------------------------------------
FINANCING ACTIVITIES
Capital contributions - - 150,904,000 4,261,000
Proceeds from borrowings, net of
financing costs 103,328,000 168,545,000 - -
Proceeds from issuance of preferred
stock 50,000,000 - - -
Proceeds from exercise of stock options
and warrants 12,463,000 16,145,000 3,000 -
Principal payments (5,936,000) (3,469,000) - -
Principal payments of capital lease
obligations (15,568,000) (2,379,000) (4,000) -
--------------------------------------------------------------------------------
Net cash provided by financing
activities 144,287,000 178,842,000 150,903,000 4,261,000
--------------------------------------------------------------------------------
(Decrease) increase in cash and cash
equivalents (60,883,000) 60,524,000 26,161,000 -
Cash and cash equivalents at beginning
of period 86,685,000 26,161,000 - -
--------------------------------------------------------------------------------
Cash and cash equivalents at end of
period $ 25,802,000 $ 86,685,000 $ 26,161,000 $ -
================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid for interest $ 14,362,000 $ 2,032,000 $ 4,000 $ -
Income taxes paid 369,000 1,421,000 - -
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING ACTIVITIES
Capital contributions of noncash net
assets $ - $ - $ 30,059,000 $ -
Liabilities incurred to acquire fixed
assets 35,626,000 19,621,000 175,000 -
Common stock, preferred stock, stock
options and warrants issued for
acquisitions 400,665,000 43,952,000 - -
Notes issued for acquisition, net
of discount 94,015,000 - - -
See accompanying notes.
F-94
CORECOMM LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS
CoreComm Limited ("Limited"), formerly a wholly-owned subsidiary of
Cellular Communications of Puerto Rico, Inc. ("CCPR"), was formed in March 1998
in order to succeed to the businesses and assets that were operated by OCOM
Corporation and as an appropriate vehicle to pursue new telecommunications
opportunities outside of Puerto Rico and the U.S. Virgin Islands. Operations
commenced in April 1998. In September 1998, CCPR made a cash contribution to
Limited of $150,000,000 and distributed 100% of the outstanding shares of
Limited on a one-for-one basis to CCPR's stockholders.
In September 2000, Limited, a Bermuda corporation, merged with and into its
newly-formed, wholly-owned Delaware corporate subsidiary. The Delaware
corporation then merged into ATX Telecommunications Services, Inc. ("ATX") with
ATX being the surviving corporation and changing its name to CoreComm Limited.
For accounting purposes, Limited's predecessor is CoreComm Limited, the Bermuda
corporation.
CoreComm Limited's competitive local exchange carrier ("CLEC"), cellular
long distance, landline long distance and cellular resale businesses were
formerly owned and operated by OCOM Corporation Telecoms Division ("OCOM"). CCPR
acquired the operating assets and related liabilities of these businesses from
OCOM on June 1, 1998. OCOM is the original predecessor business to Limited.
CoreComm Limited provides integrated telephone, Internet and high-speed
data services to business and residential customers in targeted markets
throughout the United States. As of December 31, 2000, Limited's customers are
located throughout the United States, although much of Limited's business is
conducted in Pennsylvania, Ohio and Michigan.
In April 2001, Limited completed a reevaluation of its business plan in
light of current market conditions and has made significant modifications to its
plans. CoreComm Limited currently intends to devote its resources to the more
profitable areas of its business and substantially reduce its operations and
related costs in the other areas of its business. CoreComm Limited expects a
portion of its residential customer base to decline over time due to a
combination of churn and a decline in new customer growth. In addition, Limited
intends to sell its non-CLEC assets and businesses, and has decided to select
and retain one or more investment banks in April 2001 for the purpose of
conducting this sale. CoreComm Limited expects to record significant charges in
2001 in connection with these plans to reduce costs and sell non-CLEC assets and
businesses. CoreComm Limited currently expects the charges relating to the cost
reductions and the sale of non-CLEC assets and businesses to be in excess of
$100 million, substantially all of which is a non-cash charge from the write
down of intangible assets that became impaired as a result of the decision in
April 2001 to sell non-CLEC assets and businesses.
In April 2001, Limited entered into financing arrangements to provide $80
million of additional cash, which it expects to receive in April 2001. The
arrangements include $55 million to be provided under an Amended and Restated
Agreement Credit Agreement that amends and restates the term loan facility and
revolving credit facility described in Note 9. A portion of the $55 million will
come from The Chase Manhattan Bank ("Chase"), and the remainder from America
Online, Inc. ("AOL") and Goldman Sachs Credit Partners. The remainder of the $80
million is in the form of debt financing to be provided by Booth American
Company and NTL Incorporated ("NTL") in the amounts of $10 million and $15
million, respectively.
In connection with these arrangements, Limited entered into other
agreements including the following:
- A marketing agreement with AOL to market a joint CoreComm/AOL bundled
package in Limited's market areas. CoreComm Limited also committed to
purchase $22.5 million in advertising from AOL of which $7.5 million is
payable immediately for advertising to be utilized in 2001. The
remainder is for advertising to be utilized in 2002.
- CoreComm Limited will pay $9 million in fees in connection with the ATX
and Voyager.net, Inc. ("Voyager") acquisitions which are included in
accrued expenses at December 31, 2000.
- CoreComm Limited agreed to pay Chase $500,000 upon receipt of funds
under the Credit Agreement.
- A network and software agreement with NTL pursuant to which Limited will
provide U.S. network access on Limited's network for U.K. Internet
traffic from NTL's U.K. customers for three years, as well as a royalty
free license to use billing and provisioning software and know-how.
F-95
CORECOMM LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND BUSINESS (CONTINUED)
- CoreComm Limited agreed to amend the conversion price of the Series A
preferred stock issued in September 2000 to Booth American Company to
the stated liquidation value of $1,000 per Series A preferred share
divided by $1.75 from the stated liquidation value of $1,000 per share
divided by $14.36.
- CoreComm Limited agreed to issue to lenders warrants to purchase
approximately 10.6 million shares of its common stock at an exercise
price of $.01 per share that expire in April 2011. If Limited reduces
the aggregate commitments under the Credit Agreement by $40 million on
or prior to September 30, 2001, warrants issued to purchase
approximately 4.2 million shares of common stock may be canceled.
Warrants to purchase an aggregate of approximately 1.3 million shares of
common stock issued in December 2000 and January 2001 will be canceled
upon the issuance of these new warrants.
CoreComm Limited anticipates that it will have sufficient cash to execute
its revised business plan, however, there can be no assurance that: (a) actual
costs will not exceed the amounts estimated or that additional funding
substantially in excess of the amounts estimated will not be required, (b)
Limited and its subsidiaries will be able to generate sufficient cash from
operations to meet capital requirements, debt service and other obligations when
required, (c) Limited will be able to access cash flow or (d) Limited will not
be adversely affected by interest rate fluctuations. CoreComm Limited continues
to review its operations and may incur additional charges in the future related
to further restructuring or downsizing of its operations.
The Amended and Restated Credit Agreement amends and restates the term loan
facility and revolving credit facility described in Note 9. The aggregate amount
available was amended to $156.1 million of which the term loan facility is
$106.1 million and the revolving credit facility is $50 million. In addition,
the interest rate was amended to, at Limited's option, either 3.5% per annum
plus the base rate, which is the higher of the prime rate or the federal funds
effective rate plus 0.5% per annum, or the reserve-adjusted London Interbank
Offered Rate plus 4.5% per annum.
In April 2001, Limited entered into agreements with Booth American Company
and NTL for the issuance of $10 million and $15 million, respectively, of
unsecured convertible notes. These notes will mature in April and May 2011.
Interest on the notes is at an annual rate of 10.75% payable semiannually on
October 15 and April 15 of each year, commencing October 15, 2001. The interest
will be payable in kind by the issuance of additional unsecured convertible
notes in principal amount equal to the interest payment that is then due. These
notes will be convertible into common stock prior to maturity at a conversion
price of $1.00 per share, subject to adjustment. The additional notes issued for
interest will have an initial conversion price equal to 120% of the weighted
average closing price of our common stock for a specified period. These notes
will be redeemable, in whole or in part, at our option, at any time in April or
May 2003, at a redemption price of 103.429% that declines annually to 100% in
April or May 2007, in each case together with accrued and unpaid interest to the
redemption date.
The following is the revenues from external customers for each of Limited's
communication services:
THE PREDECESSOR
FOR THE PERIOD FROM (OCOM)
APRIL 1, 1998 (DATE -----------------------------
OPERATIONS COMMENCED) FOR THE
YEAR ENDED DECEMBER 31, TO PERIOD FROM JANUARY 1, 1998
DECEMBER 31, TO MAY 31,
2000 1999 1998 1998
-----------------------------------------------------------------------------------------
Telecommunications $102,033,000 $47,456,000 $2,993,000 $ 217,000
Internet and Data 28,788,000 6,996,000 155,000 -
Other (a) 1,301,000 3,699,000 3,565,000 1,235,000
-----------------------------------------------------------------------------------------
$132,122,000 $58,151,000 $6,713,000 $ 1,452,000
=========================================================================================
(a) Other includes cellular long distance, wireless and paging revenue.
F-96
CORECOMM LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Limited,
its wholly-owned subsidiaries and those entities where Limited's interest is
greater than 50%. Significant intercompany accounts and transactions have
been eliminated in consolidation.
CASH EQUIVALENTS
Cash equivalents are short-term highly liquid investments purchased with
a maturity of three months or less. Cash equivalents were approximately $25.5
million and $71.6 million at December 31, 2000 and 1999, respectively, and
consisted of corporate commercial paper.
MARKETABLE SECURITIES
Marketable securities are classified as available-for-sale, which are
carried at fair value. Unrealized holding gains and losses on securities, net
of tax, are carried as a separate component of stockholders' equity. The
amortized cost of debt securities is adjusted for amortization of premiums
and accretion of discounts to maturity. This amortization is included in
interest income. Realized gains and losses and declines in value judged to be
other than temporary will be included in interest income. The cost of
securities sold or matured is based on the specific identification method.
Interest on securities is included in interest income.
Marketable securities at December 31, 2000 and 1999 consisted of
corporate commercial paper. During the years ended December 31, 2000 and 1999
and for the period from April 1, 1998 (date operations commenced) to December
31, 1998, there were no realized gains or losses on sales of securities. All
of the marketable securities as of December 31, 2000 and 1999 had a
contractual maturity of less than one year.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
CoreComm Limited records an estimate of uncollectible accounts
receivable based on the current aging of its receivables and its prior
collection experience.
FIXED ASSETS
Fixed assets are stated at cost. Depreciation is computed by the
straight-line method over the estimated useful lives of the assets. Estimated
useful lives are as follows: operating equipment - 3 to 15 years, computer
hardware and software - 3 or 5 years and other equipment - 2 to 7 years,
except for leasehold improvements for which the estimated useful lives are
the term of the lease.
Long-lived assets are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount may not be recoverable. If
the sum of the expected future undiscounted cash flows is less than the
carrying amount of the asset, a loss is recognized for the difference between
the fair value and carrying value of the asset.
GOODWILL
Goodwill is the excess of the purchase price over the fair value of net
assets acquired in business combinations accounted for as purchases. Goodwill
is amortized on a straight-line basis over the period benefited, which is
estimated to be 5 or 7 years. CoreComm Limited continually reviews the
recoverability of the carrying value of goodwill using the same methodology
that it uses for the evaluation of its other long-lived assets.
F-97
CORECOMM LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LMDS LICENSE COSTS
The costs incurred to acquire the Local Multipoint Distribution Service
("LMDS") licenses from the Federal Communications Commission (the "FCC") were
deferred and will be amortized on a straight-line basis over the term of the
licenses upon the commencement of operations. CoreComm Limited continually
reviews the recoverability of the carrying value of LMDS licenses using the same
methodology that it uses for the evaluation of its other long-lived assets.
INTANGIBLE ASSETS
Intangible assets include workforce and customer lists. These are
acquisition-related assets which are stated at their estimated fair value as of
the date acquired in a business combination accounted for as a purchase, less
accumulated amortization. Amortization is recorded on a straight-line basis over
estimated useful lives of 2 and 7 years. CoreComm Limited continually reviews
the recoverability of the carrying value of the intangible assets using the same
methodology that it uses for the evaluation of its other long-lived assets.
OTHER ASSETS
Other assets include deferred financing costs and notes receivable from
former officers of Voyager. Deferred financing costs were incurred in connection
with the issuance of debt and are charged to interest expense over the term of
the related debt. The notes receivable earn interest at 5% per annum and are due
in 2002 and 2003.
NET (LOSS) PER SHARE
CoreComm Limited reports its basic and diluted net (loss) per share in
accordance with Financial Accounting Standards Board ("FASB") Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share." The
weighted average shares used for the computation of net (loss) per share prior
to September 1998 are equivalent to CCPR's historical weighted average shares
(since CCPR stockholders received one share of Limited for each CCPR share
owned).
REVENUE RECOGNITION AND CERTAIN COST CLASSIFICATIONS
Revenues are recognized at the time the service is rendered to the
customer or the performance of the service has been completed. Charges for
services that are billed in advance are deferred and recognized when earned.
Operating costs includes direct costs of sales and network costs. Direct
cost of sales includes the costs directly incurred primarily with other
telecommunications carriers in order to render services to customers. Network
costs include the costs of fiber and access, points of presence, repairs and
maintenance, rent, utilities and property taxes of the telephone, Internet and
data network, as well as salaries and related expenses of network personnel.
ADVERTISING EXPENSE
CoreComm Limited charges the cost of advertising to expense as incurred.
Advertising costs for the years ended December 31, 2000 and 1999, for the period
from April 1, 1998 (date operations commenced) to December 31, 1998 and for the
period from January 1, 1998 to May 31, 1998 were $8,683,000, $4,407,000,
$812,000 and $79,000, respectively.
STOCK-BASED COMPENSATION
CoreComm Limited has adopted the disclosure-only provisions of SFAS No.
123, "Accounting for Stock-Based Compensation." CoreComm Limited applies APB
Opinion No. 25, "Accounting for Stock Issued to Employees" and related
interpretations in accounting for its stock option plans.
RECLASSIFICATIONS
Some prior year amounts have been reclassified to conform to the current
year presentation.
F-98
CORECOMM LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 provides guidance on the recognition, presentation and
disclosure of revenue in financial statements. SAB 101 was required to be
adopted retroactive to January 1, 2000. The adoption of SAB 101 had no
significant effect on revenues or results of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended by SFAS Nos. 137 and 138.
This new accounting standard was required to be adopted by Limited effective
January 1, 2001. The adoption of this new standard had no significant effect
on the results of operations, financial condition or cash flows of Limited.
In 1998, Limited adopted SFAS No. 130, "Reporting Comprehensive Income"
and SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information," both of which had no effect on the consolidated financial
statements. CoreComm Limited operates in a single business segment.
4. CERTAIN RISKS AND UNCERTAINTIES
CoreComm Limited requires additional financing. There can be no
assurance that the required financing will be obtained on acceptable terms or
at all.
CoreComm Limited's performance is affected by, among other things, its
ability to implement expanded interconnection and collocation with the
facilities of incumbent local exchange carriers ("ILECs") and develop
efficient and effective working relationships with the ILECs and other
carriers. CoreComm Limited has installed its own switches and related
equipment in some of its markets. CoreComm Limited will continue to lease the
unbundled local loop needed to connect its customers to its switches.
CoreComm Limited purchases capacity from the ILECs on a wholesale basis
pursuant to contracts and sells it at retail rates to its customers. CoreComm
Limited depends upon the ILECs to maintain the quality of their service to
Limited's customers. Also, except for CLEC customers who are connected to one
of Limited's switches and Internet services customers, Limited depends upon
the ILECs for accurate and prompt billing information in order for Limited to
bill its customers.
CoreComm Limited's business is highly competitive which results in
pricing pressure and increasing customer acquisition costs. Expenses are
expected to exceed revenues in each location in which Limited offers service
until a sufficient customer base is established.
5. INTANGIBLE ASSETS
Intangible assets consist of:
DECEMBER 31,
2000 1999
------------------------------------------
LMDS license costs $ 4,230,000 $25,366,000
Workforce, net of accumulated amortization of $198,000 (2000) and $310,000
(1999) 52,000 1,160,000
Customer lists, net of accumulated amortization of $530,000 (2000) and
$1,478,000 (1999) 1,810,000 11,862,000
------------------------------------------
$ 6,092,000 $38,388,000
==========================================
On September 29, 2000, Limited completed two significant acquisitions.
CoreComm Limited acquired Voyager, a large independent Internet
communications company focused on the Midwestern United States. Voyager was
acquired for approximately $36.1 million in cash and 19,435,000 shares of
Limited's common stock. The common stock was valued at $154.6 million, the
fair value at the time of the closing of the transaction. In addition,
Limited incurred acquisition related costs of approximately $9.4 million and
repaid approximately $24.0 million of Voyager debt including accrued
interest.
CoreComm Limited also acquired ATX, a CLEC providing integrated voice
and high-speed data services, including long distance, local, wireless and
network services through the use of telephone switching equipment and other
physical facilities in the New York - Virginia corridor. ATX was acquired for
approximately $39.4 million in cash, approximately
F-99
CORECOMM LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INTANGIBLE ASSETS (CONTINUED)
$108.7 million principal amount of Limited's senior unsecured notes due 2003,
12,398,000 shares of Limited's common stock and 250,000 shares of Limited's
Series B preferred stock with a stated value of $250.0 million. The common stock
was valued at $178.7 million, the fair value at the time of the third amendment
to the ATX merger agreement on July 31, 2000. The senior unsecured notes and the
Series B preferred stock were valued at $94.0 million and $67.3 million,
respectively, the fair value on the date of issuance. In addition, Limited
incurred acquisition related costs of approximately $12.4 million.
These acquisitions have been accounted for as purchases, and, accordingly
the net assets and results of operations of the acquired businesses have been
included in the consolidated financial statements from the date of acquisition.
The aggregate purchase price of $615.9 million exceeded the estimated fair value
of net tangible assets acquired by $588.5 million, which was allocated to
goodwill. Under the purchase method of accounting, the purchase price is
allocated to the assets acquired and liabilities assumed based on the estimated
fair values at acquisition. Changes to the allocation of purchase price are
anticipated as valuations of assets and liabilities are completed.
In May 1999, Limited acquired 100% of the stock of MegsINet Inc., a
national Internet Service Provider ("ISP") in Chicago for a total consideration
of $16.8 million in cash and 3,245,000 shares of Limited's common stock. In
addition, Limited exchanged MegsINet stock options for options to purchase
444,000 shares of Limited's common stock, repaid $2.0 million of MegsINet debt
and incurred acquisition related costs of $1.2 million. The common stock portion
of the consideration was valued at $30.8 million, the fair value on the date
prior to the announcement. The stock options were valued at $4.0 million using
the Black-Scholes option pricing model.
Also in May 1999, Limited acquired the wireline assets of USN
Communications, Inc., which was a CLEC that operated on a resale basis, for a
cash payment of $26.4 million, warrants to purchase 563,000 shares of Limited's
common stock at a price of $13.33 per share and 225,000 shares at a price of
$22.22 per share, and a potential contingent cash payment which was capped at
$58.6 million. The contingent payment was payable only if the USN assets met or
exceeded operating performance thresholds. CoreComm Limited does not expect the
actual payment, if any, to be significant. The warrants were valued at $9.1
million, the fair value on the date of issuance. In addition, Limited incurred
acquisition related costs of $1.0 million.
These acquisitions have been accounted for as purchases, and, accordingly,
the net assets and results of operations of the acquired businesses have been
included in the consolidated financial statements from the dates of acquisition.
The aggregate purchase price of $91.3 million exceeded the fair value of the net
tangible assets acquired by $75.6 million, which was allocated as follows: $13.3
million to customer lists, $1.5 million to workforce and $60.8 million to
goodwill.
The pro forma unaudited consolidated results of operations for the years
ended December 31, 2000 and 1999 assuming consummation of the acquisitions as of
January 1, 1999 are as follows:
YEAR ENDED DECEMBER 31,
2000 1999
---------------------------------------------
Total revenue $298,446,000 $297,873,000
Net (loss) (432,255,000) (270,389,000)
Basic and diluted net (loss) per share (6.46) (4.33)
A significant component of the 1999 pro forma results is associated with
the acquisition of some 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 successful in improving these operations in many
areas. However, because of quality deficiencies in the operations acquired from
USN, and the need to improve quality in order to continue to sell lines in the
former USN markets, and consistent with our due diligence, transaction structure
and purchase price, revenues associated with the USN assets declined
significantly since our acquisition.
In accordance with our accounting policy, at December 31, 2000 Limited
reduced the carrying amount of some intangible assets from business combinations
to their fair value. Goodwill and other intangibles with a book value of
F-100
CORECOMM LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INTANGIBLE ASSETS (CONTINUED)
$14,784,000 were written-off. The goodwill had useful lives of 5 and 10
years, and the other intangibles had useful lives of 3 and 5 years.
6. LMDS LICENSE COSTS
Cortelyou Communications Corp. ("Cortelyou"), a wholly-owned
subsidiary of Limited, was the successful bidder for 15 Block A LMDS
licenses in Ohio. The LMDS licenses were acquired for an aggregate of $25.4
million, which includes costs incurred of $125,000. LMDS frequencies are
used for the provision of voice and data services to businesses and homes
in competition with ILECs and/or cable television operators. The FCC has
allocated two blocks of frequencies to be licensed in each of the 493 Basic
Trading Areas in the United States and its territories based on an auction
that ended in March 1998. At December 31, 2000, Limited reduced the
carrying amount of the LMDS licenses by $21,136,000 to reflect their
estimated fair value.
7. FIXED ASSETS
Fixed assets consist of:
DECEMBER 31,
2000 1999
---------------------------------------------
Operating equipment $131,470,000 $50,290,000
Computer hardware and software 53,960,000 17,455,000
Other equipment 15,680,000 9,300,000
Construction-in-progress 19,985,000 24,681,000
---------------------------------------------
221,095,000 101,726,000
Accumulated depreciation (41,444,000) (11,107,000)
---------------------------------------------
$179,651,000 $90,619,000
=============================================
8. ACCRUED EXPENSES
Accrued expenses consist of:
DECEMBER 31,
2000 1999
---------------------------------------------
Payroll and related $ 5,032,000 $ 2,903,000
Professional fees 2,995,000 2,161,000
Taxes, including income taxes 14,829,000 6,089,000
Accrued equipment purchases 14,460,000 13,455,000
Toll and interconnect 20,628,000 637,000
Interest 4,565,000 3,037,000
Acquisition costs 16,090,000 -
Other 11,714,000 3,933,000
---------------------------------------------
$90,313,000 $32,215,000
=============================================
F-101
CORECOMM LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. LONG-TERM DEBT (CONTINUED)
Long-term debt consists of:
DECEMBER 31,
2000 1999
--------------------- --------------------
6% Convertible Subordinated Notes (the "Public Notes") $175,000,000 $175,000,000
Working capital promissory note, interest at 8.5% 1,496,000 3,077,000
Note payable for equipment, interest at 12.75% 3,331,000 6,238,000
Senior secured credit facility 91,100,000 -
Senior unsecured notes due 2003, less unamortized discount of
$13,433,000 95,236,000 -
Other 160,000 283,000
--------------------- --------------------
366,323,000 184,598,000
Less current portion 7,699,000 5,280,000
--------------------- --------------------
$358,624,000 $179,318,000
===================== ====================
In September 2000, subsidiaries of Limited entered into a senior secured
credit facility with The Chase Manhattan Bank as lender, administrative agent
and collateral agent. The senior secured credit facility provides for both a
term loan facility and a revolving credit facility. The term loan facility is
for an initial aggregate amount of $100.0 million and will amortize in quarterly
installments of principal commencing on December 31, 2003 with a final maturity
on September 22, 2008. At December 31, 2000, Limited had $50.0 million
outstanding under the term loan facility. In January 2001, Limited borrowed an
additional $6.7 million under the term loan facility. The revolving credit
facility is for a total of $50.0 million. The revolving credit facility shall be
automatically and permanently reduced in increasing quarterly installments of
principal commencing on December 31, 2003 with a termination date on September
22, 2008. At December 31, 2000, Limited had $41.1 million outstanding under the
revolving credit facility. In January 2001, Limited borrowed an additional $3.3
million under the revolving credit facility. In the event the Public Notes have
not been converted or refinanced on or prior to April 1, 2006, then the
facilities become payable in full on April 1, 2006. Of the aggregate of $10.0
million borrowed in January 2001, $3.0 million was used for the payment of
acquisition costs included in accrued expenses at December 31, 2000.
The interest rate on both the term loan facility and the revolving credit
facility is initially, at Limited's option, either 3.25% per annum plus the base
rate, which is the higher of the prime rate or the federal funds effective rate
plus 0.50% per annum; or the reserve-adjusted London Interbank Offered Rate
(Adjusted LIBOR) plus 4.25% per annum. The applicable margin for the facilities
will be subject to reductions based on the ratio of Limited's consolidated total
debt to annualized EBITDA. At December 31, 2000, the effective interest rate on
the amounts outstanding was 10.982%. Interest is payable at least quarterly. The
unused portion of the facility is subject to a commitment fee equal to 1.25% per
annum payable quarterly, subject to reduction to 1.00% per annum based upon the
amount borrowed under the facility. On April 11, 2001, this facility was amended
(see Note 1).
In September 2000, Limited issued approximately $108,669,000 aggregate
principal amount of the senior unsecured notes to the former stockholders of
ATX. The senior unsecured notes mature on September 29, 2003. Interest on the
notes is at an annual rate of 6.47% payable in either cash or common stock, at
Limited's election, on October 1 and April 1 of each year beginning on April 1,
2001. In January 2001, Limited made a required principal payment of
approximately $2.1 million. The notes require additional principal payments of
approximately $640,000 on March 29, 2001, approximately $2.7 million on January
1, 2002 and approximately $2.7 million on January 1, 2003.
In October 1999, Limited issued $175,000,000 principal amount of 6% Public
Notes due October 1, 2006. Interest on the Public Notes is payable semiannually
on April 1 and October 1 of each year, which commenced on April 1, 2000. The
Public Notes are unsecured obligations convertible into common stock prior to
maturity at a conversion price of $27.39 per share, subject to adjustment. There
are approximately 6,388,000 shares of common stock reserved for issuance upon
conversion of the Public Notes. The Public Notes are redeemable, in whole or in
part, at the option of Limited, at any time on or after October 1, 2002, at a
redemption price of 103.429% that declines annually to 100% in 2006, in each
case together with accrued and unpaid interest to the redemption date. CoreComm
Limited incurred $7,040,000 in fees and expenses in connection with the issuance
of the Public Notes, which is included in deferred financing costs.
MegsINet originally borrowed $4,000,000 from Ascend Communications, Inc.
("Ascend") under a working capital promissory note dated August 1998. MegsINet
is required to make monthly principal and interest payments of $148,000 through
January 2002. CoreComm Limited issued a warrant to Ascend to purchase
approximately 29,000 shares of Limited's common stock at $13.75 per share in
connection with the promissory note.
F-102
CORECOMM LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. LONG-TERM DEBT (CONTINUED)
In 1998, MegsINet entered into an agreement with Cisco Systems Capital
Corporation ("Cisco"), whereby MegsINet can purchase operating equipment under a
promissory note. Monthly payments of principal and interest commenced in 1999.
MegsINet is required to make monthly principal and interest payments that
decline each month from $366,000 beginning in January 2000 through September
2001. CoreComm Limited has guaranteed the obligations of MegsINet under the
promissory note.
CoreComm Limited issued a note payable in the amount of $362,000 in
connection with an acquisition. Interest on the note accrues at 5.542% per
annum. The note is payable in twelve consecutive quarterly payments of principal
and interest of $33,000 which commenced in May 1999 and is collateralized by the
acquired assets.
The senior secured credit facility restricts the payment of cash dividends
and loans to Limited. At December 31, 2000, restricted net assets were
approximately $700 million.
The aggregate principal amounts of notes payable scheduled for repayment
are as follows:
Year Ending December 31,
2001 $ 7,699,000
2002 2,767,000
2003 104,329,000
2004 5,694,000
2005 14,804,000
Thereafter 244,463,000
-------------------
$379,756,000
===================
10. OTHER CHARGES
Other charges include a reserve of $8,700,000 for notes receivable from
former officers of Voyager, and restructuring costs of $4,006,000. The
restructuring costs relate to Limited's announcements in March and December 2000
of reorganizations of its operations. The charge consisted of employee severance
and related costs of $2,089,000 for approximately 250 employees to be terminated
and lease exit costs of $1,917,000. As of December 31, 2000, $2,171,000 of these
provisions had been used, including $775,000 for employee severance and related
costs and $1,396,000 for lease exit costs. As of December 31, 2000, none of the
employees to be terminated were still employed by Limited. The remaining
provision for leases will be used through 2003.
F-103
CORECOMM LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by Limited in estimating
its fair value disclosures for financial instruments:
CASH AND CASH EQUIVALENTS: The carrying amounts reported in the
consolidated balance sheets approximate fair value.
LONG-TERM DEBT: The fair value of Limited's Public Notes is based on the
quoted market price. The carrying amount of the variable rate senior secured
credit facility approximates the fair value. The fair value of Limited's other
notes payable are estimated using discounted cash flow analyses, based on
Limited's current incremental borrowing rates for similar types of borrowing
arrangements.
The carrying amounts and fair values of Limited's financial instruments are
as follows:
DECEMBER 31, 2000 DECEMBER 31, 1999
--------------------------------------------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
--------------------------------------------------------------------
(in thousands)
Cash and cash equivalents $ 25,802 $ 25,802 $ 86,685 $ 86,685
Long-term debt:
Public Notes 175,000 55,125 175,000 273,000
Working capital promissory note 1,496 1,392 3,077 2,721
Equipment note 3,331 2,496 6,238 5,561
Senior secured credit facility 91,100 91,100 - -
Senior unsecured notes due 2003 95,236 95,236 - -
Notes payable to related parties 16,100 15,355 - -
Other 160 138 283 248
F-104
CORECOMM LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. LEASES
CoreComm Limited has capital leases for some of its operating
equipment. Leased property included in operating equipment consists of:
DECEMBER 31,
2000 1999
-----------------------------------------------
Operating equipment $41,859,000 $33,941,000
Accumulated depreciation 14,699,000 5,901,000
-----------------------------------------------
$27,160,000 $28,040,000
===============================================
Future minimum annual payments under these leases at December 31, 2000
are as follows:
Year Ending December 31,
2001 $ 16,611,000
2002 3,719,000
2003 231,000
-------------------
Total minimum lease payments 20,561,000
Less amount representing interest (at rates ranging from 8.5% to 26.44%) 2,646,000
-------------------
Present value of net minimum obligations 17,915,000
Current portion 15,222,000
-------------------
$ 2,693,000
===================
As of December 31, 2000, Limited had leases for office space and
equipment which extend through 2013. Total rent expense for the years ended
December 31, 2000 and 1999, for the period from April 1, 1998 (date
operations commenced) to December 31, 1998 and for the period from January
1, 1998 to May 31, 1998 under operating leases was $7,764,000, $5,151,000,
$354,000 and $98,000, respectively.
Future minimum annual lease payments under noncancellable operating
leases at December 31, 2000 are as follows: $10,748,000 (2001); $9,877,000
(2002); $9,193,000 (2003); $7,492,000 (2004); $6,963,000 (2005) and
$17,306,000 thereafter.
13. RELATED PARTY TRANSACTIONS
In December 2000, Limited issued $16,100,000 aggregate principal
amount of senior unsecured convertible notes to officers and directors of
Limited. The senior unsecured convertible notes mature in December 2010.
Interest on the notes is at an annual rate of 10.75% payable semiannually
on January 1 and July 1 of each year, commencing July 1, 2001. The interest
will be payable in kind by the issuance of additional senior unsecured
convertible notes in principal amount equal to the interest payment that is
then due. The senior unsecured convertible notes are convertible into
common stock prior to maturity at a conversion price of $5.00 per share,
subject to adjustment. The additional notes issued for interest will have
an initial conversion price equal to 120% of the weighted average closing
price of Limited's common stock for a specified period. There are
approximately 3,220,000 shares of common stock reserved for issuance upon
conversion of the notes. The notes are redeemable, in whole or in part, at
the option of Limited, at any time on or after December 16, 2002, at a
redemption price of 103.429% that declines annually to 100% on December 16,
2006, in each case together with accrued and unpaid interest to the
redemption date.
Some of the officers and directors of Limited are also officers or
directors of NTL. NTL provides Limited with management, financial, legal
and technical services, access to office space and equipment and use of
supplies. Amounts charged to Limited by NTL consist of salaries and direct
costs allocated to Limited where identifiable, and a percentage of the
portion of NTL's corporate overhead which cannot be specifically allocated
to NTL (which is agreed upon by the Board of Directors of NTL and Limited).
NTL's charges to Limited commenced in October 1998. It is not practicable
to determine the amounts of these expenses that would have been incurred
had Limited operated as an unaffiliated entity. In the opinion of
management, this allocation method is reasonable. In 2000, 1999 and 1998,
NTL charged Limited $1,186,000, $2,330,000 and $313,000, respectively,
which is included in corporate expenses.
F-105
CORECOMM LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED)
13. RELATED PARTY TRANSACTIONS (CONTINUED)
CoreComm Limited provides NTL with access to office space and
equipment and the use of supplies. In the fourth quarter of 1999, Limited
began charging NTL a percentage of Limited's office rent and supplies
expense. It is not practicable to determine the amounts of these expenses
that would have been incurred had Limited operated as an unaffiliated
entity. In the opinion of management, this allocation method is reasonable.
In 2000 and 1999, Limited charged NTL $267,000 and $62,000, respectively,
which reduced corporate expenses.
A subsidiary of Limited provides billing and software development
services to subsidiaries of NTL. The Company charges an amount in excess of
its costs to provide these services. General and administrative expenses
were reduced by $1,400,000, $800,000, $275,000 and $138,000 for the years
ended December 31, 2000 and 1999, for the period from April 1, 1998 (date
operations commenced) to December 31, 1998 and for the period from January
1, 1998 to May 31, 1998, respectively, as a result of these charges.
In October 2000, Limited billed NTL $6,674,000 for billing and
software development services to be rendered from January to September
2001. In March 2000, Limited and NTL announced that they had entered into
an agreement to link their networks in order to create an international
Internet backbone. In November 2000, Limited billed NTL $9,128,000
primarily for usage of the network in 2001. The $15,802,000 total is
included in due from NTL and deferred revenue at December 31, 2000.
14. NET LOSS PER COMMON SHARE
The following table sets forth the computation of basic and diluted
net loss per common share:
FOR THE PERIOD
FROM APRIL 1, FOR THE
1998 (DATE PERIOD FROM
OPERATIONS JANUARY 1,
COMMENCED) TO 1998 TO
YEAR ENDED DECEMBER 31, DECEMBER 31, MAY 31,
2000 1999 1998 1998
-------------------------------------------------------------------------
Numerator:
Net loss $(313,811,000) $(103,524,000) $(16,255,000) $(2,782,000)
Preferred stock dividend (4,491,000) - - -
Preferred stock accretion to redemption value (1,099,000) - - -
-------------------------------------------------------------------------
Net loss available to common stockholders $(319,401,000) $(103,524,000) $(16,255,000) $(2,782,000)
-------------------------------------------------------------------------
Denominator for basic net loss per common share 47,480,000 34,189,000 29,678,000 29,664,000
Effect of dilutive securities - - - -
-------------------------------------------------------------------------
Denominator for diluted net loss per common share 47,480,000 34,189,000 29,678,000 29,664,000
-------------------------------------------------------------------------
Basic and diluted net loss per common share $(6.73) $(3.03) $(.55) $(.09)
=========================================================================
The shares issuable upon the exercise of stock options and warrants
and upon the conversion of convertible securities are excluded from the
calculation of net loss per common share as their effect would be
antidilutive. At December 31, 2000, 1999 and 1998, Limited had 41.7
million, 18.0 million and 9.8 million shares, respectively, issuable upon
the exercise of stock options and warrants and the conversion of
convertible securities.
15. 401(k) PLAN
The Company sponsors a 401(k) Plan in which all full-time employees
who have completed 90 days of employment and are 21 years of age may
participate. The Company's matching contribution is determined annually by
the Board of Directors. Participants may make salary deferral contributions
of 1% to 15% of their compensation not to exceed the maximum allowed by
law. The expense for the years ended December 31, 2000 and 1999, for the
period from April 1, 1998 (date operations commenced) to December 31, 1998
and for the period from January 1, 1998 to May 31, 1998 was $486,000,
$350,000, $103,000 and $29,000, respectively.
F-106
CORECOMM LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. STOCKHOLDERS' EQUITY
STOCK SPLITS
In August 1999, Limited declared a 3-for-2 stock split by way of a
stock dividend, which was paid on September 2, 1999. In January 2000,
Limited declared a 3-for-2 stock split by way of a stock dividend, which
was paid on February 2, 2000. The consolidated financial statements and the
notes thereto give retroactive effect to the stock splits.
PREFERRED STOCK
In September 2000, Limited issued 50,000 shares of Series A preferred
stock in exchange for cash of $50 million. The Series A preferred stock
pays cumulative dividends at 8.5% per annum of the liquidation value of
$1,000 per share, payable quarterly in arrears which commenced on December
31, 2000. At Limited's option, dividends may be paid either in cash, shares
of common stock or additional shares of Series A preferred stock. The
50,000 shares of Series A preferred stock originally issued are convertible
at any time at the option of the holder into shares of common stock at the
stated liquidation value of $1,000 divided by the conversion price of
$14.36. Any additional shares of Series A preferred stock issued will have
an initial conversion price equal to 120% of the volume weighted average
sale price of Limited's common stock for a specified period. On September
29, 2010, Limited will be required to redeem any shares of Series A
preferred stock outstanding for $1,000 per share plus accrued and unpaid
dividends. At Limited's discretion, the redemption price may be paid either
in cash or in shares of common stock. CoreComm Limited may redeem the
Series A preferred stock at a redemption price of $1,000 per share,
together with accrued and unpaid dividends, payable either, at Limited's
option in cash or in shares of common stock, or a combination of both,
beginning on September 29, 2002 if the 25-day volume weighted average sale
price of Limited's common stock exceeds targets. In addition, the Series A
preferred stock may be redeemed by Limited at any time following September
29, 2005 at a redemption price of $1,010 per share, together with accrued
and unpaid dividends, payable either in cash or in shares of common stock,
or a combination of both. Except as provided by law, holders of the
preferred stock are not entitled to vote on matters brought before
Limited's stockholders.
In September 2000, Limited issued 250,000 shares of Series B preferred
stock in connection with the ATX acquisition. The Series B preferred stock
pays cumulative dividends at an initial annual rate of $30 per share,
payable quarterly in arrears, when, if and as declared by the Board of
Directors, which commenced on December 31, 2000. At Limited's discretion,
dividends may be paid either in cash or in shares of common stock. The
annual dividend will increase to $50 per share on September 29, 2001 if, by
that date, any of the senior unsecured notes due 2003 remain unpaid and to
$70 per share on March 29, 2002 if, by that date, any of the senior
unsecured notes due 2003 remain unpaid. The Series B preferred stock has a
liquidation preference of $1,000 per share, plus accumulated and unpaid
dividends. The Series B preferred stock is convertible at any time at the
option of the holder into shares of common stock at the stated liquidation
preference of $1,000 divided by the conversion price of $32.11. On
September 29, 2020, Limited will be required to redeem any shares of Series
B preferred stock outstanding for $1,000 per share plus accrued and unpaid
dividends. At Limited's discretion, the redemption price may be paid either
in cash or in shares of common stock. Except as provided by law, holders of
the preferred stock are not entitled to vote on matters brought before
Limited's stockholders.
As of December 31, 2000, there were 11,550,000 shares of common stock
reserved for issuance upon conversion of preferred stock.
NON-CASH COMPENSATION
In April 2000, the Compensation and Option Committee of the Board of
Directors approved the issuance of options to purchase approximately
2,747,000 shares of Limited's common stock to various employees at an
exercise price of $14.55, which was less than the fair market value of
Limited's common stock on the date of the grant. In accordance with APB
Opinion No. 25, "Accounting for Stock Issued to Employees," in April 2000,
Limited recorded a non-cash compensation expense of approximately $29.0
million and a non-cash deferred expense of approximately $31.3 million.
From April 2000 to December 31, 2000, $9.7 million of the deferred non-cash
compensation was charged to expense. CoreComm Limited will charge the
deferred expense to non-cash compensation expense over the vesting period
of the stock options as follows: $12.9 million in 2001, $7.5 million in
2002 and $1.2 million in 2003. In November 2000, the Board of Directors
approved the rescission of some previously exercised employee stock
options. CoreComm Limited issued notes to employees for the repurchase of
the 671,000 shares of common stock for an aggregate of $6,803,000, which
exceeded the fair market value of
F-107
CORECOMM LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. STOCKHOLDER'S EQUITY (CONTINUED)
Limited's common stock on the date of repurchase. The notes earned
interest at a rate of 4.5% and were redeemed by Limited in December 2000.
CoreComm Limited recorded non-cash compensation of $4.7 million from these
transactions.
The non-cash compensation charge of $1.1 million in 1999 was recorded
in accordance with APB Opinion No. 25, related to a change in employee stock
option agreements.
The non-cash compensation charge of $4.6 million in 1998 was recorded
in accordance with APB Opinion No. 25, as a one time charge related to the
issuance of Limited's warrants and stock options to holders of CCPR's stock
options in connection with Limited's distribution to CCPR's stockholders.
STOCKHOLDER RIGHTS PLAN
CoreComm Limited adopted a stockholder rights plan in September 2000.
In connection with the stockholder rights plan, the Board of Directors declared
and paid a dividend of one preferred share purchase right for each share of
common stock outstanding on October 16, 2000. Each right entitles the holder,
under specified potential takeover events, to purchase from Limited one
one-hundredth of a share of Series C Junior Participating Preferred Stock
("Series C Preferred Stock") at an exercise price of $50.00, subject to
adjustment. The rights expire in October 2010. There are 1,000,000 shares of
Series C Preferred Stock authorized for issuance under the plan. No shares of
Series C Preferred Stock are issued or outstanding.
The Series C Preferred Stock will be entitled to a minimum preferential
quarterly dividend payment of an amount equal to the greater of $.01 per share
or an aggregate dividend of 100 times the dividend, if any, declared per share
of common stock. In the event of liquidation, the holders of Series C Preferred
Stock will be entitled to a minimum preferential liquidation payment of $1 per
share plus accrued and unpaid dividends and will be entitled to an aggregate
payment of 100 times the payment made per share of common stock. Each share of
Series C Preferred Stock will have 100 votes and will vote together with the
common stock. In the event of any merger, consolidation or other transaction in
which shares of common stock are changed or exchanged, each share of Series C
Preferred Stock will be entitled to receive 100 times the amount received per
share of common stock. The rights are protected by customary antidilution
provisions.
WARRANTS
CoreComm Limited had the following warrants outstanding as of December
31, 2000: (1) warrants to purchase an aggregate of 29,000 shares of common stock
at $13.75 per share issued in 1999 that expire in August 2008, (2) warrants to
purchase an aggregate of 225,000 shares of common stock at $22.22 per share
issued in 1999 that expire in May 2004, (3) warrants to purchase an aggregate of
563,000 shares of common stock at $13.33 per share issued in 1999 that expire in
May 2002 and (4) warrants to purchase an aggregate of 403,000 shares of common
stock at $3.39 per share issued in 2000 that expire in December 2010. None of
these warrants were exercised in 2000 or 1999. In addition, in January 2001,
Limited issued warrants to purchase an aggregate of 969,000 shares of common
stock at $3.71 per share that expire in January 2011.
DISTRIBUTION WARRANTS AND STOCK OPTIONS
In connection with the distribution of Limited to CCPR's stockholders,
Limited issued warrants to purchase shares of common stock to holders of CCPR
stock options who elected to receive warrants as follows: (1) warrants to
purchase an aggregate of 4,303,000 shares of common stock at an exercise price
of $5.86 per share which expire in 2005, (2) warrants to purchase an aggregate
of 8,000 shares of common stock at an exercise price of $5.86 per share which
expire in 2003 and (3) warrants to purchase an aggregate of 1,842,000 shares of
common stock at an exercise price of $7.03 which expire in 2005. All of these
warrants were exercised by December 31, 2000.
There are approximately 33,051,000 shares of common stock reserved for
issuance under Limited stock option plans (the "Plans"), and there were
approximately 11.3 million shares available for issuance at December 31, 2000.
The Plans provide that incentive stock options be granted at the fair market
value of Limited's common stock on the date of grant, and nonqualified stock
options be granted at a price determined by the Compensation and Option
Committee. Options are generally exercisable as to 20% of the shares subject
thereto on the date of grant and become exercisable as to an additional 20% of
the shares subject thereto on each January 1 thereafter, while the optionee
remains an employee of Limited. Options will expire ten years after the date of
the grant.
In connection with the distribution of Limited to CCPR's shareholders,
Limited issued approximately 1,877,000 options to purchase shares of Limited's
common stock to holders of CCPR stock options who elected to receive options.
F-108
CORECOMM LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. STOCKHOLDER'S EQUITY (CONTINUED)
Pro forma information regarding net loss and net loss per share is
required by SFAS No. 123, and has been determined as if Limited had accounted
for its employee warrants and stock options under the fair value method of that
Statement. The fair value for these warrants and options was estimated at the
date of grant using the Black-Scholes option pricing model with the following
weighted-average assumptions for 2000, 1999 and 1998: risk-free interest rate of
5.30%, 6.81% and 5.02%, respectively, dividend yield of 0%, volatility factor of
the expected market price of Limited's common stock of .804, .465 and .810,
respectively, and a weighted-average expected life of the warrants and options
of 10 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because Limited's distribution warrants and stock options have
characteristics significantly different from those of traded options and because
changes in the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its distribution warrants
and stock options.
For purposes of pro forma disclosures, the estimated fair value of the
distribution warrants and options is amortized to expense over the options'
vesting periods. Following is Limited's pro forma information:
FOR THE PERIOD FROM APRIL 1,
1998 (DATE OPERATIONS
YEAR ENDED DECEMBER 31, COMMENCED) TO
2000 1999 DECEMBER 31, 1998
-----------------------------------------------------------------------
Pro forma net (loss) $(389,127,000) $(128,795,000) $(48,015,000)
Pro forma net (loss) per share - basic and
diluted $(8.31) $(3.77) $(1.62)
A summary of Limited's distribution warrants and stock option activity
and related information for the years ended December 31, 2000 and 1999 and for
the period from April 1, 1998 (date operations commenced) to December 31, 1998
follows:
2000 1999 1998
-------------------------------------------------------------------------------------------
NUMBER OF WEIGHTED- NUMBER OF WEIGHTED- NUMBER OF WEIGHTED-AVERAGE
WARRANTS AND AVERAGE WARRANTS AND AVERAGE WARRANTS AND EXERCISE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS PRICE
-------------------------------------------------------------------------------------------
Outstanding - beginning
of period 10,754,000 $15.37 9,765,000 $ 5.51 - $ -
Granted 10,404,000 10.98 7,925,000 19.56 9,767,000 5.51
Exercised 1,640,000 7.61 5,606,000 6.27 2,000 5.86
Forfeited 169,000 14.09 1,330,000 6.27 - -
--------------
-------------- --------------
Outstanding - end of
period 19,349,000 $13.69 10,754,000 $15.37 9,765,000 $5.51
==============
============== ==============
Exercisable at end of
period 10,112,000 $12.51 3,438,000 $10.11 7,747,000 $5.42
============== ============== ==============
Weighted-average fair value of distribution warrants and options,
calculated using the Black-Scholes option pricing model, granted during 2000,
1999 and 1998 is $14.04, $14.28 and $4.33, respectively.
F-109
CORECOMM LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED)
16. STOCKHOLDER'S EQUITY (CONTINUED)
The following table summarizes the status of the distribution warrants
and stock options outstanding and exercisable at December 31, 2000:
Warrants and Stock Options Outstanding Warrants and Stock Options Exercisable
------------------------------------------------------ --------------------------------------------
Number of Weighted- Weighted- Number of Weighted-
Range of Exercise Warrants and Remaining Average Warrants and Average
Prices Options Contractual Life Exercise Price Options Exercise Price
------------------------------------------------------------------------------------------------------------------------
$0.02 to $3.36 3,146,000 9.0 Years $ 2.085 2,803,000 $ 1.988
$5.28 to $8.13 4,346,000 8.9 Years $ 7.197 1,294,000 $ 6.814
$11.94 to $14.78 3,373,000 9.4 Years $ 14.205 1,950,000 $ 14.005
$15.63 to $18.95 901,000 8.6 Years $ 18.185 487,000 $ 17.756
$19.18 to $22.45 7,156,000 8.7 Years $ 20.759 3,394,000 $ 20.621
$24.92 to $27.13 185,000 8.7 Years $ 25.115 77,000 $ 25.200
$30.00 to $33.75 28,000 9.3 Years $ 31.168 16,000 $ 31.239
$34.33 to $37.33 5,000 9.1 Years $ 36.889 3,000 $ 36.889
$38.07 to $41.75 182,000 9.1 Years $ 39.480 74,000 $ 39.536
$45.75 to $46.00 27,000 9.2 Years $ 45.826 14,000 $ 45.806
------------------------------------------------------------------------------------------------------------------------
Total 19,349,000 10,112,000
========================================================================================================================
17. INCOME TAXES
The provision for income taxes consists of the following:
FOR THE PERIOD
FROM APRIL 1, 1998
(DATE OPERATIONS
COMMENCED) TO
YEAR ENDED DECEMBER 31, DECEMBER 31,
2000 1999 1998
---------------------------------------------------------------
Current:
Federal $ - $106,000 $ -
State and local 250,000 625,000 440,000
---------------------------------------------------------------
Total current 250,000 731,000 440,000
---------------------------------------------------------------
Deferred:
Federal - - -
State and local - - -
---------------------------------------------------------------
Total deferred - - -
---------------------------------------------------------------
$ 250,000 $731,000 $ 440,000
===============================================================
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of Limited's deferred tax assets are as follows
F-110
CORECOMM LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. INCOME TAXES (CONTINUED)
DECEMBER 31,
2000 1999
-----------------------------------------------
Deferred tax assets:
Depreciation $ 1,226,000 $ 887,000
Net operating losses 109,245,000 35,444,000
Allowance for doubtful accounts 4,414,000 1,599,000
Amortization of goodwill 7,405,000 653,000
Accrued expenses 35,820,000 10,359,000
Asset impairments 8,546,000 -
Other 174,000 200,000
-----------------------------------------------
166,830,000 49,142,000
Valuation allowance for deferred tax assets (166,830,000) (49,142,000)
-----------------------------------------------
Net deferred tax assets $ - $ -
===============================================
The deferred tax assets have been fully offset by a valuation allowance
due to the uncertainty of realizing the tax benefit. The deferred tax assets
include $39 million which, if realized, would be accounted for as a reduction of
goodwill or an increase in equity.
At December 31, 2000, Limited had net operating loss carryforwards of
approximately $250 million for federal income tax purposes that begin to expire
in 2018, of which $38 million and $68 million may be limited pursuant to
separate return limitation rules and change in ownership rules, respectively.
The reconciliation of income taxes computed at U.S. federal statutory
rates to income tax expense is as follows:
FOR THE PERIOD
FROM APRIL 1, 1998
(DATE OPERATIONS
COMMENCED) TO
YEAR ENDED DECEMBER 31, DECEMBER 31,
2000 1999 1998
-------------------------------------------------------------
Benefit at federal statutory rate (35%) $(109,746,000) $(35,978,000) $(5,535,000)
State and local income taxes 250,000 625,000 440,000
Expenses not deductible for tax purposes 34,429,000 2,160,000 1,623,000
Foreign income not subject to U.S. tax - (399,000) (846,000)
U.S. losses with no benefit 75,317,000 34,323,000 4,758,000
-------------------------------------------------------------
$ 250,000 $ 731,000 $ 440,000
=============================================================
F-111
18. COMMITMENTS AND CONTINGENT LIABILITIES
As of December 31, 2000, Limited had purchase commitments of
approximately $52,000,000 outstanding, which includes approximately $18,000,000
pursuant to a contract that ends in January 2009. The Company is in the process
of canceling a significant portion of these commitments.
Fiberstream, Inc. ("FiberCo"), a wholly-owned subsidiary of Limited,
has an obligation under an agreement with the City of New York to pay an annual
franchise fee in the amount of the greater of (a) 5% of gross revenue (as
defined in the agreement) or (b) $200,000. Estimated quarterly payments begin
the earlier of (a) the date that FiberCo completes construction of its initial
backbone or (b) November 2002. Additionally, FiberCo has an obligation to
provide equipment, cash or services to the City of New York with a value of not
more than $100,000 over 15 years.
The Company is involved in various disputes, arising in the ordinary
course of its business, which may result in pending or threatened litigation.
None of these matters are expected to have a material adverse effect on
Limited's financial position, results of operations or cash flows.
F-112
Complete and correct copies of the applicable Letters of Transmittal,
properly completed and duly signed, will be accepted. The applicable Letters of
Transmittal, certificates for outstanding securities and any other required
documents should be sent or delivered by each holder of outstanding securities
or his or her broker, dealer, commercial bank, trust company or other nominee to
the exchange agent at one of its addresses set forth below.
THE EXCHANGE AGENT FOR THE EXCHANGE OFFERS IS:
CONTINENTAL STOCK TRANSFER & TRUST COMPANY
BY REGULAR OR CERTIFIED MAIL: BY FACSIMILE: BY OVERNIGHT COURIER OR HAND:
(ELIGIBLE GUARANTOR INSTITUTIONS
17 Battery Place ONLY) 17 Battery Place
New York, New York 10004 (212) 616-7610 8th Floor
Attn: Reorganization Department New York, New York 10004
CONFIRM BY TELEPHONE:
(212) 509-4000
Extension 536
Any questions or requests for assistance or additional copies of the
prospectus, the Letters of Transmittal, the Notices of Guaranteed Delivery and
related exchange offer materials may be directed to the information agent at its
telephone number and location listed below. You may also contact your local
broker, commercial bank, trust company or nominee for assistance concerning the
offer.
THE INFORMATION AGENT FOR THE EXCHANGE OFFERS IS:
D. F. KING & CO., INC.
77 Water Street
New York, New York 10005
Banks and Brokers Call Collect (212) 269-5550
All Others Call Toll Free (800) 848-2998
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law authorizes a
corporation to indemnify its directors, officers, employees and agents against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement reasonably incurred, including liabilities under the Securities Act,
provided they act in good faith and in a manner reasonably believed to be in or
not opposed to the best interests of the corporation, although in the case of
proceedings brought by or on behalf of the corporation, this indemnification is
limited to expenses and is not permitted if the individual is adjudged liable to
the corporation (unless the court determines otherwise). Our charter and amended
bylaws require us to indemnify our officers and directors to the full extent
permitted by Delaware law.
Section 102 of the Delaware General Corporation Law authorizes a
corporation to limit or eliminate its directors' liability to the corporation or
its stockholders for monetary damages for breaches of fiduciary duties, other
than for (1) breaches of the duty of loyalty, (2) acts or omissions not in good
faith or that involve intentional misconduct or knowing violations of law, (3)
unlawful payments of dividends, stock purchases or redemptions, or (4)
transactions from which a director derives an improper personal benefit. Our
charter contains provisions limiting the liability of our directors to us and to
our stockholders to the full extent permitted by Delaware law.
Section 145 of the Delaware General Corporation Law authorizes a
corporation to purchase and maintain insurance on behalf of any person who is or
was a director, officer, employee or agent of the corporation against any
liability asserted against him or her and incurred by him or her in any capacity
as a director, officer, employee or agent, or arising out of his or her status
as such. Our charter and amended bylaws provide that we may, to the full extent
permitted by law, purchase and maintain insurance on behalf of any of our
directors, officers, employees or agents against any liability that may be
asserted against him or her and we currently maintain this insurance. We
maintain liability insurance covering our directors and officers for claims
asserted against them or incurred by them in their capacity as directors or
officers, including claims brought under the Securities Act.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The Exhibit Index is hereby incorporated by reference.
(b) The financial statement schedules are included in this registration
statement beginning on page S-1.
ITEM 22. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request;
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Exchange
Act (and, where applicable, each filing of an employee benefit plan's annual
report pursuant to Section 15(d) of the Exchange Act) that is incorporated by
reference in the registration statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
CORECOMM LIMITED
INDEX TO FINANCIAL SCHEDULES
CORECOMM HOLDCO
Report of Independent Auditor on Schedules ..................................................................S-2
Schedule I - Condensed Financial Information of CoreComm Holdco, Inc..........................................S-4
Schedule II - Valuation and Qualifying Accounts ..............................................................S-9
CORECOMM LIMITED
Schedule I - Condensed Financial Information of CoreComm Limited..............................................S-11
Schedule II - Valuation and Qualifying Accounts...............................................................S-16
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
S-1
REPORT OF INDEPENDENT AUDITOR ON SCHEDULES
We have audited the consolidated financial statements of CoreComm
Holdco, Inc. as of December 31, 2000 and 1999, and for each of the years then
ended and the period from April 1, 1998 (date operations commenced) to
December 31, 1998, and have issued our report thereon dated March 12, 2001
(included elsewhere in this Registration Statement). Our audits also included
the financial statement schedules listed in Item 16(b) of this Registration
Statement. These schedules are the responsibility of the Company's management.
Our responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedules referred to above,
when considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
New York, New York
March 12, 2001
S-2
CORECOMM LIMITED
REPORT OF INDEPENDENT AUDITOR ON SCHEDULES
We have audited the consolidated financial statements of OCOM
Corporation Telecoms Division for the period from January 1, 1998 to May 31,
1998, and have issued our report thereon dated February 26, 1999 (included
elsewhere in this Registration Statement). Our audit also included the financial
statement schedule listed in Item 16(b) of this Registration Statement. This
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion based on our audit.
In our opinion, the financial statement schedule referred to above,
when considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
New York, New York
February 26, 1999
S-3
CORECOMM LIMITED
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF CORECOMM HOLDCO, INC.
CONDENSED BALANCE SHEETS
DECEMBER 31,
2000 1999
--------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 6,198,000 $ 1,882,000
1,343,000 -
1,600,000 480,000
--------------------------------------
Total current assets 9,141,000 2,362,000
Investments in and loans to subsidiaries 605,274,000 127,628,000
Other 1,059,000 -
--------------------------------------
$ 615,474,000 $129,990,000
======================================
LIABILITIES AND SHAREHOLDER'S EQUITY
Notes payable $ 16,170,000 $ -
Commitments and contingent liabilities
Shareholder's equity:
Common stock 95,000 95,000
Additional paid-in capital 1,039,083,000 246,890,000
Deferred non-cash compensation (21,638,000) -
(Deficit) (418,236,000) (116,995,000)
--------------------------------------
599,304,000 129,990,000
--------------------------------------
$615,474,000 $129,990,000
======================================
See accompanying notes.
S-4
CORECOMM LIMITED
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF CORECOMM HOLDCO, INC.
(CONTINUED)
CONDENSED STATEMENTS OF OPERATIONS
FOR THE PERIOD FROM
APRIL 1, 1998 (DATE
OPERATIONS COMMENCED)
YEAR ENDED DECEMBER 31, TO DECEMBER 31,
2000 1999 1998
-------------------- ------------------- -----------------------
COSTS AND EXPENSES
Corporate $ - $ 13,000 $ -
-------------------- ------------------- -----------------------
Operating (loss) - (13,000) -
OTHER INCOME (EXPENSE)
Interest income and other, net 2,787,000 1,638,000 384,000
Interest expense (70,000) - -
-------------------- ------------------- -----------------------
Income before income taxes and equity
in net (loss) of subsidiaries 2,717,000 1,625,000 384,000
Income tax provision - (7,000) -
-------------------- ------------------- -----------------------
Income before equity in net (loss) of
subsidiaries 2,717,000 1,618,000 384,000
Equity in net (loss) of subsidiaries (303,958,000) (104,798,000) (14,199,000)
-------------------- ------------------- -----------------------
Net (loss) $(301,241,000) $(103,180,000) $(13,815,000)
==================== =================== =======================
See accompanying notes.
S-5
CORECOMM LIMITED
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF CORECOMM HOLDCO, INC.(Continued)
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM
APRIL 1, 1998 (DATE
OPERATIONS COMMENCED)
YEAR ENDED DECEMBER 31, TO DECEMBER 31,
2000 1999 1998
---------------------------------------------------------
Net cash provided by operating activities $ 539,000 $ 2,320,000 $ 639,000
INVESTING ACTIVITIES
Acquisitions, net of cash acquired (98,613,000) (47,056,000) --
Purchase of marketable securities (1,343,000) -- --
Increase in investments in and loans to subsidiaries (144,909,000) (105,267,000) (20,551,000)
---------------------------------------------------------
Net cash (used in) investing activities (244,865,000) (152,323,000) (20,551,000)
FINANCING ACTIVITIES
Capital contributions 232,472,000 151,885,000 19,912,000
Proceeds from borrowings, net of financing costs 16,170,000 -- --
---------------------------------------------------------
Net cash provided by financing activities 248,642,000 151,885,000 19,912,000
---------------------------------------------------------
Increase in cash and cash equivalents 4,316,000 1,882,000 --
Cash and cash equivalents at beginning of period 1,882,000 -- --
---------------------------------------------------------
Cash and cash equivalents at end of period $ 6,198,000 $ 1,882,000 $ --
=========================================================
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING ACTIVITIES
Capital contributions of non-cash net assets $559,721,000 $ 45,007,000 $ 30,181,000
See accompanying notes.
S-6
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF CORECOMM HOLDCO, INC.(Continued)
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. ORGANIZATION
CoreComm Holdco, Inc. (the "Company") was formed in May 1998 as a Bermuda
corporation. It was a wholly-owned subsidiary of CoreComm Limited ("Limited")
until December 2001. In July 1999, the Company was domesticated under the laws
of Delaware.
2. BASIS OF PRESENTATION
In the Company's condensed financial statements, the Company's investment
in subsidiaries is stated at cost plus equity in the undistributed earnings of
the subsidiaries. The Company's share of net loss of its subsidiaries is
included in net loss using the equity method of accounting. The condensed
financial statements should be read in conjunction with the Company's
consolidated financial statements.
3. NOTES PAYABLE
In December 2000, the Company issued $16,100,000 aggregate principal amount
of 10.75% Senior Unsecured Convertible PIK Notes Due December 2010, which were a
joint obligation of Limited and the Company, to officers and directors of
Limited and the Company. Interest on the notes was at an annual rate of 10.75%
payable semiannually on January 1 and July 1 of each year, commencing July 1,
2001. The interest was payable in kind by the issuance of additional Senior
Unsecured Convertible PIK Notes Due December 2010 in such principal amount as
shall equal the interest payment that is then due. The notes were convertible
into Limited common stock prior to maturity at a conversion price of $5.00 per
share, subject to adjustment. The additional notes issued for interest had an
initial conversion price equal to 120% of the weighted average closing price of
Limited's common stock for a specified period. All of the outstanding 10.75%
Senior Unsecured Convertible PIK Notes Due December 2010 were exchanged for
shares of the Company in December 2001.
Some of the officers and directors of the Company are also officers or
directors of NTL Incorporated ("NTL"). In April 2001, CoreComm Limited and the
Company as co-obligors issued to NTL $15 million aggregate principal amount of
10.75% Unsecured Convertible PIK Notes Due April 2011. Interest on the notes is
at an annual rate of 10.75% payable semiannually on October 15 and April 15 of
each year, commencing October 15, 2001. The interest is payable in kind by the
issuance of additional 10.75% Unsecured Convertible PIK Notes Due April 2011 in
such principal amount as shall equal the interest payment that is then due. The
notes are convertible into common stock prior to maturity at a conversion price
of $1.00 per share, subject to adjustment. However, the holder of these notes
and CoreComm Limited and CoreComm Holdco have entered into an agreement relating
to the conversion feature of the note following the Holdco Recapitalization.
Through that agreement, consistent with the original terms of the note, CoreComm
Limited and CoreComm Holdco have agreed to exercise their right under the note
such that, following the successful completion of our exchange offer to the
holders of CoreComm Limited common stock to exchange their shares of CoreComm
Limited common stock for shares of our common stock, the convertibility feature
of the note will be altered so that rather than the note being convertible into
shares of CoreComm Limited common stock, it will become convertible into shares
of our common stock. At that time, the conversion price of $1.00 will be
equitably adjusted by applying the exchange ratio in the exchange offers, which
results in a new conversion price of $116.70 per share of our common stock. The
holder has agreed not to exercise its rights to convert into CoreComm Limited
common stock for six months from February 5, 2002 (unless that right has
previously ceased as a result of the completion of the exchange offer and the
change in the convertibility feature). In the event that we are unsuccessful in
completing the exchange offer, the conversion feature would remain into CoreComm
Limited common stock. These notes are redeemable, in whole or in part, at our
option, at any time in April 2003, at a redemption price of 103.429% that
declines annually to 100% in April 2007, in each case together with accrued and
unpaid interest to the redemption date. Additional notes issued for interest
will have an initial conversion price equal to 120% of the weighted average
closing price of the common stock for a specified period.
4. GUARANTEES OF THE REGISTRANT
In September 2000, subsidiaries of the Company entered into a senior
secured credit facility with The Chase Manhattan Bank as lender, administrative
agent and collateral agent. The facility was amended and restated in April 2001.
As of April 2001, the entire amount available under the senior secured credit
facility of $156.1 million has been borrowed. The Company is a guarantor of the
credit facility.
S-7
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF CORECOMM HOLDCO, INC.(Continued)
NOTES TO CONDENSED FINANCIAL STATEMENTS
5. OTHER
No cash dividends were paid to the registrant by subsidiaries from April 1,
1998 (date operations commenced) through December 31, 2000.
S-8
CORECOMM HOLDCO, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT CHARGED TO
BEGINNING OF COSTS AND CHARGED TO BALANCE AT END
DESCRIPTION PERIOD EXPENSES OTHER ACCOUNTS DEDUCTIONS OF PERIOD
--------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 2000:
Allowance for doubtful accounts $ 3,949,000 $ 7,130,000 $ - $ (45,000) (a) $ 11,034,000
Year ended December 31, 1999:
Allowance for doubtful accounts $ 742,000 $ 3,241,000 $ $ (34,000) (b) $ 3,949,000
For the period from April 1, 1998
(date operations commenced) to
December 31, 1998:
Allowance for doubtful accounts $ $ 501,000 $ $ 241,000 (c) $ 742,000
----------
(a) Uncollectible accounts written-off, net of recoveries, of $9,269,000 offset
by $9,224,000 allowance for doubtful accounts as of acquisition date from
business combinations.
(b) Uncollectible accounts written-off, net of recoveries, of $24,688,000
offset by $24,654,000 allowance for doubtful accounts as of acquisition
date from business combinations.
(c) Uncollectible accounts written-off, net of recoveries, of $117,000 offset
by $358,000 allowance for doubtful accounts as of acquisition date from
business combinations.
S-9
OCOM CORPORATION TELECOMS DIVISION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT CHARGED TO
BEGINNING OF COSTS AND CHARGED TO BALANCE AT END
DESCRIPTION PERIOD EXPENSES OTHER ACCOUNTS DEDUCTIONS OF PERIOD
--------------------------------------------------------------------------------------------------------------------------
For the period from January 1, 1998 to
May 31, 1998:
Allowance for doubtful
Accounts $ 46,000 $ 92,000 $ - $ 60,000 (a) $ 78,000
----------
(a) Uncollectible accounts written-off, net of recoveries.
S-10
CORECOMM LIMITED
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF CORECOMM LIMITED
CONDENSED BALANCE SHEETS
DECEMBER 31,
2000 1999
--------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 3,029,000 $ 75,437,000
Marketable securities 2,029,000 92,041,000
Other 842,000 466,000
--------------------------------------
Total current assets 5,900,000 167,944,000
Investments in and loans to subsidiaries 598,712,000 130,125,000
Other, net of accumulated amortization of $1,243,000 (2000) and
$237,000 (1999) 7,369,000 6,698,000
--------------------------------------
$ 611,981,000 $ 304,767,000
=================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 256,000 $ 115,000
Accrued expenses 25,211,000 2,726,000
Current portion of long-term debt 2,740,000 -
------------------- ------------------
Total current liabilities 28,207,000 2,841,000
Long-term debt 267,496,000 175,000,000
Commitments and contingent liabilities
Shareholders' equity:
Series preferred stock 3,000 -
Common stock 720,000 386,000
Additional paid-in capital 781,357,000 246,319,000
Deferred non-cash compensation (21,638,000) -
(Deficit) (433,590,000) (119,779,000)
------------------- ------------------
326,852,000 126,926,000
Treasury stock at cost, 1,329,000 shares (10,574,000) -
------------------- ------------------
316,278,000 126,926,000
------------------- ------------------
$ 611,981,000 $ 304,767,000
=================== ==================
See accompanying notes
S-11
CORECOMM LIMITED
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF CORECOMM LIMITED (CONTINUED)
CONDENSED STATEMENTS OF OPERATIONS
FOR THE PERIOD FROM
APRIL 1, 1998 (DATE
OPERATIONS COMMENCED)
TO DECEMBER 31,
YEAR ENDED DECEMBER 31,
2000 1999 1998
----------------------------------------------------------------
COSTS AND EXPENSES
Corporate $ 1,659,000 $ 1,310,000 $ -
Non-cash compensation 43,440,000 1,056,000 4,586,000
----------------------------------------------------------------
Operating (loss) (45,099,000) (2,366,000) (4,586,000)
OTHER INCOME (EXPENSE)
Interest income and other, net 7,759,000 6,731,000 2,969,000
Interest expense (14,529,000) (2,716,000) -
----------------------------------------------------------------
Income (loss) before income taxes and equity
in net (loss) of subsidiaries (51,869,000) 1,649,000 (1,617,000)
Income tax provision (125,000) (534,000) (440,000)
----------------------------------------------------------------
Income (loss) before equity in net (loss) of
subsidiaries (51,994,000) 1,115,000 (2,057,000)
Equity in net (loss) of subsidiaries (261,817,000) (104,639,000) (14,198,000)
----------------------------------------------------------------
Net (loss) $(313,811,000) $(103,524,000) $(16,255,000)
================================================================
See accompanying notes.
S-12
CORECOMM LIMITED
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF CORECOMM LIMITED (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM
APRIL 1, 1998 (DATE
OPERATIONS COMMENCED)
TO DECEMBER 31,
YEAR ENDED DECEMBER 31,
2000 1999 1998
-----------------------------------------------------------------
Net cash provided by operating activities $ 8,209,000 $ 2,150,000 $ 1,347,000
INVESTING ACTIVITIES
Acquisitions, net of cash acquired (98,613,000) (47,056,000) -
Purchase of marketable securities (36,021,000) (142,922,000) (110,079,000)
Proceeds from sale of marketable securities 128,496,000 164,652,000 -
Increase in investments in and loans to subsidiaries (136,837,000) (106,886,000) (20,886,000)
-----------------------------------------------------------------
Net cash (used in) investing activities (142,975,000) (132,212,000) (130,965,000)
FINANCING ACTIVITIES
Capital contributions - - 150,904,000
Proceeds from borrowings, net of financing costs (105,000) 168,065,000 -
Proceeds from issuance of preferred stock 50,000,000 - -
Proceeds from exercise of stock options and warrants 12,463,000 16,145,000 3,000
-------------------- -------------------- ---------------------
Net cash provided by financing activities 62,358,000 184,210,000 150,907,000
-------------------- -------------------- ---------------------
Increase (decrease) in cash and cash equivalents (72,408,000) 54,148,000 21,289,000
Cash and cash equivalents at beginning of period 75,437,000 21,289,000 -
-------------------- -------------------- ---------------------
Cash and cash equivalents at end of period $ 3,029,000 $ 75,437,000 $ 21,289,000
==================== ==================== =====================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $ 10,354,000 $ - $ -
Income taxes paid 210,000 1,236,000 -
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES
Common stock, preferred stock, stock options and
warrants issued for acquisitions $ 400,665,000 $ 43,952,000 $ -
Notes issued for acquisitions, net of discount 94,015,000 - -
Capital contributions of noncash net assets - - 30,059,000
See accompanying notes.
S-13
CORECOMM LIMITED
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF CORECOMM LIMITED (CONTINUED)
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. ORGANIZATION
CoreComm Limited ("Limited"), formerly a wholly-owned subsidiary of
Cellular Communications of Puerto Rico, Inc. ("CCPR"), was formed in March
1998 in order to succeed to the businesses and assets that were operated by
OCOM Corporation and as an appropriate vehicle to pursue new
telecommunications opportunities outside of Puerto Rico and the U.S. Virgin
Islands. Operations commenced in April 1998. In September 1998, CCPR made a
cash contribution to Limited of $150,000,000 and distributed 100% of the
outstanding shares of Limited on a one-for-one basis to CCPR's stockholders.
In September 2000, Limited, a Bermuda corporation, merged with and into
its newly-formed, wholly-owned Delaware corporate subsidiary. The Delaware
corporation then merged into ATX Telecommunications Services, Inc. ("ATX")
with ATX being the surviving corporation and changing its name to CoreComm
Limited. For accounting purposes, Limited's predecessor is CoreComm Limited,
the Bermuda corporation.
2. BASIS OF PRESENTATION
In Limited's condensed financial statements, Limited's investment in
subsidiaries is stated at cost plus equity in the undistributed earnings of
the subsidiaries. The Company's share of net loss of its subsidiaries is
included in net loss using the equity method of accounting. The condensed
financial statements should be read in conjunction with Limited's
consolidated financial statements.
3. LONG-TERM DEBT
Long-term debt consists of:
DECEMBER 31,
2000 1999
--------------------------------------------
6% Convertible Subordinated Notes $175,000,000 $175,000,000
Senior unsecured notes due 2003, less unamortized
discount of $13,433,000 95,236,000 -
--------------------------------------------
270,236,000 175,000,000
Less current portion 2,740,000 -
--------------------------------------------
$267,496,000 $175,000,000
============================================
In September 2000, Limited issued approximately $108,669,000 aggregate
principal amount of the senior unsecured notes to the former stockholders of
ATX. The senior unsecured notes mature on September 29, 2003. Interest on
the notes is at an annual rate of 6.47% payable in either cash or common
stock, at Limited's election, on October 1 and April 1 of each year
beginning on April 1, 2001. In January 2001, Limited made a required
principal payment of approximately $2.1 million. The notes require
additional principal payments of approximately $640,000 on March 29, 2001,
approximately $2.7 million on January 1, 2002 and approximately $2.7 million
on January 1, 2003.
In October 1999, Limited issued $175,000,000 principal amount of 6%
Convertible Subordinated Notes due October 1, 2006 (the "Public Notes").
Interest on the Public Notes is payable semiannually on April 1 and October
1 of each year, which commenced on April 1, 2000. The Public Notes are
unsecured obligations convertible into common stock prior to maturity at a
conversion price of $27.39 per share, subject to adjustment. There are
approximately 6,388,000 shares of common stock reserved for issuance upon
conversion of the Public Notes. The Public Notes are redeemable, in whole or
in part, at the option of Limited, at any time on or after October 1, 2002,
at a redemption price of 103.429% that declines annually to 100% in 2006, in
each case together with accrued and unpaid interest to the redemption date.
The Company incurred $7,040,000 in fees and expenses in connection with the
issuance of the Public Notes, which is included in deferred financing costs.
S-14
CORECOMM LIMITED
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF CORECOMM LIMITED (CONTINUED)
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
3. LONG-TERM DEBT (CONTINUED)
The aggregate principal amounts of notes payable scheduled for
repayment are as follows:
Year Ending December 31,
2001 $ 2,740,000
2002 2,740,000
2003 103,189,000
2004 -
2005 -
Thereafter 175,000,000
-------------------
$283,669,000
===================
4. GUARANTEES OF THE REGISTRANT
In September 2000, subsidiaries of Limited entered into an aggregate
$150 million senior secured credit facility with The Chase Manhattan Bank as
lender, administrative agent and collateral agent. The Company is a
guarantor of the credit facility. The Company has guaranteed the obligations
of one of its subsidiaries under a note payable for equipment. At December
31, 2000, there was $3,331,000 outstanding under this note payable. Included
in other assets at December 31, 2000 was $1,572,000 in deposits for leases
entered into by subsidiaries of Limited.
5. OTHER
No cash dividends were paid to the registrant by subsidiaries from
April 1, 1998 (date operations commenced) through December 31, 2000.
S-15
CORECOMM LIMITED AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
COL. A COL. B COL. C COL. D COL. E
---------------------------------------------------------------------------------------------------------------------------
ADDITIONS
------------------------------
(1) (2)
------------------------------
CHARGED TO
BALANCE AT CHARGED TO OTHER
BEGINNING OF COSTS AND ACCOUNTS- DEDUCTIONS - BALANCE AT
DESCRIPTION PERIOD EXPENSES DESCRIBE DESCRIBE END OF PERIOD
---------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 2000:
Allowance for doubtful accounts $3,949,000 $7,130,000 $ - $ (45,000) (a) $ 11,034,000
Year ended December 31, 1999:
Allowance for doubtful accounts $ 742,000 $3,241,000 $ - $ (34,000) (b) $ 3,949,000
For the period from April 1, 1998
(date operations commenced) to
December 31, 1998:
Allowance for doubtful accounts $ - $ 501,000 $ - $ 241,000 (c) $ 742,000
(a) Uncollectible accounts written-off, net of recoveries, of $9,269,000
offset by $9,224,000 allowance for doubtful accounts as of acquisition
date from business combinations.
(b) Uncollectible accounts written-off, net of recoveries, of $24,688,000
offset by $24,654,000 allowance for doubtful accounts as of acquisition
date from business combinations.
(c) Uncollectible accounts written-off, net of recoveries, of $117,000 offset
by $358,000 allowance for doubtful accounts as of acquisition date from
business combinations.
S-16
OCOM CORPORATION TELECOMS DIVISION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
COL. A COL. B COL. C COL. D COL. E
-----------------------------------------------------------------------------------------------------------------------
ADDITIONS
-------------------------------------
(1) (2)
-------------------------------------
BALANCE AT CHARGED TO COSTS CHARGED TO OTHER BALANCE AT
BEGINNING OF AND EXPENSES ACCOUNTS- DEDUCTIONS END AT
DESCRIPTION PERIOD DESCRIBE - DESCRIBE PERIOD
------------------------------------------------------------------------------------------------------------------------
For the period from
January 1, 1998 to
May 31, 1998:
Allowance for doubtful
accounts $46,000 $92,000 $ - $60,000 (a) $78,000
(a) Uncollectible accounts written-off, net of recoveries.
S-17
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, State of New
York on February 8, 2002.
CORECOMM HOLDCO, INC.
By: /s/ Michael A. Peterson
----------------------------------
Name: Michael A. Peterson
Title: Executive Vice President,
Chief Operating Officer and
Chief Financial Officer
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Michael A. Peterson such person's true
and lawful attorney-in-fact and agent, with full power of substitution and
revocation, for such person and in such person's name, place and stead, in any
and all capacities (until revoked in writing), to sign any and all amendments
(including post-effective amendments) to this registration statement filed
pursuant to Rule 462 under the Securities Act, and to file the same with all
exhibits thereto, and the other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent full power and authority to do and perform each and every act and things
requisite and necessary to be done, as fully to all intents and purposes as such
person might or could do in person, hereby ratifying and confirming all that
said attorney-in-fact and agent, or his substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act, this registration
statement has been signed by the following persons in the capacities and on the
dates indicated.
SIGNATURE TITLE DATE
/s/ Barclay Knapp Chairman of the Board of Directors February 8, 2002
------------------------------
Barclay Knapp
/s/ Thomas Gravina President and Chief Executive February 8, 2002
------------------------------
Thomas Gravina Officer (Principal Executive Officer);
Director
/s/ Michael A. Peterson Executive Vice President, Chief February 8, 2002
------------------------------
Michael A. Peterson Operating Officer and Chief Financial
Officer (Principal Financial Officer);
Director
/s/ Gregg N. Gorelick Senior Vice President-- Controller and February 8, 2002
------------------------------
Gregg N. Gorelick Treasurer
/s/ George S. Blumenthal Director, Chairman Emeritus February 8, 2002
------------------------------
George S. Blumenthal
/s/ Ralph H. Booth, II Director February 8, 2002
------------------------------
Ralph H. Booth, II
/s/ Alan J. Patricof Director February 8, 2002
------------------------------
Alan J. Patricof
/s/ Warren Potash Director February 8, 2002
------------------------------
Warren Potash
EXHIBIT INDEX
EXHIBITS DESCRIPTION
2.1 Exchange Agreement, dated as of December 14, 2001, by and among
CoreComm Holdco, Inc., CoreComm Limited and each of the parties set
forth under the heading "Security Holders" on the signature pages
thereto (incorporated by reference to Exhibit 2.1 to CoreComm
Holdco, Inc.'s registration statement on Form S-1, filed on the date
hereof)
3.1 Restated Certificate of Incorporation of CoreComm Holdco, Inc.
(incorporated by reference to Exhibit 3.1 to CoreComm Holdco, Inc.'s
registration statement on Form S-1, filed on the date hereof)
3.2 Certificate of Amendment to the Restated Certificate of
Incorporation of CoreComm Holdco, Inc. (incorporated by reference to
Exhibit 3.2 to CoreComm Holdco, Inc.'s registration statement on
Form S-1, filed on the date hereof)
3.3 Certificate of Correction to the Certificate of Amendment to the
Restated Certificate of Incorporation of CoreComm Holdco, Inc.
(incorporated by reference to Exhibit 3.3 to CoreComm Holdco, Inc.'s
registration statement on Form S-1, filed on the date hereof)
3.4 Amended By-laws of CoreComm Holdco, Inc. (incorporated by reference
to Exhibit 3.4 to CoreComm Holdco, Inc.'s registration statement on
Form S-1, filed on the date hereof)
4.1 Specimen common stock certificate (front and reverse side)
(incorporated by reference to Exhibit 4.1 to CoreComm Holdco, Inc.'s
registration statement on Form S-1, filed on the date hereof)
4.2 Rights Agreement, dated as of December 17, 2001, by and between
CoreComm Holdco, Inc. and Continental Stock Transfer & Trust
Company, including form of rights certificate (incorporated by
reference to Exhibit 4.2 to CoreComm Holdco, Inc.'s registration
statement on Form S-1, filed on the date hereof)
4.3 10.75% Unsecured Convertible PIK Note Due 2011, dated as of April
12, 2001, made jointly by CoreComm Holdco, Inc. and CoreComm Limited
(incorporated by reference to Exhibit 10.3 to CoreComm Limited's
Form 8-K, dated April 13, 2001)
5.1 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP
10.1 2001 Stock Option Plan of CoreComm Holdco, Inc. (incorporated by
reference to Exhibit 10.1 to CoreComm Holdco, Inc.'s registration
statement on Form S-1, filed on the date hereof)
10.2 Exchange Agreement, dated as of December 14, 2001, by and between
CoreComm Holdco, Inc. and CoreComm Limited (incorporated by
reference to Exhibit 10.2 to CoreComm Holdco, Inc.'s registration
statement on Form S-1, filed on the date hereof)
10.3 Credit Agreement, dated as of September 28, 2000, as amended and
restated on April 11, 2001, among CoreComm Limited, CoreComm
Communications, Inc., CoreComm Holdco, Inc., the lenders party
thereto and The Chase Manhattan Bank, as Administrative Agent and
Collateral Agent (incorporated by reference to Exhibit 10.52 to
CoreComm Limited's registration statement on Form S-1, file no.
333-47984)
10.4 First Amendment and Waiver dated as of October 31, 2001 to the
Credit Agreement, dated as of September 28, 2000, as amended and
restated on April 11, 2001, among CoreComm Limited, CoreComm
Communications, Inc., CoreComm Holdco, Inc., the lenders party
thereto and JP Morgan Chase Bank, as Administrative Agent and
Collateral Agent (incorporated by reference to Exhibit 10.4 to
CoreComm Holdco, Inc.'s registration statement on Form S-1, filed on
the date hereof)
10.5 Second Amendment dated as of December 14, 2001 to the Credit
Agreement, dated as of September 28, 2000, as amended and restated
on April 11, 2001, and amended by the First Amendment and Waiver
dated as of October 31, 2001, among CoreComm Limited, CoreComm
Communications, Inc., CoreComm Holdco, Inc., the lenders party
thereto and JP Morgan Chase Bank, as Administrative Agent and
E-1
Collateral Agent (incorporated by reference to Exhibit 10.5 to
CoreComm Holdco, Inc.'s registration statement on Form S-1, filed on
the date hereof)
10.6 Lease Agreement dated as of January 18, 1994 between Monument Road
Associates and ATX Telecommunications Services, Inc. (incorporated
by reference to Exhibit 10.2 to CoreComm Limited's registration
statement on Form S-4, file no. 333-44028)
10.7 Addendum, dated as of January 25, 1996, to Lease Agreement dated as
of January 18, 1994 between Monument Road Associates and ATX
Telecommunications Services, Inc. (incorporated by reference to
Exhibit 10.3 to CoreComm Limited's registration statement on Form
S-4, file no. 333-44028)
10.8 Addendum, dated as of January 1, 1998, to Lease Agreement dated as
of January 18, 1994 between Monument Road Associates and ATX
Telecommunications Services, Inc. (incorporated by reference to
Exhibit 10.4 to CoreComm Limited's registration statement on Form
S-4, file no. 333-44028)
10.9 Addendum, dated as of October 1, 1998, to Lease Agreement dated as
of January 18, 1994 between Monument Road Associates and ATX
Telecommunications Services, Inc. (incorporated by reference to
Exhibit 10.5 to CoreComm Limited's registration statement on Form
S-4, file no. 333-44028)
10.10 Addendum, dated as of November 1, 1999, to Lease Agreement dated as
of January 18, 1994 between Monument Road Associates and ATX
Telecommunications Services, Inc. (incorporated by reference to
Exhibit 10.6 to CoreComm Limited's registration statement on Form
S-4, file no. 333-44028)
10.11 Lease Agreement dated as of January 2, 1993 between Walnut Bridge
Associates and ATX Telecommunications Services, Inc. (incorporated
by reference to Exhibit 10.7 to CoreComm Limited's registration
statement on Form S-4, file no. 333-44028.)
10.12 Addendum, dated as of July 1, 1995, to Lease Agreement dated as of
January 2, 1993 between Walnut Bridge Associates and ATX
Telecommunications Services, Inc. (incorporated by reference to
Exhibit 10.8 to CoreComm Limited's registration statement on Form
S-4, file no. 333-44028)
10.13 Addendum, dated as of November 1, 1999, to Lease Agreement dated as
of January 2, 1993 between Walnut Bridge Associates and ATX
Telecommunications Services, Inc. (incorporated by reference to
Exhibit 10.9 to CoreComm Limited's registration statement on Form
S-4, file no. 333-44028)
10.14 Addendum, dated as of March 1, 2000, to Lease Agreement dated as of
January 2, 1993 between Walnut Bridge Associates and ATX
Telecommunications Services, Inc. (incorporated by reference to
Exhibit 10.10 to CoreComm Limited's registration statement on Form
S-4, file no. 333-44028)
10.15 Letter of Credit dated October 30, 1998 (incorporated by reference
to Exhibit 10.14 to CoreComm Limited's registration statement on
Form S-4, file no. 333-44028)
10.16 Summary of Principal Terms of Employment Arrangements with Thomas J.
Gravina and Michael A. Peterson (incorporated by reference to
Exhibit 10.16 to CoreComm Holdco, Inc.'s registration statement on
Form S-1, filed on the date hereof)
10.17 Summary of provision of services to ATX Telecommunications Services,
Inc. by University City Housing (incorporated by reference to
Exhibit 10.17 to CoreComm Limited's registration statement on Form
S-4, file no. 333-44028)
20.1 Letter sent to holders of CoreComm Limited common stock disclosing
CoreComm Limited's reliance on financial viability exception to
stockholder approval requirements under Nasdaq Marketplace Rule
4350(i)(2) (incorporated by reference to Exhibit 20.1 to CoreComm
Holdco, Inc.'s registration statement on Form S-1, filed on the date
hereof)
E-2
21.1 Subsidiaries of CoreComm Holdco, Inc. (incorporated by reference to
Exhibit 21.1 to CoreComm Holdco, Inc.'s registration statement on
Form S-1, filed on the date hereof)
23.1 Consent of Ernst & Young LLP
23.2 Consent of Ernst & Young LLP
23.3 Consent of Ernst & Young LLP
23.4 Consent of BDO Seidman LLP
23.5 Consent of PricewaterhouseCoopers LLP
23.6 Consent of Skadden, Arps, Slate, Meagher & Flom LLP (included in
Exhibit 5.1)
24.1 Powers of Attorney (included on signature page of this registration
statement)
99.1 Letter of Transmittal Relating to Limited Common Stock
99.2 Letter of Transmittal Relating to Public Notes
99.3 Notice of Guaranteed Delivery Relating to Limited Common Stock
99.4 Notice of Guaranteed Delivery Relating to Public Notes
99.5 Letter to Brokers, Dealers, Commercial Banks, Trust Companies and
Other Nominees
99.6 Letter to Clients for use by Brokers, Dealers, Commercial Banks,
Trust Companies and Other Nominees
99.7 Letter to Holders of Limited Common Stock
99.8 Letter to Holders of Public Notes
99.9 Guidelines for Certification of Taxpayer Identification Number on
Substitute Form W-9
E-3
EXHIBIT 5.1
Skadden, Arps, Slate, Meagher & Flom LLP
Four Times Square
New York, New York 10036-6522
February 8, 2002
CoreComm Holdco, Inc.
110 East 59th Street
26th Floor
New York, New York 10022
Re: CORECOMM HOLDCO, INC.
Ladies and Gentlemen:
You have requested that we deliver an opinion as to the legality of the
shares of common stock (the "Holdco Common Stock"), par value $0.01 per share,
together with the associated rights to purchase Series A Junior Participating
Preferred Stock, par value $0.01 per share (the "Rights"), of CoreComm Holdco,
Inc., a Delaware corporation ("Limited"), to be issued pursuant to the offers by
Limited (the "Exchange Offers") to exchange (i) 1/116.7 of a share of Holdco
Common Stock for each validly tendered and accepted share of common stock (the
"Limited Common Stock"), par value $0.01 per share, together with the associated
rights to purchase Series A Junior Participating Preferred Stock, par value
$0.01 per share, of CoreComm Limited, a Delaware corporation ("Limited"), and
(ii) 3.0349 shares of Holdco Common Stock and $30.00 in cash, without interest
for each $1,000 in aggregate principal amount of 6% Convertible Subordinated
Notes due 2006 of Limited (the "Public Notes") that is validly tendered and
accepted.
This opinion is being furnished in accordance with, and is limited to, the
requirements of Item 601(b)(5)(i) of Regulation S-K under the Securities Act of
1933, as amended (the "Securities Act").
In connection with this opinion, we have examined originals or copies,
certified or otherwise identified to our satisfaction, of: (i) Limited's
registration statement on Form S-4 to be filed by Limited with the Securities
and Exchange Commission (the "Commission") on the date hereof under the
Securities Act (the "Registration Statement"); (ii) the Restated Certificate of
Incorporation of Limited, as amended to date and as certified by the Secretary
of State of the State of Delaware and currently in effect; (iii) the By-Laws of
Limited, as amended to date and currently in effect; (iv) a specimen certificate
representing the Holdco Common Stock; (v) the Rights Agreement, dated as of
December 17, 2001, by and between Limited and Continental Stock Transfer & Trust
Company pursuant to which the Rights were issued or are issuable; and (vi)
certain resolutions of the Board of Directors of Limited relating to the
Exchange Offers and related matters. We have also examined originals or copies,
certified or otherwise identified to our satisfaction, of such records of
Limited and such agreements, statements, certificates and receipts of public
officials, certificates of directors, officers and other representatives of
Limited and others, and such other documents, certificates and corporate or
other records as we have deemed necessary or appropriate as a basis for the
opinions set forth herein.
In our examination, we have assumed the legal capacity of all natural
persons, the genuineness of all signatures, the authenticity of all documents
submitted to us as originals, the conformity to original documents of all
documents submitted to us as certified, conformed or photostatic copies and the
authenticity of the originals of such latter documents. In making our
examination of executed documents,
CoreComm Holdco Inc.
February 8,2002
Page 2
we have assumed that the parties thereto, other than Limited, had the power,
corporate or other, to enter into and perform all obligations thereunder and
have also assumed the due authorization by all requisite action, corporate or
other, and execution and delivery by such parties of such documents. In
addition, in making our examination of executed documents, we have assumed that
such documents constitute the valid and binding obligations of the parties
thereto. We have also assumed that the consideration recited in the resolutions
of the Board of Directors of Limited authorizing the issuance of the Holdco
Common Stock in connection with the Exchange Offers will be received in full by
Limited upon issuance of the Holdco Common Stock in the Exchange Offers and that
such consideration will not be less than the par value of the Holdco Common
Stock issued in the Exchange Offers.
As to any facts material to the opinions expressed herein which we have not
independently established or verified, we have relied upon statements and
representations of directors, officers and other representatives of Limited and
others. In rendering the opinions set forth herein, we have assumed that the
certificates representing the shares of Holdco Common Stock to be issued
pursuant to the transactions contemplated by the Exchange Offers will conform to
the specimen certificate examined by us and will be countersigned by a duly
authorized officer of the transfer agent for the Holdco Common Stock and will be
duly registered by the registrar for the Holdco Common Stock in the share record
books of Limited.
Members of our firm are admitted to the bar in the State of New York and we
do not express any opinion as to the laws of any jurisdiction other than the
corporate laws of the State of Delaware, and we do not express any opinion as to
the effect of any other laws on the opinions stated herein. The opinions
expressed herein are based on laws in effect on the date hereof, which laws are
subject to change with possible retroactive effect.
Based upon and subject to the foregoing, and to the limitations,
qualifications, exceptions and assumptions set forth herein, we are of the
opinion that the shares of Holdco Common Stock to be issued in exchange for
shares of Limited Common Stock and the Public Notes pursuant to the Exchange
Offers have been duly authorized for issuance and, when issued upon consummation
of the Exchange Offers, will be validly issued, fully paid and nonassessable.
We hereby consent to the filing of this opinion with the Commission as an
exhibit to the Registration Statement. We also consent to the reference to our
firm under the caption "Legal Matters" in the Registration Statement. In giving
this consent, we do not thereby admit that we are included in the category of
persons whose consent is required under Section 7 of the Securities Act or the
rules and regulations of the Commission.
Very truly yours,
/s/ Skadden, Arps, Slate, Meagher
& Flom LLP
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our reports dated February 26, 1999, with respect to the financial
statements and schedules of OCOM Corporation Telecoms Division included in the
Registration Statement (Form S-4) and related Prospectus of CoreComm Holdco Inc.
for the registration of 1,344,416 shares of its common stock.
/s/ Ernst & Young LLP
New York, New York
February 5, 2002
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our reports dated March 12, 2001, in the Registration Statement (Form
S-4) and related Prospectus of CoreComm Holdco Inc. for the registration of
1,344,416 shares of its common stock.
/s/ Ernst & Young LLP
New York, New York
February 5, 2002
EXHIBIT 23.3
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our reports dated March 12, 2001 except for Note 1 as to which the date
is April 11, 2001, with respect to the financial statements and schedules of
CoreComm Limited included in the Registration Statement (Form S-4) and related
Prospectus of CoreComm Holdco Inc. for the registration of 1,344,416 shares of
its common stock.
/s/ Ernst & Young LLP
New York, New York
February 5, 2002
EXHIBIT 23.4
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
CoreComm Holdco, Inc.
New York, New York
We hereby consent to the use in this Registration Statement (Form S-4) of
CoreComm Holdco, Inc. and related Prospectus of our report dated March 10, 2000,
relating to the combined financial statements of ATX Telecommunications Service
Group as of December 31, 1999 and for each of the two years in the period ended
December 31, 1999.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
/s/ BDO Seidman, LLP
Philadelphia, Pennsylvania
February 4, 2002
EXHIBIT 23.5
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of CoreComm Holdco, Inc.:
We hereby consent to the use in this Registration Statement on Form S-4 of our
report dated February 10, 2000, except for Note 18, for which the date is March
12, 2000, relating to the financial statements of Voyager.net, Inc. which appear
in such Registration Statement. We also consent to the reference to us under the
heading "Experts" in such Registration Statement.
/s/ Pricewaterhousecoopers LLP
Grand Rapids, MI
February 5, 2002