AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 27, 2002
REGISTRATION NO. 333-82400
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 4
TO
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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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.)
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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)
MICHAEL A. PETERSON THOMAS H. KENNEDY, ESQ.
EXECUTIVE VICE PRESIDENT -- CHIEF OPERATING SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
OFFICER AND CHIEF FINANCIAL OFFICER FOUR TIMES SQUARE
CORECOMM HOLDCO, INC. NEW YORK, NEW YORK 10036
110 EAST 59TH STREET, 26TH FLOOR (212) 735-3000
NEW YORK, NEW YORK 10022
(212) 906-8485
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent For Service)
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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.
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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
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE OFFERING PRICE(2) REGISTRATION FEE(2)
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Common Stock, par value $0.01 per share,
including the associated Rights to
purchase Series A Junior Participating
Preferred Stock(3)...................... 4,233,248 N/A $38,694,271 $3,560
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(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 (1/38.9 of a share of
CoreComm Holdco common stock for each share of CoreComm Limited common stock
and 9.1047 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, but excluding any shares issuable to
Corecomm Holdco, Inc. The amount to be registered has changed solely due to
a possible reduction in the conversion price of the 6% Convertible
Subordinated Notes due 2006 of CoreComm Limited.
(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)
140,326,706, the maximum number of shares of CoreComm Limited common stock
estimated, as of February 8, 2002, to be received by CoreComm Holdco
pursuant to the exchange offers plus (b) the product of (1) $0.065, the
average of the high and low sale prices per share of CoreComm Limited common
stock on May 10, 2002, as reported by the Nasdaq National Market, times (2)
389,416,374, the maximum additional number of shares of CoreComm Limited
common stock estimated, as of May 15, 2002, to be received by CoreComm
Holdco pursuant to the exchange offers plus (c) 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 (d) $142,500 aggregate cash consideration
payable with respect to the 6% Convertible Subordinated Notes due 2006
pursuant to the exchange offers. The fee has previously been paid.
(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(a), MAY DETERMINE.
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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.
CORECOMM HOLDCO, INC.
OFFERS TO EXCHANGE
SHARES OF CORECOMM HOLDCO, INC. COMMON STOCK
FOR SHARES OF CORECOMM LIMITED COMMON STOCK
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 NOON, NEW YORK
CITY TIME, ON JULY 1, 2002, UNLESS EXTENDED.
Until December 2001, we were a direct, wholly-owned subsidiary of CoreComm
Limited. As a result of prior recapitalization transactions completed as part of
CoreComm Limited's recapitalization plan, CoreComm Limited currently owns only
approximately 13% of our outstanding common stock with the remaining
approximately 87% being owned by former debt and preferred stock holders of
CoreComm Limited. The final phase of the recapitalization plan includes the
exchange offers, which are being made to all remaining public security holders
of CoreComm Limited. In the exchange offers, we are offering to exchange:
- 1/38.9 of a share of CoreComm Holdco common stock for each share of CoreComm
Limited common stock, with the number of shares of CoreComm Holdco common
stock rounded up to the nearest whole share for each unaffiliated holder; and
- 9.1047 shares of CoreComm Holdco common stock and $30.00 in cash for each
$1,000 in aggregate principal amount of 6% Convertible Subordinated Notes due
2006 of CoreComm Limited, with the number of shares of CoreComm Holdco common
stock rounded up to the nearest whole share for each unaffiliated holder.
We will accept all outstanding shares of CoreComm Limited common stock and
all outstanding 6% convertible subordinated notes and will issue up to an
aggregate of 3,943,248 shares of CoreComm Holdco common stock in the exchange
offers plus additional shares which may be issued (1) as a result of rounding up
in the exchange offers and (2) in exchange for shares of CoreComm Limited common
stock that are issued upon conversion of convertible securities and tendered in
the exchange offer.
Currently, no public market exists for the shares of CoreComm Holdco common
stock. CoreComm Limited common stock is currently listed on the Nasdaq National
Market under the symbol "COMM." We intend to transfer the listing of CoreComm
Limited common stock to CoreComm Holdco common stock. Nasdaq has determined that
it will treat us as a successor to CoreComm Limited and will transfer the symbol
"COMM" to us upon the satisfaction of the following: (1) our exchange of shares
of CoreComm Holdco common stock for at least 90% of the outstanding shares of
CoreComm Limited common stock, (2) the transfer of the shares of CoreComm
Limited common stock that we accept in the exchange offer to one of our
wholly-owned subsidiaries and (3) the merger of this subsidiary into CoreComm
Limited. Please refer to the section of the prospectus entitled "The Exchange
Offers -- Effect of the Exchange Offers -- Transfer of Nasdaq Listing."
PLEASE REFER TO THE "RISK FACTORS" SECTION OF THIS PROSPECTUS BEGINNING ON
PAGE 14 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 6% CONVERTIBLE SUBORDINATED 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 date of this preliminary prospectus is June 27, 2002
TABLE OF CONTENTS
PAGE
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QUESTIONS AND ANSWERS ABOUT THE EXCHANGE OFFERS............. 1
PROSPECTUS SUMMARY.......................................... 6
CoreComm Overview......................................... 6
Holdco Recapitalization................................... 6
Recent Developments....................................... 9
COMPARATIVE PER SHARE DATA.................................. 11
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA OF CORECOMM
HOLDCO, INC. ............................................. 12
RISK FACTORS................................................ 14
THE EXCHANGE OFFERS......................................... 26
SOURCE AND AMOUNT OF FUNDS.................................. 44
UNAUDITED PRO FORMA FINANCIAL DATA OF CORECOMM HOLDCO,
INC....................................................... 46
UNAUDITED PRO FORMA FINANCIAL DATA OF CORECOMM LIMITED...... 55
SELECTED HISTORICAL FINANCIAL DATA OF CORECOMM HOLDCO,
INC....................................................... 59
SELECTED HISTORICAL FINANCIAL DATA OF CORECOMM LIMITED...... 62
INFORMATION ABOUT CORECOMM HOLDCO, INC. .................... 65
Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 65
Capitalization............................................ 80
Our Business.............................................. 82
GOVERNMENT REGULATION OF THE TELECOMMUNICATIONS SERVICES
BUSINESS.................................................. 94
MANAGEMENT AND EXECUTIVE COMPENSATION....................... 102
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................ 108
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 109
INFORMATION ABOUT CORECOMM LIMITED.......................... 113
Management's Discussion and Analysis of Results of
Operations and Financial Condition..................... 113
Capitalization............................................ 125
Our Business.............................................. 126
Options................................................... 126
COMPARATIVE STOCK PRICES AND DIVIDENDS...................... 128
DESCRIPTION OF CAPITAL STOCK................................ 130
DESCRIPTION OF OUR INDEBTEDNESS............................. 139
COMPARISON OF RIGHTS OF HOLDERS OF HOLDCO COMMON STOCK AND
THE OUTSTANDING SECURITIES................................ 143
DESCRIPTION OF PUBLIC NOTES................................. 150
MATTERS RELATING TO OUTSTANDING SECURITIES.................. 155
MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES............... 157
LEGAL MATTERS............................................... 159
EXPERTS..................................................... 159
WHERE YOU CAN FIND MORE INFORMATION......................... 159
INDEX TO FINANCIAL STATEMENTS............................... F-1
QUESTIONS AND ANSWERS ABOUT THE EXCHANGE OFFERS
The following questions and answers, and the summary that follows, are
intended to 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 prospectus, the accompanying
letters of transmittal and instructions to the letters of transmittal carefully.
Q: WHY ARE YOU MAKING THE EXCHANGE OFFERS?
A. In late 2001, CoreComm Limited determined that it would be advantageous to
recapitalize a significant portion of its debt and preferred stock so that
it could continue as a going concern. On October 31, 2001, CoreComm Limited
publicly announced a two-phase recapitalization plan, which we refer to as
the Holdco recapitalization, to achieve that objective. The exchange offers
described in detail in this prospectus comprise part of the second phase of
the Holdco recapitalization. We are making the exchange offer for shares of
CoreComm Limited common stock because we must obtain at least 90% of the
outstanding shares of CoreComm Limited common stock in order to complete
the Holdco recapitalization as discussed below. We are making the offer for
the 6% Convertible Subordinated Notes due 2006 of CoreComm Limited, which
we refer to as public notes, in order to complete the recapitalization of
the indebtedness of CoreComm Limited and to reduce CoreComm Limited's debt
and interest expense. If the Holdco recapitalization is successfully
completed, CoreComm Limited will be a wholly-owned subsidiary of CoreComm
Holdco which will be the Nasdaq listed company. Current public stockholders
of CoreComm Limited who exchange their shares of CoreComm Limited common
stock in the exchange offer for CoreComm Limited common stock will become
stockholders in CoreComm Holdco, which will succeed to the Nasdaq listing
of CoreComm Limited.
Q: WHAT HAPPENED IN THE FIRST PHASE OF THE HOLDCO RECAPITALIZATION?
A: In the first phase of the Holdco recapitalization, which commenced in early
October 2001, CoreComm Limited and CoreComm Holdco exchanged approximately
$600 million of CoreComm Limited's approximately $786 million of debt and
preferred stock for approximately 87% of the outstanding CoreComm Holdco
common stock and a cash payment representing an interest payment on the
public notes. CoreComm Limited and CoreComm Holdco successfully negotiated
with holders representing 97% of the outstanding public notes to exchange
their public notes for cash payments equal to an overdue interest payment
and common stock representing an aggregate of 5% of the outstanding shares
of CoreComm Holdco common stock. Only $4.75 million in principal amount, or
approximately 3% of the $164.75 million in total principal amount of public
notes outstanding, remain outstanding and held by persons other than
CoreComm Holdco. The first phase of the Holdco recapitalization also
included other debt and preferred securities in an aggregate principal
amount/ liquidation preference of $432.8 million which were exchanged for
shares of CoreComm Holdco common stock in December 2001. These holders in
the aggregate received approximately 82% of the outstanding shares of
CoreComm Holdco common stock as part of the first phase.
Q: WHAT ARE THE CONSEQUENCES IF LESS THAN 90% OF THE OUTSTANDING SHARES OF
CORECOMM LIMITED COMMON STOCK ARE TENDERED?
A: Unless at least 90% of the outstanding shares of CoreComm Limited common
stock are tendered, CoreComm Holdco will not be able to complete the Holdco
recapitalization and therefore will not accept shares of CoreComm Limited
common stock in the exchange offer. Nasdaq will not transfer CoreComm
Limited's Nasdaq National Market listing to CoreComm Holdco until CoreComm
Limited becomes a wholly-owned subsidiary of CoreComm Holdco, which would
require 90% ownership of CoreComm Limited common stock by CoreComm Holdco
to complete a short-form merger under Delaware law. If the Holdco
recapitalization is not completed, CoreComm Limited common stock will
likely be delisted from the Nasdaq National Market, which could have a
negative impact on the trading activity and price of CoreComm Limited
common stock. If the exchange offer
is not completed, holders of CoreComm Limited common stock will continue to
hold those shares which represent an indirect interest in CoreComm Holdco.
Since less than 90% of the outstanding shares of CoreComm Limited common
stock have been tendered as of June 25, 2002, we will convert securities of
CoreComm Limited which we currently hold into shares of CoreComm Limited
common stock and require CoreComm Limited to pay to us in shares of CoreComm
Limited common stock all past due interest payments under CoreComm Limited's
Senior Unsecured Notes due September 29, 2003 which we own, and then tender
all of these shares of CoreComm Limited common stock into the exchange offer
for CoreComm Limited common stock to help achieve satisfaction of the
minimum condition that at least 90% of the outstanding shares of CoreComm
Limited common stock are tendered. All of the shares of CoreComm Holdco
common stock received by CoreComm Holdco under the exchange offers will be
cancelled immediately following the merger, and therefore these shares will
have no effect on any holders of CoreComm Holdco common stock. Based upon
the number of shares of CoreComm Limited common stock tendered as of June
25, 2002, these actions would result in the 90% minimum condition being
satisfied. For a discussion of these transactions, see the section of this
prospectus entitled "The Exchange Offers -- Conditions for Completion of the
Exchange Offers."
Holders of public notes who do not tender their public notes will continue
to hold public notes whether or not the merger takes place. If the merger
does not take place, CoreComm Limited would probably lack sufficient funds
to pay amounts due under the public notes as its only material asset would
be its ownership of 13% of the outstanding shares of CoreComm Holdco common
stock.
Q: WHAT ARE THE CONSEQUENCES IF 90% OR MORE OF THE OUTSTANDING SHARES OF
CORECOMM LIMITED COMMON STOCK ARE TENDERED?
A: If 90% or more of the outstanding shares of CoreComm Limited common stock
are tendered, CoreComm Limited will become a wholly-owned subsidiary of
CoreComm Holdco through a merger. Stockholders who did not tender their
shares of CoreComm Limited common stock in the exchange offer will receive
the same number of shares of CoreComm Holdco common stock in the merger
that they would have received had they tendered their shares in the
exchange offer, unless appraisal is sought. Holders of public notes who do
not tender their public notes will continue to hold public notes whether or
not the merger takes place. However, the public notes will remain
obligations of CoreComm Limited and CoreComm Limited would probably lack
sufficient funds to pay amounts due under the public notes as it will have
little or no material assets.
Q: WHY HAVE YOU CHANGED THE EXCHANGE RATIO WITH RESPECT TO THE NUMBER OF SHARES
OF CORECOMM HOLDCO COMMON STOCK TO BE ISSUED IN THE EXCHANGE OFFERS?
A: On April 12, 2002, the CoreComm Holdco board of directors declared a
3-for-1 stock split of CoreComm Holdco common stock, which was effected in
the form of a dividend of shares. The board declared the stock dividend in
order to increase the number of shares of CoreComm Holdco common stock that
will be outstanding to have additional shares available for trading at the
completion of the second phase of the Holdco recapitalization and to better
reflect the capitalization of CoreComm Holdco.
As a result of the declaration and payment of this stock dividend, the
previous exchange ratio of:
- 1/116.7 of a share of CoreComm Holdco common stock for each share of
CoreComm Limited common stock has been changed to 1/38.9 of a share,
rounded up to the nearest whole share for each unaffiliated holder;
and
- 3.0349 shares of CoreComm Holdco common stock for each $1,000 in
aggregate principal amount of public notes has been changed to 9.1047
shares, rounded up to the nearest whole share for each unaffiliated
holder.
There will be no change with respect to the cash portion of the public notes
exchange offer.
2
All references in this prospectus to shares of CoreComm Holdco common stock
have been adjusted to reflect this stock dividend. If you have already
tendered shares or public notes and not withdrawn them, you will receive the
number of shares of CoreComm Holdco common stock based on the new exchange
ratios.
Q: DOES THE STOCK DIVIDEND ON SHARES OF CORECOMM HOLDCO COMMON STOCK INCREASE
THE NUMBER OF SHARES OF CORECOMM LIMITED COMMON STOCK YOU CURRENTLY OWN?
A: No. The declaration and payment of the stock dividend on shares of CoreComm
Holdco common stock has no effect on the number of shares of CoreComm
Limited common stock you currently own.
Q: DOES THE STOCK DIVIDEND ON SHARES OF CORECOMM HOLDCO COMMON STOCK AND THE
CHANGE TO THE EXCHANGE RATIOS MEAN THAT YOU HAVE INCREASED THE CONSIDERATION
YOU ARE PAYING IN THE EXCHANGE OFFERS?
A: No. If you elect to tender in the exchange offers, your ownership
percentage in CoreComm Holdco would be the same as under the previous
exchange ratios.
Q: DO THE BOARDS OF DIRECTORS OF CORECOMM LIMITED AND CORECOMM HOLDCO SUPPORT
THE EXCHANGE OFFERS?
A: Yes. The board of directors of each of CoreComm Limited and CoreComm Holdco
unanimously supports the exchange offers and recommends that you tender
your shares of CoreComm Limited common stock in the exchange offer for
CoreComm Limited common stock so that we can complete the Holdco
recapitalization. For more information, see the section of the prospectus
entitled "The Exchange Offers -- Recommendation." However, neither CoreComm
Limited's nor CoreComm Holdco's respective board of directors takes a
position on whether you should tender your public notes or convert your
public notes and tender the shares of CoreComm Limited common stock. For
information on the decision to tender your public notes or convert your
public notes and tender the shares of CoreComm Limited common stock, see
the section of the prospectus entitled "The Exchange Offers -- Conditions
for Completion of 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 public notes and/or CoreComm Limited common stock, which we refer to
collectively as the outstanding securities, so that the exchange agent
receives them before 12:00 Noon, New York City time, on July 1, 2002,
unless we extend the exchange offers.
Q: HOW WILL I KNOW IF THE EXCHANGE OFFERS ARE EXTENDED?
A: If we extend the exchange offers, we will make a public announcement of the
extension not later than 9:00 A.M., New York City time, on the next
business day after the day on which the exchange offers were scheduled to
expire.
Q: HOW DO I PARTICIPATE IN THE EXCHANGE OFFERS?
A: If you wish to tender your outstanding securities, you should complete and
sign the 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. If you hold certificates
representing shares of CoreComm Limited common stock or public notes, or if
you hold shares of CoreComm Limited common stock or public notes through a
broker, and cannot deliver required documentation to the exchange agent by
the expiration date, you may obtain up to three additional Nasdaq National
Market trading days to do so by having an eligible institution guarantee
that the missing documentation will be received by the exchange agent
within that period. The exchange agent must receive the missing
documentation within that period or your outstanding securities will not be
validly tendered. For more information on tendering your outstanding
securities, see the section of the prospectus entitled "The Exchange
Offers -- Procedures for Tendering Outstanding Securities."
3
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 your outstanding securities are held
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: 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 in the section of this prospectus entitled "The
Exchange Offers -- Conditions for Completion of the Exchange Offers" are
satisfied. In particular, there is a condition for the exchange offer
relating to the CoreComm Limited common stock that at least 90% of the
outstanding shares of CoreComm Limited common stock be tendered. We
sometimes refer to this condition as the minimum condition. There is no
minimum condition for the exchange offer relating to the public notes.
While we may at any time waive any or all of the conditions to one or both
of the exchange offers, we do not intend to waive the minimum condition
because Nasdaq requires that the merger take place, which requires the
tender of 90% of the outstanding shares of CoreComm Limited common stock.
Q: CAN I WITHDRAW PREVIOUSLY TENDERED OUTSTANDING SECURITIES?
A: You may withdraw tenders of your outstanding securities at any time before
the expiration date and, unless we have accepted your tender as provided in
this prospectus and the accompanying documents, after the expiration of 40
business days from the commencement of the exchange offers. 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.
Q: HOW DO I WITHDRAW PREVIOUSLY TENDERED OUTSTANDING SECURITIES?
A: To withdraw your previously tendered outstanding securities, you must
deliver a written notice of withdrawal with the required information to the
exchange agent while you still have the right to withdraw outstanding
securities.
Q: WHAT IS THE MARKET VALUE OF MY OUTSTANDING SECURITIES?
A: You can obtain quotes for shares of CoreComm Limited common stock in
newspapers, over the Internet or from your broker. CoreComm Limited's
common stock is currently listed on the Nasdaq National Market under the
symbol "COMM." On December 17, 2001, the last trading day before the public
announcement of our intention to commence the exchange offers, the per
share closing price of CoreComm Limited common stock was $0.17. On June 25,
2002, the per share closing price of CoreComm Limited common stock was
$0.0422. We encourage you to obtain a recent quotation for CoreComm Limited
common stock prior to deciding whether to tender. Currently, no public
market exists for the shares of CoreComm Holdco common stock; Nasdaq has
determined that it will treat CoreComm Holdco as a successor to CoreComm
Limited and will transfer the symbol "COMM" to us following completion of
the merger.
The public notes are not currently traded on any national securities
exchange or authorized to be quoted in any inter-dealer quotation system of
any national securities association. Although some institutions and
securities dealers do provide sporadic quotations for and engage in
transactions in these securities, there is no established trading market for
these securities, other than these sporadic quotations.
Q: DO I HAVE APPRAISAL RIGHTS IN CONNECTION WITH THE EXCHANGE OFFERS OR THE
MERGER?
A: Holders of public notes do not have any appraisal rights.
4
Holders of CoreComm Limited common stock do not have appraisal rights in
connection with the exchange offer, but will have the right, under Section
262 of the Delaware General Corporation Law, to dissent and demand appraisal
of their shares of CoreComm Limited common stock in connection with the
merger, if they perfect their appraisal rights.
Under Section 262, dissenting stockholders who:
- did not vote in favor of the merger, in the event that a stockholder
vote is necessary; and
- comply with the applicable statutory requirements and procedures
may be entitled to receive a judicial determination of the fair value of
their shares of CoreComm Limited common stock not tendered nor accepted by
us in the exchange offer, exclusive of any element of value arising from the
accomplishment or expectation of the merger, and to receive payment of this
fair value in cash, together with a fair rate of interest, if any.
For more information on appraisal rights, see the section of the prospectus
entitled "The Exchange Offers -- Effect of the Exchange Offers -- Appraisal
Rights."
Q: WILL I BE TAXED ON THE SHARES OF CORECOMM HOLDCO COMMON STOCK AND, IF
APPLICABLE, CASH THAT I RECEIVE?
A: We have received an opinion of Skadden, Arps, Slate, Meagher & Flom
(Illinois), special U.S. federal income tax counsel to CoreComm Holdco,
that your exchange of CoreComm Limited common stock for CoreComm Holdco
common stock should not be a taxable exchange for United States federal
income tax purposes and that your exchange of public notes for CoreComm
Holdco common stock and cash should cause you to recognize gain, if any,
but not loss, to the extent of the cash you receive in the exchange. This
gain should 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. For more information, please
refer to the section of the prospectus entitled "Material U.S. Federal
Income Tax Consequences."
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 commenced on February 8, 2002 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."
5
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.
CORECOMM OVERVIEW
We are an integrated communications provider offering local exchange
carrier and interexchange carrier 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 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.
CoreComm Holdco is a Delaware corporation that was created by the 1999
merger of two former wholly-owned subsidiaries of CoreComm Limited. Until
December 17, 2001, CoreComm Holdco was a wholly-owned subsidiary of CoreComm
Limited. We operate the same businesses that CoreComm Limited historically
operated. Our only material assets are loans to, and the capital stock of, our
subsidiary, CoreComm Communications, Inc., which in turn owns the capital stock
of various operating companies.
HOLDCO RECAPITALIZATION
BACKGROUND
From 1998 to 2000, CoreComm Limited was in the process of building
infrastructure to support a national roll-out according to its original business
plan. This business plan required significant funds for capital expenditures,
operating expenses and debt service. In early 2001, CoreComm Limited still
required significant funds to complete its business plan as originally intended.
However, adverse changes in the capital markets, particularly in the
telecommunications sector, made it extremely difficult to raise new capital, and
CoreComm Limited could no longer finance its original business plan. As a
result, in early 2001 CoreComm Limited significantly revised its business plan
to focus on its most profitable businesses and geographic areas, and to reduce
its operational costs and need for capital. These changes were generally
successful, as evidenced by the significant improvement in financial results
during 2001.
Despite the improvement to operations during 2001, CoreComm Limited did not
expect that it would generate enough cash from operations to cover all of its
debt service and other obligations. In late 2001, CoreComm Limited developed a
plan to reduce the amount of its outstanding debt and the significant cash
outlays needed to service its debt, as well as its preferred stock and
associated dividend payments. The goal was to strengthen its financial position
and give CoreComm Limited a chance to participate in future industry
consolidation and financings.
In December 2001, the first phase of the recapitalization plan was
completed, in which approximately $600 million of CoreComm Limited's
approximately $786 million of debt and preferred stock was exchanged for
approximately 87% of the outstanding CoreComm Holdco common stock and a cash
payment representing an interest payment on the public notes. The exchange
offers and related transactions described in this prospectus comprise the second
phase of the Holdco recapitalization, which is to (1) exchange CoreComm Limited
common stock for CoreComm Holdco common stock and (2) exchange $4.75 million of
public notes for CoreComm Holdco common stock and a cash payment.
THE FIRST PHASE OF THE HOLDCO RECAPITALIZATION
In early October 2001, CoreComm Limited began discussions with holders of
its public notes regarding the Holdco recapitalization in an attempt to exchange
all of its outstanding public notes for shares of CoreComm Holdco common stock.
As described further below, CoreComm Limited and
6
CoreComm Holdco successfully negotiated with 34 of the holders to exchange their
public notes for cash payments equal to an overdue interest payment and common
stock representing an aggregate of 5% of the outstanding shares of CoreComm
Holdco common stock. In the aggregate, CoreComm Limited paid $4.8 million in
cash representing this interest payment and CoreComm Holdco issued 1,411,278
shares of its common stock in exchange for $160 million of the $164.75 million
public notes outstanding.
The first phase of the Holdco recapitalization also included other debt and
preferred securities being exchanged for shares of CoreComm Holdco common stock.
On December 14, 2001, CoreComm Limited and CoreComm Holdco entered into an
exchange agreement with:
(1) all four holders of Senior Unsecured Notes due September 29, 2003
of CoreComm Limited with respect to 100% of the $105.7 million in principal
amount outstanding;
(2) all four holders of 10.75% Senior Unsecured Convertible PIK Notes
due 2010 with respect to 100% of the $16.1 million in principal amount
outstanding;
(3) one of the two holders of 10.75% Unsecured Convertible PIK Notes
due 2011 with respect to the initial principal amount of $10 million,
representing 40% of the then outstanding principal amount of these notes;
and
(4) all five holders of the preferred stock of CoreComm Limited, with
respect to the liquidation preference of approximately $301 million,
representing 100% of CoreComm Limited's outstanding preferred stock.
These holders in the aggregate received 24,600,000 shares of CoreComm Holdco
common stock which represented approximately 82% of the outstanding shares of
CoreComm Holdco common stock. These holders included officers, directors and
affiliates of CoreComm Limited who received an aggregate of 11,105,454 shares of
CoreComm Holdco common stock which represented approximately 37% of the
outstanding shares of CoreComm Holdco common stock. In total in the first phase,
including shares issued to holders of public notes, CoreComm Holdco issued
approximately 87% if its outstanding common stock to holders of debt of and
preferred stock of CoreComm Limited. CoreComm Limited believed that the
completion of the first phase of the Holdco recapitalization in December 2001
was imperative because CoreComm Limited faced significant cash obligations in
January 2002.
THE SECOND PHASE OF THE HOLDCO RECAPITALIZATION
In the second phase, we are offering to exchange shares of CoreComm Limited
common stock for an aggregate of approximately 4 million shares, representing
approximately 13% of CoreComm Holdco common stock. The holders of the public
notes are being offered $30.00 in cash, which represents the interest payment
that was due on April 1, 2002, and 9.1047 shares of CoreComm Holdco common
stock, which represents their proportionate share of the 5% of CoreComm Holdco
common stock offered to all holders of public notes, for each $1,000 principal
amount of public notes.
If the exchange offers are completed, stockholders of CoreComm Limited will
hold common stock of CoreComm Holdco, a company with the same businesses that
CoreComm Limited historically operated, but with approximately $600 million less
debt and preferred stock than CoreComm Limited. Instead of owning 100% of the
common stock of CoreComm Limited, which would have no value to common
stockholders in the event of liquidation, upon completion of the exchange
offers, CoreComm Limited's current stockholders, including holders of warrants
exercisable for CoreComm Limited common stock, would own approximately 13% of
the outstanding common stock of the recently recapitalized CoreComm Holdco,
which would have significantly less debt and an improved financial condition. In
addition, Nasdaq has informed us that, upon completion of the second phase,
CoreComm Limited's Nasdaq listing will be transferred to CoreComm Holdco, and
CoreComm Holdco common stock will commence, and CoreComm Limited common stock
will cease, trading on the Nasdaq National Market.
7
CORPORATE STRUCTURE
The following three charts summarize the corporate structure of CoreComm
Limited and CoreComm Holdco at different stages in the Holdco recapitalization.
The first chart illustrates our historical corporate structure prior to December
17, 2001. The second chart illustrates our current corporate structure following
completion of the first phase of the Holdco recapitalization which, as described
below, was completed on December 28, 2001. The third chart illustrates our
corporate structure following completion of the second phase of the Holdco
recapitalization, assuming 100% of the outstanding public notes have been
tendered and accepted in the exchange offer and the merger has been consummated.
None of these charts show details of our operating or other intermediate
companies or ownership interests in those entities.
[FLOW CHART]
---------------
(1) Based upon the number of shares of CoreComm Holdco common stock and CoreComm
Limited common stock outstanding on December 31, 2001.
8
(2) Senior debt and preferred stock of CoreComm Limited are outstanding and held
by CoreComm Holdco.
(3) CoreComm Limited has agreed to surrender that number of shares of our common
stock that are issued in the exchange offers and the merger that we request,
which would result in CoreComm Limited having little or no material assets.
(4) Senior debt and/or preferred stock of CoreComm Limited may remain
outstanding and held by CoreComm Holdco.
For a more in-depth discussion of the Holdco recapitalization, please refer
to the section of the prospectus entitled "The Exchange Offers -- Background and
Purpose."
RECENT DEVELOPMENTS
CHANGES IN OUR 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 Chairman;
- George S. Blumenthal was elected Chairman Emeritus;
- Thomas J. Gravina was elected President -- Chief Executive Officer and
was elected to serve as a director;
- Michael A. Peterson was elected Executive Vice President -- Chief
Operating Officer and Chief Financial Officer and was elected to serve as
a director; and
- Ralph H. Booth, II was elected to serve as a director.
Effective February 4, 2002, Richard J. Lubasch resigned as Senior Vice
President -- General Counsel and Secretary.
RECEIPT OF GOING CONCERN QUALIFICATION
The auditors of CoreComm Limited have included a going concern explanatory
paragraph in their audit report for CoreComm Limited for the year ended December
31, 2001, which states that CoreComm Limited's liquidity position raises
substantial doubt about CoreComm Limited's ability to continue as a going
concern.
The audit report of CoreComm Holdco for the year ended December 31, 2001
does not contain a going concern explanatory paragraph.
STOCK DIVIDEND
On April 12, 2002, the CoreComm Holdco board of directors declared a
3-for-1 stock split of CoreComm Holdco common stock which was effected in the
form of a dividend of shares. This dividend was paid in additional shares of
CoreComm Holdco common stock on April 12, 2002 to stockholders of record on
April 11, 2002.
PUBLIC NOTES INTEREST PAYMENT
The interest payment that was due under the outstanding public notes on
April 1, 2002 has not been made and CoreComm Limited is in default under the
public notes. The consideration we are offering in our exchange offer for the
public notes includes $30.00 in cash, which represents the April 1, 2002
interest payment, for each $1,000 in principal amount outstanding.
9
RECEIPT OF NOTICE OF NASDAQ STAFF DETERMINATION
On May 16, 2002, Nasdaq provided CoreComm Limited with notice of a Nasdaq
Staff Determination indicating that CoreComm Limited common stock is subject to
delisting from the Nasdaq National Market because CoreComm Limited did not
comply with the minimum bid price and the minimum market value of publicly held
shares requirements for continued listing. On May 23, 2002, CoreComm Limited
filed a request for a hearing before a Nasdaq Listing Qualifications Panel to
review the Nasdaq Staff Determination. A hearing has been set for June 28, 2002.
Under Nasdaq rules, pending a decision by the Panel, CoreComm Limited common
stock will continue to trade on the Nasdaq National Market. Please see the
section of this prospectus entitled "Risk Factors -- Risk factors relating to
the exchange offers -- If you fail to tender your shares of CoreComm Limited
common stock we may not be able to complete the Holdco recapitalization and
shares of CoreComm Limited common stock will likely be delisted from the Nasdaq
National Market."
Our 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, 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, which
is 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, and its telephone number is (212) 906-8485.
10
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 merger, the relationship would reverse, with CoreComm Holdco becoming the
parent of CoreComm Limited which would have little or no material assets. The
pro forma per share data presented below gives effect to the first phase of the
Holdco recapitalization, which includes the recapitalization and exchange
transactions completed in December 2001 and other transactions that were entered
into by December 31, 2001 to eliminate additional amounts of outstanding
CoreComm Holdco indebtedness. In addition, the unaudited pro forma per share
data gives effect to the second phase of the Holdco recapitalization, which
includes the exchange offers for the outstanding securities set forth in this
prospectus.
In conjunction with the completion of the first phase of the Holdco
recapitalization, we determined that the estimated fair value of CoreComm
Holdco's common stock issued in these transactions was $0.98 per share.
Multiplying the CoreComm Holdco estimated fair value per share of $0.98 by the
exchange ratio of 1/38.9 implies that the value of the CoreComm Holdco common
stock being offered for each share of CoreComm Limited common stock is
approximately $0.025 per share of CoreComm Limited common stock. The trading
price per share of CoreComm Limited common stock today and CoreComm Holdco
common stock in the future may be different from these values. As of the date of
the exchange agreement entered into on December 14, 2001, the closing bid price
of CoreComm Limited common stock was $0.16. See the section of this prospectus
entitled "The Exchange Offers -- Background and Purpose" for a discussion of the
value of CoreComm Limited common stock. Our actual financial position and
results of operations will differ, perhaps significantly, from the unaudited pro
forma amounts reflected in this prospectus.
AS OF AND FOR THE THREE-MONTH PERIOD ENDED MARCH 31, 2002
------------------------------------------------------------
HOLDCO LIMITED
---------------------- -----------------------------------
EQUIVALENT
HISTORICAL PRO FORMA HISTORICAL PRO FORMA PRO FORMA
---------- --------- ---------- --------- ----------
Book value per share.................. $ (.03) $ (.16) $(4.36) N/A N/A
Net (loss) per share.................. (.39) (.39) (0.09) N/A N/A
AT AND FOR THE YEAR ENDED DECEMBER 31, 2001
------------------------------------------------------------
HOLDCO LIMITED
---------------------- -----------------------------------
EQUIVALENT
HISTORICAL PRO FORMA HISTORICAL PRO FORMA PRO FORMA
---------- --------- ---------- --------- ----------
Book value per share.................. $ 0.36 $ .23 $(4.24) N/A N/A
(Loss) per share before extraordinary
items(1)............................ (22.15) (21.34) (6.77) $(.52) $ (.01)
---------------
(1) The loss per share for Holdco is significantly higher than that of Limited
due to the number of shares outstanding of 30,000,000 for Holdco and
140,326,000 for Limited.
We have never paid or declared cash dividends on our common stock.
11
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
OF CORECOMM HOLDCO, INC.
The following information is only a summary and you should read it together
with the financial information we include elsewhere in this prospectus.
The following summary financial data of CoreComm Holdco has been derived
from, and should be read in conjunction with, the historical consolidated
financial statements and related notes included in this prospectus.
The following unaudited pro forma financial data as of and for the three
months ended March 31, 2002 and for the year ended December 31, 2001, gives
effect to the Holdco recapitalization, the other transactions that were entered
into by December 31, 2001 to eliminate additional amounts of our outstanding
indebtedness. For additional information with respect to the Holdco
recapitalization, without giving effect to the exchange offers or merger, refer
to the Unaudited Pro Forma Financial Data included elsewhere in this prospectus.
This information should be read in conjunction with the unaudited pro forma
financial data included elsewhere in this prospectus.
Interim data for the three months ended March 31, 2002 and 2001 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 three months ended March 31, 2002 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 stockholders 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 public notes in 1999, of which, as a
result of the Holdco recapitalization and prior conversions into CoreComm
Limited common stock by holders of the notes, only $4.75 million in principal
amount of public notes is currently held by persons other than CoreComm Holdco.
PRO FORMA
THREE-MONTHS PRO FORMA HISTORICAL THREE-MONTHS
ENDED YEAR ENDED ENDED MARCH 31, HISTORICAL YEAR ENDED DECEMBER 31,
MARCH 31, DECEMBER 31, ----------------------- ------------------------------------
2002 2001 2002 2001 2001 2000 1999
------------- ------------ ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS EXCEPT PER SHARE DATA)
INCOME STATEMENT DATA
Revenues..................... $ 74,419 $ 293,207 $ 74,311 $ 72,811 $ 292,681 $ 131,526 $ 57,151
Operating expenses........... 82,297 906,260 82,196 310,886 902,152 427,847 157,660
(Loss) before extraordinary
item....................... (11,682) (633,955) (11,654) (241,552) (633,413) (301,241) (103,180)
Gain from extinguishment of
debt....................... -- -- -- -- 39,498 -- --
Net (loss)................... n/a n/a (11,654) (241,552) (593,915) (301,241) (103,180)
Basic and diluted net (loss)
per common share:
(Loss) before extraordinary
item....................... (.39) (21.34) (.39) (8.46) (22.15) (10.55) (3.62)
Gain from extinguishment of
debt....................... -- -- -- -- 1.38 -- --
Net (loss)................... n/a n/a (.39) (8.46) (20.77) (10.55) (3.62)
Basic and diluted weighted
average number of common
shares(1).................. 29,706 29,706 30,000 28,542 28,599 28,542 28,542
12
MARCH 31, 2002
----------------------
HISTORICAL PRO FORMA
---------- ---------
(IN THOUSANDS)
BALANCE SHEET DATA
Working capital (deficiency)................................ $(87,725) $(91,993)
Fixed assets -- net......................................... 80,339 80,452
Total assets................................................ 312,674 310,387
Long-term debt (including current portion), capital leases
and notes payable to related parties...................... 170,659 170,659
Shareholders' equity........................................ (871) (4,674)
---------------
(1) After giving retroactive effect to the 6,342.944-for-1 stock split in
December 2001 and the 3-for-1 stock split by way of a stock dividend on
April 12, 2002. We have never declared or paid any cash dividends.
13
RISK FACTORS
You should consider these risk factors in evaluating whether to tender your
outstanding securities and thereby become a holder of CoreComm 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.
RISK FACTORS RELATING TO THE EXCHANGE OFFERS:
IF YOU FAIL TO TENDER YOUR SHARES OF CORECOMM LIMITED COMMON STOCK WE MAY NOT BE
ABLE TO COMPLETE THE HOLDCO RECAPITALIZATION AND SHARES OF CORECOMM LIMITED
COMMON STOCK WILL LIKELY BE DELISTED FROM THE NASDAQ NATIONAL MARKET.
Nasdaq has determined that it will treat us as a successor to CoreComm
Limited and will transfer the symbol "COMM" to us following our exchange of
shares of CoreComm Holdco common stock for at least 90% of the outstanding
shares of CoreComm Limited common stock, the transfer of the shares of CoreComm
Limited common stock that we accept in the exchange offers to one of our
wholly-owned subsidiaries and the merger of that subsidiary into CoreComm
Limited. If less than 90% of the outstanding shares of CoreComm Limited common
stock are tendered and accepted, Nasdaq will not transfer the listing and we
will not be able to complete the Holdco recapitalization which will adversely
affect our ability to continue our business operations and adversely affect the
holders of CoreComm Limited common stock and the holders of public notes as
described below.
On February 14, 2002, CoreComm Limited received written notification from
Nasdaq that CoreComm Limited had failed to comply with the minimum market value
of publicly held shares and minimum bid price requirements for continued listing
on the Nasdaq National Market and that CoreComm Limited would have until May 15,
2002 to regain compliance. CoreComm Limited did not regain compliance by May 15,
2002. On May 16, 2002, Nasdaq provided CoreComm Limited written notice of a
Nasdaq Staff Determination indicating that CoreComm Limited common stock is
subject to delisting from the Nasdaq National Market. On May 23, 2002, CoreComm
Limited filed a request for a hearing before a Nasdaq Listing Qualifications
Panel to review the Nasdaq Staff Determination. A hearing has been set for June
28, 2002. Under Nasdaq rules, pending a decision by the Panel, CoreComm Limited
common stock will continue to trade on the Nasdaq National Market. CoreComm
Limited will not be notified until the Panel makes a formal decision. There can
be no assurance that CoreComm Limited will prevail at the hearing, and that its
common stock will not be delisted from the Nasdaq National Market.
If CoreComm Limited common stock is delisted from the Nasdaq National
Market prior to the completion of the merger, the Nasdaq listing will not
transfer to CoreComm Holdco, it will have a negative impact on the trading
activity and price of CoreComm Limited common stock, CoreComm Limited common
stock may no longer constitute margin securities for the purposes of the Federal
Reserve Board's margin regulations, and it could make obtaining accurate
quotations for CoreComm Limited common stock difficult. In addition, it could
make it more difficult for CoreComm Limited to raise additional equity capital
in the future, which could adversely affect both the public notes and CoreComm
Limited common stock and could lead to the possible termination of registration
of the shares under the Securities Exchange Act of 1934, as described below.
CORECOMM LIMITED COMMON STOCK'S REGISTRATION UNDER THE EXCHANGE ACT COULD BE
TERMINATED IF THE HOLDCO RECAPITALIZATION IS NOT COMPLETED.
Shares of CoreComm Limited common stock are currently registered under the
Exchange Act. That registration may be terminated if the outstanding shares are
not listed on a national securities exchange or listed on an automated
inter-dealer quotation system and if there are fewer than 300 holders of record
of shares of CoreComm Limited common stock. Termination of registration of the
shares of CoreComm 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
14
proxy statement in connection with stockholders meetings under Section 14(a) and
the related requirement of furnishing an annual report to stockholders, no
longer applicable with respect to shares of CoreComm Limited common stock. In
addition, if shares of CoreComm 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 under Rule 144 under the Securities Act of 1933 may be impaired or
eliminated. If registration of the shares under the Exchange Act were
terminated, CoreComm 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.
If CoreComm Limited common stock is delisted prior to completion of the
exchange offer for CoreComm Limited common stock or if the exchange offer is
extended and during such extension CoreComm Limited loses its Nasdaq listing,
Nasdaq will not permit the transfer of the listing to CoreComm Holdco.
CORECOMM LIMITED HAS RECEIVED A GOING CONCERN QUALIFICATION FROM ITS AUDITORS
WHICH RAISES SUBSTANTIAL DOUBT THAT CORECOMM LIMITED CAN CONTINUE AS A GOING
CONCERN IF THE HOLDCO RECAPITALIZATION IS NOT COMPLETED.
The auditors of CoreComm Limited have included a going concern explanatory
paragraph in their audit report for CoreComm Limited for the year ended December
31, 2001 which raises substantial doubt about CoreComm Limited's ability to
continue as a going concern. The receipt of this going concern explanatory
paragraph could adversely affect CoreComm Limited's ability to obtain additional
financing, could make the terms of any financing that CoreComm Limited is able
to obtain more onerous and could adversely affect CoreComm Limited's
relationship with its customers and suppliers.
CORECOMM LIMITED WOULD HOLD VIRTUALLY NO MATERIAL ASSETS FOLLOWING THE
COMPLETION OF THE HOLDCO RECAPITALIZATION AND MAY NOT BE ABLE TO MEET ITS
OBLIGATIONS UNDER THE PUBLIC NOTES.
Holders of public notes own securities in CoreComm Limited. As a result of
the first phase of the Holdco recapitalization, CoreComm Limited, which formerly
owned 100% of our outstanding capital stock, now owns approximately 13% of our
outstanding capital stock as its sole material asset. CoreComm Holdco owns 100%
of the business operations which CoreComm Limited formerly owned indirectly
through CoreComm Holdco. If you own public notes and do not tender them in the
exchange offers, they will continue to be obligations of CoreComm Limited,
rather than CoreComm Holdco. CoreComm Limited has agreed that it will surrender
to us that number of shares of our common stock that we request. We intend to
request that CoreComm Limited surrender, immediately following the merger, all
shares of our common stock that it owns, other than the number of shares of our
common stock deliverable upon conversion of public notes neither tendered in the
exchange offer for public notes nor converted prior to the completion of the
merger. Therefore, if the Holdco recapitalization is completed, CoreComm Limited
will own little or none of our common stock, and thus will own little or no
material assets, since shares of our common stock are CoreComm Limited's only
material assets. 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. CoreComm Holdco is not and will not be an
obligor or guarantor of the public notes. However, if the merger occurs, any
public notes not tendered or converted will become convertible into CoreComm
Holdco common stock, and their conversion price will be adjusted based on the
exchange ratio for CoreComm Limited common stock.
15
HOLDERS OF PUBLIC NOTES COULD FACE REDUCED LIQUIDITY FOLLOWING THE EXCHANGE
OFFERS.
The public notes are currently not traded on any national securities
exchange or authorized to be quoted in any inter-dealer quotation system of any
national securities association. Although some 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. To the extent public notes
are tendered and accepted in the exchange offers, these dealers and institutions
may less frequently, or no longer, provide quotations for and engage in
transactions in these securities.
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 their public notes 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 CoreComm Limited may be able to make any
or all future payments on the public notes, by tendering your public notes for
CoreComm Holdco common stock you will lose the right to any of these payments
and instead will hold shares of CoreComm 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, 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;
- our charter prohibits action by written consent of 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."
OUR SIGNIFICANT STOCKHOLDERS, SOME OF WHOM HAVE THE RIGHT TO MAINTAIN SPECIFIED
OWNERSHIP PERCENTAGES OF OUR VOTING SECURITIES AND 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.
Michael Karp, together with the Florence Karp Trust, currently owns 34.0%
of our common stock. Booth American Company currently owns 20.0% of our common
stock. Each of Thomas Gravina, who is our CEO, President and a director, and
Debra Buruchian currently owns 10.8% of our common stock. Subject to the terms
of our stockholder rights plan, each of the above stockholders has the right,
together with their affiliates and their associates, to increase their
percentage ownership of our voting securities each
16
year by the amount equal to 0.0735 times his, her or its original percentage
ownership of our common stock. Under the terms of the exchange agreement, in no
event are any of the above stockholders permitted to own more than 39.0% of our
voting securities. As a result of their ownership of large amounts of our common
stock, these stockholders are able to significantly influence all matters
requiring stockholder approval, including the election of directors and approval
of significant corporate transactions. This concentration of ownership may also
have the effect of delaying or preventing a change in control of CoreComm
Holdco.
Michael Karp has a contractual 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. Likewise, Booth American Company has
the right to designate one director to our board of directors. Booth American
Company has designated Ralph H. Booth, II to the board. As of June 25, 2002,
Michael Karp had not nominated any directors. Please see the section of this
prospectus entitled "Description of Capital Stock -- The Exchange Agreement."
OUR OFFICERS AND DIRECTORS OWN A SIGNIFICANT PORTION OF OUR OUTSTANDING COMMON
STOCK AND MAY BE ABLE TO CONTROL THE OUTCOME OF CORPORATE ACTIONS THAT REQUIRE
STOCKHOLDER APPROVAL.
As of June 25, 2002, our directors and officers as a group own 11,156,550
shares, representing 37.2% of the outstanding shares of CoreComm Holdco common
stock. Our directors and officers obtained all of these shares in the first
phase of the Holdco recapitalization. As a result of this significant ownership
interest, our directors and officers could exercise significant control over
matters requiring stockholder approval, including the election of directors or a
change in control of CoreComm Holdco. Please refer to the sections of this
prospectus entitled "Security Ownership of Certain Beneficial Owners and
Management" and "Description of Capital Stock."
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 the section of this
prospectus entitled "Management and Executive Compensation -- Executive
Compensation -- Stock Option Plan." In January 2002, our board of directors
approved an initial grant of options exercisable for 7.74 million shares of our
common stock under the plan. In addition, under the terms of the indenture
governing the public notes and the warrant agreements of CoreComm Limited, upon
completion of the merger, these securities will become convertible or
exercisable, as the case may be, into shares of CoreComm Holdco common stock as
adjusted based on the exchange ratio for CoreComm Limited common stock. 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 or the liquidity of our common stock.
OUR ABILITY TO PAY DIVIDENDS IS RESTRICTED.
We have never paid cash dividends on our common stock and are currently
restricted from doing so by the terms of our senior secured credit facility. We
do not presently contemplate paying cash dividends and believe that it is
extremely unlikely that we will pay cash dividends in the foreseeable future due
to our current financial condition.
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 lack of trading history and the
transfer of CoreComm Limited common stock's listing on the Nasdaq National
Market to our common stock. Since our common stock has yet to trade on a
national securities exchange or on Nasdaq, we cannot predict the extent to which
investors' interest in us will lead to the development of a trading market in
our common stock or how liquid the market might become. The transfer of the
Nasdaq listing from CoreComm Limited to us may confuse investors which could
lead to erratic bid and ask prices and increased volatility in our common stock.
In addition, the
17
stock market in general, and the telecommunications sector specifically, in
recent years have experienced broad price and volume fluctuations. We cannot
assure you that our common stock will trade at the same levels as the stock of
other telecommunications companies or at the level that CoreComm Limited common
stock would have traded at had the exchange offers and merger not been
consummated.
ASSUMING THE HOLDCO RECAPITALIZATION IS COMPLETED AND CORECOMM LIMITED'S NASDAQ
LISTING IS TRANSFERRED TO US, 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.
The Nasdaq National Market continued listing requirements require that an
issuer satisfy Nasdaq's corporate governance standards and meet one of two
alternative maintenance standards. The first maintenance standard requires that
an issuer have total stockholders' equity of at least $10.0 million or $4.0
million in net tangible assets and that an issuer's common stock have a minimum
bid price of $1.00, at least two market makers, at least 400 stockholders that
hold 100 or more shares each and at least 750,000 shares held by other than
directors, officers and beneficial owners of 10% or more of the shares having a
market value of at least $5.0 million. The second maintenance standard requires
that an issuer have either a market value of listed securities of at least $50.0
million or total assets and total revenues of at least $50.0 million each and
that an issuer's common stock have a minimum bid price of $3.00, at least four
market makers, at least 400 stockholders that hold 100 or more shares each and
at least 1.1 million shares held by other than directors, officers and
beneficial owners of 10% or more of the shares having a market value of at least
$15.0 million.
While we do believe that, based on the current set of facts known to us, it
is reasonably likely that we will be able to satisfy one of the Nasdaq National
Market continued listing requirements immediately following the transfer of
CoreComm Limited's Nasdaq listing to us, there is a risk that we will fail to
meet one or more of the continued listing standards, particularly the minimum
market value of shares held by non-affiliates requirement of both of the
maintenance standards and the stockholders' equity or net tangible assets
requirement of the first maintenance standard. In light of the foregoing, we
cannot assure you that we will be able to maintain the Nasdaq National Market
listing for shares of CoreComm Holdco common stock. 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. In addition, the delisting of CoreComm Holdco common stock from the
Nasdaq National Market could also make it more difficult for us to raise equity
capital in the future.
If CoreComm Holdco common stock is delisted from the Nasdaq National
Market, the shares will likely begin trading on the Over-the-Counter Bulletin
Board. The Over-the-Counter Bulletin Board is not considered an exchange. Shares
that trade on the Over-the-Counter Bulletin Board do not enjoy the same
liquidity as shares that trade on the Nasdaq National Market and obtaining
timely and accurate quotations is more difficult.
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 26,056,806 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
joint obligations of CoreComm Limited and CoreComm Holdco in the first phase 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 specified
manners. Please refer to the section of the prospectus entitled "Description of
Capital Stock -- The Exchange Agreement."
Sales in the public market of the securities acquired in connection with
the Holdco recapitalization could lower our stock price and impair our ability
to raise funds in additional stock offerings. Future sales
18
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 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 will still have significant liabilities even after the completion of the
Holdco recapitalization. On a pro forma basis, at March 31, 2002, our current
liabilities exceed our current assets by approximately $92 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 that
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 our 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 currently have debt which consists of a
$156.1 million senior secured credit facility, approximately $16.6 million in
principal amount of 10.75% Unsecured Convertible PIK Notes due 2011 and
approximately $9.7 million of capital leases. We estimate that our aggregate
debt service and capital expenditures will amount to approximately $30.0 million
during 2002 and approximately $22.3 million during 2003. 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.
We intend to fund our requirements from cash and cash equivalents on hand,
funds internally generated by operations and future issuances of both public and
private debt and equity. We cannot give you any assurance that we will be able
to meet these obligations, including the repayment of our present and future
indebtedness, with the resources currently on hand or the cash that may be
generated by our operations in the future.
If we are unable to repay our present or future indebtedness, 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
19
- 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 allow us 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.
WE EXPECT TO INCUR NET LOSSES AND NEGATIVE CASH FLOW FOR SOME TIME.
On a pro forma basis, we would have had net losses before extraordinary
items for the three months ended March 31, 2002 and for the year ended December
31, 2001 of approximately $11.7 million and $634 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 expect to incur future operating losses and 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 of CoreComm Holdco, Inc."
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 we experience difficulty in obtaining new trade credit and vendor
financing, or if the terms of financing become 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 March 31, 2002, we had $182.4 million in outstanding debt obligations
in the form of: our $156.1 million senior secured credit facility with The Chase
Manhattan Bank; approximately $16.6 million of 10.75% Unsecured Convertible PIK
Notes due 2011; and approximately $9.7 million in capital leases and other
notes. In addition, we have approximately $114.1 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 under the senior secured credit
facility and any other trade payables and other debt which we may incur may have
important consequences to you. For example, it could:
- limit our ability to obtain additional financing, which may be needed for
working capital, capital expenditures, acquisitions, debt service
requirements or other purposes;
- increase our vulnerability to adverse economic and industry conditions;
20
- 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;
- increase our sensitivity to interest rate fluctuations;
- limit our flexibility in planning for, or reacting to, changes in our
business and the industry in which we compete; and
- place us at a competitive disadvantage compared to our competitors that
may have less debt.
OUR EMPLOYMENT ARRANGEMENTS WITH OUR SENIOR EXECUTIVE OFFICERS REPRESENT A
SIGNIFICANT CASH OBLIGATION.
We have significant compensation obligations to our Chief Executive Officer
and Chief Operating Officer/Chief Financial Officer. These compensation
obligations are higher than we have paid our senior executives in the past.
Although a significant portion of these compensation obligations are tied to our
performance, we are committed to paying these senior executives substantial base
salaries regardless of our performance. Our compensation obligations to these
senior executives represent a significant cash obligation regardless of whether
such results are achieved. See the section of this prospectus entitled
"Management and Executive Compensation" for a discussion of these employment
arrangements.
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:
- 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 or in sufficient amounts to enable us to continue our
operations. 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."
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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 our subsidiaries are organized
generally limit the payment of dividends, repayment of loans and other
distributions to them, subject in some cases to exceptions that allow them to
service indebtedness in the absence of specified defaults. Our senior secured
credit facility contains covenants that restrict our ability and the ability of
our subsidiaries to declare dividends and to issue new indebtedness.
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 divert our technical and/or
management personnel. Additionally, any litigation liability 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. For a summary of
outstanding matters which, if resolved unfavorably to us, could have a material
adverse effect on us, please see the section of the prospectus entitled
"Information about Holdco -- Our Business -- Legal Proceedings."
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 or 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 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 complete the Holdco
recapitalization 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.
22
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,
who also compete with us 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.
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. Further, many of our agreements with our
suppliers require us to purchase a minimum commitment of services which we may
not be able to resell in a manner which allows us to recover our expenses.
The outcome of regulatory or judicial rulings with respect to these
agreements could have a material adverse effect on our financial condition and
results of operations. 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 which could
cause interruption in service and/or reduced capacity for our customers.
We may not be able to obtain the facilities and services we require at
satisfactory quality levels, deployment levels, rates, or terms and conditions,
which could delay the buildout of our networks, degrade the quality of service
to our subscribers, effect the pricing of our products and services and thus
have materially adverse effects on our operating results. Further, several of
our telecommunications suppliers have sought the protection of the bankruptcy
courts or have indicated that they may not be able to continue operations. It is
possible that the failure or liquidation of one or more of our suppliers may
negatively impact our ability to provide services to our customers.
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.
OUR LACK OF SUFFICIENT NETWORK CAPACITY TO ACCOMMODATE NEW USERS, TO MAINTAIN
NETWORK RELIABILITY OR TO MAINTAIN NETWORK 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 could 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
23
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. While we currently maintain multiple network operations centers with
fail-over capability, our network is vulnerable to disruption if any of our
operation centers or other network components are impaired. 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 co-location facilities, network
operations center or points-of-presence through which members connect to the
Internet, in the networks of telecommunications carriers we use, or in the
Internet backbone in general could cause interruptions to our Internet services.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
In this prospectus there are "forward-looking statements" 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 also include the
following:
- technological developments;
- our ability to attract, retain and compensate key executives and
associates;
- our ability to continue to design networks, install facilities, obtain
and maintain any required governmental licenses or approvals and finance
construction and development, all in a timely manner, at reasonable costs
and on satisfactory terms and conditions;
- our assumptions about customer acceptance, churn rates, overall market
penetration and competition from providers of alternative services;
- the impact of 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; 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 should consider these risks and uncertainties,
together with the other risks
24
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.
25
THE EXCHANGE OFFERS
BACKGROUND AND PURPOSE
From 1998 to 2000, CoreComm Limited was in the process of building
infrastructure to support a national roll-out according to its original business
plan. This business plan required significant capital to fund capital
expenditures, operating expenses and debt service. In early 2001, CoreComm
Limited still required significant funds to complete its business plan as
originally intended. However, adverse changes in the capital markets,
particularly in the telecommunications sector, made it extremely difficult to
raise new capital, and CoreComm Limited could no longer finance its original
business plan. As a result, in 2001 CoreComm Limited significantly revised its
business plan to focus on its most profitable businesses and geographic areas,
and to reduce its operational costs and need for capital. These changes were
generally successful, as evidenced by the significant improvement in financial
results during 2001.
However, CoreComm Limited still had a significant amount of debt and
preferred stock. Despite the improvement to operations, CoreComm Limited did not
expect that it would generate enough cash from operations to cover all of its
debt service and other obligations. In late 2001, CoreComm Limited developed a
plan to reduce the amount of its outstanding debt and the significant cash
outlays needed to service its debt, as well as its preferred stock and
associated dividend payments. The goal was to strengthen its financial position,
give CoreComm Limited a chance to participate in future industry consolidation
and financings, and avoid the prospect of a Chapter 11 bankruptcy filing.
CoreComm Limited believed that the completion of the first phase of the Holdco
recapitalization in December 2001 was imperative because CoreComm Limited faced
significant cash obligations in January 2002.
On October 31, 2001, CoreComm Limited first announced a two-phase
recapitalization plan whereby it would recapitalize up to approximately $600
million of its approximately $786 million of debt and preferred stock. In
December 2001, the first phase of this plan was completed, in which CoreComm
Holdco issued approximately 87% if its outstanding common stock to holders of
debt of CoreComm Limited and CoreComm Holdco and preferred stock of CoreComm
Limited. Please see the three charts contained in the section of this prospectus
entitled "Prospectus Summary" for an illustration of the corporate structure of
CoreComm Limited and CoreComm Holdco, prior to the commencement of the Holdco
recapitalization, in their current form and assuming the completion of the
Holdco recapitalization.
In addition to the Holdco recapitalization, CoreComm Limited considered
other strategic alternatives to improve its financial condition. Of all of the
options, CoreComm Limited's board of directors determined that the Holdco
recapitalization was the most likely to succeed. Other options CoreComm Limited
considered were:
- Business Combinations. CoreComm Limited initiated preliminary talks
about possible business combinations with several parties. However, these
activities were not expected to be successful due to the fact that nearly
all companies in the telecommunications sector were facing similar
circumstances, and therefore these transactions would not necessarily
improve the financial position of CoreComm Limited. In addition, these
transactions would likely have triggered change of control provisions
contained in a significant amount of CoreComm Limited's debt securities
which would have accelerated a significant amount of CoreComm Limited's
debt and worsened CoreComm Limited's financial condition.
- Asset sales. CoreComm Limited has considered, and is continuing to
consider, the divestiture of its non-core assets which include the
Voyager business and its Local Multipoint Distribution System licenses.
Due to the depressed telecommunications market, CoreComm Limited has yet
to receive an offer that it deems fair for these assets.
The negotiation process relating to the recapitalization began in October
2001, and was completed in December 2001. At the direction of the board of
directors of CoreComm Limited, Michael Peterson, our Executive Vice
President -- Chief Operating Officer and Chief Financial Officer, held
negotiations with large holders of CoreComm Limited's and CoreComm Holdco's debt
and preferred securities. These
26
negotiations culminated in agreements with holders of the public notes and in
the exchange agreement with holders of other debt and preferred securities of
CoreComm Limited and CoreComm Holdco as described below. At the time of these
agreements, the board of directors and officers of CoreComm Limited and CoreComm
Holdco were the same individuals, and these individuals acted in both capacities
during the negotiation process with the holders of debt and preferred stock of
CoreComm Limited and CoreComm Holdco. In addition, George Blumenthal, our then
Chairman, Barclay Knapp, our then Chief Executive Officer, Thomas Gravina, our
then Chief Operating Officer, our affiliate Booth American Company and Richard
Lubasch, our then Senior Vice President -- General Counsel and Secretary, were
among the holders of CoreComm Limited securities who entered into these
agreements. As a result of entering into these agreements, these individuals
exchanged their CoreComm Limited securities for shares of CoreComm Holdco common
stock. During the negotiation process these individuals acted in their capacity
as holders of CoreComm Limited securities while also representing the interests
of CoreComm Limited and CoreComm Holdco in their respective officer and director
capacities. While the board of directors of CoreComm Limited believes this
arrangement was in the best interests of the stockholders of CoreComm Limited,
there may be potential conflicting demands when individuals serve in multiple
capacities representing different constituencies with sometimes differing
expectations with respect to the timing, form, terms and success of a
transaction.
The board of directors and officers of CoreComm Limited represented the
interests of the holders of CoreComm Limited common stock in the negotiation
process of the Holdco recapitalization. Under the terms of the exchange
agreement described below, the holders of CoreComm Limited common stock,
including holders of warrants exercisable for CoreComm Limited common stock,
would be entitled to approximately 13% of the recapitalized company. This
percentage was negotiated and unanimously approved by CoreComm Limited's entire
board of directors including the directors who were not parties to the exchange
agreement, and was agreed to by the holders of debt and preferred stock who
entered into the exchange agreement. As of September 2001, the CoreComm Limited
common stock was junior in CoreComm Limited's capital structure to securities
with an aggregate principal amount or liquidation preference of approximately
$786 million, as well as to trade payables which represented additional
obligations senior to the CoreComm Limited common stock. In transactions similar
to the Holdco recapitalization, holders of junior securities often receive no
compensation until senior securities are fully repaid and/or attain their full
value, if ever. In a liquidation or bankruptcy scenario, it seemed very likely
that CoreComm Limited would be valued at less than the aggregate principal
amount/liquidation preference of its senior securities, which would leave no
value for the holders of CoreComm Limited common stock. In addition, the common
stock of Holdco issued to, or to be issued to, the holders of the $164.75
million of public notes in the aggregate represents approximately 5% of the
recapitalized company as discussed below. For all of the above reasons, CoreComm
Limited's board of directors unanimously thought the 13% ownership was fair to
the holders of CoreComm Limited common stock.
THE HOLDCO RECAPITALIZATION
In early October 2001, CoreComm Limited commenced the first phase of the
Holdco recapitalization in an attempt to exchange all of its outstanding public
notes into equity of a restructured company. CoreComm Limited initially held
discussions with a single large holder of public notes regarding the Holdco
recapitalization. Following this initial discussion, CoreComm Limited also held
discussions with other holders of public notes, some of whom CoreComm Limited
contacted and some of whom approached CoreComm Limited. In total, CoreComm
Limited offered to exchange 99% of the outstanding public notes. Limited did not
give these holders a deadline prior to when they had to decide whether or not to
exchange their public notes.
As described below, CoreComm Limited and CoreComm Holdco successfully
negotiated with many of these holders to exchange their public notes for a cash
payment equal to an overdue interest payment and common stock representing an
aggregate of 5% of CoreComm Holdco. By the end of October, CoreComm Limited
entered into agreements with 31 of these holders of public notes with respect to
approximately $147.15 million in aggregate principal amount, representing
approximately 89% of the
27
outstanding public notes. Between November 2001 and December 2001, CoreComm
Limited entered into agreements with three additional holders representing $7.85
million in aggregate principal amount, bringing the total principal amount to
$155.0 million, representing approximately 94% of the outstanding public notes.
All of these agreements were on the same material terms. Under the terms of
these agreements, these holders received an aggregate of approximately $4.65
million in cash, which was equivalent to the amount of the October 1, 2001
interest payment due to these holders which had not previously been paid, and
1,411,278 shares of CoreComm Holdco common stock, which represented the holders'
proportionate share of 5% of the recapitalized company. Please refer to the
section of the prospectus entitled "Description of Capital Stock -- The Public
Note Agreements."
In December 2001, SCI Global Hedge Fund, a holder of $5.0 million in
principal amount of public notes, indicated that, rather than accepting the
terms described above, it wanted more cash for its public notes. However,
CoreComm Limited was unable to pay any additional cash due to restrictions
contained in its senior secured credit facility. Therefore, in order to induce
SCI to sell its notes, Thomas Gravina, our current President and Chief Executive
Officer and a director and Michael Peterson, our current Executive Vice
President -- Chief Operating Officer, Chief Financial Officer and a director,
agreed to immediately personally fund the additional cash required to satisfy
SCI's condition to complete the transaction. In return, CoreComm Holdco agreed
that, at the time the other transactions in the first phase of the Holdco
recapitalization were completed, it would issue the same number of shares that
it would have issued to SCI under the terms of the other public note exchanges,
to Messrs. Gravina and Peterson. Under agreements that were entered into,
Messrs. Gravina and Peterson paid $3,750 each to SCI, CoreComm Limited paid the
amount of the October 1, 2001 interest payment to SCI, and all of SCI's public
notes were transferred to CoreComm Holdco. Upon completion of the first phase of
the Holdco recapitalization at the end of December 2001, Messrs. Gravina and
Peterson each received 22,764 shares of CoreComm Holdco common stock which, in
the aggregate, equals the number of shares of common stock that CoreComm Holdco
would have issued to SCI if SCI had exchanged all of its public notes on the
terms described in the preceding paragraph. Including this transaction, the
total principal amount of public notes exchanged was $160 million, representing
approximately 97% of the outstanding public notes.
The first phase of the Holdco recapitalization also included other debt and
preferred securities being exchanged for equity of the restructured company. In
early November 2001, CoreComm Limited commenced negotiations with holders of its
Senior Unsecured Notes due September 29, 2003, holders of the 10.75% Unsecured
Convertible PIK Notes due 2011 and 10.75% Senior Unsecured Convertible PIK Notes
due 2010, both of which were joint obligations of CoreComm Limited and CoreComm
Holdco, and holders of its preferred stock, in an attempt to exchange all of
these securities for equity of the restructured company. The terms of the
exchanges were determined during extensive negotiations with each of the
holders. The relevant factors in these negotiations were the amounts, the
seniority and other terms of the securities being exchanged. Since several of
these holders held more than one of these securities, the terms of the exchange
were negotiated in consideration of these holders' overall holdings rather than
on a per security basis. CoreComm Limited did not give a deadline with respect
to when these holders had to decide whether or not to exchange their securities.
On December 14, 2001, CoreComm Limited and CoreComm Holdco entered into a single
exchange agreement with:
(1) all four holders of Senior Unsecured Notes due September 29, 2003
of CoreComm Limited with respect to 100% of the $105.7 million in
outstanding principal amount of these notes, including approximately $16.8
million in principal amount, held by Thomas Gravina, who was an affiliate
of CoreComm Limited at that time;
(2) all four holders of 10.75% Senior Unsecured Convertible PIK Notes
due 2010 with respect to 100% of the $16.1 million in outstanding principal
amount of these notes, including approximately $15.6 million in principal
amount held by Barclay Knapp, George Blumenthal and Richard Lubasch, each
of whom was an affiliate of CoreComm Limited at that time;
(3) Booth American Company, which was an affiliate of CoreComm
Limited at that time and one of the two holders of 10.75% Unsecured
Convertible PIK Notes due 2011, with respect to the
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initial principal amount of $10.0 million, representing 40% of the then
outstanding principal amount of these notes; and
(4) all five holders of the preferred stock of CoreComm Limited, with
respect to the initial liquidation preference of $301 million, representing
100% of CoreComm Limited's outstanding preferred stock and including
approximately $51.1 million in liquidation preference held by Booth
American Company, which was an affiliate of CoreComm Limited at that time.
Under this exchange agreement, CoreComm Holdco issued 24,600,000 shares of
its common stock on December 28, 2001 in exchange for the securities set forth
above, representing approximately 82% of the outstanding common stock. This
issuance under the exchange agreement included the following shares being issued
to our current officers, directors and affiliates:
(1) 10,200,000 shares, including 591,303 shares to The Florence Karp
Trust of which Mr. Karp disclaims beneficial ownership, to Michael Karp,
currently a holder of over 10% of our common stock;
(2) 6,000,000 shares to Booth American Company, currently a holder of
over 10% of our common stock and whose affiliate Ralph H. Booth, II, is
currently one of our directors;
(3) 3,240,000 shares to Thomas J. Gravina, currently our President
and Chief Executive Officer, one of our directors and currently a holder of
over 10% our common stock;
(4) 3,240,000 shares to Debra Buruchian, currently a holder of over
10% of our common stock;
(5) 1,200,000 shares to Barclay Knapp, currently our Chairman; and
(6) 600,000 shares to George S. Blumenthal, currently our Chairman
Emeritus and one of our directors.
The balance of this issuance included 65,454 shares to Richard Lubasch and
54,546 shares to Ted McCourtney. Please refer to the section of the prospectus
entitled "Description of Capital Stock -- The Exchange Agreement."
All shares of CoreComm Holdco common stock beneficially owned by our
officers as of the commencement of the exchange offers were obtained by them in
the first phase of the Holdco recapitalization. Our officers and directors
exchanged public notes, as well as other debt and preferred securities, for an
aggregate of 3,703,674 shares of CoreComm Holdco common stock. Additionally,
each of Mr. Gravina and Mr. Peterson received 22,764 shares of CoreComm Holdco
common stock from us for an aggregate of $3,750 each in order to induce SCI, the
holder of $5.0 million in principal amount of public notes to transfer the
public notes that it held as described above. Upon completion of the Holdco
recapitalization, we expect our officers, directors and affiliates, together
with their affiliates, to have beneficial ownership of our securities as set
forth in the following table:
AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP
--------------------------------------------------
EXERCISABLE
OPTIONS,
OFFICERS, DIRECTORS COMMON AND
AND AFFILIATES STOCK WARRANTS(1) TOTAL PERCENT(2)
------------------- ---------- ----------- ---------- ----------
All officers as a group....................... 4,328,262 879,750 5,208,012 16.87%
All officers and directors as a group......... 11,156,550 912,390 12,068,940 39.04%
All officers, directors and affiliates as a
group....................................... 24,596,550 937,890 25,534,440 82.53%
---------------
(1) Includes shares of common stock purchasable upon the exercise of options
which are exercisable or become so in the next 60 days and warrants.
(2) Includes common stock, exercisable options and warrants.
29
Other actions taken as part of the Holdco recapitalization are:
- 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, thereby 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.
- In December 2001, we consummated other transactions to eliminate
additional amounts of our outstanding indebtedness.
- 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:
- 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.
The exchange offers and related transactions described in this prospectus
comprise the second phase of the Holdco recapitalization, which is to (1)
exchange CoreComm Limited common stock for common stock of CoreComm Holdco and
(2) exchange $4.75 million of public notes for a cash payment and common stock
of CoreComm Holdco and a cash payment.
RELATED MATTERS
On March 28, 2002, the holders of the $4.75 million in principal amount of
outstanding public notes that were not held by CoreComm Holdco were paid the
interest payment that was due on October 1, 2001, together with interest accrued
on that payment to March 28, 2002, by CoreComm Holdco. This payment was made to
holders of record as of March 18, 2002 and equaled an aggregate of $30.89 per
$1,000 principal amount of public notes held, for a total payment of $146,728.
CoreComm Holdco waived its right to these payments with respect to the $160
million in principal amount of public notes that it holds.
The auditors of CoreComm Limited have included a going concern explanatory
paragraph in their audit report for CoreComm Limited for the year ended December
31, 2001, which states that CoreComm Limited's liquidity problem raises
substantial doubt about CoreComm Limited's ability to continue as a going
concern. The auditors of CoreComm Holdco have not included a going concern
explanatory paragraph in their audit report of CoreComm Holdco for the year
ended December 31, 2001. The credit agreement governing our senior secured
credit facility was further amended in March 2002 to permit the completion of
the second phase of the Holdco recapitalization.
EFFECT OF THE EXCHANGE OFFERS
CoreComm Holdco plans, as soon as practicable after the completion of the
exchange offers, to transfer all shares of CoreComm Limited common stock that it
accepts in the exchange offers to a newly formed, wholly-owned subsidiary and to
have this subsidiary merge into CoreComm Limited with CoreComm Limited surviving
the merger as a wholly-owned subsidiary of CoreComm Holdco. The
30
issuance of shares of Holdco common stock in the exchange offers and the merger
will not increase the number of shares of Holdco common stock outstanding as we
plan to exercise our right granted to us under the intercompany 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 that we request. We intend to request that CoreComm Limited surrender,
immediately following the merger, all shares of our common stock that it owns,
other than the number of shares of our common stock deliverable upon conversion
of public notes neither tendered in the exchange offer for public notes nor
converted prior to the completion of the merger. Thus, CoreComm Limited will be
a wholly-owned subsidiary of CoreComm Holdco and will have little or no material
assets following consummation of the exchange offers and the merger. Please
refer to the section of the prospectus entitled "Certain Relationships and
Related Transactions -- Intercompany Exchange Agreement."
CoreComm Holdco will retain all public notes tendered and accepted in the
exchange offers. As described above, CoreComm Holdco will transfer all shares of
CoreComm Limited common stock tendered and accepted in the exchange offers to a
newly formed, wholly-owned subsidiary in order to consummate the merger.
If the merger is consummated, any shares of CoreComm Limited common stock
not tendered and accepted will be converted into shares of CoreComm Holdco
common stock in the merger and any public notes not tendered and accepted will
remain outstanding obligations solely of CoreComm Limited, which will hold
virtually no material assets following the completion of the Holdco
recapitalization and may not be able to meet its obligations under the public
notes. Immediately following the consummation of the merger, the 10.75%
Unsecured Convertible PIK Note due 2011 and the additional notes issued under
the terms of that note, all outstanding warrants exercisable into shares of
CoreComm Limited common stock and all outstanding public notes will become
exercisable or convertible into shares of CoreComm Holdco common stock. None of
the outstanding options exercisable into shares of CoreComm Limited common stock
will become exercisable into shares of CoreComm Holdco common stock. Please see
the sections of the prospectus entitled "-- Change of Control" and "-- Option
Plans."
CHANGE OF CONTROL
Upon the consummation of the merger, a change of control of CoreComm
Limited will result under the terms of CoreComm Limited's outstanding warrants
and outstanding public notes. Under the merger, holders of shares of CoreComm
Limited common stock not tendered and accepted into the exchange offers would
receive the same consideration as they would have received if their shares were
tendered and accepted. Under the terms of the outstanding warrants and
outstanding public notes, consummation of the merger would cause the warrants
and outstanding public notes to become immediately exercisable for, or
convertible into, as the case may be, shares of CoreComm Holdco common stock in
an amount equal to the number of shares that each holder would have received in
the merger if it had exercised its warrants or converted its public notes for
shares of CoreComm Limited common stock immediately prior to the merger. The
outstanding warrants to purchase shares of CoreComm Limited common stock entitle
their holders to purchase, in the aggregate, 34,189,734 shares of CoreComm
Limited common stock.
Upon consummation of the merger, each then outstanding CoreComm Limited
warrant and public note would become exercisable into, or convertible into, as
the case may be, the number of shares of Holdco common stock determined by
dividing the 38.9 exchange ratio into the number of shares of CoreComm Limited
common stock into which that warrant or public note was exercisable or
convertible immediately prior to the merger, at an exercise price equal to 38.9
times the exercise price of that warrant or public note immediately prior to the
merger.
Under the terms of the outstanding 10.75% Unsecured Convertible PIK Note
due 2011 which was issued to NTL Incorporated in the principal amount of $15.0
million and the additional notes issued under the terms of that note, a change
of control occurs when CoreComm Holdco becomes the beneficial owner of more than
50% of the total voting power of all classes of voting stock of CoreComm
Limited. These notes provide for preferential conversion terms for thirty days
following NTL's receipt of notice of a
31
change of control. However, in recent letter agreements regarding the conversion
feature of these notes, NTL agreed not to exercise its rights to convert these
notes into CoreComm Limited common stock until August 5, 2002. Please see the
section of the prospectus entitled "Description of Our Indebtedness -- 10.75%
Unsecured Convertible PIK Note due 2011."
We do not believe that the consummation of the exchange offers or the
merger will result in a change of control that will materially impact our
vendor, customer or other material agreements, nor do we believe that the
consummation of the exchange offers or the merger will result in a change of
control that will materially impact our ability to maintain regulatory approvals
for the conduct of our business. Please refer to the section of the prospectus
entitled "-- Regulatory Approvals."
OPTION 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 they are all presently fully
vested and exercisable. As is permitted under CoreComm Limited's option plans,
on or around April 11, 2002 CoreComm Limited sent notices to the holders of its
options stating CoreComm Limited's intention to consummate the merger and
informing these holders that they have at least 30 days to exercise their
options before the options terminate on the date when the merger is consummated.
If holders of CoreComm Limited options exercise their options prior to the
expiration date, they would have the right to tender their shares in the
exchange offer for CoreComm Limited common stock. In the event that these
holders exercise their options prior to the date of the merger and fail to
tender their shares in the exchange offer, they would, at the time of the
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 the same 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
do not anticipate any issues related to approvals interfering with the
completion of the exchange offers or the merger. 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 consummation of the exchange
offers or the merger.
THE MERGER
Section 253 of the Delaware General Corporation Law would permit the merger
to occur without a vote of CoreComm Limited's stockholders if CoreComm Holdco
were to acquire at least 90% of the outstanding shares of CoreComm Limited
common stock in the exchange offers or otherwise and contribute the shares
immediately prior to the merger to a wholly-owned subsidiary of CoreComm Holdco.
If, however, CoreComm Holdco does not acquire at least 90% of the then
outstanding shares of CoreComm Limited common stock under the exchange offers or
otherwise, a vote of CoreComm Limited's stockholders would be required under the
Delaware General Corporation Law and a longer period of time would be required
to effect the merger. As discussed below, Nasdaq will not transfer CoreComm
Limited's listing on the Nasdaq National Market to us unless we acquire at least
90% of the then-outstanding shares of CoreComm Limited common stock.
32
TRANSFER OF NASDAQ LISTING
Nasdaq has informed us that it will treat us as a successor to CoreComm
Limited and will transfer CoreComm Limited's listing on the Nasdaq National
Market and the symbol "COMM" to us upon us acquiring at least 90% of the
outstanding shares of CoreComm Limited common stock in the exchange offers or
otherwise, contributing the shares immediately prior to the merger to one of our
wholly-owned subsidiaries and consummating the merger. We expect CoreComm
Limited's Nasdaq listing to be transferred to us and for CoreComm Holdco common
stock to commence, and CoreComm Limited common stock to cease, trading on the
Nasdaq National Market within two business days following the date on which the
merger is consummated. For information on the requirements for continued listing
on the Nasdaq National Market, see "Risk Factors -- Risk factors relating to our
common stock and corporate control -- Assuming the Holdco recapitalization is
completed and CoreComm Limited's Nasdaq listing is transferred to us, 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."
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.
Holders of CoreComm Limited common stock will have the right, under Section
262 of the Delaware General Corporation Law, to dissent and demand appraisal of
their shares in connection with any merger of CoreComm Limited with another
entity, regardless of whether CoreComm Holdco acquires 90% of all of the
outstanding shares of CoreComm Limited common stock.
Under Section 262, dissenting stockholders who:
- did not vote in favor of the merger, in the event that a stockholder vote
is necessary; and
- comply with the applicable statutory requirements and procedures
may be entitled to receive a judicial determination of the fair value of
their shares not tendered nor accepted by us in the exchange offers, exclusive
of any element of value arising from the accomplishment or expectation of the
merger, and to receive payment of this fair value in cash, together with a fair
rate of interest, if any.
ACCOUNTING TREATMENT
Effective with the completion of the Holdco Recapitalization on December
28, 2001, CoreComm Limited began accounting for its ownership of approximately
13% of the outstanding shares of CoreComm Holdco using the equity method.
CoreComm Limited accounted for CoreComm Holdco as a consolidated subsidiary
prior to that date. CoreComm Holdco accounted for this transaction at historical
cost.
TERMS OF THE EXCHANGE OFFERS
CoreComm Holdco is offering to exchange 1/38.9 of a share of CoreComm
Holdco common stock for each share of CoreComm Limited common stock, and 9.1047
shares of CoreComm Holdco common stock and $30.00 in cash, net without interest,
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 Noon, New York City time, on July 1, 2002.
The number of shares of CoreComm Holdco common stock issued to each unaffiliated
holder of Limited common stock and the number of shares of CoreComm 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. 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
33
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 1/38.9, applicable to the exchange offer for shares
of Limited common stock, and 9.1047 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.
CoreComm Holdco will accept up to all of (a) the outstanding shares of
Limited common stock and (b) the outstanding public notes for exchange, and will
issue up to 3,943,248 shares of Holdco common stock in the exchange offers plus
additional shares which may be issued (1) as a result of rounding up in the
exchange offers and (2) in exchange for shares of CoreComm Limited common stock
that are issued upon conversion of convertible securities and tendered in the
exchange offer. 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 the exchange agreement that CoreComm Holdco and CoreComm Limited
entered into with (1) holders of a significant portion of CoreComm Limited's
debt other than public notes, (2) holders of a significant portion of joint debt
of CoreComm Limited and CoreComm Holdco and (3) holders of all of CoreComm
Limited's outstanding preferred stock regarding the equity of the recapitalized
company. The board of directors and officers of CoreComm Limited represented the
interests of the holders of CoreComm Limited common stock in the negotiation
process. Under the terms of the exchange agreement, the holders of CoreComm
Limited common stock, including holders of warrants to purchase CoreComm Limited
common stock, would be entitled to approximately 13% of the restructured
company. This percentage was negotiated by CoreComm Limited's board of directors
and agreed to by the holders of debt and preferred stock who entered into the
exchange agreement. CoreComm Limited's board of directors thought this
percentage was fair to the holders of CoreComm Limited common stock because, as
of September 2001, the CoreComm Limited common stock was junior in CoreComm
Limited's capital structure to securities with an aggregate principal amount or
liquidation preference of approximately $786 million and it seemed likely that
CoreComm Limited would be valued at less than this amount in a liquidation or
bankruptcy scenario which would leave no value for the CoreComm Limited 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 approximately
94% of the outstanding principal amount of the public notes in the first phase
of the Holdco recapitalization. The cash consideration that was offered and
accepted by those holders represented the October 1, 2001 interest payment that
had not been paid at the time of those agreements. Since the October 1, 2001
interest payment was paid on all outstanding public notes on March 28, 2002,
other than those held by CoreComm Holdco which waived its right to this payment,
the cash consideration component of the exchange offers represents the April 1,
2002 interest payment that has not been paid on the public notes.
CoreComm Holdco will furnish this prospectus 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.
The terms and conditions of the exchange offers are set forth in this
prospectus, 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
34
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
The board of directors of each of CoreComm Limited and CoreComm Holdco
recommends that you tender your CoreComm Limited common stock in the exchange
offer for CoreComm Limited common stock so that we can complete the Holdco
recapitalization. However, neither CoreComm Limited's nor CoreComm Holdco's
respective board of directors takes a position on whether you should tender your
public notes or convert your public notes and tender the shares of CoreComm
Limited common stock. For information on the decision to tender your public
notes or convert your public notes and tender the shares of CoreComm Limited
common stock, see the section of the prospectus entitled "The Exchange Offers --
Conditions for Completion of 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 1/38.9 of a share of Holdco common stock for each
validly tendered share of Limited common stock and 9.1047 shares of Holdco
common stock and $30.00 in cash 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,
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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.
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 prospectus 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 prospectus 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.
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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
prospectus.
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 prospectus and in the applicable letter of
transmittal and the instructions to the applicable letter of transmittal. A
person who tenders shares of Limited
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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 prospectus 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 prospectus 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 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 prospectus 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,
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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 prospectus 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 prospectus 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
- 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 prospectus 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 prospectus. 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.
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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 under 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."
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.
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CONDITIONS FOR COMPLETION OF THE EXCHANGE OFFERS
CoreComm Holdco will not be obligated to complete the exchange offer
relating to CoreComm Limited common stock unless at least 90% of the outstanding
shares of CoreComm 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 minimum condition 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
- 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.
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As of June 25, 2002, approximately 102 million shares of CoreComm Limited
common stock, representing approximately 73% of the outstanding shares, were
tendered and not withdrawn. Since the minimum condition has not been met because
less than 90% of the outstanding shares of CoreComm Limited common stock have
been tendered as of June 25, 2002, in order to help achieve satisfaction of the
minimum condition, we will convert the convertible debt and convertible
preferred securities of CoreComm Limited we currently own into shares of
CoreComm Limited common stock, and then tender these shares into the exchange
offer. In an amendment to an exchange agreement between CoreComm Limited and
CoreComm Holdco, CoreComm Limited and CoreComm Holdco agreed that all shares of
CoreComm Holdco common stock issued to CoreComm Holdco in the exchange offer for
shares of CoreComm Limited common stock will be cancelled following the merger,
and therefore will have no effect on any of the holders of CoreComm Limited or
CoreComm Holdco common stock.
CoreComm Holdco owns the following securities, which are convertible into
CoreComm Limited common stock: (1) 250,000 shares of Series B Senior Convertible
Exchangeable Preferred Stock, which currently have a conversion price of $5.29
as determined under the CoreComm Limited charter; (2) approximately 51,000
shares of 8.5% Senior Convertible Preferred Stock, Series A, which currently
have a conversion price of $1.17 per share as determined under the CoreComm
Limited charter; and (3) $160 million in principal amount of public notes,
which, prior to the reduction discussed in the following paragraph, had a
conversion price of $27.39 per share.
On May 30, 2002, in order to induce conversion of public notes into shares
of CoreComm Limited common stock to facilitate our meeting the minimum condition
and the completion of the short form merger of a wholly-owned subsidiary of
CoreComm Holdco into CoreComm Limited, CoreComm Limited entered into a
supplemental indenture with the trustee for the public notes that lowered the
per share conversion price of the public notes into shares of CoreComm Limited
common stock from $27.39 to $0.75. Under the terms of the indenture governing
the public notes, CoreComm Limited has the right to lower the conversion price
of the public notes at any time without the consent of the public notes holders.
CoreComm Limited provided notice to the holders of the public notes of the lower
conversion price as required by the terms of the indenture. The change in the
conversion price will not impact the exchange ratios in the exchange offers. The
effect of this reduction of the conversion price is as follows:
(1) Prior to the lowering of the conversion price of the public notes, the
holders of public notes wishing to participate in the exchange offers could
have received either (a) 9.1047 shares of CoreComm Holdco common stock and
$30.00 in cash for each $1,000 in principal amount of public notes they
tendered and that were accepted in the public notes exchange offer or (b)
approximately 0.939 shares of CoreComm Holdco common stock for each $1,000
in principal amount of public notes they converted into shares of CoreComm
Limited common stock, which they then tendered and that were accepted in
the CoreComm Limited common stock exchange offer.
(2) Subsequent to the lowering of the conversion price of the public notes,
the holders of public notes wishing to participate in the exchange offers
can receive either (a) 9.1047 shares of CoreComm Holdco common stock and
$30.00 in cash for each $1,000 in principal amount of public notes they
tender and that are accepted in the public notes exchange offer or (b)
approximately 34.276 shares of CoreComm Holdco common stock for each $1,000
in principal amount of public notes they convert into shares of CoreComm
Limited common stock, which they then tender and that are accepted in the
CoreComm Limited common stock exchange offer.
Holders of public notes, in deciding to whether to (1) tender their public
notes, (2) convert their public notes into shares of CoreComm Limited common
stock and tender those shares or (3) hold their public notes and not participate
in the exchange offers, should carefully review the different form and amount of
consideration offered in the public notes exchange offer and the CoreComm
Limited common stock exchange offer. Holders of public notes may also want to
consider that in conjunction with the completion of the first phase of the
Holdco recapitalization, we determined that the estimated fair value of CoreComm
Holdco's common stock issued in these transactions was $0.98 per share. Please
see the section of this prospectus entitled "Comparative Per Share Data."
Holders of public notes are cautioned when making their decision to tender,
convert and tender or hold their public notes that there can be no assurance
that they will be able to sell their shares of CoreComm Holdco common stock or
be able to purchase shares of CoreComm Holdco common stock for $0.98 per share.
In fact, shares of CoreComm
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Holdco common stock may trade for lower, higher or the same as $0.98 per share
depending on public float of, and demand for, shares of CoreComm Holdco common
stock, as well as the market on which the shares trade and the results of
operations, liquidity and business performance of CoreComm Holdco. Although
CoreComm Limited's and CoreComm Holdco's respective board of directors supports
the public notes exchange offer, each holder of public notes will need to make
its own determination of which of the above actions to take. Holders of public
notes that decide to hold their public notes will continue to hold debt
securities of CoreComm Limited, which will have no material assets following the
completion of the CoreComm Limited common stock exchange offer and the merger.
Following the completion of the merger, each $1,000 in principal amount of
public notes will be convertible into approximately 34.276 shares of CoreComm
Holdco common stock. Please see the sections of this prospectus entitled "Risk
Factors -- Risk factors relating to the exchange offers -- CoreComm Limited
would hold virtually no material assets following the completion of the Holdco
recapitalization and may not be able to meet its obligations under the public
notes," "Risk Factors -- Risk factors relating to the exchange offers -- Holders
of public notes could face reduced liquidity following the exchange offers" and
"Risk Factors -- Risk factors relating to the exchange offers -- Holders of
public notes that tender in the exchange offers will be giving up their rights
to receive interest."
CoreComm Holdco currently owns approximately $105.7 million principal
amount of CoreComm Limited's Senior Unsecured Notes due September 29, 2003.
Interest on these notes is payable in shares of CoreComm Limited common stock.
Since less than 90% of the outstanding shares of CoreComm Limited common stock
have been tendered as of June 25, 2002, in order to help achieve satisfaction of
the minimum condition, we will require CoreComm Limited to issue the unpaid
interest payment that was due to us on April 1, 2002 in shares of CoreComm
Limited common stock, and we will then tender those shares into the CoreComm
Limited common stock exchange offer. Based upon the number of shares of CoreComm
Limited common stock tendered as of June 25, 2002, the conversion of the
securities as described above and the payment of the interest in shares would
result in the satisfaction of the minimum condition.
In an amendment to an exchange agreement between CoreComm Limited and
CoreComm Holdco, CoreComm Limited and CoreComm Holdco agreed that all shares of
CoreComm Holdco common stock issued to CoreComm Holdco in the exchange offer for
shares of CoreComm Limited common stock will be cancelled following the merger,
and therefore will have no effect on any of the holders of CoreComm Limited or
CoreComm Holdco common stock.
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 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
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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 prospectus 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 prospectus 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 Stock Transfer & Trust Company currently serves as the transfer
agent for each of CoreComm Limited and CoreComm Holdco and as the rights agent
under the rights agreement entered into with each of CoreComm Limited and
CoreComm Holdco and has served as the escrow agent under 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.
The exchange agent has not been retained to make solicitations or
recommendations and the information agent has not been retained to make
recommendations. However, CoreComm Holdco has retained the information agent to
telephonically solicit large stockholders of CoreComm Limited to tender their
shares of CoreComm Limited in the exchange offer for CoreComm Limited common
stock, for which it is paying the information agent approximately $10,000. The
fees the exchange agent and information agent 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 3,943,248 shares of CoreComm
Holdco common stock plus any additional shares required to be issued (1) as a
result of rounding up in the exchange offers and (2) in exchange for shares of
CoreComm Limited common stock that are issued upon conversion of convertible
securities and tendered in the
44
exchange offer. This number consists of approximately 3,900,000 shares in
exchange for CoreComm Limited common stock, assuming all holders of outstanding
warrants to acquire CoreComm Limited common stock were to exercise and tender in
the exchange offer, and 43,248 shares in exchange for public notes. In lieu of
issuing fractional shares of CoreComm Holdco common stock in the exchange
offers, the number of shares of CoreComm Holdco common stock being issued to
each holder of Limited common stock and the number of shares of CoreComm 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
CoreComm Holdco common stock issued. We will pay up to $142,500 of cash
consideration in the exchange offer for the public notes, plus reimbursements of
costs and expenses, plus amounts due to the information agent and exchange
agent, out of our available cash on hand.
45
UNAUDITED PRO FORMA FINANCIAL DATA OF CORECOMM HOLDCO, INC.
In 2001, CoreComm Limited entered into agreements with holders of its
public notes whereby the holders agreed, to exchange their notes as part of the
Holdco recapitalization. The exchange for $160 million principal amount of
public notes was completed in December 2001, including the payment of the
approximately $4.8 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 under 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;
(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,
with respect to the initial liquidation preference of $301 million.
The following summarizes the indebtedness and preferred stock that was
exchanged for shares of our common stock in December 2001:
PRINCIPAL AMOUNT OR
LIQUIDATION PREFERENCE
DESCRIPTION DATE ISSUED ISSUER WHEN ISSUED
----------- -------------- -------------------- -------------------------
10.75% Unsecured Convertible PIK
Notes due 2011................. April 2001 CoreComm Limited and $ 10.0 million(1)
CoreComm Holdco
10.75% Senior Unsecured
Convertible PIK Notes due
2010........................... December 2000 CoreComm Limited and $ 16.1 million(1)
CoreComm Holdco
Senior Unsecured Notes due
September 29, 2003............. September 2000 CoreComm Limited $108.7 million(2)
6% Convertible Subordinated Notes
due 2006....................... October 1999 CoreComm Limited $175.0 million(3)
Series A and Series A-1 Preferred
Stock.......................... September 2000 CoreComm Limited $ 51.1 million(2)
Series B Preferred Stock......... September 2000 CoreComm Limited $250.0 million(2)
---------------
(1) Entire amount was cancelled following the exchange.
(2) Entire amount was exchanged and is currently held by CoreComm Holdco.
(3) $164.75 million was outstanding as of December 31, 2001, of which $160
million was exchanged and is currently held by CoreComm Holdco.
As a result of the completion of the first phase of the Holdco
recapitalization in December 2001, approximately 87% of our outstanding shares,
or 26,056,806 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
3,943,248 shares, continue to be held by CoreComm Limited. We have filed a shelf
registration statement on Form S-1 under the Securities Act to permit the sale
of our common stock that was issued in the first phase of the Holdco
recapitalization. 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, approxi-
46
mately 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 $10.0
million principal and $0.8 million of accrued interest of our 10.75% Unsecured
Convertible PIK Notes due 2011 and the approximately $16.1 million principal and
$1.9 million of accrued interest of our 10.75% Senior Unsecured Convertible PIK
Notes due 2010 for shares of our common stock.
The second phase of the Holdco recapitalization includes the exchange
offers for shares of CoreComm Limited common stock and the public notes that
remained outstanding following the first phase of the Holdco recapitalization.
As soon as practicable after the completion of the exchange offers, CoreComm
Holdco will transfer all shares of CoreComm Limited common stock that it holds
to a wholly-owned subsidiary of CoreComm Holdco which will then be merged into
CoreComm Limited with CoreComm Limited surviving the merger as a wholly-owned
subsidiary of CoreComm Holdco. On the business day following the day when the
merger is consummated, CoreComm Limited's Nasdaq listing will be transferred to
CoreComm Holdco and CoreComm Holdco common stock will commence, and CoreComm
Limited common stock will cease, trading on the Nasdaq National Market.
Please see the three charts contained in the section of this prospectus
entitled "Prospectus Summary" for an illustration of the corporate structure of
CoreComm Limited and CoreComm Holdco, prior to the commencement of the Holdco
recapitalization, in their current form and assuming the completion of the
Holdco recapitalization.
The unaudited pro forma condensed consolidated balance sheet at March 31,
2002 gives effect to second phase of the Holdco recapitalization, which includes
the completion of the exchange offer for shares of CoreComm Limited common stock
and public notes that remained outstanding following the first phase of the
Holdco recapitalization as well as the merger transaction between CoreComm
Limited and a wholly-owned subsidiary of CoreComm Holdco as if they occurred on
March 31, 2002.
The unaudited pro forma condensed consolidated statement of operations for
the three months ended March 31, 2002 gives effect to second phase of the Holdco
recapitalization, which includes the completion of the exchange offers for
shares of CoreComm Limited common stock and public notes that remained
outstanding following the first phase of the Holdco recapitalization as well as
the merger transaction between CoreComm Limited and a wholly-owned subsidiary of
CoreComm Holdco as if they occurred on January 1, 2002.
The unaudited pro forma condensed consolidated statements of operations for
the year ended December 31, 2001 gives effect to both the first and second
phases of the Holdco recapitalization, which includes the recapitalization and
exchange transactions, the other transactions to eliminate additional amounts of
our outstanding indebtedness.
The pro forma financial statements do not give effect to the potential
conversion of our investment in CoreComm Limited into CoreComm Limited common
stock. The effect on CoreComm Holdco's operating results of this conversion
would not be significant.
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 Holdco 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
Holdco appearing elsewhere in this prospectus.
47
CORECOMM HOLDCO, INC.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
MARCH 31, 2002
CORECOMM CORECOMM
CORECOMM LIMITED AND PRO FORMA HOLDCO
HOLDCO SUBSIDIARIES MERGER RECAPITALIZATION
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
---------- ------------ ----------- ----------------
(IN THOUSANDS)
ASSETS
Cash and cash equivalents................... $ 26,841 $ 472 $ (3,515)(b) $ 23,798
Other current assets........................ 37,746 37 254(d) 38,037
-------- --------- --------- --------
Total current assets........................ 64,587 509 (3,261) 61,835
Fixed assets, net........................... 80,339 113 -- 80,452
Investment in CoreComm Limited.............. 3,863 -- 42(a) --
(3,905)(c)
Investment in CoreComm Holdco............... -- 2,348 (2,348)(f) --
Goodwill, net............................... 147,380 -- (42)(a) 149,479
3,905(c)
(32,088)(e)
2,348(f)
(258,087)(g)
(4,750)(h)
4,537(i)
(288)(l)
286,564(k)
Intangible assets, net...................... 5,622 -- -- 5,622
Other, net.................................. 10,883 6,653 (4,537)(i) 12,999
-------- --------- --------- --------
$312,674 $ 9,623 $ (11,910) $310,387
======== ========= ========= ========
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
Current portion of debt and capital
leases.................................... $ 9,426 $ 4,750 $ (4,750)(h) $ 9,426
Due to CoreComm Holdco...................... -- 31,834 (32,088)(e) --
254(d)
Other current liabilities................... 142,886 1,516 -- 144,402
-------- --------- --------- --------
Total current liabilities................... 152,312 38,100 (36,584) 153,828
Debt and capital leases..................... 144,992 258,087 (258,087)(g) 144,992
Notes payable to related parties............ 16,241 -- -- 16,241
Shareholders' deficiency.................... (871) (286,564) 286,564(k) (4,674)
(288)(l)
(3,515)(b)
-------- --------- --------- --------
$312,674 $ 9,623 $ (11,910) $310,387
======== ========= ========= ========
48
CORECOMM HOLDCO, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2002
CORECOMM CORECOMM
CORECOMM LIMITED AND HOLDCO
HOLDCO SUBSIDIARIES PRO FORMA RECAPITALIZATION
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
---------- ------------- ----------- ----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
REVENUES........................................ $ 74,311 $ 108 $ -- $ 74,419
COSTS AND EXPENSES
Operating....................................... 48,038 -- -- 48,038
Selling, general and administrative............. 22,313 68 -- 22,381
Corporate....................................... 1,698 -- -- 1,698
Recapitalization costs.......................... 1,182 -- -- 1,182
Depreciation.................................... 8,881 33 -- 8,914
Amortization.................................... 84 -- 84
-------- ------- ------ --------
82,196 101 -- 82,297
-------- ------- ------ --------
Operating (loss)................................ (7,885) 7 -- (7,878)
Other income (expense)
Interest income and other, net.................. 134 7 (42)(a) 99
Equity in net (loss) of CoreComm Holdco......... -- (1,515) 1,515(e) --
Interest expense................................ (3,903) (5,651) 5,573(b) (3,903)
78(d)
-------- ------- ------ --------
(Loss) before extraordinary item................ $(11,654) $(7,152) $7,124 $(11,682)
======== ======= ====== ========
Basic and diluted (loss) per share before
extraordinary item............................ $ (0.39) $ (0.39)
======== ========
Weighted average shares......................... 30,000 (294)(c) 29,706
======== ====== ========
49
CORECOMM HOLDCO, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE YEAR ENDED DECEMBER 31, 2001
PRO FORMA FOR
COMPLETED
PORTION OF CORECOMM CORECOMM
CORECOMM HOLDCO LIMITED & HOLDCO
HOLDCO FIRST PHASE RECAPITALIZATION SUBSIDIARIES SECOND PHASE RECAPITALIZATION
HISTORICAL ADJUSTMENTS AND OTHER HISTORICAL(1) ADJUSTMENTS PRO FORMA
---------- ----------- ---------------- ------------- ------------ ----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
REVENUES..................... $ 292,681 $ -- $ 292,681 $ 526 $ -- $ 293,207
COSTS AND EXPENSES
Operating.................... 224,807 -- 224,807 -- -- 224,807
Selling, general and
administrative............. 96,854 -- 96,854 905 -- 97,759
Corporate.................... 5,648 -- 5,648 2,687 -- 8,335
Non-cash compensation........ 21,638 -- 21,638 -- -- 21,638
Other charges................ 39,553 -- 39,553 (39) -- 39,514
Asset impairments............ 368,288 -- 368,288 -- -- 368,288
Depreciation................. 47,976 -- 47,976 134 -- 48,110
Amortization................. 97,388 -- 97,388 1 420(e) 97,809
--------- -------- --------- -------- ------- ---------
902,152 -- 902,152 3,688 420 906,260
--------- -------- --------- -------- ------- ---------
Operating (loss)............. (609,471) -- (609,471) (3,162) (420) (613,053)
Other income (expense)
Interest income and other,
net........................ 1,799 (575)(a) 1,224 158 -- 1,382
Equity in net (loss) of
CoreComm Holdco............ -- -- -- (3,863) 3,863(h)
Interest expense............. (25,647) 3,772(b)
22,044(c) 169 (22,667) 312(g) (22,186)
--------- -------- --------- -------- ------- ---------
(Loss) before income taxes
and extraordinary item..... (633,319) 25,241 (608,078) (29,534) 3,755 (633,857)
Income tax provision......... (94) -- (94) (4) (98)
--------- -------- --------- -------- ------- ---------
(Loss) before extraordinary
item....................... $(633,413) $ 25,241 $(608,172) $(29,538) $ 3,755 $(633,955)
========= ======== ========= ======== ======= =========
Basic and diluted (loss) per
share before extraordinary
item....................... $ (22.15) $ (20.27) $ (21.34)
========= ========= =========
Weighted average shares...... 28,599 1,401(d) 30,000 (294)(f) 29,706
========= ======== ========= ======= =========
---------------
(1) The historical results of operations for CoreComm Limited and subsidiaries
exclude the historical results of operations of CoreComm Holdco, Inc. Please
refer to the section of this Prospectus entitled "-- CoreComm Limited -- Pro
Forma Condensed Consolidated Statement Of Operations (Unaudited) For The
Year Ended December 31, 2001."
50
CORECOMM HOLDCO, INC.
NOTES TO UNAUDITED PRO FORMA FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE DATA)
PRO FORMA BALANCE SHEET ADJUSTMENTS
The pro forma adjustments made to our condensed consolidated balance sheet
as of March 31, 2002 reflect:
a) Our additional investment in CoreComm Limited for the exchange of the
remaining $4,750 of principal of CoreComm Limited's 6% convertible
subordinated notes for 43,248 of our common shares valued at $42.
b) Estimated recapitalization costs of the transactions, which include
legal, accounting and other costs of $1,515 and employee incentives
of $2,000.
c) The elimination of our $3,905 investment in CoreComm Limited's notes
and preferred stock.
d) The elimination of our amounts due to CoreComm Limited totaling $254.
e) The elimination of amounts due to CoreComm Holdco, which includes
interest payable on CoreComm Limited's 6% Convertible Subordinated
Notes and Senior Unsecured Notes due 2003 of $8,238 and dividends
payable on CoreComm Limited's preferred stock of $23,850.
f) The elimination of CoreComm Limited's $2,348 investment in CoreComm
Holdco.
g) The elimination of CoreComm Limited's 6% Convertible Subordinated
Notes of $160,000 and Senior Unsecured Notes due 2003 of $98,087 both
of which are due to us.
h) The elimination of the current portion of CoreComm Limited's 6%
Convertible Subordinated Notes of $4,750.
i) The elimination of the unamortized portion of deferred financing
costs on CoreComm Limited's 6% Convertible Subordinated Notes of
$4,537.
j) The elimination of CoreComm Limited's Series A and Series B preferred
stock of $50,000 and $74,169.
k) To eliminate CoreComm Limited historical equity of $286,564
l) Adjustment to record 294,000 shares of our common stock, held by
CoreComm Limited, as treasury shares valued at $288.
PRO FORMA STATEMENT OF OPERATIONS ADJUSTMENTS
The pro forma adjustments for the condensed consolidated statement of
operations for the three months ended March 31, 2002 reflect:
a) The reduction in interest income recorded as a result of cash paid to
effectuate our recapitalization plans, which would have reduced our
cash balance at January 1, 2002.
REDUCTION OF
DESCRIPTION CASH PAID INTEREST INCOME
----------- --------- ---------------
Interest payments to the holders of CoreComm
Limited's 6% Convertible Subordinated Notes........ $ 214 $ 2
Recapitalization payments for legal, accounting and
other transaction costs............................ 2,141 21
Recapitalization employee incentive payments......... 1,900 19
------ ---
$4,255 $42
====== ===
51
CORECOMM HOLDCO, INC.
NOTES TO UNAUDITED PRO FORMA FINANCIAL DATA -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
b) The reduction in interest expense, related to CoreComm Limited's 6%
Convertible Subordinated Notes and Senior Unsecured Notes due 2003, as
follows:
REDUCTION OF
DESCRIPTION INTEREST EXPENSE
----------- ----------------
Interest expense on the $160 million 6% Convertible
Subordinated Notes exchanged ($160 million X 6% X 3/12
months)................................................... $2,400
Amortization of deferred financing costs for the $160
million 6% Convertible Subordinated Notes exchanged....... 245
Interest expense on Senior Unsecured Notes due 2003
exchanged ($105,679 X 6.47% X 3/12 months)................ 1,709
Amortization of debt discount for the Senior Unsecured Notes
due 2003 exchanged. The debt discount on March 31, 2002 is
$7,592.................................................... 1,219
------
$5,573
======
c) The acquisition of 294,000 of our common shares held by CoreComm
Limited, which will become treasury shares upon consolidation of
CoreComm Limited with CoreComm Holdco.
d) The reduction in interest expense, related to the exchange of the
remaining $4.75 million of CoreComm Limited's 6% Convertible
Subordinated Notes outstanding as follows:
DESCRIPTION REDUCTION OF INTEREST EXPENSE
----------- -----------------------------
Interest expense on the $4.75 million 6% Convertible
Subordinated Notes which were not yet exchanged
($4.75 million X 6% X 3/12 months)................. $71
Amortization of deferred financing costs for the
$4.75 million 6% Convertible Subordinated Notes
which were not yet exchanged....................... 7
---
$78
===
e) The elimination of CoreComm Limited's equity share of our net loss
of $1,515 included in our net loss for the three months ended March 31,
2002.
52
CORECOMM HOLDCO, INC.
NOTES TO UNAUDITED PRO FORMA FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE DATA)
PRO FORMA STATEMENT OF OPERATIONS ADJUSTMENTS
The pro forma adjustments for the condensed consolidated statement of
operations for the year ended December 31, 2001, which relate to the first phase
of our recapitalization plan, reflect:
a) The reduction in interest income recorded as a result of cash paid to
effectuate our recapitalization plans, which would have reduced our
cash balance at January 1, 2001.
REDUCTION OF
DESCRIPTION CASH PAID INTEREST INCOME
----------- --------- ---------------
Interest payments to the holders of CoreComm
Limited's 6% Convertible Subordinated Notes........ $ 5,014 $200
Recapitalization payments for legal, accounting and
other transaction costs............................ 2,250 90
Recapitalization employee incentive payments......... 3,950 157
Payments to eliminate notes payable and capital
leases under our recapitalization plan............. 3,200 128
------- ----
$14,414 $575
======= ====
b) The reduction of interest expense for debt that has been exchanged
for shares of our common stock as well as other debt that has been
eliminated as part of phase one of our recapitalization plan, as follows:
REDUCTION OF
DESCRIPTION INTEREST EXPENSE
----------- ----------------
Interest expense on 10.75% unsecured $10.0 million
convertible notes due 2011 from their April 2001 issuance
date ($10 million X 10.75% X 8.5 months/12 months)........ $ 761
Interest expense on 10.75% senior unsecured $16.1 million
convertible notes due 2010 ($16.1 million X 10.75%)....... 1,731
Interest expense on a working capital note, notes payable
and capital leases........................................ 1,280
------
$3,772
======
c) The reduction in interest expense, related to CoreComm Limited's 6%
Convertible Subordinated Notes and Senior Unsecured Notes due 2003, as
follows:
REDUCTION OF
DESCRIPTION INTEREST EXPENSE
----------- ----------------
Interest expense on the $160 million 6% Convertible
Subordinated Notes exchanged ($160 million X 6%).......... $ 9,600
Amortization of deferred financing costs for the $160
million 6% Convertible Subordinated Notes exchanged....... 979
Interest expense on Senior Unsecured Notes due 2003
exchanged ($105,679 X 6.47%).............................. 6,837
Amortization of debt discount for the Senior Unsecured Notes
due 2003 exchanged. The debt discount at December 31, 2001
is $8,805................................................. 4,628
-------
$22,044
=======
53
CORECOMM HOLDCO, INC.
NOTES TO UNAUDITED PRO FORMA FINANCIAL DATA -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
d) The issuance of 1,456,806 shares of our common stock in exchange
for CoreComm Limited's 6% Convertible Subordinated Notes.
The pro forma adjustments for the condensed consolidated statement of
operations for the year ended December 31, 2001, which related to the second
phase of our recapitalization plan, reflect:
e) The increase to amortization expense of $420 as the result of
$2,099 of additional goodwill from the consolidation of CoreComm
Limited with an estimated useful life of five years.
f) The acquisition of 294,000 of our common shares held by CoreComm
Limited, which will become treasury shares upon consolidation of
CoreComm Limited with CoreComm Holdco.
g) The reduction in interest expense, related to the exchange of the
remaining $4.75 million of CoreComm Limited's 6% Convertible
Subordinated Notes outstanding as follows:
DESCRIPTION REDUCTION OF INTEREST EXPENSE
----------- -----------------------------
Interest expense on the $4.75 million 6% Convertible
Subordinated Notes which were not yet exchanged
($4.75 million X 6%).............................. $285
Amortization of deferred financing for the $4.75
million 6% Convertible Subordinated Notes which
were not yet exchanged............................ 27
----
$312
====
h) The elimination of CoreComm Limited's equity share of our loss of
$3,863 included in our pro forma loss before extraordinary item for the
year ended December 31, 2001.
54
UNAUDITED PRO FORMA FINANCIAL DATA OF CORECOMM LIMITED
In 2001, CoreComm Limited entered into agreements with holders of its
public notes whereby the holders agreed, to exchange their notes as part of the
Holdco recapitalization. The exchange for $160 million principal amount of
public notes was completed in December 2001, including the payment of the
approximately $4.8 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 under 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;
(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,
with respect to the initial liquidation preference of $301 million.
The following summarizes the indebtedness and preferred stock that was
exchanged for shares of our common stock in December 2001:
PRINCIPAL AMOUNT OR
LIQUIDATION PREFERENCE
DESCRIPTION DATE ISSUED ISSUER WHEN ISSUED
----------- -------------- ---------------- ----------------------
10.75% Unsecured Convertible PIK
Notes due 2011..................... April 2001 CoreComm Limited $ 10.0 million(1)
and
CoreComm Holdco
10.75% Senior Unsecured Convertible
PIK Notes due 2010................. December 2000 CoreComm Limited $ 16.1 million(1)
and
CoreComm Holdco
Senior Unsecured Notes due September
29, 2003........................... September 2000 CoreComm Limited $108.7 million(2)
6% Convertible Subordinated Notes due
2006............................... October 1999 CoreComm Limited $175.0 million(3)
Series A and Series A-1 Preferred
Stock.............................. September 2000 CoreComm Limited $ 51.1 million(2)
Series B Preferred Stock............. September 2000 CoreComm Limited $250.0 million(2)
---------------
(1) Entire amount was cancelled following the exchange.
(2) Entire amount was exchanged and is currently held by CoreComm Holdco.
(3) $164.75 million was outstanding as of December 31, 2001, of which $160
million was exchanged and is currently held by CoreComm Holdco.
As a result of the completion of the first phase of the Holdco
recapitalization plan in December 2001, approximately 87% of our outstanding
shares, or 26,056,806 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
3,943,248 shares, continue to be held by CoreComm Limited. We have agreed to
file, and filed, a shelf registration statement on Form S-1 under the Securities
Act to permit the sale of our common stock that was issued in the first phase of
the recapitalization plan. 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, and
55
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 approximately $10.8
million principal amount and accrued interest of 10.75% Unsecured Convertible
PIK Notes due 2011 and approximately $18 million principal amount and accrued
interest of 10.75% Senior Unsecured Convertible PIK Notes due 2010 ,which were
cancelled upon the exchange.
The unaudited pro forma condensed statement of operations for the year
ended December 31, 2001 presented below gives effect to the completed
recapitalization and exchange transactions as if they had occurred on January 1,
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 adjustment to the conversion ratio of the convertible debt
will result in an extraordinary gain. The pro forma financial statements do not
give effect to this extraordinary gain which will approximate the book value of
the debt, approximately $160,000,000.
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 appearing elsewhere in this prospectus.
56
CORECOMM LIMITED
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE YEAR ENDED DECEMBER 31, 2001
CORECOMM DECONSOLIDATION CORECOMM
LIMITED AND OF CORECOMM LIMITED AND
SUBSIDIARIES HOLDCO SUBSIDIARIES PRO
HISTORICAL HISTORICAL ADJUSTMENTS FORMA
------------ --------------- ----------- ----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
REVENUES................................. $ 293,207 $(292,681) $ -- $ 526
COSTS AND EXPENSES
Operating................................ 224,807 (224,807) -- --
Selling, general and administrative...... 97,759 (96,854) -- 905
Corporate................................ 8,335 (5,648) -- 2,687
Non-cash compensation.................... 21,638 (21,638) -- --
Other charges............................ 39,514 (39,553) -- (39)
Asset impairments........................ 368,288 (368,288) -- --
Depreciation............................. 48,110 (47,976) -- 134
Amortization............................. 97,389 (97,388) -- 1
--------- --------- --------- --------
905,840 (902,152) -- 3,688
--------- --------- --------- --------
Operating (loss)......................... (612,633) (609,471) -- (3,162)
--------- --------- --------- --------
Other income (expense)...................
Interest income and other, net........... 1,957 (1,799) -- 158
Equity in net (loss) of CoreComm
Holdco................................. -- -- (3,863)a (3,863)
Interest expense......................... (48,314) 25,647 -- (22,667)
--------- --------- --------- --------
(Loss) before income taxes and
extraordinary item..................... (658,990) 633,319 (3,863) (29,534)
Income tax (provision) benefit........... (98) 94 (4)
--------- --------- --------- --------
(Loss) before extraordinary item......... $(659,088) $ 633,413 $ (3,863) $(29,538)
========= ========= ========= ========
Basic and diluted (loss) per share before
extraordinary item(1).................. $ (6.77) $ (0.52)
========= ========
Weighted average shares.................. 100,669 100,669
========= ========
---------------
(1) After deduction for preferred stock dividends and accretion of $22,387.
57
CORECOMM LIMITED
NOTES TO UNAUDITED PRO FORMA FINANCIAL DATA
(IN THOUSANDS)
The pro forma adjustment for the condensed consolidated statement of
operations for the year ended December 31, 2001 reflects:
(a) The recording of CoreComm Limited's equity share of loss before
extraordinary item of $3,863 included in our pro forma loss before
extraordinary item of $608,172 for the year ended December 31, 2001. The
amount of the loss was limited to the extent of CoreComm Limited's
investment as of December 31, 2001.
58
SELECTED HISTORICAL FINANCIAL DATA OF CORECOMM HOLDCO, INC.
The following selected historical financial data should be read in
conjunction with the historical consolidated financial statements and related
notes included elsewhere in this prospectus. The selected historical financial
data as of December 31, 2001, 2000, 1999 and 1998, and for the years ended
December 31, 2001, 2000 and 1999, and for the period from April 1, 1998 to
December 31, 1998, have been derived from the historical consolidated financial
statements of CoreComm Holdco audited by Ernst & Young LLP, independent
auditors. The selected historical financial data, for the period from January 1,
1998 to May 31, 1998, and as of and for the year ended December 31, 1997 is that
of OCOM Corporation Telecoms Division, a predecessor company and have been
derived from its historical financial statements audited by Ernst & Young LLP,
independent auditors.
Interim data for the three months ended March 31, 2002 and 2001 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 three months ended March 31, 2002 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 stockholders 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.
In 1998, we were formed to succeed the businesses and assets that were
operated by OCOM. Our operations commenced in April 1998. We acquired the
operating assets and related liabilities of OCOM on June 1, 1998.
FOR THE PERIOD
FROM APRIL 1,
1998 (DATE THE PREDECESSOR (OCOM)
OPERATIONS ------------------------------
THREE-MONTHS COMMENCED) FOR THE PERIOD
ENDED MARCH 31, YEAR ENDED DECEMBER 31, TO FROM JANUARY 1, YEAR ENDED
-------------------- --------------------------------- DECEMBER 31, 1998 TO MAY 31, DECEMBER 31,
2002 2001 2001 2000 1999 1998 1998 1997
-------- --------- --------- --------- --------- -------------- --------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
INCOME STATEMENT DATA
Revenues............... $ 74,311 $ 72,811 $ 292,681 $ 131,526 $ 57,151 $ 6,713 $ 1,452 $ 3,579
Costs and expenses
Operating.............. 48,038 63,520 224,807 142,323 57,551 5,584 772 1,581
Selling, general and
administrative....... 22,313 30,795 96,854 109,197 72,821 11,940 3,205 5,934
Corporate.............. 1,698 2,098 5,648 11,224 6,686 2,049 -- --
Non-cash
compensation......... -- 3,234 21,638 43,440 1,056 -- -- --
Recapitalization
costs................ 1,182 -- -- -- -- -- -- --
Other charges.......... -- 119 39,553 12,706 -- -- -- --
Asset impairments...... -- 167,599 368,288 35,920 -- -- -- --
Depreciation and
amortization......... 8,965 43,521 145,364 73,037 19,546 980 257 439
-------- --------- --------- --------- --------- -------- ------- -------
82,196 310,886 902,152 427,847 157,660 20,553 4,234 7,954
-------- --------- --------- --------- --------- -------- ------- -------
59
FOR THE PERIOD
FROM APRIL 1,
1998 (DATE THE PREDECESSOR (OCOM)
OPERATIONS ------------------------------
THREE-MONTHS COMMENCED) FOR THE PERIOD
ENDED MARCH 31, YEAR ENDED DECEMBER 31, TO FROM JANUARY 1, YEAR ENDED
-------------------- --------------------------------- DECEMBER 31, 1998 TO MAY 31, DECEMBER 31,
2002 2001 2001 2000 1999 1998 1998 1997
-------- --------- --------- --------- --------- -------------- --------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Operating (loss)....... (7,885) (238,075) (609,471) (296,321) (100,509) (13,840) (2,782) (4,375)
Other income (expense)
Interest and other
income............... 134 664 1,799 1,134 55 46 -- (4)
Interest expense....... (3,903) (4,141) (25,647) (5,929) (2,624) (21) -- --
-------- --------- --------- --------- --------- -------- ------- -------
(Loss) before income
taxes and
extraordinary item... (11,654) (241,552) (633,319) (301,116) (103,078) (13,815) (2,782) (4,379)
Income tax provision... -- -- (94) (125) (102) -- --
-------- --------- --------- --------- --------- -------- ------- -------
(Loss) before
extraordinary
item(2).............. (11,654) (241,552) (633,413) (301,241) (103,180) (13,815) -- --
Gain from
extinguishment of
debt................. -- -- 39,498 -- -- -- -- --
-------- --------- --------- --------- --------- -------- ------- -------
Net (loss)(2).......... $(11,654) $(241,552) $(593,915) $(301,241) $(103,180) $(13,815) $(2,782) $(4,379)
======== ========= ========= ========= ========= ======== ======= =======
Basic and diluted net
(loss) per common
share:
(Loss) before
extraordinary
item(2).............. $ (.39) $ (8.46) $ (22.15) $ (10.55) $ (3.62) $ (.48) $ (.10) $ (.15)
Gain from
extinguishment of
debt................. -- -- 1.38 -- -- -- -- --
-------- --------- --------- --------- --------- -------- ------- -------
Net (loss)(2).......... $ (.39) $ (8.46) $ (20.77) $ (10.55) $ (3.62) $ (.48) $ (.10) $ (.15)
======== ========= ========= ========= ========= ======== ======= =======
Weighted average
shares(1)............ 30,000 28,542 28,599 28,542 28,542 28,542 28,542 28,542
======== ========= ========= ========= ========= ======== ======= =======
THE PREDECESSOR
(OCOM)
DECEMBER 31, ---------------
-----------------------------------------------------------
MARCH 31, 2002 2001 2000 1999 1998 1997
-------------- -------- --------- -------- ------- ---------------
BALANCE SHEET DATA
Working capital
(deficiency).............. $(87,725) $(83,794) $(100,684) $(43,279) $ 1,695 $ (950)
Fixed assets -- net......... 80,339 86,722 179,379 90,347 3,581 1,269
Total assets................ 312,674 316,620 896,606 216,877 44,596 1,731
Long-term debt and capital
leases.................... 161,233 160,487 109,990 18,882 501 --
Shareholders' equity
(deficiency).............. (871) 10,783 599,304 129,990 36,278 --
Parent's investment......... -- -- -- -- -- 321
---------------
(1) After giving retroactive effect to the 6,342.944-for-1 stock split in
December 2001 and the 3-for-1 stock split by way of a stock dividend on
April 12, 2002.
We have never declared or paid any cash dividends.
(2) In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (referred to as SFAS) No. 142, "Goodwill and
Other Intangible Assets." 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. We adopted SFAS No. 142 on January 1, 2002.
The adoption of this new standard
60
had no significant effect on our results of operations, financial condition
or cash flows, other than amortization of goodwill ceased as of January 1,
2002.
Upon the adoption of SFAS No. 142, we performed an analysis of our
intangible assets acquired before July 1, 2001 to determine whether they
should be classified and accounted for as part of or separate from
goodwill. As a result of the analysis, we determined that our identifiable
intangible assets such as customer lists and LMDS licenses do not meet the
indefinite life criteria of SFAS No. 142. Additionally, we determined that,
with respect to these assets, no changes in the remaining useful lives of
these assets were required.
We also performed an evaluation for impairment of our goodwill as of
January 1, 2002, and determined that no impairment charge was required.
Absent any new indicators of impairment, our next evaluation of impairment
will be the annual test on October 1, 2002.
The following table shows our loss before extraordinary item and net loss
had SFAS No. 142 been in effect during the three years ended December 31,
2001. Additionally, the table presents the effect on our basic and diluted
loss per share before extraordinary item and basic and diluted net loss per
share.
THREE-MONTHS
ENDED MARCH 31, YEAR ENDED DECEMBER 31,
--------------------- -----------------------------------
2002 2001 2001 2000 1999
-------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Loss before extraordinary
item -- as reported......... $(11,654) $(241,552) $(633,413) $(301,241) $(103,180)
Goodwill amortization......... -- 31,369 96,973 39,330 6,841
Workforce amortization........ -- 31 52 532 310
-------- --------- --------- --------- ---------
Loss before extraordinary
item -- as adjusted......... $(11,654) $(210,152) $(536,388) $(261,379) $ (96,029)
======== ========= ========= ========= =========
Net loss -- as reported....... $(11,654) $(241,552) $(593,915) $(301,241) $(103,180)
Goodwill amortization......... -- 31,369 96,973 39,330 6,841
Workforce amortization........ -- 31 52 532 310
-------- --------- --------- --------- ---------
Net loss -- as adjusted....... $(11,654) $(210,152) $(496,890) $(261,379) $ (96,029)
======== ========= ========= ========= =========
Basic and diluted per share
information:
Loss before extraordinary
item -- as reported......... $ (0.39) $ (8.46) $ (22.15) $ (10.55) $ (3.62)
Goodwill amortization......... -- 1.10 3.39 1.38 0.24
Workforce amortization........ -- -- -- 0.02 0.01
-------- --------- --------- --------- ---------
Loss before extraordinary
item -- as adjusted......... $ (0.39) $ (7.36) $ (18.76) $ (9.15) $ (3.37)
======== ========= ========= ========= =========
Net loss per share -- as
reported.................... $ (0.39) $ (8.46) $ (20.77) $ (10.55) $ (3.62)
Goodwill amortization......... -- 1.10 3.39 1.38 0.24
Workforce amortization........ -- -- -- 0.02 0.01
-------- --------- --------- --------- ---------
Net loss per share -- as
adjusted.................... $ (0.39) $ (7.36) $ (17.38) $ (9.15) $ (3.37)
======== ========= ========= ========= =========
61
SELECTED HISTORICAL FINANCIAL DATA OF CORECOMM LIMITED
The following selected historical financial data should be read in
conjunction with the historical consolidated financial statements and related
notes included elsewhere in this prospectus. The selected historical financial
data as of December 31, 2001, 2000, 1999 and 1998 and for the years ended
December 31, 2001, 2000 and 1999 and for the period from April 1, 1998 to
December 31, 1998 have been derived from the historical consolidated financial
statements of CoreComm Limited audited by Ernst & Young LLP, independent
auditors. The selected historical financial data for the period from January 1,
1998 to May 31, 1998 and as of and for the year ended December 31, 1997 is that
of OCOM, a predecessor company and have been derived from its historical
financial statements audited by Ernst & Young LLP, independent auditors.
Interim data for the three months ended March 31, 2002 and 2001 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 three months ended March 31, 2002 and 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 borrowed
$91.1 million under a senior secured credit facility with The Chase Manhattan
Bank, issued approximately $108.7 million aggregate principal amount of senior
unsecured notes to the former stockholders of ATX 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 approximately $43.4 million and we
recorded restructuring and other charges of $12.7 million.
In 1999, we acquired 100% of the stock of MegsINet Inc. and the assets of
USN Communications, Inc. In addition, we issued $175 million in aggregate
principal amount of 6% Convertible Subordinated Notes due 2006.
During the period from April 1, 1998 (date operations commenced) to
December 31, 1998, Cellular Communications of Puerto Rico, Inc., a predecessor
company made the following contributions to CoreComm Limited prior to the
spin-off: (a) a cash contribution of $150 million, (b) businesses acquired by
Cellular Communications of Puerto Rico, Inc. 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. We acquired the operating assets and related
liabilities of OCOM on June 1, 1998.
62
THREE-MONTHS
ENDED MARCH 31, YEAR ENDED DECEMBER 31,
-------------------- ---------------------------------
2002 2001 2001 2000 1999
-------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
INCOME STATEMENT DATA:
Revenues......................... $ 108 $ 72,937 $ 293,207 $ 132,122 $ 58,151
Operating expenses............... 101 313,521 905,840 431,449 161,376
(Loss) before extraordinary
item(2)......................... (7,152) (249,646) (658,990) (313,811) (103,524)
Gain from early extinguishment of
debt............................ -- -- 39,498 -- --
-------- --------- --------- --------- ---------
Net (loss)(2).................... $ (7,152) $(249,661) $(619,590) $(313,811) $(103,524)
======== ========= ========= ========= =========
Basic and diluted net (loss) per
common share:
(Loss) before extraordinary
item(2)......................... $ (0.09) $ (3.58) $ (6.77) $ (6.73) $ (3.03)
Gain from early extinguishment of
debt............................ -- -- 0.39 -- --
-------- --------- --------- --------- ---------
Net (loss)(2).................... $ (0.09) $ (3.58) $ (6.38) $ (6.73) $ (3.03)
======== ========= ========= ========= =========
Weighted average number of common
shares basic and diluted(1):.... 140,327 71,232 100,669 47,480 34,189
======== ========= ========= ========= =========
THE PREDECESSOR (OCOM)
---------------------------
FOR THE PERIOD FOR THE
FROM APRIL 1, 1998 PERIOD FROM
(DATE OPERATIONS JANUARY 1, YEAR ENDED
COMMENCED) TO 1998 TO DECEMBER 31,
DECEMBER 31, 1998 MAY 31, 1998 1997
------------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
INCOME STATEMENT DATA:
Revenues......................... $ 6,713 $ 1,452 $ 3,579
Operating expenses............... 25,139 4,234 7,954
(Loss) before extraordinary
item(2)......................... (16,255) (2,782) (4,379)
Gain from early extinguishment of
debt............................ -- -- --
-------- ------- -------
Net (loss)(2).................... $(16,255) $(2,782) $(4,379)
======== ======= =======
Basic and diluted net (loss) per
common share:
(Loss) before extraordinary
item(2)......................... $ (.55) $ (.09) $ (.15)
Gain from early extinguishment of
debt............................ -- -- --
-------- ------- -------
Net (loss)(2).................... $ (.55) $ (.09) $ (.15)
======== ======= =======
Weighted average number of common
shares basic and diluted(1):.... 29,678 29,664 29,419
======== ======= =======
DECEMBER 31, THE PREDECESSOR
-------------------------------------------------------------
(OCOM)
MARCH 31, ---------------
2002 2001 2000 1999 1998 1997
--------- --------- --------- -------- -------- ---------------
BALANCE SHEET DATA:.............
Working capital (deficiency).... $(37,591) $ (25,545) $(123,712) $121,292 $133,899 $(950)
Fixed assets, net............... 113 146 179,651 90,619 3,582 1,269
Total assets.................... 9,623 12,423 909,763 392,103 176,526 1,731
Long-term debt.................. 258,087 261,624 358,624 179,318 283 --
Notes payable to affiliates..... -- -- 16,170 -- -- --
Other noncurrent liabilities.... -- -- 2,693 14,564 218 --
Shareholders' equity............ (286,564) (274,900) 316,278 126,926 169,297 --
Parent's investment............. -- -- -- -- -- 321
---------------
(1) After giving retroactive effect to the 3-for-2 stock split by way of stock
dividend paid in September 1999 and the 3-for-2 stock split by way of stock
dividend paid in February 2000. The weighted average number of common shares
prior to September 1998 are equivalent to Cellular Communications of Puerto
Rico, Inc.'s historical weighted average shares (since Cellular
Communications of Puerto Rico, Inc. stockholders received one share of
CoreComm Limited for each Cellular Communications of Puerto Rico, Inc.
shared owned).
We have never declared or paid any cash dividends.
(2) In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (referred to as SFAS) No. 142, "Goodwill and
Other Intangible Assets." 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. We adopted SFAS No. 142 on January 1, 2002.
The adoption of this new standard had no significant effect on our results
of operations, financial condition or cash flows, other than amortization of
goodwill ceased as of January 1, 2002.
Upon the adoption of SFAS No. 142, CoreComm Holdco performed an analysis of
its intangible assets acquired before July 1, 2001 to determine whether
they should be classified and accounted for
63
as part of or separate from goodwill. As a result of the analysis, CoreComm
Holdco determined that its identifiable intangible assets such as customer
lists and LMDS licenses do not meet the indefinite life criteria of SFAS
No. 142. Additionally, CoreComm Holdco determined that, with respect to
these assets, no changes in the remaining useful lives of these assets were
required.
CoreComm Holdco also performed an evaluation for impairment of its goodwill
as of January 1, 2002, and determined that no impairment charge was
required. Absent any new indicators of impairment, CoreComm Holdco's next
evaluation of impairment will be the annual test on October 1, 2002.
The following table shows our loss before extraordinary item and net loss
had SFAS No. 142 been in effect during the three years ended December 31,
2001. Additionally, the table presents the effect on our basic and diluted
loss per share before extraordinary item and basic and diluted net loss per
share.
THREE-MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
------------------- ---------------------------------
2002 2001 2001 2000 1999
------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Loss before extraordinary item -- as
reported..................................... $(7,152) $(249,646) $(659,088) $(313,811) $(103,524)
Goodwill amortization.......................... -- 31,369 96,973 39,354 6,844
Workforce amortization......................... -- 31 52 532 310
------- --------- --------- --------- ---------
Loss before extraordinary item -- as
adjusted..................................... $(7,152) $(218,246) $(562,063) $(273,925) $ (96,370)
======= ========= ========= ========= =========
Net loss -- as reported........................ $(7,152) $(249,661) $(619,590) $(313,811) $(103,524)
Goodwill amortization.......................... -- 31,369 96,973 39,354 6,844
Workforce amortization......................... -- 31 52 532 310
------- --------- --------- --------- ---------
Net loss -- as adjusted........................ $(7,152) $(218,261) $(522,565) $(273,925) $ (96,370)
======= ========= ========= ========= =========
Basic and diluted per share information:
Loss before extraordinary item -- as
reported..................................... $ (0.09) $ (3.58) $ (6.77) $ (6.73) $ (3.03)
Goodwill amortization.......................... -- 0.44 0.96 0.83 0.20
Workforce amortization......................... -- -- -- 0.01 0.01
------- --------- --------- --------- ---------
Loss before extraordinary item -- as
adjusted..................................... $ (0.09) $ (3.14) $ (5.81) $ (5.89) $ (2.82)
======= ========= ========= ========= =========
Net loss per share -- as reported.............. $ (0.09) $ (3.58) $ (6.38) $ (6.73) $ (3.03)
Goodwill amortization.......................... -- 0.44 0.96 0.83 0.20
Workforce amortization......................... -- -- -- 0.01 0.01
------- --------- --------- --------- ---------
Net loss per share -- as adjusted.............. $ (0.09) $ (3.14) $ (5.42) $ (5.89) $ (2.82)
======= ========= ========= ========= =========
64
INFORMATION ABOUT CORECOMM HOLDCO, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
Until December 2001, we were a direct, wholly-owned subsidiary of CoreComm
Limited. As a result of prior recapitalization transactions completed as part of
the Holdco recapitalization, CoreComm Limited currently owns only approximately
13% of our outstanding common stock. Prior to the completion of the first phase
of the Holdco recapitalization, CoreComm Limited operated the same businesses
that we currently operate.
From 1998 to 2000, we were in the process of building infrastructure to
support a national roll-out according to our original business plan. This
business plan required significant capital to fund capital expenditures,
operating expenses and debt service. As a result, we historically experienced
substantial operating and net losses. In early 2001, we still required
significant funds to complete our business plan as originally intended. However,
adverse changes in the capital markets, particularly in the telecommunications
sector, made it extremely difficult to raise new capital, and we could no longer
finance our original business plan. As a result, in 2001, we significantly
revised our business plan to focus on our most profitable businesses and
geographic areas, and reduce our operational costs and need for capital.
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
for the residential market, with a focus on using Internet interfaces, as well
as our call centers, to efficiently sell, install and service our customers.
We have implemented cost savings through a variety of means, including
facility consolidation, efficiency improvements, vendor negotiations, network
optimization, and headcount reduction. We have reduced network costs and capital
expenditures by converting many of our local access lines to more profitable
Unbundled Network Element - Platform pricing from Total Service Resale pricing,
which provides higher margins. In addition, we were able to reduce the number of
facilities established without substantially affecting our service area by
leasing enhanced extended local loops from the incumbent local exchange
carriers. We have also improved our operating efficiency through improved
pricing terms and the elimination of duplicative or unneeded network facilities.
These efficiencies are reflected in the decrease in our expenses of more
than $140 million on an annualized basis, as shown in the table below:
THREE MONTHS ENDED
(IN THOUSANDS)
------------------------
% REDUCTION MARCH 31, DECEMBER 31,
Q4'00-Q1'02 2002 2000
----------- --------- ------------
Operating Expenses................................. 26% $48,038 $ 65,002
Selling, General and Administrative................ 42% 22,313 38,414
Corporate Expenses................................. 55% 1,698 3,759
------- --------
Total............................................ 33% $72,049 $107,175
======= ========
While reducing expenses in all areas of our business, we implemented new
low cost revenue initiatives such as launching business communications service
to several markets in the Great Lakes region and residential service in the East
using existing facilities. As a result of these changes, we are now focused
primarily in the Mid-Atlantic and Mid-West regions of the U.S.
65
In addition, the recapitalization transactions which were completed in 2001
will reduce interest expense and preferred dividends from an aggregate annual
total of approximately $53.2 million to approximately $13.7 million, $10.5
million of which is in cash, based on interest rates as of April 13, 2002.
By the end of 2001, we had completed the implementation of our revised
business plan. Going forward, we will continue to monitor all areas of the
business for additional cost saving and revenue generating opportunities.
Although we continue to engage in efforts to increase our profitability, we
are also investigating other ways to generate cash for our business. In April
2001, as announced by CoreComm Limited, we began evaluating strategic
alternatives for our non-CLEC assets and businesses and have retained advisors
for the purpose of conducting this review.
THREE MONTHS ENDED MARCH 31, 2002 AND 2001
The increase in revenues to $74,311,000 from $72,811,000 is due primarily
to customer acquisition, increased pricing and carrier access billing.
Operating costs include direct cost of sales, network costs and salaries
and related expenses of network personnel. Operating costs decreased to
$48,038,000 from $63,520,000 due to a decrease in costs as a result of the
implementation of our revised business plan.
Selling, general and administrative expenses decreased to $22,313,000 from
$30,795,000 due to a decrease in costs as a result of the implementation of our
revised business plan.
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 $1,698,000 from $2,098,000 due to a decrease in costs as a result of the
implementation of our revised business plan.
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 January 1, 2001 to March 31, 2001, $3.2 million of the
deferred non-cash compensation was charged to expense. The remaining portion of
deferred non-cash compensation was charged to expense between April 1 and
December 31, 2001.
We incurred additional costs, which consist primarily of legal fees,
accounting fees and printing fees, in connection with our recapitalization of
$1,182,000 during the three months ended March 31, 2002.
Other charges of $119,000 for the three months ended March 31, 2001 are for
adjustments relating to our announcement in December 2000 of a reorganization of
certain of our operations. These charges include additional employee severance
and related costs of $351,000, offset by a reversal of the lease exit provision
of $232,000.
At March 31, 2001, we reduced the carrying amount of goodwill related to
certain acquisitions by $167,599,000. In connection with the reevaluation of our
business plan and the decision to sell non-CLEC assets and businesses, 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 was
eliminated before reducing the carrying amounts of the other assets. The
estimated fair value of these businesses was determined based on the information
provided by the investment bank retained for the purposes of conducting this
sale.
Depreciation expense decreased to $8,881,000 from $12,012,000 primarily as
a result of the reduction in the carrying value of our fixed assets as
determined by a fair value analysis performed in accordance with SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of."
Amortization expense decreased to $84,000 from $31,509,000 due to the
reduction in the carrying value of our intangible assets as determined by a fair
value analysis performed in accordance with
66
SFAS 121 as well as our adoption of SFAS 142, "Goodwill and Other Intangible
Assets" on January 1, 2002, which required us to cease amortizing goodwill.
Amortization expense on our goodwill and workforce during the three months ended
March 31, 2001 was $31,369,000 and $31,000, respectively. Our net loss and our
basic and diluted net loss per common share would have been $210,183,000 and
$7.36, respectively, had SFAS 142 been in effect for the first quarter of 2001.
Interest expense decreased to $3,903,000 from $4,141,000 due to the net
effect of a reduction in the effective interest rate on our senior secured
credit facility and an increase in the amortization of debt discount associated
with the senior secured credit facility. The effective interest rate on our
senior secured credit facility during the three months ended March 31, 2002 and
2001 was 6.86% and 9.11%, respectively.
YEARS ENDED DECEMBER 31, 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 prior to October 1, 2000.
The increase in revenues to $292,681,000 from $131,526,000 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 acquisition of assets from USN Communications, Inc. to
$21,340,000 from $28,174,000. USN Communications, Inc. was a CLEC that operated
on a resale basis. CLEC, which stands for competitive local exchange carrier, is
a term commonly used for telecommunications companies that entered into
competition to provide local exchange services with the incumbent local exchange
companies after passage of the Telecommunications Act of 1996. 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. 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 have substantially
reduced our resale business to focus on more profitable services.
Operating costs include direct cost of sales, network costs and salaries
and related expenses of network personnel. Operating costs increased to
$224,807,000 from $142,323,000 due to acquisitions in 2000, which amounted to
$111,878,000 of the increase. This increase is offset by a decrease in costs of
$29,394,000 in 2001 primarily as a result of the implementation of our modified
business plan as described above.
Selling, general and administrative expenses decreased to $96,854,000 from
$109,197,000 primarily as a result of the implementation of our modified
business plan as described above. These expenses decreased by $64,791,000 in
2001. This decrease was offset by the increase due to acquisitions in 2000,
which amounted to $52,448,000.
Corporate expenses include the costs of 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 $5,684,000 from $11,224,000 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 in 2000 at an exercise
price of $14.55 which was less than the fair value of CoreComm Limited's common
stock on the date of the grant. From April 2000 to December 31, 2001, the
deferred non-cash compensation was charged to expense, including $21.6 million
and $9.7 million in the years ended December 31, 2001 and 2000, respectively.
Also in 2000, non-cash compensation includes $4.7 million related to option
rescissions.
Other charges in 2001 include reorganization charges of $37,372,000 and an
adjustment to the reserve for notes receivable from former officers of Voyager
of $2,181,000. The reorganization charges 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 its business.
67
A total of $21,386,000 of these costs are for equipment and other assets that
will not require any future cash outlays. The employee severance and related
costs in 2001 were for approximately 630 employees to be terminated, none of
whom are still employed by us as of December 31, 2001. The major actions
involved in the 2001 reorganization included: (1) consolidation of functions
such as network operations, customer service and finance, (2) initiatives to
increase gross margins and (3) agreements 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 $2.7 million for prepayments in respect
of incumbent local exchange carrier facilities in abandoned markets.
Other charges in 2000 include a reserve of $8,700,000 for notes receivable
from former officers of Voyager, and reorganization charges of $4,006,000. The
employee severance and related costs in 2000 were for approximately 250
employees to be terminated, none of whom were still employed by us as of
December 31, 2000.
The following table summarizes the reorganization charges incurred and
utilized in 2000 and 2001. As indicated in the table, of the approximately $4
million of reorganization charges incurred in 2000, and approximately $38.7
million incurred in 2001, $31.4 million have been paid, reversed or otherwise
utilized, and $7.3 million remain as a balance as of December 31, 2001. Those
charges that remain as a balance represent charges that we and CoreComm Limited
have incurred on our statement of operations, but that have not yet been paid,
reversed or otherwise utilized:
EMPLOYEE
SEVERANCE LEASE FIXED 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................... 3,409 6,928 6,572 21,772 38,681
Adjustments.......................... (996) 73 -- (386) (1,309)
Utilized............................. (3,218) (4,416) (2,914) (21,386) (31,934)
------- ------- ------- -------- --------
Balance, December 31, 2001........... $ 509 $ 3,106 $ 3,658 $ -- $ 7,273
======= ======= ======= ======== ========
We performed a review of the recoverability of our goodwill and long-lived
assets, which indicated that the carrying value of certain assets would not be
recoverable. During 1999 and 2000, acquisitions were made against a background
of increasing consolidation and record valuations in the telecommunications
industry. Asset impairments in 2001 include a write-down of goodwill of
$186,160,000 and a write-down of fixed assets of $14,529,000 in the fourth
quarter of 2001 prior to the deconsolidation as a result of this evaluation. In
addition, 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 its business plan and the decision to sell its non-CLEC assets
and businesses, 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.
68
At December 31, 2000, we wrote-off the carrying amount of intangible assets
from certain business combinations, and reduced the carrying amount of its Local
Multipoint Distribution System, or LMDS licenses. Asset impairments in 2000
include goodwill of $6,690,000, workforce of $577,000 and customer lists of
$7,517,000. These assets were primarily related to the 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 the 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. Also at December 31, 2000, in connection
with the reevaluation of its business plan announced in April 2001, we reduced
the carrying amount of its 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.
Depreciation expense increased to $47,976,000 from $30,641,000 primarily as
a result of an increase in fixed assets due to acquisitions in 2000.
Amortization expense increased to $97,388,000 from $42,936,000 due to the
amortization of goodwill from the acquisitions in 2000.
Interest income and other, net, increased to $1,799,000 from $1,134,000
primarily due to interest income on our cash, cash equivalents and marketable
securities.
Interest expense increased to $25,647,000 from $5,929,000 primarily due to
increased borrowings to fund our acquisitions and operations.
The income tax provision of $94,000 in 2001 and $125,000 in 2000 are for
state and local income tax.
Extraordinary gains in 2001 of $39,498,000 relate to the completion of the
first phase of the Holdco recapitalization, as well as the successful settlement
of various equipment and working capital notes, capital leases and other
liabilities for less than the outstanding balance.
YEARS 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 Internet
service 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.
69
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 it
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, 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. 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 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 our announcements in March and
December 2000 of reorganizations of some 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 $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.
70
CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements and related financial information are
based on the application of generally accepted accounting principles, referred
to as GAAP. GAAP requires the use of estimates, assumptions, judgments and
subjective interpretations of accounting principles that have an impact on the
assets, liabilities, revenue and expense amounts reported, as well as
disclosures about contingencies, risk and financial condition. The following
critical accounting policies have the potential to have a more significant
impact on our financial statements, either because of the significance of the
financial statement item to which they relate, or because they require more
judgment and estimation due to the uncertainty involved in measuring, at a
specific point in time, transactions which are continuous in nature.
- We have provided estimated allowances for bad debts based on estimates of
collectability of our accounts receivable. These allowances were provided
based on both the age of outstanding receivable balances and specific
identification of customers. We identify customer payment histories and
determine if additional allowances are required. Since we have a limited
operating history such estimates are based on reviewing current customer
balances and economic conditions on a monthly basis. The estimated
allowance for doubtful accounts as of January 1, 2001 exceeded the actual
write-offs of customer balances for non-payment. In addition, we write
off customer balances generally upon bankruptcy or other events where
customers receipts are unlikely. We require security deposits in the
normal course of business if customers do not meet our criteria
established for offering credit. If the financial condition of our
customers were to deteriorate resulting in an impairment in their ability
to make payments, additions to the allowance may be required.
ADDITIONS TO ADDITIONS TO
ALLOWANCE ALLOWANCE ALLOWANCE ALLOWANCE ALLOWANCE AS
FOR BAD DEBT BASED ON UNCOLLECTIBLE FROM FOR BAD A PERCENTAGE
AT BEGINNING COLLECTIBILITY ACCOUNTS BUSINESS DEBT AT END OF ACCOUNTS
DESCRIPTION OF PERIOD ESTIMATES WRITTEN-OFF COMBINATIONS OF PERIOD RECEIVABLE
----------- ------------ -------------- ------------- ------------ ----------- ------------
Three months ended
March 31, 2002..... $ 9,759,000 $2,192,000 $(3,563,000) $ -- $8,388,000 20%
Year ended December
31, 2001........... 11,034,000 7,143,000 (8,418,000) -- 9,759,000 23%
Year ended December
31, 2000........... 3,949,000 7,130,000 (9,269,000) 9,224,000 11,034,000 24%
Year ended December
31, 1999........... 742,000 3,241,000 (24,688,000) 24,654,000 3,949,000 34%
AVERAGE
ALLOWANCE AS
A PERCENTAGE
OF ANNUAL
DESCRIPTION REVENUE
----------- ------------
Three months ended
March 31, 2002..... 2.8%(a)
Year ended December
31, 2001........... 3.6%
Year ended December
31, 2000........... 5.7%
Year ended December
31, 1999........... 4.1%
(a) Our revenue for the three months ended March 31, 2002 was annualized
to calculate the percentage.
- Our determination of the treatment of contingent liabilities in the
financial statements is based on a view of the expected outcome of the
applicable contingency. Legal counsel is consulted on matters related to
litigation. Experts both within and outside the company are consulted
with respect to other matters that arise in the ordinary course of
business. Examples of matters that are based on assumptions, judgments
and estimates are the amount to be paid to terminate some agreements
included in reorganization costs, the amounts to be paid to settle some
toll and interconnection liabilities, the amount to be paid as a result
of some sales and use tax audits and potential liabilities arising from
other sales tax matters. A liability is accrued if the likelihood of an
adverse outcome is probable of occurrence and the amount is estimable. At
March 31, 2002, the aggregate amount of our pending contingent
liabilities was approximately $125 million. See the section of this
prospectus "-- Legal Proceedings."
- We review long-lived assets and goodwill for impairment as described in
the Notes to Consolidated Financial Statements. In analyzing potential
impairments, projections of future cash flows from the asset are used.
The projections are based on assumptions, judgments and estimates of
growth rates for the related business, anticipated future economic,
regulatory and political conditions, the assignment of discount rates
relative to risk and estimates of terminal values. Changes to these
71
variables in the future may necessitate impairment charges to reduce the
carrying value to fair value.
- Fixed assets and intangible assets are assigned useful lives which
impacts the annual depreciation and amortization expense. The assignment
of useful lives involves significant judgments and the use of estimates.
Changes in technology or changes in intended use of these assets may
cause the estimated useful life to change.
- In 2001, reorganization charges were recorded as a result of additional
actions to reorganize, re-size and reduce operating costs and create
greater efficiency in various areas. These charges, for both severance
and exit costs, required the use of estimates. Actual results could
differ from those estimated for reorganization.
OTHER RESULTS OF OPERATIONS MATTERS
In August 2001, the Financial Accounting Standards Board, referred to as
FASB, issued Statement of Financial Accounting Standards, referred to as SFAS,
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets,"
effective for CoreComm Limited 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
adoption of this new standard had no significant effect on our results of
operations, financial condition or cash flows.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," effective for CoreComm Limited 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." We adopted SFAS No. 142 on January
1, 2002. The adoption of this new standard had no significant effect on our
results of operations, financial condition or cash flows.
LIQUIDITY AND CAPITAL RESOURCES
We anticipate that we will have sufficient cash and cash equivalents on
hand to fund our operations, capital expenditures and debt service in 2002. By
the end of 2002, we anticipate that we will be generating enough cash from our
operations, which is net of cash interest expense, to fund our anticipated
capital expenditures. However, we anticipate that we and our subsidiaries will
not generate sufficient cash from operations to repay at maturity the entire
principal amount of our outstanding indebtedness. We intend to repay these
amounts through refinancings of this debt, or through other sources of
financing. However, our ability to raise additional capital in the future will
be dependent on a number of factors, such as our results of operations, the
amount of our indebtedness, and also 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.
72
As of March 31, 2002, we had debt, which consists of a $156.1 million
senior secured credit facility, approximately $16.6 million in principal amount
of 10.75% Unsecured Convertible PIK Notes due 2011, and approximately $9.7
million of capital leases. Debt service on the senior secured credit facility
includes approximately $10.5 million in interest expense in each of 2002 and
2003 and $10.2 million in 2004, on an annualized basis, based on the interest
rates as of April 13, 2002, as well as quarterly amortization and principal
reductions which total $0 in 2002, $1,950,000 in 2003, and $9,750,000 in 2004.
We have made interest payments of approximately $2.7 million for our senior
secured credit facility during the three months ended March 31, 2002. The 10.75%
Unsecured Convertible PIK Notes due 2011 have no cash interest payments, and are
not due until 2011. Our capital leases have $9.4 million due during the
remainder of 2002, and $0.3 million due for the remainder of their terms.
However, approximately $8.3 million of these capital leases are obligations of
our subsidiary, MegsINet, Inc. and are not obligations of CoreComm Holdco.
MegsINet, Inc. is currently in settlement discussions with the holders of these
leases. In addition, at March 31, 2002, our current liabilities exceed our
current assets by approximately $88 million.
We still have significant expected capital expenditures even after the
implementation of our modified business plan. Under our revised business plan,
capital expenditures have been significantly reduced from prior levels. Total
actual capital expenditures for the three months ended March 31, 2002, described
as cash used to purchase of fixed assets in our cash flow statement, were
approximately $2.4 million. According to our current plans, capital expenditures
are expected to be approximately $7.4 million for the remainder of 2002 and $9.5
million and $14.2 million in 2003 and 2004, respectively. These future capital
expenditures will depend on a number of factors relating to our business, in
particular the growth level, geographic location and services provided to new
customers added during these years. Capital expenditures in future years will
also depend on the availability of capital and the amount of cash, if any,
generated by operations, which may impact our capital decisions relating to
initiatives such as, for example, network expansion and the implementation of
upgrades to our information services platforms.
In the first quarter of 2002, net cash provided by operations was
approximately $4.5 million. Continued execution of our business plan, including
revenue growth in more profitable areas and continued expense reduction, are
expected to continue to improve our financial results. 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.
In addition, 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. However, the limited permitted circumstances of
distributions from our subsidiaries may be sufficient for our operations,
because nearly all of the uses of funds described above are cash requirements of
our subsidiaries.
Depending upon the success of the execution of our business plan,
additional capital raising may not be necessary in the foreseeable future.
However, we cannot assure you that:
(a) we will be able to refinance our indebtedness as it comes due;
(b) actual costs will not exceed the amounts estimated in our business
plan or that additional funding will not be required;
(c) we and our subsidiaries will be able to generate sufficient cash
from operations to meet capital requirements, debt service and other
obligations when required;
(d) we will be able to access this cash flow;
(e) 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
(f) we will not be adversely affected by interest rate fluctuations.
73
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: (1) refinancing all or a portion of this
indebtedness, (2) seeking modifications to the terms of this 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. We are currently in compliance with all required ratios and
covenants contained in agreements governing our outstanding indebtedness.
The following table shows our aggregate cash interest expense and principal
payments on our existing long term debt, anticipated estimated capital
expenditures, payments on capital leases and other debt, as well as the sources
of funds that we expect to use to meet these cash requirements through 2004.
NINE MONTHS
ENDED
DECEMBER 31,
2002 2003 2004 SOURCE OF FUNDS
------------ ------ ------ ---------------
(IN MILLIONS)
Cash Interest Expense on
existing Long-term debt(1)... $7.8 $10.5 $10.2 Cash and cash equivalents on
hand and cash from operations
Estimated Capital
Expenditures(2).............. 7.4 9.5 14.2 Cash and cash equivalents on
hand and cash from operations
Principal Payments on existing
Long-term debt(3)............ -- 1.95 9.75 For 2002 and 2003, Cash and
cash equivalents on hand and
cash from operations;
For 2004, cash and cash
equivalents on hand, cash from
operations, and, if required,
refinancing sources or other
sources of financing(4).
Payments on Capital Leases..... 9.4 0.3 -- Approximately $8.3 million of
these capital leases are
obligations of our subsidiary,
MegsINet, Inc. and are not
obligations of CoreComm Holdco.
MegsINet, Inc. is currently in
settlement discussions with the
holders of these leases(5);
For the remaining amounts, cash
and cash equivalents on hand
and cash from operations
--------- ------ ------
$24.6 $22.25 $34.15
========= ====== ======
---------------
(1) The only long term debt of ours that requires cash interest expense is our
$156.1 million senior secured credit facility. The amounts in the table are
based on our current interest rate of 6.75%, which is in effect through
October 12, 2002, and assume principal reductions as required in the
facility.
(2) Future capital expenditures will depend on a number of factors relating to
our business, in particular the growth level, geographic location and
services provided to new customers added during these years.
(3) Principal payments indicated are amortization and principal reductions under
our senior secured credit facility.
(4) Refinancing sources may include, for example, a new bank facility used to
repay these amounts; other sources of financing may include capital raised
through new debt or equity financing or asset sales. There can be no
assurance that we will be able to refinance our indebtedness or raise the
required funds.
74
(5) Approximately $8 million of the capital lease and other debt obligations of
MegsINet, Inc. are the subject of current litigation, as described in the
section of this prospectus entitled "-- Our Business -- Legal Proceedings."
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 our plans, intentions and
expectations will be achieved in a timely manner if at all.
Our outstanding indebtedness is described in further detail in the
subsequent paragraphs.
In April 2001, CoreComm Limited 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. Total annual principal
payments are as follows: $1,950,000 (2003); $9,750,000 (2004); $25,350,000
(2005); $50,700,000 (2006); $39,000,000 (2007) and $29,350,000 (2008). In the
event that any of the remaining approximately $4.75 million in principal amount
of public notes not owned by us 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. Beginning October 12, 2001 and ending April 12, 2002, the interest rate
was 6.86%. Beginning April 13, 2002 and ending October 12, 2002, the interest
rate is 6.75%. 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 and CoreComm Limited issued, as joint and several
obligors, to NTL Incorporated a convertible note in the aggregate principal
amount of $15 million. This note will mature in April 2011. Interest on the note
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. Additional unsecured convertible PIK
notes, dated October 15, 2001, and April 15, 2002 were issued in the principal
amount of approximately $0.8 million, and approximately $0.9 million,
respectively, as interest payments. The additional notes issued for interest
will have an initial conversion price equal to the greater of $1.00 and 120% of
the weighted average closing price of CoreComm Limited common stock for a
specified period. The April 2001 note and the October 2001 note are each
convertible into CoreComm Limited common stock prior to maturity at a conversion
price of $1.00 per share, subject to adjustment. However, NTL, which is the
holder of these notes, entered into letter agreements with us and with CoreComm
Limited relating to the conversion feature of these notes following the
acceptance of shares under the exchange offer for CoreComm Limited common stock.
Through those letter agreements, consistent with the original terms of the
notes, we and CoreComm Limited have agreed to exercise our right under these
notes so that, following our accepting shares of CoreComm Limited common stock
in the exchange offers, the convertibility feature of these notes will be
altered so that rather than the notes being convertible into shares of CoreComm
Limited common stock, they will become convertible into shares of our common
stock. At that time, the conversion prices of these notes will be equitably
adjusted by applying the exchange ratio in the exchange offer for CoreComm
Limited common stock, which results in a new conversion price of $38.90 per
share of our common stock for each of these notes. NTL has agreed not to
exercise its rights to convert any of these notes into CoreComm Limited common
stock until August 5, 2002, unless that right has previously ceased as described
above. In the event that we do not accept shares of CoreComm Limited common
stock in the exchange offers, the conversion feature of these notes would remain
into CoreComm Limited common stock. These notes are redeemable, in whole or in
part, at our
75
option, at any time 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 October 1999, CoreComm Limited issued $175 million principal amount of
public notes, 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 public notes were exchanged for 1,456,806 common shares of our common stock
and the payment of the October 2001 interest payment of approximately $4.8
million. The exchange offer for the public notes is our attempt to exchange the
remaining $4.75 million principal amount of the public notes not owned by us for
an aggregate amount of approximately 43,248 shares of our common stock and
$142,500 in cash.
HOLDCO RECAPITALIZATION
In 2001, CoreComm Limited entered into agreements with holders of its
public notes whereby the holders agreed, to exchange their notes as part of the
Holdco recapitalization. The exchange for $160 million principal amount of
public notes was completed in December 2001, including the payment of the
approximately $4.8 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 under 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,
(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,
with respect to the initial liquidation preference of $301 million.
In December 2001, in connection with the Holdco recapitalization, we and
CoreComm Limited were granted an exception by Nasdaq, absent which we and
CoreComm Limited would have had to obtain stockholder approval prior to the
completion of the Holdco recapitalization. Accordingly, following the
consummation of the merger, we anticipate, based on conversations with Nasdaq,
that we 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 listed on
the Nasdaq National Market would have an adverse effect 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.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
On January 22, 2002, the Securities and Exchange Commission issued FR-61,
Commission Statement about Management's Discussion and Analysis of Financial
Condition and Results of Operations. The release sets forth views of the
Securities and Exchange Commission regarding disclosure that should be
considered by registrants. Our contractual obligations and commercial
commitments are summarized below, and are fully disclosed in the Notes to
Consolidated Financial Statements.
76
The following table includes aggregate information about our contractual
obligations as of March 31, 2002 and the periods in which payments are due:
PAYMENTS DUE BY PERIOD
----------------------------------------------------
CONTRACTUAL LESS THAN 1 1-3 4-5 AFTER 5
OBLIGATIONS TOTAL YEAR YEARS YEARS YEARS
----------- -------- ----------- ------- ------- -------
(IN THOUSANDS)
Long-Term Debt(1).......................... $172,699 $ -- $15,600 $81,900 $75,199
Capital Lease Obligations.................. 9,670 9,426 244 -- --
Operating Leases........................... 29,490 7,477 10,684 6,738 4,591
Unconditional Purchase Obligations......... none -- -- -- --
Other Long-Term Obligations................ none -- -- -- --
-------- ------- ------- ------- -------
Total Contractual Cash Obligations......... $211,859 $16,903 $26,528 $88,638 $79,790
======== ======= ======= ======= =======
---------------
(1) Long-term debt includes the senior secured credit facility of $156,100,000
and the 10.75% Unsecured Convertible PIK Notes due April 2011 of $16,599,000
including accrued PIK interest.
The following table includes aggregate information about our commercial
commitments as of March 31, 2002 and the periods in which payments are due.
Commercial commitments are items that we could be obligated to pay in the
future. They are not required to be included in the consolidated balance sheet.
AMOUNT OF COMMITMENT
EXPIRATION PER PERIOD
----------------------------------------------------------
OTHER COMMERCIAL TOTAL AMOUNTS LESS THAN 1 1 - 3 4 - 5 OVER 5
COMMITMENTS COMMITTED YEAR YEARS YEARS YEARS
---------------- ------------- ----------- -------- -------- ------
(IN THOUSANDS)
Guarantees..................................... none $ -- -- -- --
Lines of Credit................................ none -- -- -- --
Standby Letters of Credit...................... none -- -- -- --
Standby Repurchase Obligations................. none -- -- -- --
Other Commercial Commitments................... $5,700 $5,700 -- -- --
------ ------ ---- ---- ----
Total Commercial Commitments................... $5,700 $5,700 -- -- --
====== ====== ==== ==== ====
CONSOLIDATED STATEMENT OF CASH FLOWS
For the three months ended March 31, 2002, cash provided by operating
activities was $4,544,000 in comparison to cash used in operating activities of
$18,555,000 for the three months ended March 31, 2001. The change in cash flow
is primarily due to the implementation of our revised business plan.
For the three months ended March 31, 2002, cash used to purchase fixed
assets increased to $2,405,000 from $530,000 in the three months ended March 31,
2001, which reflects increased purchases of operating equipment to improve and
expand our network.
Proceeds from borrowings, net of financing costs, of $9,736,000 was from
the borrowings under the senior secured credit facility in January 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
77
do we hold securities for trading or speculative purposes. Under our current
policies, we do not use interest rate derivative instruments to manage our
exposure to interest rate changes.
The fair-market value of long-term fixed interest rate debt is subject to
interest rate risk. Generally the fair market value of fixed interest rate debt
will increase as interest rates fall and decrease as interest rates rise. The
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.
78
INTEREST RATE SENSITIVITY
AS OF MARCH 31, 2002
PRINCIPAL AMOUNT BY EXPECTED MATURITY
AVERAGE INTEREST RATE
APRIL 1,
2002 TO
DECEMBER 31, FOR THE YEARS ENDING DECEMBER 31,
------------ --------------------------------------------- FAIR VALUE
2002 2003 2004 2005 2006 THEREAFTER TOTAL 3/31/02
------------ --------- --------- --------- --------- ---------- -------- ----------
(IN THOUSANDS)
Long-term debt,
including current
portion:
Fixed rate............. $ -- $-- $-- $-- $-- $16,599 $ 16,599 $ 16,599
Average interest
rate................. 10.75%
Variable rate.......... $ -- $1,950 $9,750 $25,350 $50,700 $68,350 $156,100 $156,100
Average interest
rate................. Libor + Libor + Libor + Libor + Libor +
4.5% or 4.5% or 4.5% or 4.5% or 4.5% or
base rate base rate base rate base rate base rate
+ 3.5% + 3.5% + 3.5% + 3.5% + 3.5%
79
CAPITALIZATION
The following table shows our cash and cash equivalents and capitalization
as of March 31, 2002 as adjusted to give effect to the second phase of the
Holdco recapitalization, which includes the exchange offers. 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. 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 of
CoreComm Holdco, Inc." and "-- Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
AS OF MARCH 31, 2002
-------------------------
ACTUAL AS ADJUSTED
----------- -----------
(IN THOUSANDS)
Cash and cash equivalents................................... $ 26,841 $ 23,798
=========== ===========
Current portion of long-term debt........................... $ 9,426 $ 9,426
=========== ===========
Long-term debt:
Capital lease obligations................................. $ 244 $ 244
Senior secured credit facility, less unamortized discount
of $11,352,000......................................... 144,748 144,748
10.75% unsecured convertible PIK notes due 2011, less
unamortized discount of $358,000....................... 16,241 16,241
----------- -----------
Total long-term debt................................... 161,233 161,233
Stockholders' deficiency:
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; 30,000,000 issued(1)................ 300 300
Additional paid-in capital................................ 1,022,634 1,022,634
(Deficit)................................................. (1,023,805) (1,027,320)
----------- -----------
(871) (4,386)
Treasury stock, none (actual) and 294,000 (as adjusted)
shares................................................ -- (288)
----------- -----------
Total stockholders' (deficiency).................. (871) (4,674)
----------- -----------
Total capitalization.............................. $ 160,362 $ 156,559
=========== ===========
---------------
(1) Excludes shares issuable upon the possible future conversion of the 10.75%
Unsecured Convertible PIK Notes or upon exercise of stock options and
warrants.
- The 10.75% Unsecured Convertible PIK Notes due 2011 are convertible
into CoreComm Limited common stock prior to maturity at a conversion
price of $1.00 per share subject to adjustment. However, we, the
holder of this note and CoreComm Limited have entered into letter
agreements relating to the conversion feature of these notes and of
the additional notes issued under these notes, following the
acceptance of shares under the exchange offer for CoreComm Limited
common stock. Through those letter agreements, consistent with the
original terms of the notes, we and CoreComm Limited have agreed to
exercise our right under the notes so that, following our accepting
shares of CoreComm Limited common stock in the exchange offers, the
convertibility feature of these notes will be altered so that rather
than the notes being convertible into shares of CoreComm Limited
common stock, they will become convertible into shares of our common
stock. At that time, the conversion prices of these notes will be
equitably adjusted by applying the exchange ratio in the exchange
offer for CoreComm Limited common stock, which results in a new
conversion price of $38.90 per share of our common stock. The holder
has agreed not to exercise its rights to convert any of
80
these notes into CoreComm Limited common stock until August 5, 2002,
unless that right has previously ceased as described above. In the
event that we do not accept shares of CoreComm Limited common stock in
the exchange offers, the conversion feature of these notes would
remain into CoreComm Limited common stock. These notes are redeemable,
in whole or in part, at our option, at any time 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.
- CoreComm Limited's warrants to purchase shares of CoreComm Limited
common stock will be exercisable for shares of our common stock,
subject to any exchange ratio in the exchange offer for CoreComm
Limited common stock, upon the consummation of the merger.
- As of March 31, 2002, 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. As is permitted under CoreComm
Limited's option plans, on or around April 11, 2002 CoreComm Limited
sent notices to the holders of its options stating CoreComm Limited's
intention to consummate the merger and informing these holders that
they have to exercise their options prior to the date when the merger
is consummated at which time their options will terminate. Between now
and the time of the merger, if holders of CoreComm Limited options
exercise their options, they would, at the time of the 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.
- In December 2001, we adopted a new stock option plan for our
employees. A total of 8.7 million shares of common stock were reserved
for issuance under the plan, which represents 22.5% of the total fully
diluted shares of our common stock. In January 2002, our board of
directors approved a grant of options to purchase an aggregate of
approximately 7.74 million shares of our 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 $1.00 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.
81
OUR BUSINESS
We are an integrated communications provider that offers local exchange
carrier and interexchange carrier 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 purchase
of local exchange carrier services that connect to homes and businesses,
combined with the leasing of a national and international 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, as well as other local exchange carriers.
In 2001, CoreComm Limited streamlined its strategy and operations 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. The second is bundled local telephony and
Internet products for the residential market, with a focus on using
Internet-centric interfaces, as well as our call centers, to efficiently sell,
install and service our customers. Our strategy is to attractively bundle
telephony and data services in our target markets in order to compete with the
incumbent local exchange carrier and gain market share.
As of March 31, 2002, we had approximately 277,000 local telephone access
lines in service. The following table details our customer base:
AS OF MARCH 31, 2002
--------------------
Residential Local Access Lines.............................. 56,500
Business Local Access Lines................................. 220,800
Toll-related Access Line Equivalents........................ 497,800
Internet Subscribers........................................ 307,200
Other Data Customers(1)..................................... 24,400
---------------
(1) Other data customers included Point-to-Point data, Frame Relay, Web
Development, Web Hosting, E-Commerce, Co-location and other related
customers.
For the three months ended March 31, 2002, our revenues were attributable
to the following service categories:
3 MONTHS ENDED
MARCH 31, 2002
--------------
Local Exchange Services..................................... 35%
Toll-related Telephony Services............................. 24%
Internet, Data and Web-related Services..................... 32%
Other Revenue............................................... 9%
---
Total............................................. 100%
We have engaged in significant efforts to increase the profitability of our
services. We have capitalized on opportunities such as converting customers from
Total Service Resale, where we resell service as purchased from the incumbent
local exchange carrier, to the more profitable Unbundled Network
Element -- Platform or UNE-P and Enhanced Extended Loops or EEL in order to
reduce our existing network costs and capital expenditures and to enhance our
gross margins. Under UNE-P, we lease all of the Unbundled Network Elements
needed to provide service to a customer from an incumbent local
82
exchange carrier so that we do not need to use any of our own facilities to
provide the service. With UNE-P, we pay the total cost to lease each network
element, which generally provides us a greater gross margin than total service
resale. By using Enhanced Extended Loops we are able to lease a combination of
local network elements and facilities from the incumbent local exchange carrier
to extend the reach of our regional networks to service customers that are
outside of service areas of our network. This allows us to put more traffic on
our regional networks without needing to build additional infrastructure.
Over the past year, many 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 connect telephony
customers onto our owned and leased networks where we have facilities in place,
while also taking advantage of UNE-P and EEL 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 exchange carrier and
interexchange carrier 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.
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 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 internal network
connectivity, dedicated point-to-point circuits, frame relay to the
Internet, and specialized connections 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, toll-free service and
calling card telephone service. We currently provide intrastate and
interstate long distance services nationwide and international long
distance 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 private line and frame relay
services.
83
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 many aspects of
establishing and maintaining an interactive global presence in Web
services. The various segments of Web services we offer include website
design, development and 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 consumer premise
equipment configuration, local area network switching, electronic commerce,
cabling and virtual local area network design and set-up.
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 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
training and career development program, and our shared vision and incentive
structure to reward individual and team performance objectives. Each sale begins
with a consultation that investigates the needs of the customer. The sales
consultant then designs a tailored, integrated and cost-effective platform that
addresses the specific customer's communications needs. 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 approximately 80% 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 area in the Midwest and Mid-Atlantic regions of the
United States. Customers who purchase multiple services are billed for their
services with one consolidated bill. Customers can also choose to access their
billing information and pay their bills online, or they may select 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 convenient and simple ways that are attractive to the customer and
distinctive in the marketplace. In general, we currently offer the following
voice, data and Internet services to residential customers in our markets:
- 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 -- local, long-distance, international
calls, 800/888/877 toll free services, calling cards and other related
services.
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We typically offer a package of our most popular services and then create
ways for customers to purchase other services easily and conveniently. In our
current residential offering, which may change over time, we offer a package of
local and long distance phone service and Internet access, which is called the
CoreComm Unlimited Premium service. Although the details of the offerings vary
somewhat by region, the package typically includes:
-- Local dial tone;
-- Local calls;
-- Call waiting;
-- Caller-ID with name;
-- Personal 800 number;
-- Premium Internet service;
-- 56K unlimited Internet access;
-- 3 e-mail addresses;
-- 10 megabytes of personal web space;
-- Long distance service; and
-- Bundled minutes of long distance.
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
by the customer. The pricing for CoreComm Unlimited Premium varies by region,
but in all areas the price compares favorably to prices offered by the incumbent
telephone company and other providers of these 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 service
area 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 bundled local and
toll-related telephony and Internet products to our Internet-only customers.
While residential customers can purchase our services by calling our
toll-free number, 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 at a low transaction cost for us.
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 points of presence in
Michigan, Wisconsin, Ohio, Illinois, Indiana, Minnesota, Pennsylvania, New York
and California.
In April 2001, CoreComm Limited announced that it is evaluating strategic
alternatives for its non-CLEC assets and businesses and has retained advisors
for the purpose of conducting this review.
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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. A majority of our
residential subscribers pay their monthly fee automatically by a pre-authorized
monthly charge to their credit card. Our Internet access options include:
Dial-up Access. Our residential access services are designed to
provide subscribers with reliable Internet access through standard dial-up
modems.
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, LLC, we offer high-speed Internet access in some locations
through the use of modems integrated with local cable television networks
and provide 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 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. Our 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 provide 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.
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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 provide our customers a secure, managed network over the public
Internet. This service is targeted towards organizations that desire a
secure wide-area network between locations without building dedicated
network infrastructure between these locations.
Long Distance and other Telecommunications. We currently resell long
distance telecommunications services as well as a toll-free service,
calling cards and prepaid cards to our 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.
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 Internet 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 software configured
to facilitate installation and connection to our service.
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.
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 leasing of a 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. A
Class 5 switch connects local calls to the public switched telephone network.
These switches are connected via leased local transport to the incumbent local
exchange carrier. We minimize the number of co-locations we establish with
incumbent local exchange carriers by utilizing Enhanced Extended Loops that
allow us to virtually extend our local networks to service customers well
outside of our network area. We also utilize Unbundled Network Element-Platform
and Total Service Resale to service our customers. We also operate five Class 4
switches that are responsible for connecting toll-related calls.
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Internet Network Infrastructure. We designed and built our Internet
network to specifically service Internet traffic. Our network is comprised
primarily of 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 protocols to quickly and dependably deliver
customer traffic. We have two Internet network operating centers to oversee
traffic flows and general network operations, which ensures a secure and
reliable network. Our 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. Our network has been
reconfigured to include redundant data circuits, which will generally be able to
automatically re-route customer traffic in the event of a failure, and our
network topology offers high levels of performance and security.
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. Through various relationships with competitive local exchange
carriers, we have been able to reduce our 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. We currently have 4 network operations centers
localized to manage network traffic. These network operations centers are
located in Philadelphia, PA, Cleveland, OH, East Lansing, MI and New Berlin, WI.
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. We have relationships at multiple points with several
different organizations, including Verio, Inc., NAP.net and MCI and Savvis, thus
building network redundancy that allows for better connectivity for our
customers.
We are continuously attempting to improve our network infrastructure and
connectivity costs.
ELECTRONIC BONDING AND INFORMATION SYSTEMS
We are currently bonded electronically with Ameritech and Verizon. Bonding
is an electronic interface that establishes an electronic link between our
operating support systems and those of Ameritech and Verizon. Electronic bonding
enables us to more timely and accurately service customers. Bonding also allows
real-time access to customer information while facilitating order entry and
confirmation.
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 establishing
service to customers by manual keying or fax. Our systems also allow 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, finding and reserving telephone
numbers, verifying customer addresses, validating due dates, searching the
incumbent local exchange carrier's switches for feature availability, and yellow
page listings.
Our recent and ongoing enhancements to our information systems include the
following:
- Improving the performance and scalability of our rating and billing
engines.
- Enhancing our provisioning systems for the Ameritech region to support
Ameritech's five state region. Our service order management system has
been enhanced to allow for validation in real time of the feature
availability, the electronic generation of service order data, and
automated switch activation software, all within a single system.
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- Automating the migration processes to move customers from resold networks
to our networks and from Total Service Resale to Unbundled Network
Element -- Platform.
- Purchasing a platform for our call centers which has introduced
skills-based routing of inbound calls with an automated attendant
allowing 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.
- Integrating 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 installation, 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 is
the incumbent local exchange carriers. We also face competition or prospective
competition from other competitive local exchange carriers. For example, the
following companies have begun to offer local telecommunications services in
major U.S. markets: 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:
-- wireless telephone system operators;
-- large customers who build private networks;
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-- 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;
-- regional Bell operating companies, such as Verizon and Ameritech, and
local telephone companies;
-- cable operators, including Comcast and Time Warner Cable;
-- nonprofit or educational Internet service providers;
-- online cable services, such as 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
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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.
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 March 31, 2002, we had an aggregate of approximately 1,335 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, technical equipment space
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:
- CoreComm Newco, Inc., an indirect, wholly-owned subsidiary of CoreComm
Holdco, is currently in litigation with Ameritech Ohio, a supplier from
whom it purchases telecommunications products and services, over the
adequacy of Ameritech's performance under a 1998 contract between
CoreComm Newco and Ameritech, and related issues. This litigation began
in June 2001 when Ameritech threatened to stop processing new orders
following CoreComm Limited's exercise of its right under the contract to
withhold payments for Ameritech's performance failures. In response to
this threat, CoreComm Limited sought and received an order from an
official of the Public Utilities Commission of Ohio 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 CoreComm Limited of approximately $8,600,000 allegedly owed under
the contract. On August 8, 2001,
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Ameritech filed a second claim against CoreComm Limited in Ohio state court,
seeking an additional approximately $4,300,000 in allegedly improperly withheld
amounts. On August 28, 2001, CoreComm Limited exercised its 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, CoreComm Newco filed its 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. In lieu of filing an answer
to CoreComm Newco's counterclaims, Ameritech filed a series of motions on
March 25, 2002, asking the Court to dismiss several of CoreComm Newco's
counterclaims. On April 17, 2002, CoreComm Newco filed its opposition in
Ameritech's motions for dismissal and these items are now pending before
the court for disposition.
We believe that CoreComm Newco has 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. For example, the
figure specified in Ameritech's complaint does not account for (a) more
than $5.2 million in refunds that Ameritech contends it has already
credited to CoreComm Newco's accounts since the filing its complaint, and
(b) payments that were made by CoreComm Newco in the ordinary course after
the time of Ameritech's submission. However, we cannot be certain how or
when the matter will be resolved. We also believe that, to the extent
Ameritech prevails with respect to any of its claims, Ameritech's award
may be offset in whole or in part by amounts that CoreComm Newco is
seeking to obtain from Ameritech under its counterclaims. However, it is
impossible at this time to predict the outcome of the litigation.
- On December 3, 2001, General Electric Capital Corp. filed a lawsuit in
the Circuit Court of Cook County, Illinois against CoreComm Limited and
MegsINet, Inc., an indirect subsidiary of CoreComm Holdco, seeking
approximately $8 million in allegedly past due amounts and return of
equipment 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. On February 19, 2002, the
defendants filed a motion to dismiss several of GECC's claims. In
response, GECC withdrew its original complaint and on May 1, 2002 filed
an amended complaint naming CoreComm Holdco as an additional defendant.
On June 5, 2002, defendants filed a motion to dismiss and/or stay
plaintiff's complaint. Concurrently, on April 12, 2002, GECC filed a
second complaint in the Circuit Court of Cook County, Illinois against
MegsINet, CoreComm Limited and CoreComm Holdco seeking a court order
allowing it to take repossession of its alleged equipment. After a
hearing on the matter following the submission of defendants' opposition,
GECC withdrew its complaint and filed a new action on May 3, 2002, in an
effort to supply the court with additional information regarding its
alleged rights to the equipment. Defendants' response to the May 3
complaint was filed on May 29, 2002 asking the court to dismiss
plaintiff's complaint. Defendants intend to defend themselves vigorously
against both complaints and to pursue all available claims and defenses.
However, it is impossible at this time to predict the outcome of the
foregoing litigation.
- 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, primarily in
respect of alleged early termination liabilities, under a services
agreement and a co-location agreement with MegsINet. The defendants have
denied KMC's claims and have asserted that the contracts at issue were
signed without proper authorization, that KMC failed to perform under the
alleged contracts, and that the termination penalties are not
enforceable. The
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defendants have served discovery and intend to defend themselves in coordination
with one of their insurance carriers. On March 27, 2002, some of the defendants
initiated litigation against several former principals of MegsINet seeking
indemnification and contribution against KMC's claims.
- On March 1, 2002, Easton Telecom Services, LLC, initiated litigation in
the Northern District of Ohio against CoreComm Internet Group, Inc.
asserting that Easton Telecom Services, LLC is the assignee of 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, primarily in respect of early
termination penalties, for telecommunications services purportedly
provided under alleged contracts between Easton Telecom Services, Inc.
and MegsINet, Inc. Subsequently, on April 18, 2002, Easton Telecom
Services, LLC filed an amended complaint in the above-referenced matter
naming Voyager Information Networks, Inc. as an additional defendant and
increasing the amount in dispute to approximately $5.1 million. On May 7,
2002, defendants filed their answer denying Easton LLC's allegations and
asserting multiple defenses, including defenses challenging the validity
of the alleged contracts and plaintiff's claims as to alleged damages.
Defendants intend to defend themselves vigorously and pursue all
available claims and defenses. However, it is impossible at this time to
predict the outcome of this litigation.
- We have received correspondence from various operating subsidiaries of
Verizon Communications, Inc. claiming that Verizon is owed a total of
approximately $11 million for services allegedly provided in Delaware,
Maryland, Virginia, 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 July
22, 2002. We are currently reviewing Verizon's claims against our own
billing records, including records reflecting unresolved disputed
charges. We intend to pursue all remedies available to us and defend
ourself vigorously against these allegations. However, we cannot
presently predict how the matter will be resolved.
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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, but is intended rather as an overview of material
regulatory regimes. 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 predicted 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 "Information about CoreComm Holdco, Inc. -- Our
Business -- Competition."
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- 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 CoreComm Holdco's 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. All local exchange carriers must provide
telephone number portability, which 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.
- CO-LOCATION. 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 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.
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
installation 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.
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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 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.
CO-LOCATION
The FCC has adopted rules requiring incumbent local exchange carriers to
provide co-location 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
co-location 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 co-location 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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On May 24, 2002, the United States Court of Appeals for the District of
Columbia Circuit issued a decision vacating the FCC's line sharing rules and
remanding them back to the FCC for further consideration. The Court concluded
that the FCC failed to give adequate consideration to the issue of whether the
line sharing requirements are necessary given the apparent presence of
competition in broadband services offered by other cable and satellite
providers. As a result of the Court's decision, the line sharing rules will be
deemed no longer effective absent a temporary order by the FCC or the Court
requiring the rules to remain in affect pending final resolution of the issue on
appeal or upon further review by the FCC. Although the ruling should have no
direct effect on us because we do not engage in line sharing, it could have a
direct affect on the operations of a provider from whom we purchase DSL services
for resale to our ISP customers, which could in turn have an adverse impact on
us unless the effect of the Court's ruling is stayed pending further review.
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 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.
On May 24, 2002, the United States Court of Appeals for the District of
Columbia Circuit issued a decision overturning the FCC's rules requiring ILECs
to provide Unbundled Network Elements to competing carriers and remanding those
rules back to the FCC for further consideration. The Court found that under the
"impair" standard set forth in the Telecommunications Act, the FCC failed to
adequately justify why it adopted a uniform national list of elements that must
be unbundled by ILECs in all geographic and customer markets, as opposed to
market-specific rules requiring particular elements to be unbundled only in
those markets where the absence of such an element would "impair" competition.
Unlike the Court's decision in respect of line sharing, the Court's ruling as to
the FCC's unbundling requirements did not vacate the unbundling requirements
and, therefore, those rules should remain in effect without alteration pending
final resolution upon appeal or upon further review by the FCC.
Section 271 Entry. Our principal competitor in each market is the ILEC.
Some of these carriers, the Regional Bell Operating Companies are currently
permitted to provide long distance services to customers outside of their local
service areas and in conjunction with their mobile telephone services, but are
prohibited from providing long distance services that originate in those 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 ILECs can provide in-region long distance services in a
state after receiving approval from the FCC. To obtain approval, the ILEC 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 an ILEC to provide
customers with a full range of local and long distance telecommunications
services. The provision of landline long distance services by ILECs 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 ILECs into
the long distance market may have adverse consequences on the ability of CLECs
both to generate access revenues from the inter-exchange carriers 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, Missouri, Georgia and Louisiana, and an application for 271 authority
in New Jersey is currently pending before the
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FCC. 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 us.
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.
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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 some 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 were required to 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 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.
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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.
INTERNET REGULATION
The FCC currently does not regulate the provision of Internet service,
although it does regulate common carriers that provide elements of the networks
on which the Internet is based. Similarly, state
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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.
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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. 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
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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 was also Director -- Corporate Development at NTL from
1996 to 2002. 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 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 Florence
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.
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EXECUTIVE COMPENSATION
The following table discloses compensation received by our Chief Executive
Officer and our four other most highly paid executive officers for the year
ended December 31, 2001.
CORECOMM HOLDCO
SUMMARY COMPENSATION TABLE*
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------------------------ COMMON
OTHER ANNUAL STOCK ALL OTHER
NAME AND PRINCIPAL COMPENSATION UNDERLYING COMPENSATION
POSITION IN 2001 YEAR SALARY($) BONUS($) ($) 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(5)..... 2001 2,400 750,000 -- 225,000
Vice President -- 2000 2,400 -- -- 100,000
Corporate Development
Patty J. Flynt(6).......... 2001 58,700 50,615 -- --
Senior Vice President and 2000 223,149 117,742 38,161(7) 150,000
Chief Operating Officer 1999 206,250 100,435 -- 450,001
---------------
* The amounts in the table above represent the amounts directly paid by
CoreComm Limited and by us to the named executives. In addition, we share
resources with NTL related to corporate activity, including a corporate
office and corporate employees. In conjunction with this arrangement, some
employees of NTL provided management, financial, legal and technical
services to CoreComm Limited and us. Under this arrangement, NTL charges us
the salaries of these employees and other expenses of the shared resources,
such as an office expense. In 2001, 2000 and 1999, NTL charged CoreComm
Limited $325,000, $919,000 and $2,268,000, respectively, net of CoreComm
Limited's charges to NTL. These charges are not included in the above table.
It is not practicable to determine the amounts of these expenses that would
have been incurred had CoreComm Limited operated without these services.
However, in the opinion of CoreComm Limited's management, the allocated
method is reasonable. The named executives, except for Mr. Gravina, received
salaries from NTL and spent portions of their time providing executive
management to us. See the section of the prospectus entitled "Certain
Relationships and Related Transactions."
(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. As is permitted under CoreComm Limited's option plans, on or
around April 11, 2002 CoreComm Limited sent notices to the holders of its
options stating CoreComm Limited's intention to consummate the merger and
informing these holders that their options will
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terminate upon the consummation of the merger. Between now and the time of
the merger, if holders of CoreComm Limited options exercise their options,
they would, at the time of the 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 Executive Vice President and Chief Operating
Officer effective February 1, 2001, following the resignation of Patty J.
Flynt as Senior Vice President and Chief Operating Officer. In January 2002,
he became President and Chief Executive Officer.
(4) Other annual compensation represents a car allowance.
(5) In January 2002, Mr. Peterson became Executive Vice President -- Chief
Operating Officer and Chief Financial Officer.
(6) Effective February 1, 2001, Ms. Flynt resigned from office as Senior Vice
President and Chief Operating Officer.
(7) Other annual compensation includes reimbursement for relocation expenses and
moving expenses.
EMPLOYMENT ARRANGEMENTS
Our executive compensation program is designed to be closely linked to
corporate performance. To this end, we have developed an overall compensation
strategy that links compensation directly to the achievement of operational
goals, and also ties a portion of an executive's aggregate compensation to the
appreciation in stock price. The overall objective of this strategy is to
attract and retain the best possible executive talent and to motivate these
executives to achieve the goals inherent in our business strategy, thereby
seeking to enhance our profitability and value.
In furtherance of our incentive-oriented compensation goals, historically
cash compensation such as annual base salary and bonus has generally been set
below levels paid by comparable sized telecommunications companies and was
supplemented by equity-based option grants. However, in part due to the
significant downturn in the financial markets, the elimination of value
associated with stock options generally, as well as the uncertainty and changes
relating to our business in this environment, the compensation committee
determined to increase the level of cash compensation paid to several of its
senior executives in order to retain them. In assessing these compensation
levels, the compensation committee, which is composed of independent directors,
recognizes the fact that some executives have participated in the development of
our business from its earliest stages, have preserved significant value in an
extremely challenging environment, and are very important to retain for the
future success of our business.
In January 2002, our board of directors promoted Thomas J. Gravina from our
Executive Vice President and Chief Operating Officer to our President and Chief
Executive Officer. At the same time, our board of directors promoted Michael A.
Peterson from our Vice President -- Corporate Development to our Executive Vice
President -- Chief Operating Officer and Chief Financial Officer. The following
represent the principal terms of employment arrangements for Messrs. Gravina and
Peterson that were agreed in principal between the compensation committee of the
board of directors, which is comprised solely of independent directors, and the
named executive in January 2002. The compensation to be received by Messrs.
Gravina and Peterson is significantly greater than the compensation we have
historically paid to our executives. We believe that this compensation is
reasonable given that Messrs. Gravina and Peterson have been leading the company
through the recapitalization process and given that a large share of their
compensation is tied to the achieving of financial targets by CoreComm Holdco.
The employment arrangements are subject to formalization in fully executed
employment contracts. These principal terms are currently in effect, although
these contracts may contain different or additional material terms when
finalized and executed.
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Thomas J. Gravina:
Term: Three years, plus automatic one year renewals
unless six months notice of non-renewal by
executive or by us
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 EBITDA and free cash flow targets, whereby
none of these quarterly bonuses would be paid if
these targets are not met; bonus of $700,000
payable in connection with 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 967,500 shares
of our common stock at an exercise price of $1.00
per share(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 by us
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 EBITDA and free cash flow targets, whereby
none of these quarterly bonuses would be paid if
these targets are not met; bonus of $350,000
payable in connection with completion of the Holdco
recapitalization process; additional bonuses
commensurate with position, performance and awards
to other senior executives
Options: Initial grant of options to purchase 1,485,000
shares of our common stock at an exercise price of
$1.00 per share(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.
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OPTION EXERCISES AND YEAR-END VALUE TABLE
There were no options to purchase shares of our common stock 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.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table provides, as of June 25, 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. Except as set forth in footnote (4) below, all shares
of our common stock set forth in the table below were obtained by our executive
officers, directors and principal stockholders in the first phase of the Holdco
recapitalization where they exchanged debt securities or preferred stock for
shares of our common stock.
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............................... 1,042,734 0 1,042,734 3.48%
Thomas J. Gravina(4)........................ 3,262,764 328,950 3,591,714 11.84%
Michael A. Peterson(4)...................... 22,764 504,900 527,664 1.73%
Gregg N. Gorelick........................... 0 45,900 45,900 *
George S. Blumenthal........................ 586,011 0 586,011 1.95%
Ralph H. Booth, II(5)....................... 6,240,000(5) 0 6,240,000(5) 20.80%(5)
Alan J. Patricof............................ 0 16,320 16,320 *
Warren Potash............................... 2,277 16,320 18,597 *
All directors and officers as a group (8 in
number)................................... 11,156,550 912,390 12,068,940 39.04%
Michael Karp(6)............................. 10,200,000 0 10,200,000 34.00%
University City Housing Company
1062 East Lancaster Avenue, Suite 30B
Rosemont, PA 19010
Booth American Company(5)................... 6,240,000 0 6,240,000 20.80%
333 West Fort Street, Suite 1230
Detroit, MI 48226
CoreComm Limited............................ 3,943,248 0 3,943,248 13.14%
Debra Buruchian............................. 3,240,000 25,500 3,265,500 10.88%
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 and exercisable options.
(4) In December 2001, each of Mr. Gravina and Mr. Peterson received 22,764
shares of our common stock under agreements entered into in order to induce
a holder of $5 million in principal amount of public notes to sell its
public notes. See the section of this prospectus entitled "The Exchange
Offers."
(5) 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 6,240,000 shares set forth opposite Ralph H. Booth, II's name in the
table.
(6) Includes 591,303 shares of common stock held by the Florence Karp Trust, of
which shares Mr. Karp disclaims beneficial ownership.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CoreComm Holdco has entered into several transactions with related parties
as described below. Each of these transactions is as favorable to CoreComm
Holdco as could be obtained with an unrelated third party.
NTL INCORPORATED
NTL Incorporated is a related party to CoreComm Holdco because the two
entities have several overlapping directors and officers. Barclay Knapp,
currently our Chairman, is also the President, Chief Executive Officer and a
director of NTL and a director of Bredbandsbolaget, a Swedish company in which
NTL holds a 25% interest. Gregg N. Gorelick, currently our Senior Vice
President -- Controller and Treasurer, is also a Vice President and Controller
at NTL. George S. Blumenthal, currently our Chairman Emeritus, is also Chairman,
Treasurer and a director of NTL. Each of Alan J. Patricof and Warren Potash
serves as a director of both CoreComm Holdco and NTL.
We share resources with NTL related specifically to corporate activity,
including corporate employees and a corporate office. In conjunction with these
arrangements, NTL provides us with management, financial, legal and
administrative support services through the use of employees, as well as access
to office space and equipment and use of supplies and related office services.
Approximately 7 NTL employees provided services to CoreComm Limited and to us in
2001. The salaries of these employees are charged to us by NTL based on the
allocations of their time spent providing services to us. Amounts charged to us
by NTL consist of 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 CoreComm Limited
commenced in October 1998. It is not practicable to determine the amounts of
these expenses that would have been incurred had CoreComm Limited operated as an
unaffiliated entity. In the opinion of management, this allocation method is
reasonable. For the three months ended March 31, 2002, and for the years ended
December 31, 2001, 2000 and 1999, NTL charged CoreComm Limited $84,000,
$446,000, $1,186,000 and $2,330,000, respectively, which is included in
corporate expenses. In 2001 and 2002, we have reduced our reliance on NTL for
these services and have developed our internal ability to meet our business
needs.
As part of these arrangements, at a separate office location, we provided
NTL with access to office space and equipment and the use of supplies until
August 2001, at which time this office was vacated. In the fourth quarter of
1999, CoreComm Limited began charging NTL a percentage of its 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. For
the three months ended March 31, 2002, and for the years ended December 31,
2001, 2000 and 1999, CoreComm Limited charged NTL $67,000, $121,000, $267,000
and $62,000 respectively, which reduced corporate expenses.
On April 12, 2001, we 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. At that time, in order to induce NTL to purchase the 10.75%
Unsecured Convertible PIK Note due April 2011, CoreComm Limited entered into a
network and software agreement with NTL and CoreComm Limited issued to NTL
warrants, with an estimated value of $397,000 at that time, to purchase CoreComm
Limited common stock. Under 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 some of
our software and know-how. On February 5, 2002, we and CoreComm Limited entered
into letter agreements regarding the convertibility feature of this note and of
the additional notes issued under this note, which letter agreements are filed
as exhibits to the registration statement of which this prospectus forms a part.
Through those letter agreements, consistent with the original terms of the
notes, we and CoreComm Limited have agreed to exercise our rights under the
notes so that, following our accepting CoreComm
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Limited common stock under the exchange offer for CoreComm Limited common stock,
the convertibility feature of the notes will be altered so that rather than the
notes being convertible into shares of CoreComm Limited common stock, they 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 offer for CoreComm Limited common stock, which results in a new
conversion price of $38.90 per share of our common stock. In the event that we
do not accept CoreComm Limited common stock under the exchange offer, the
conversion feature would remain into CoreComm Limited common stock. The
principal features of these notes and the additional letter agreements are set
forth in "Description of Our Indebtedness -- 10.75% Unsecured Convertible PIK
Note due 2011."
A subsidiary of ours provides billing and software development services to
subsidiaries of NTL. These services relate to the development and maintenance of
software that was originally developed by employees of ours. These services are
provided to NTL through approximately 15 of our employees. General and
administrative expenses were reduced by $144,000, $1,883,000, $1,400,000, and
$800,000 for the three months ended March 31, 2002 and for the years ended
December 31, 2001, 2000 and 1999, respectively, as a result of the charges for
these services. In October 2000, CoreComm Limited billed NTL $6,674,000 for
billing and software development services to be rendered from January to
September 2001.
In 2001, CoreComm Holdco and NTL entered into a license agreement whereby
NTL was granted an exclusive, irrevocable, perpetual license to billing software
developed by CoreComm Holdco for telephony rating, digital television events
rating, fraud management and other tasks. The sales price was cash of $12.8
million, which was received in 2001. The billing software was being used by NTL
at the time of this agreement, and was being maintained and modified by CoreComm
Holdco under an ongoing software maintenance and development outsourcing
arrangement between the companies. CoreComm Holdco recorded the $12.8 million as
deferred revenue to be recognized over a period of three years, which was the
estimated amount of time CoreComm Holdco expected to provide service under this
arrangement. CoreComm Holdco recognized $1.1 million and $2.5 million during the
three months ended March 31, 2002 and the year ended December 31, 2001,
respectively.
In March 2000, CoreComm Holdco and NTL announced that they had entered into
an agreement to link their networks in order to create an international Internet
backbone that commenced operations in February 2001. CoreComm Holdco recognized
revenue of $327,000 for the network usage in the year ended December 31, 2001.
On May 8, 2002 NTL filed for bankruptcy protection pending its
reorganization under Chapter 11 of the United States Bankruptcy Code. We do not
believe that this will materially affect our relationship with NTL or our
ability to carry on our operations.
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. For the year ended December 31, 2001, we paid approximately
$1.6 million in rent for these facilities. 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:
- the landlord is required to give consent to a reasonable sublease, and is
entitled to all profits from that sublease;
- a standard recapture right;
- 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
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- 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 entitled to participate in these plans.
INTERCOMPANY EXCHANGE AGREEMENT
On December 14, 2001, we and CoreComm Limited, as part of the Holdco
recapitalization, entered into an agreement whereby CoreComm Limited agreed that
from time to time, upon our written request, it would deliver to us shares of
our common stock held by it. The purpose of this agreement was to maintain
CoreComm Limited's stockholders' percentage interest in us, as agreed to in the
exchange agreement among us, CoreComm Limited and holders of CoreComm Limited's
debt and preferred stock, at approximately 13%, assuming the exercise of
warrants. Following the consummation of the first phase of the Holdco
recapitalization, CoreComm Limited owned, and continues to own, 3,943,248 shares
of our common stock. By tendering their shares of CoreComm Limited common stock
in the exchange offers, CoreComm Limited stockholders will become the direct
owner of shares of our common stock rather than hold shares indirectly through
CoreComm Limited. We and CoreComm Limited plan to have CoreComm Limited
surrender, immediately following the merger, all shares of our common stock that
it owns, other than the number of shares of our common stock deliverable upon
conversion of public notes neither tendered in the exchange offer for public
notes nor converted prior to the completion of the merger, so that holders of
CoreComm Limited common stock that tender their shares will continue to own
approximately the same equity interest in us as they currently hold in CoreComm
Limited. This intercompany exchange agreement relates to all 3,943,248 shares of
our common stock that CoreComm Limited currently owns.
Under the terms of this intercompany exchange agreement, we agreed, upon
the surrender of shares of our common stock by CoreComm Limited under the
intercompany exchange agreement, to
(1) waive our rights to interest payments under CoreComm Limited debt
securities that we hold;
(2) extend by twenty years the maturity dates of CoreComm Limited debt
securities that we hold;
(3) delete provisions contained in the Senior Unsecured Notes due
September 29, 2003 of CoreComm Limited relating to scheduled prepayments,
mandatory prepayments and liens;
(4) 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
(5) 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 waivers, 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. The main purposes
of these waivers, amendments and deletions was to delay CoreComm Limited from
having to make any payments with respect to these securities and prevent it from
having to issue any shares of its common stock with respect to these securities.
The effect of these waivers, amendments and deletions is that beginning on the
date on which we acquire shares of our common stock surrendered by CoreComm
Limited under the intercompany exchange agreement, we will not be able to
require CoreComm Limited to make any payments under these securities for over 20
years, to issue shares of its common stock with respect to these securities or
to comply with many of the restrictive covenants that formerly applied to these
securities.
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Since we have not yet acquired the shares of our common stock that are held
by CoreComm Limited, the waivers, amendments and deletions discussed above are
currently not in effect. For a discussion of transactions we intend to enter
into with respect to the above listed securities, please see the section of this
prospectus entitled "The Exchange Offers -- Conditions for Completion of the
Exchange Offers."
This agreement was subsequently amended to waive (1) the interest payment
that was due to Holdco on April 1, 2002 under the terms of the Senior Unsecured
Notes due September 29, 2003 until the date on which Holdco provides notice to
Limited demanding that this interest payment be made; (2) the interest payment
that would be due to Holdco on October 1, 2002 under the terms of the Senior
Unsecured Notes due September 29, 2003 until April 1, 2003; and (3) all
principal payments that would be due to Holdco before April 1, 2003 under the
terms of the Senior Unsecured Notes due September 29, 2003 until April 1, 2003.
Because CoreComm Limited will be a wholly owned subsidiary of CoreComm Holdco
following the completion of the Holdco recapitalization, the foregoing waivers
will no longer be necessary and will be of no further effect. The intercompany
exchange agreement was also amended (1) to provide for the cancellation,
immediately upon the completion of the merger, of all shares of Holdco common
stock that Holdco receives in the exchange offer for shares in CoreComm Limited
common stock; and (2) to irrevocably waive future acceleration of the public
notes held by Holdco relating to CoreComm Limited's failure to pay the April 1,
2002 interest payment on the public notes.
AGREEMENTS IN CONNECTION WITH THE HOLDCO RECAPITALIZATION
Several related parties of ours were parties to the exchange agreement that
we and CoreComm Limited entered into on December 14, 2001. Under this exchange
agreement, each of
(1) Barclay Knapp, currently our Chairman;
(2) Thomas J. Gravina, currently our President and Chief Executive
Officer, one of our directors and a current holder of over 10% of our
common stock;
(3) George S. Blumenthal, currently our Chairman Emeritus and one of
our directors;
(4) Booth American Company, a current holder of over 10% of our common
stock and whose affiliate Ralph H. Booth, II, is currently one of our
directors;
(5) Michael Karp, a current holder of over 10% of our common stock;
and
(6) Debra Buruchian, a current holder of over 10% of our common stock
exchanged debt securities of CoreComm Limited, debt securities which were joint
obligations of us and CoreComm Limited and/or CoreComm Limited preferred stock
for shares of our common stock. Please refer to the section of the prospectus
entitled "Description of Capital Stock -- The Exchange Agreement."
In October 2001, we and CoreComm Limited entered into agreements with
George S. Blumenthal, our current Chairman Emeritus and a director, Barclay
Knapp, our current Chairman and Warren Potash, a current director of ours, each
of whom held public notes under which CoreComm Limited paid to these related
parties an amount equal to the October 1, 2001 interest payment which had not
previously been paid and we exchanged shares of our common stock for the public
notes held by these related parties. The terms of these transactions were
substantially similar to the other transactions in the first phase of the Holdco
recapitalization in which other holders of public notes exchanged their notes
for our common stock. Please refer to the sections of the prospectus entitled
"Description of Capital Stock -- The Public Note Agreements" and "Matters
Relating to Outstanding Securities -- Public Notes."
For a discussion of an agreement entered into by two of our officers and
directors in order to induce a holder of $5 million in principal amount of
public notes to sell its public notes, please see the section of this prospectus
entitled "The Exchange Offers -- Background and Purpose."
EMPLOYMENT ARRANGEMENTS
A summary of the terms of employment arrangements between each of Thomas J.
Gravina, our President and 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."
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INFORMATION ABOUT CORECOMM 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 the Holdco recapitalization, CoreComm
Limited, which formerly owned 100% of CoreComm Holdco's outstanding capital
stock, now owns only approximately 13% of CoreComm Holdco's outstanding capital
stock. CoreComm Holdco owns substantially all of the business operations, which
CoreComm Limited formerly owned indirectly through CoreComm Holdco. However,
CoreComm Limited remains a party liable under the $156.1 million senior secured
credit facility and has no right to withdraw any additional money under that
facility. Additionally, CoreComm Limited is a co-obligor with CoreComm Holdco
for the 10.75% Unsecured Convertible PIK Notes due April 2011 of $16,599,000,
including accrued PIK interest. In addition, as of March 31, 2002, CoreComm
Limited had obligations of approximately $591 million of debt and preferred
securities now held by CoreComm Holdco, $4.75 million principal amount of public
notes that are not held by CoreComm Holdco, and other liabilities. In addition,
the senior secured credit facility does not allow CoreComm Holdco to pay any
dividends or distribute assets to CoreComm Limited. As a result of these
financial conditions, CoreComm Limited currently lacks the resources to meet its
obligations as they become due.
CoreComm Limited's auditors included a going concern explanatory paragraph
in their audit report for the year ended December 31, 2001, which states that
CoreComm Limited's liquidity conditions raise substantial doubt about its
ability to continue as a going concern.
CoreComm Limited does not contemplate raising any additional financing in
the foreseeable future.
As a result of the first phase of the Holdco recapitalization, CoreComm
Holdco holds $160 million principal amount of public notes, approximately $105.7
million principal amount of CoreComm Limited Senior Unsecured Notes and all of
CoreComm Limited's outstanding preferred stock. CoreComm Limited does not have
the financial resources to meet its obligations under these notes and preferred
stock if CoreComm Holdco requires it to do so. CoreComm Limited has agreed that
it will surrender to CoreComm Holdco the number of shares of CoreComm Holdco
common stock that CoreComm Holdco requests. We intend to request that CoreComm
Limited surrender, immediately following the merger, all shares of our common
stock that it owns, other than the number of shares of our common stock
deliverable upon conversion of public notes not tendered in the exchange offer
for public notes or converted prior to the completion of the merger. Therefore,
if the merger is completed, CoreComm Limited will own little or no common stock
of CoreComm Holdco, and thus will own little or no material assets, since
CoreComm Holdco common stock is CoreComm Limited's only material asset. In
exchange for surrendering shares of CoreComm Holdco common stock, both CoreComm
Holdco and CoreComm Limited have agreed to waivers and amendments to delay
payments with respect to these securities.
Under the exchange offers, those stockholders and noteholders who exchange
their shares and public notes, respectively, will receive shares of CoreComm
Holdco, and would no longer hold CoreComm Limited securities.
CoreComm Limited may lack the resources to meet the obligations of the
remaining $4.75 million in principal amount of public notes that are not held by
CoreComm Holdco. CoreComm Limited did not pay any interest that was due on the
public notes on October 1, 2001 until December 2001 at which time it paid this
interest to the parties that entered into public note agreements in connection
with the first phase of the Holdco recapitalization. On March 28, 2002, the
October 1, 2001 interest payment, together with interest accrued thereon, was
paid on the $4.75 million in principal amount of public notes that did not
receive the October 1, 2001 interest payment in December 2001. The April 1, 2002
interest payment on the public notes has not yet been paid and CoreComm Limited
is in default under those notes. The consideration CoreComm Holdco is offering
in its exchange offer for the public notes includes $30.00 in cash, which
represents the April 1, 2002 interest payment, for each $1,000 in principal
amount outstanding.
On February 14, 2002, CoreComm Limited received written notification from
Nasdaq indicating that it failed to comply with the minimum market value of
publicly held shares and minimum bid price
113
requirements for continued listing on the Nasdaq National Market and that it
would have until May 15, 2002 to regain compliance. CoreComm Limited did not
regain compliance by May 15, 2002. On May 16, 2002, Nasdaq provided CoreComm
Limited written notice of a Nasdaq Staff Determination indicating that CoreComm
Limited common stock is subject to delisting from the Nasdaq National Market. On
May 23, 2002, CoreComm Limited filed a request for a hearing before a Nasdaq
Listing Qualifications Panel to review the Nasdaq Staff Determination. A hearing
has been set for June 28, 2002. Under Nasdaq rules, pending a decision by the
Panel, CoreComm Limited common stock will continue to trade on the Nasdaq
National Market. CoreComm Limited will not be notified until the Panel makes a
formal decision. There can be no assurance that CoreComm Limited will prevail at
the hearing, and that its common stock will not be delisted from the Nasdaq
National Market.
If CoreComm Limited common stock is delisted from the Nasdaq National
Market, shares may trade in the over-the-counter market and price quotations may
be reported by other sources. The extent of the public market and the
availability of quotations for shares of CoreComm 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 CoreComm Limited common stock on
the part of securities firms and other factors. If the exchange offer for
CoreComm Limited common stock is completed and the Nasdaq listing is transferred
from CoreComm Limited to CoreComm Holdco, (1) CoreComm Limited will terminate
the registration of its shares under the Securities Exchange Act of 1934 and (2)
CoreComm Holdco will become the "successor" issuer to CoreComm Limited and will
be subject to the periodic reporting requirements of the Securities Exchange Act
of 1934.
On January 22, 2002, the Securities and Exchange Commission issued FR-61,
Commission Statement about Management's Discussion and Analysis of Financial
Condition and Results of Operations. The release sets forth views of the
Securities and Exchange Commission regarding disclosure that should be
considered by registrants. CoreComm Limited's contractual obligations and
commercial commitments are summarized below, and are fully disclosed in the
Notes to Consolidated Financial Statements.
The following table includes aggregate information about CoreComm Limited's
contractual obligations as of March 31, 2002 and the periods in which payments
are due:
PAYMENTS DUE BY PERIOD
------------------------------------------------------
CONTRACTUAL LESS THAN 1 1-3 4-5 AFTER 5
OBLIGATIONS TOTAL YEAR YEARS YEARS YEARS
----------- -------- ----------- -------- -------- -------
(IN THOUSANDS)
Long-Term Debt(1)......................... $270,429 $4,750 $105,679 $160,000 $ --
Capital Lease Obligations................. none -- -- -- --
Operating Leases.......................... none -- -- -- --
Unconditional Purchase Obligations........ none -- -- -- --
Other Long-Term Obligations............... none -- -- -- --
-------- ------ -------- -------- ----
Total Contractual Cash Obligations........ $270,429 $4,750 $105,679 $160,000 $ --
======== ====== ======== ======== ====
114
The following table includes aggregate information about CoreComm Limited's
commercial commitments as of March 31, 2002. Commercial commitments are items
that CoreComm Limited could be obligated to pay in the future. They are not
required to be included in the consolidated balance sheet.
AMOUNT OF COMMITMENT EXPIRATION PER PERIOD
---------------------------------------------------------
OTHER COMMERCIAL TOTAL AMOUNTS LESS THAN 1 1-3 4-5 OVER 5
COMMITMENTS COMMITTED YEAR YEARS YEARS YEARS
---------------- ------------- ----------- ------- ------- -------
(IN THOUSANDS)
Guarantees(2)........................... $172,699 $ -- $15,600 $81,900 $75,199
Lines of Credit......................... none -- -- -- --
Standby Letters of Credit............... none -- -- -- --
Standby Repurchase Obligations.......... none -- -- -- --
Other Commercial Commitments............ none -- -- -- --
-------- ---- ------- ------- -------
Total Commercial Commitments............ $172,699 $ -- $15,600 $81,900 $75,199
======== ==== ======= ======= =======
---------------
(1) Long-term debt includes $164,750,000 principal amount of 6% Convertible
Subordinated Notes and $105,679,000 principal amount of Senior Unsecured
Notes due 2003, before unamortized discount of $7,592,000.
(2) Guarantees include CoreComm Holdco's senior secured credit facility of
$156,100,000, which is unconditionally guaranteed by CoreComm Limited and
CoreComm Holdco, and CoreComm Holdco's 10.75% Unsecured Convertible PIK
Notes due April 2011 of $16,599,000 including accrued PIK interest for which
CoreComm Limited and CoreComm Holdco are co-obligors.
CONSOLIDATED STATEMENT OF CASH FLOWS
For the three months ended March 31, 2002, cash provided by operating
activities was $363,000, which consisted primarily of proceeds received from a
note receivable on behalf of CoreComm Holdco. Corecomm Limited has limited
operations and does not expect to generate any significant cash from operations
in the future.
For the three months ended March 31, 2002, Corecomm Limited did not have
any cash flow from investing activities. Corecomm Limited operations did not
require any capital expenditures during the three months ended March 31, 2002.
No significant capital expenditures are anticipated in the future.
For the three months ended March 31, 2002, Corecomm Limited did not have
any cash flow from financing activities. Corecomm Limited does not contemplate
raising any additional financing in the foreseeable future.
For the three months ended March 31, 2001, CoreComm Limited had a cash flow
deficit of $1,351,000, excluding CoreComm Holdco's cash flow deficit.
RESULTS OF OPERATIONS
The first phase of the Holdco recapitalization was completed on December
28, 2001. As a result of the completion of the first phase of the Holdco
recapitalization, CoreComm Limited's only material asset is its ownership of
approximately 13% of the outstanding capital stock of CoreComm Holdco. The
operating results of CoreComm Limited discussed herein include CoreComm Holdco
for all periods prior to its deconsolidation. After December 28, 2001, CoreComm
Limited accounts for all of CoreComm Holdco's operations using the equity
method. CoreComm Limited does not have any significant operations of its own.
CoreComm Limited's original business plan included construction of
facilities-based network in numerous markets and expansion through acquisitions.
CoreComm Limited commenced providing telephone service on a resale basis while
its network construction was in process. CoreComm Limited also incurred
significant advertising and marketing costs in order to create name recognition
and significant other operating and administrative costs used in establishing
the business. All of these activities required
115
cash expenditures which is reflected in the approximately $1.1 billion deficit
at March 31, 2002, CoreComm Limited's history of operating and net losses, cash
used in operating activities of $216 million from April 1, 1998 (date operations
commenced) to December 31, 2000 and cash used for purchases of fixed assets of
$88 million from April 1, 1998 (date operations commenced) to December 31, 2000.
In July 2001, CoreComm Limited finalized the streamlining of its operating
structure to focus on CoreComm Holdco'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.
CoreComm Limited 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 network services 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.
THREE MONTHS ENDED MARCH 31, 2002 AND 2001
The following table includes the condensed consolidated statement of
operations for the three months ended March 31, 2001 for CoreComm Holdco and
Subsidiaries, CoreComm Limited with the operations of CoreComm Holdco
deconsolidated and CoreComm Limited and Subsidiaries as reported in Corecomm
Limited quarterly financial statements.
CORECOMM CORECOMM CORECOMM
HOLDCO AND LIMITED WITHOUT LIMITED AND
SUBSIDIARIES CORECOMM HOLDCO SUBSIDIARIES
------------- --------------- -------------
REVENUES............................... $ 72,811,000 $ 126,000 $ 72,937,000
COSTS AND EXPENSES
Operating.............................. 63,520,000 -- 63,520,000
Selling, general and administrative.... 30,795,000 804,000 31,599,000
Corporate.............................. 2,098,000 1,796,000 3,894,000
Non-cash compensation.................. 3,234,000 -- 3,234,000
Other charges.......................... 119,000 -- 119,000
Asset impairments...................... 167,599,000 -- 167,599,000
Depreciation........................... 12,012,000 33,000 12,045,000
Amortization........................... 31,509,000 2,000 31,511,000
------------- ----------- -------------
310,886,000 2,635,000 313,521,000
------------- ----------- -------------
Operating (loss)....................... (238,075,000) (2,509,000) (240,584,000)
116
CORECOMM CORECOMM CORECOMM
HOLDCO AND LIMITED WITHOUT LIMITED AND
SUBSIDIARIES CORECOMM HOLDCO SUBSIDIARIES
------------- --------------- -------------
OTHER INCOME (EXPENSE)
Interest income and other, net......... 664,000 112,000 776,000
Interest expense....................... (4,141,000) (5,697,000) (9,838,000)
------------- ----------- -------------
Loss before income tax provision....... (241,552,000) (8,094,000) (249,646,000)
Income tax (provision)................. -- (15,000) (15,000)
------------- ----------- -------------
Net (loss)............................. $(241,552,000) $(8,109,000) $(249,661,000)
============= =========== =============
As the table above indicates, the changes between Corecomm Limited's
results for the three months ended March 31, 2002 and 2001 primarily relate to
the deconsolidation of CoreComm Holdco's operations on December 28, 2001. All
other significant changes between Corecomm Limited operating results for the
three months ended March 31, 2002 and Corecomm Limited operating results
(excluding CoreComm Holdco's operations) for the three months ended March 31,
2001 are discussed herein.
One of CoreComm Limited's subsidiaries provides information technology
consulting and billing services to an unaffiliated wireless company. Revenues
decreased to $108,000 from $126,000 as a result of a reduction in these services
during the three months ended March 31, 2002.
Selling, general and administrative expenses decreased to $68,000 from
$804,000 primarily due to the following: In the three months ended March 31,
2001, CoreComm Limited incurred legal and other professional fees of
approximately $363,000 due to their financing related activities that culminated
in additional financing in April 2001. Also in the three months ended March 31,
2001, CoreComm Limited's wholly owned subsidiary Fiberstream, Inc. incurred
costs of $367,000. CoreComm Limited substantially reduced Fiberstream's
operations as a result of the modifications to its business plan in April 2001.
Finally, in the three months ended March 31, 2001, CoreComm Limited's billing
services subsidiary incurred costs of $74,000. In the three months ended March
31, 2002, selling, general and administrative expenses include $60,000 from
CoreComm Limited's billing services subsidiary and $8,000 from Fiberstream.
Corporate expenses included 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. In 2002,
CoreComm Holdco incurs all corporate expenses other than those directly related
to CoreComm Limited. We did not incur any corporate expenses in the three months
ended March 31, 2002. In the three months ended March 31, 2001, a significant
portion of CoreComm Limited's corporate expenses was due to its financing
related activities.
Interest income and other, net, decreased to $7,000 from $112,000 primarily
as a result of declining cash balances.
Interest expense of $5,651,000 and $5,697,000 for the three months ended
March 31, 2002 and 2001, respectively, was related to interest accrued on public
notes and CoreComm Limited's Senior Unsecured Notes Due 2003.
The income tax provision of $15,000 in 2001 was for state and local income
tax.
YEARS ENDED DECEMBER 31, 2001 AND 2000
As a result of the completion of the acquisitions of ATX and Voyager 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 prior to October 1, 2000.
The increase in revenues to $293,207,000 from $132,122,000 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 $21,340,000 from $28,174,000. The revenues
from the USN customer based peaked in the third quarter of 1999 after CoreComm
Limited's acquisition in May
117
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. CoreComm Holdco has substantially
reduced its resale business to focus on more profitable services.
Operating costs include direct cost of sales, network costs and salaries
and related expenses of network personnel. Operating costs increased to
$224,807,000 from $142,323,000 due to acquisitions in 2000, which amounted to
$111,878,000 of the increase. This increase is offset by a decrease in costs of
$29,394,000 in 2001 primarily as a result of the implementation of CoreComm
Limited's modified business plan as described above.
Selling, general and administrative expenses decreased to $97,759,000 from
$111,010,000 primarily as a result of the implementation of CoreComm Limited's
modified business plan as described above. These expenses decreased by
$65,699,000 in 2001 after adjusting for the increase due to acquisitions in
2000, which amounted to $52,448,000.
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 $8,335,000 from $12,884,000 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 in 2000
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 December 31, 2001, the
deferred non-cash compensation was charged to expense, including $21.6 million
and $9.7 million in the years ended December 31, 2001 and 2000, respectively.
Also in 2000, non-cash compensation includes $4.7 million related to option
rescissions.
Other charges in 2001 include reorganization charges of $37,372,000 and an
adjustment to the reserve for notes receivable from former officers of an
acquired business of $2,142,000. The reorganization charges 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 $21,386,000 of these
costs are for equipment and other assets that did not and will not require any
future cash outlays. The employee severance and related costs in 2001 are for
approximately 630 employees to be terminated, none of whom were still employed
by the Company as of December 31, 2001. The major actions involved in the 2001
reorganization included: (1) consolidation of functions such as network
operations, customer service and finance, (2) initiatives to increase gross
margins and (3) agreements 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 $2.7 million for prepayments in respect
of ILEC facilities in abandoned markets.
Other charges in 2000 include a reserve of $8,700,000 for notes receivable
from former officers of an acquired business, and reorganization charges of
$4,006,000. The employee severance and related costs in 2000 were for
approximately 250 employees to be terminated, none of whom were still employed
by CoreComm Limited as of December 31, 2000.
118
The following table summarizes the reorganization charges incurred and
utilized in 2000 and 2001. As a result of the deconsolidation of CoreComm
Holdco's and CoreComm Limited's financial statements, there is no balance
remaining relating to these charges.
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.................... 3,409 6,928 6,572 21,772 38,681
Adjustments........................... (996) 73 -- (386) (1,309)
Utilized.............................. (3,218) (4,416) (2,914) (21,386) (31,934)
Deconsolidation of CoreComm Holdco.... (509) (3,106) (3,658) -- (7,273)
------ ------ ------- -------- --------
Balance, December 31, 2001............ $ -- $ -- $ -- $ -- $ --
====== ====== ======= ======== ========
CoreComm Holdco performed a review of the recoverability of its goodwill
and long-lived assets, which indicated that the carrying value of certain assets
would not be recoverable. During 1999 and 2000, acquisitions were made against a
background of increasing consolidation and record valuations in the
telecommunications industry. Asset impairments in 2001 include a write-down of
goodwill of $186,160,000 and a write-down of fixed assets of $14,529,000 in the
fourth quarter of 2001 prior to the deconsolidation as a result of this
evaluation. In addition, 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.
At December 31, 2000, CoreComm Limited wrote-off the carrying amount of
intangible assets from certain business combinations, and reduced the carrying
amount of its LMDS licenses. Asset impairments in 2000 include 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 the 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. Also at December 31, 2000, in connection
with the reevaluation of its business plan announced in April 2001, the Company
reduced the carrying amount of its 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.
Depreciation expense increased to $48,110,000 from $30,746,000 primarily as
a result of an increase in fixed assets due to acquisitions in 2000.
Amortization expense increased to $97,389,000 from $42,420,000 due to the
amortization of goodwill from the acquisitions in 2000.
Interest income and other, net, decreased to $1,957,000 from $6,223,000
primarily due to the reduction of interest income resulting from lower cash
balances in 2001.
119
Interest expense increased to $48,314,000 from $20,457,000 primarily due to
increased borrowings to fund CoreComm Limited's acquisitions and operations.
The income tax provision of $98,000 in 2001 and $250,000 in 2000 are for
state and local income tax.
Extraordinary gains in 2001 of $39,498,000 relate to the completion of the
first phase of the Holdco recapitalization, as well as the successful settlement
of various equipment and working capital notes, capital leases and other
liabilities for less than the outstanding balance.
YEARS 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.
120
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 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.
CRITICAL ACCOUNTING POLICIES
The consolidated financial statements of CoreComm Limited and related
financial information are based on the application of generally accepted
accounting principles, referred to as GAAP. GAAP requires the use of estimates,
assumptions, judgments and subjective interpretations of accounting principles
that have an impact on the assets, liabilities, revenue and expense amounts
reported, as well as disclosures about contingencies, risk and financial
condition. The following critical accounting policies have the potential to have
a more significant impact on CoreComm Limited's financial statements, either
because of the significance of the financial statement item to which they
relate, or because they require more judgment and estimation due to the
uncertainty involved in measuring, at a specific point in time, transactions
which are continuous in nature.
- CoreComm Limited, through its ownership of CoreComm Holdco, maintains an
allowance for doubtful accounts receivable for estimated losses resulting
from the potential inability of its customers to make payments. The
allowance for doubtful accounts is estimated based on the current aging
of receivables and prior collection experience. If the financial
condition of our
121
customers were to deteriorate resulting in an impairment in their ability
to make payments, additions to the allowance may be required.
- CoreComm Limited's and CoreComm Holdco's determination of the treatment
of contingent liabilities in the financial statements is based on a view
of the expected outcome of the applicable contingency. Legal counsel is
consulted on matters related to litigation. Experts both within and
outside the company are consulted with respect to other matters that
arise in the ordinary course of business. Examples of matters that are
based on assumptions, judgments and estimates are the amount to be paid
to terminate some agreements included in reorganization costs, the
amounts to be paid to settle some toll and interconnection liabilities,
the amount to be paid as a result of some sales and use tax audits and
potential liabilities arising from other sales tax matters. A liability
is accrued if the likelihood of an adverse outcome is probable of
occurrence and the amount is estimable.
- CoreComm Limited and CoreComm Holdco review long-lived assets and
goodwill for impairment as described in the Notes to Consolidated
Financial Statements. In analyzing potential impairments, projections of
future cash flows from the asset are used. The projections are based on
assumptions, judgments and estimates of growth rates for the related
business, anticipated future economic, regulatory and political
conditions, the assignment of discount rates relative to risk and
estimates of terminal values. Changes to these variables in the future
may necessitate impairment charges to reduce the carrying value to fair
value.
- Fixed assets and intangible assets are assigned useful lives which
impacts the annual depreciation and amortization expense. The assignment
of useful lives involves significant judgments and the use of estimates.
Changes in technology or changes in intended use of these assets may
cause the estimated useful life to change.
- In 2001, reorganization charges were recorded as a result of additional
actions to reorganize, re-size and reduce operating costs and create
greater efficiency in various areas. These charges, for both severance
and exit costs, required the use of estimates. Actual results could
differ from those estimated for reorganization.
RECENT ACCOUNTING PRONOUNCEMENTS
In August 2001, the Financial Accounting Standards Board, referred to as
FASB, issued Statement of Financial Accounting Standards, referred to as SFAS,
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets,"
effective for CoreComm Limited 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
adoption of this new standard had no significant effect on the results of
operations, financial condition or cash flows of CoreComm Limited.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," effective for CoreComm Limited 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. CoreComm Limited 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 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
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Assets and for Long-Lived Assets to Be Disposed Of." CoreComm Limited adopted
SFAS No. 142 on January 1, 2002. The adoption of this new standard had no
significant effect on the results of operations, financial condition or cash
flows of CoreComm Limited.
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.
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.
INTEREST RATE SENSITIVITY
AS OF MARCH 31, 2002,
PRINCIPAL AMOUNT BY EXPECTED MATURITY
AVERAGE INTEREST RATE
FOR THE NINE
MONTHS
ENDED FOR THE YEARS ENDING DECEMBER 31, FAIR
DECEMBER 31, ------------------------------------------------ VALUE
2002 2003 2004 2005 2006 THEREAFTER TOTAL 3/31/02
------------ -------- ----- ----- -------- ---------- -------- --------
Long-term debt, including
current portion:
Fixed rate.................. $4,750 $105,679 $ -- $ -- $160,000 $ -- $270,429 $ --(a)
Average interest rate....... 6.00% 6.47% 6.00%
---------------
(a) Amount not determinable because of financial difficulty of CoreComm Limited.
SUPPLEMENTARY FINANCIAL INFORMATION
The following is a summary of the unaudited quarterly results of operations
for the years ended December 31, 2001 and 2000.
2001
---------------------------------------------------
THREE MONTHS ENDED
---------------------------------------------------
MARCH 31 JUNE 30(1) SEPTEMBER 30 DECEMBER 31
--------- ---------- ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues...................................... $ 72,937 $73,243 $74,307 $ 72,720
Operating (loss).............................. (240,584) (80,712) (41,460) (249,877)
(Loss) before extraordinary item.............. (249,661) (92,096) (54,161) (263,170)
Gain on extinguishment of debt................ -- -- 2,216 37,282
Net (loss).................................... (249,661) (92,096) (51,945) (225,888)
Net (loss) per common Share -- basic and
diluted:
(Loss) before extraordinary item.............. (3.58) (1.04) (0.59) (1.92)
Gain on extinguishment of debt................ -- -- .02 0.27
Net (loss).................................... (3.58) (1.04) (0.57) (1.65)
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2000
--------------------------------------------------
THREE MONTHS ENDED
--------------------------------------------------
MARCH 31 JUNE 30(2) SEPTEMBER 30 DECEMBER 31
-------- ---------- ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues........................................ $18,959 $19,397 $18,263 $ 75,503
Operating loss.................................. (38,026) (81,079) (47,826) (132,396)
Net (loss)...................................... (39,871) (83,190) (50,149) (140,601)
Net (loss) per common Share -- basic and
diluted....................................... (1.02) (2.08) (1.24) (2.08)
---------------
(1) We reduced the carrying value of fixed assets, goodwill and other
intangibles by $368.3 million, of which $200.7 million was recorded in the
fourth quarter of 2001 and $167.6 million was recorded in the first quarter
of 2001. We recorded non-cash compensation expense of $21.6 million, of
which $11.9 million was recorded in the fourth quarter of 2001 and $3.2
million was recorded in each of the first three quarters of 2001. We
recorded reorganization and other charges of $39.5 million, of which $0.1
million was recorded in the first quarter of 2001, $33.4 million was
recorded in the second quarter of 2001, $3.9 million was recorded in the
third quarter of 2001 and $2.1 million was recorded in the fourth quarter of
2001. We also recorded extraordinary gains on the extinguishment of debt of
$39.5 million, of which $37.3 million was recorded in the fourth quarter of
2001 and $2.2 million was recorded in the third quarter of 2001.
(2) In September 2000, we acquired ATX and Voyager. We consolidated the results
of operations of ATX and Voyager from the date of acquisition. In addition,
we borrowed $91.1 million under our senior secured credit facility and
issued $108.7 million aggregate principal amount of Senior Unsecured Notes
due 2003 in September 2000 and issued $16.1 million aggregate principal
amount of 10.75% Senior Unsecured Convertible PIK Notes due 2010 in December
2000.
Also, in the fourth quarter of 2000, we reduced the carrying amount of
goodwill and other intangibles by $35.9 million, we recorded non-cash
compensation expense of $4.8 million from the rescission of option exercises
and we recorded reorganization and other charges of $12.7 million.
We recorded non-cash compensation expense from the grant of options at an
exercise price below fair market value as follows: $32.2 million in the
second quarter of 2000, $3.2 million in the third quarter of 2000 and $3.2
million in the fourth quarter of 2000.
124
CAPITALIZATION
The following table shows our cash and cash equivalents and capitalization
of CoreComm Limited as of March 31, 2002. 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 of CoreComm Limited" and "-- Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
AS OF MARCH 31,
2002
------------------
(IN THOUSANDS)
Cash and cash equivalents................................... $ 472
===========
Current portion of long-term debt........................... $ 4,750
===========
Long-term debt:
6% Convertible Subordinated Notes due 2006................ 160,000
Senior Unsecured Notes due 2003, less unamortized
discount............................................... 98,087
-----------
Total long-term debt.............................. 258,087
Stockholders' equity:
Preferred stock, par value $0.01 per share, liquidation
preference $324,937,000, 5,000,000 shares authorized,
301,000 issued and outstanding......................... 3
Common stock, par value $0.01 per share; 600,000,000
shares authorized; 141,655,000 shares issued and
outstanding(1)......................................... 1,417
Additional paid-in capital................................ 782,922
(Deficit)................................................. 1,060,332
-----------
(275,990)
Treasury stock at cost 1,329,000....................... (10,574)
-----------
Total stockholders' deficiency.................... (286,564)
-----------
Total capitalization.............................. $ (28,477)
===========
---------------
(1) Excludes shares issuable upon the possible future conversion of unsecured
convertible notes or upon the exercise of stock options and warrants.
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. As is permitted under CoreComm Limited's option plans, CoreComm
Limited sent, on or around April 11, 2002, notices to the holders of its options
stating CoreComm Limited's intention to consummate the merger and informing
these holders that they have 30 days to exercise their options before the
options will terminate. Between now and the time of the merger, if holders of
CoreComm Limited options exercise their options, they would, at the time of the
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 the exchange ratio. CoreComm Limited was not required to record compensation
expense as a result of terminating its options.
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OUR BUSINESS
CoreComm Limited's only material business is its ownership of approximately
13% of the outstanding capital stock of CoreComm Holdco.
In addition to the matters set forth in the section of this prospectus
entitled "Information about CoreComm Holdco, Inc. -- Our Business -- Legal
Proceedings" to which CoreComm Limited is a party, CoreComm Limited currently
has the following outstanding litigation matters which, if resolved unfavorably
to CoreComm Limited, could have a material adverse effect on CoreComm Limited:
- FiberStream, Inc., a direct subsidiary of CoreComm Limited, has been in
communications with Metromedia Fiber Networks, Inc., referred to as MFN,
regarding a dispute between the parties under a General Agreement dated
September 29, 2000 and a related Product Order of the same date. The
dispute centers around the accuracy of some statements that were made by
MFN concerning the nature of its network at the time of contracting, the
timeliness of the installation of the circuits by MFN under the
agreement, and FiberStream's obligation, if any, to make payments in
respect of those circuits. MFN has indicated that unless payment is made
for the circuits, it may initiate arbitration under the agreement and
seek early termination penalties in excess of approximately $1.1 million.
FiberStream has rejected MFN's demands and has advised that it will
defend itself vigorously and pursue all available counterclaims,
including claims for fraudulent inducement relating to the execution of
the contract and damages arising from MFN's alleged failure to perform
under the contract. The parties have discussed the prospect of settling
their respective claims without resort to litigation and those
discussions are presently ongoing.
- On October 9, 2001, Enavis Networks, Inc. filed an action in the Circuit
Court of Pinellas County, Florida against CoreComm Limited asserting that
Enavis is owed approximately $420,000 relating to the alleged sale and
installation of telecommunications equipment by Enavis. CoreComm Limited
has filed a motion to dismiss this action for lack of personal
jurisdiction over us in Florida and this motion is still pending. Upon
resolution of the motion to dismiss in Florida and assuming that the
matter proceeds in litigation, CoreComm Limited intends to defend this
action vigorously and assert counterclaims against Enavis arising from
Enavis' failure to provide equipment complying with CoreComm's
specifications.
- 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., a direct, wholly-owned
subsidiary of CoreComm Holdco, 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. On February 27, 2002, Yale's motion for
a preliminary injunction was denied subject to the substitution of
CoreComm Holdco for CoreComm Limited as guarantor on the lease and Yale's
motion to specify the revised figure of $404,290.87 was granted. The
parties have reached an agreement in principle to settle the litigation
although, pending the execution of a formal settlement agreement, the
litigation remains in effect.
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 the Holdco recapitalization, accelerated all outstanding
options to acquire shares of
126
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. As is permitted under CoreComm
Limited's option plans, on or around April 11, 2002 CoreComm Limited sent
notices to the holders of its options stating CoreComm Limited's
intention to consummate the merger and informing these holders that their
options will terminate upon the consummation of the merger. Between now
and the time of the consummation of the merger, if holders of CoreComm
Limited options exercise their options, they would, at the time of the
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 the same exchange ratio.
127
COMPARATIVE STOCK PRICES AND DIVIDENDS
CORECOMM LIMITED
The following table sets forth, for the periods indicated, the high and low
last bid 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.
BID PRICE
---------------
HIGH LOW
------ ------
2000
First Quarter............................................... $49.13 $32.08
Second Quarter.............................................. $42.81 $14.69
Third Quarter............................................... $20.38 $ 7.81
Fourth Quarter.............................................. $ 8.00 $ 2.06
2001
First Quarter............................................... $ 4.75 $ .09
Second Quarter.............................................. $ .63 $ .09
Third Quarter............................................... $ .22 $ .06
Fourth Quarter.............................................. $ .20 $ .07
2002
First Quarter............................................... $ .16 $ .06
Second Quarter (through June 25, 2002)...................... $ .12 $ .04
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 bid price for Limited common stock on The Nasdaq Stock Market National
Market was $0.17.
As of June 25, 2002, there were approximately 510 record holders of Limited
common stock and one record holder 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 and is currently restricted from doing so by the terms of
the senior secured credit facility. The credit agreement governing CoreComm
Limited's senior secured credit facility contains covenants which significantly
limit CoreComm Limited's and its subsidiaries' ability to pay cash dividends.
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 under 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 under the exchange offers.
128
CORECOMM HOLDCO
Currently no public market exists for the shares of our common stock. As of
June 25, 2002, there were approximately 43 record holders, one of which is
CoreComm Limited, of CoreComm 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." For a discussion of the proposed transfer of this Nasdaq
listing, please refer to the section of the prospectus entitled "The Exchange
Offers -- Effect of the Exchange Offers -- Transfer of Nasdaq Listing."
129
DESCRIPTION OF CAPITAL STOCK
AUTHORIZED CAPITAL STOCK
CoreComm Holdco's 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 June 25, 2002, we had (1) 30,000,054
shares of common stock issued and outstanding, which were held of record by
approximately 43 stockholders, including CoreComm Limited and (2) 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 under our
charter or under 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.
CoreComm Limited's outstanding common stock is currently listed, and trades,
under the symbol "COMM" on the Nasdaq National Market. For a discussion of the
proposed transfer of this Nasdaq listing, please refer to the section of the
prospectus entitled "The Exchange Offers -- Effect of the Exchange
Offers -- Transfer of Nasdaq Listing."
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.
130
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 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.
131
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.
THE PUBLIC 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 public notes. Under the terms
of the agreements, in exchange for tendering the notes, CoreComm Limited paid
each holder that signed 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.
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. The terms of the exchange agreement apply only to the security
holders who were parties to the agreement and do not apply to holders who tender
under the exchange offers. Under the agreement:
- the security holders would exchange their securities for shares of
CoreComm Holdco common stock as part of the Holdco recapitalization;
- 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 security holder, 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
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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;
- 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 under 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 under the Holdco recapitalization
and an amendment to our charter to effect this stock split and/or (2) a
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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;
- 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 public
notes; 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
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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 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 related
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 related 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 related 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 related 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
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director while that successor is a member of our board of directors, who is not
an affiliate, associate, Schedule 13D related 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
(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
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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.
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
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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 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
under 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 March 31, 2002, our subsidiaries had $9.7 million of indebtedness in
capital leases. For more information, please refer to our historical financial
statements and the related notes. Upon completion of the merger, the principal
amount of public notes that were not tendered or converted will remain
outstanding debt obligations of CoreComm Limited, which will be a wholly-owned
subsidiary of CoreComm Holdco. In addition, our subsidiaries may incur
substantial indebtedness in the future.
SENIOR SECURED CREDIT FACILITY
On September 28, 2000, CoreComm Limited 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 March 31,
2002, 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 March 31, 2002, 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 March 31, 2002, the interest rate on our term loan facility was 6.86%.
At March 31, 2002, the interest rate on our revolving credit facility was 6.86%.
Beginning April 13, 2002 and ending October 12, 2002, the interest rate is
6.75%. 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;
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- net proceeds from insurance following a casualty event; and
- excess cash flow.
Once the term loans have been repaid, the term loans will not be permitted
to be reborrowed.
We and all of our present and future direct and indirect subsidiaries,
other than subsidiaries that we may designate as unrestricted subsidiaries,
unconditionally guarantee payment under our senior secured credit facility.
These guarantees are secured by a pledge of and a perfected security interest in
all of the assets of these entities, including 100% of the stock of our
subsidiaries.
Our senior secured credit facility contains customary covenants and
restrictions on our ability and the ability of our subsidiaries to engage in
some activities, including:
- 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 NOTES DUE 2011
On April 12, 2001, we 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. This 2011 PIK Note was issued 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 ours and
as a subordinated debt obligation of CoreComm Limited.
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- 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, which we sometimes refer to as
the PIK Notes. The terms of the PIK Notes are substantially identical to
the 2011 PIK Note, except that:
(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 and dated as of October 15, 2001, 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, we 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 Limited or by us 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 we 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, we, the holder
of this note and CoreComm Limited have entered into letter agreements
relating to the conversion feature of this note and the PIK Notes
following the acceptance of shares under the exchange offer for CoreComm
Limited common stock. Through those letter agreements, consistent with
the original terms of the notes, we and CoreComm Limited have agreed to
exercise our rights under the notes so that, following our accepting
CoreComm Limited common stock under the exchange offer for CoreComm
Limited common stock, the convertibility feature of the notes will be
altered so that rather than the notes being convertible into shares of
CoreComm Limited common stock, they will become convertible into shares
of our common stock. At that time, the conversion price of $1.00, or
other applicable conversion price in the case of the PIK Notes, will be
equitably adjusted by applying the exchange ratio in the exchange offer
for CoreComm Limited common stock, which results in a new conversion
price of $38.90 per share of our common stock for the 2011 PIK Note. The
holder has agreed not to exercise its rights to convert into CoreComm
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Limited common stock for six months from February 5, 2002, unless that
right has previously ceased as described above. In the event that we do
not accept CoreComm Limited common stock under the exchange offers, the
conversion feature would remain into CoreComm Limited common stock. The
2011 PIK Note is redeemable, in whole or in part, at our option, at any
time 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.
- 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 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; or
(6) covenants with respect to
(a) maintenance of cash-flow to interest expense,
(b) asset ratio,
(c) restricted payments,
(d) transactions with affiliates, or
(e) use of proceeds from an asset sale.
142
COMPARISON OF RIGHTS OF HOLDERS OF CORECOMM
HOLDCO COMMON STOCK AND THE OUTSTANDING SECURITIES
We summarize below the material differences between the rights of holders
of outstanding securities and holders of our common stock. First, we compare the
material differences between the rights of our stockholders under our current
restated certificate of incorporation and amended by-laws in the left column and
the rights of a CoreComm Limited stockholder under the current CoreComm Limited
restated certificate of incorporation, and by-laws in the 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 our 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 our 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 CORECOMM HOLDCO AND LIMITED
GENERAL
CORECOMM HOLDCO CORECOMM LIMITED
--------------------------------------------- ---------------------------------------------
The rights of our stockholders are governed The rights of CoreComm Limited stockholders
by our charter and amended by-laws, in are governed by CoreComm Limited's restated
addition to Delaware law. certificate of incorporation and by-laws, in
addition to Delaware law.
AUTHORIZED CAPITAL
CORECOMM HOLDCO CORECOMM LIMITED
--------------------------------------------- ---------------------------------------------
Our authorized capital stock consists of: The authorized capital stock of CoreComm
Limited consists of:
250,000,000 shares of our common stock,
with a par value of $0.01 per share; 600,000,000 shares of Limited common
there were 30,000,054 shares of common stock, with a par value of $0.01 per share;
stock outstanding as of January 25, 2002; there were 140,326,706 shares of common
and stock outstanding as of January 25, 2002;
and
10,000,000 shares of preferred stock, with a
par value of $0.01 per share; there were 5,000,000 shares of preferred stock, with a
no issued or outstanding shares of par value of $0.01 per share; there were
preferred stock as of January 25, 2002. 50,000 shares of Series A, 1,086 shares
of Series A-1 and 250,000 shares of
Series B preferred 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 Except for the matters specified in the
following section, an authorization of the following section, an authorization of the
our board, followed by the vote of a majority CoreComm Limited board, followed by the vote
of the outstanding shares of our common stock of a majority of the outstanding shares of
is required for an amendment Limited common stock
143
CORECOMM HOLDCO CORECOMM LIMITED
--------------------------------------------- ---------------------------------------------
to our charter. is required for an amendment to the CoreComm
Limited charter.
An amendment to our charter with respect to
the following provisions requires the An amendment to the CoreComm Limited charter
affirmative vote of the holders of at least with respect to the following provisions
2/3 of the combined voting power of all of requires the affirmative vote of the holders
our then-outstanding shares entitled to vote: of at least 2/3 of the combined voting power
of all of the then-outstanding shares of
- The board of directors; CoreComm Limited entitled to vote:
- Removal of directors; - The board of directors;
- Prohibition of stockholder action by - Prohibition of stockholder action by
written consent without a meeting; written consent without a meeting;
- Special meetings of stockholders; - Special meetings of stockholders;
- Business combinations with interested - Business combinations with interested
parties; parties;
- Limitation on liability of directors; - Limitation on liability of directors;
and
- Action with respect to the amended
by-laws; and - Action with respect to the amended
by-laws.
- Modifications of specified provisions
of the charter
BYLAWS
CORECOMM HOLDCO CORECOMM LIMITED
--------------------------------------------- ---------------------------------------------
Our amended by-laws may be adopted, amended The CoreComm Limited by-laws may be adopted,
or repealed by: the board of directors or the amended or repealed by: the board of
affirmative vote of holders of at least 2/3 directors or the affirmative vote of holders
of the combined voting power of all of our of at least 2/3 of the combined voting power
then-outstanding shares entitled to vote of all of the then- outstanding shares of
CoreComm Limited entitled to vote.
NUMBER OF DIRECTORS
CORECOMM HOLDCO CORECOMM LIMITED
--------------------------------------------- ---------------------------------------------
Our amended by-laws provide that the board of The CoreComm Limited by-laws provide that the
directors shall consist of between three and board of directors shall consist of between
15 directors which number is fixed by the three and 15 directors which number is fixed
board of directors from time to time. The by the board of directors from time to time.
current number of directors is seven. The current number of directors is four.
CLASSIFICATION OF DIRECTORS
CORECOMM HOLDCO CORECOMM LIMITED
--------------------------------------------- ---------------------------------------------
The board of directors is divided into three The board of directors is divided into three
classes, each as nearly equal in number as classes, each as nearly equal in number as
possible, with one class being elected possible, with one class being elected
annually to a three-year term. annually to a three-year term.
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DIRECTOR NOMINATIONS
CORECOMM HOLDCO CORECOMM LIMITED
--------------------------------------------- ---------------------------------------------
Except for the right of Michael Karp and A stockholder must make any nomination for a
Booth American Company to designate directors director in writing to the secretary of
in accordance with the exchange agreement, a CoreComm Limited not less than 75 days nor
stockholder must make any nomination for a more than 90 days prior to an annual meeting
director in writing to our secretary not less of CoreComm Limited's stockholders; provided,
than 75 days nor more than 90 days prior to however, that in the event that less than 90
an annual meeting of our stockholders; days' notice or prior public disclosure of
provided, however, that in the event that the date of the meeting is given or made to
less than 90 days' notice or prior public stockholders, notice by the stockholder to be
disclosure of the date of the meeting is timely must be received by the secretary of
given or made to stockholders, notice by the CoreComm Limited not later than the close of
stockholder to be timely must be received by business on the fifteenth day following the
our secretary not later than the close of day on which the notice of the date of the
business on the fifteenth day following the meeting was mailed or the public disclosure
day on which the notice of the date of the was made, whichever first occurs.
meeting was mailed or the public disclosure
was made, whichever first occurs.
DIRECTOR QUALIFICATION
CORECOMM HOLDCO CORECOMM LIMITED
--------------------------------------------- ---------------------------------------------
Our 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 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 Securities
Exchange Act by any beneficial owner of 15%
or more of our common stock.
REMOVAL OF DIRECTORS
CORECOMM HOLDCO CORECOMM LIMITED
--------------------------------------------- ---------------------------------------------
Our directors may be removed at any time, but CoreComm Limited directors may be removed at
only for cause and only by holders of at any time, but only for cause and only by
least 2/3 of the combined voting power of all holders of at least 2/3 of the combined
of our then-outstanding shares entitled to voting power of all of the then-outstanding
vote at an election of directors. However, so shares of CoreComm Limited entitled to vote
long as holders of preferred stock are at an election of directors.
entitled to elect one or more directors, with
respect to removal for cause of a 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.
145
ANNUAL MEETINGS OF STOCKHOLDERS
CORECOMM HOLDCO CORECOMM LIMITED
--------------------------------------------- ---------------------------------------------
The annual meeting of stockholders must be The annual meeting of stockholders must be
held on a date and at a place within or held on a date and at a place within or
without Delaware as may be designated by without Delaware as may be designated by
resolution of the board of directors. resolution of the board of directors.
SPECIAL MEETINGS OF STOCKHOLDERS
CORECOMM HOLDCO CORECOMM LIMITED
--------------------------------------------- ---------------------------------------------
Special meetings of the stockholders, for any Special meetings of the stockholders, for any
purposes, may be called at any time by the purposes, may be called at any time by the
board of directors, by the chairman of the board of directors, by the chairman of the
board or by the president. board or by the president.
STOCKHOLDER PROPOSALS
CORECOMM HOLDCO CORECOMM LIMITED
--------------------------------------------- ---------------------------------------------
A stockholder of ours wishing to bring A CoreComm Limited stockholder wishing to
business before the annual or special bring business before the annual or special
stockholders' meeting must provide written stockholders' meeting must provide written
notice to the corporation's secretary. The notice to the corporation's secretary. The
notice must be received not less than 75 days notice must be received not less than 75 days
nor more than 90 days prior to the meeting; nor more than 90 days prior to the meeting;
provided, however, that in the event that provided, however, that in the event that
less than 90 days' notice or prior public less than 90 days' notice or prior public
disclosure of the date of the meeting is disclosure of the date of the meeting is
given or made to stockholders, notice by the given or made to stockholders, notice by the
stockholder to be timely must be received by stockholder to be timely must be received by
our secretary not later than the close of the secretary of CoreComm Limited not later
business on the fifteenth day following the than the close of business on the fifteenth
day on which the notice of the date of the day following the day on which the notice of
meeting was mailed or the public disclosure the date of the meeting was mailed or the
was made, whichever first occurs. public disclosure was made, whichever first
occurs.
STOCKHOLDER RIGHTS PLANS
CORECOMM HOLDCO CORECOMM LIMITED
--------------------------------------------- ---------------------------------------------
We entered into a Rights Agreement dated as CoreComm Limited entered into a Rights
of December 17, 2001 with Continental Stock Agreement dated as of September 29, 2000
Transfer & Trust Company as rights agent. between CoreComm Limited and Continental
Rights will separate from our common stock Stock Transfer & Trust Company as rights
and become exercisable following the earlier agent. Rights will separate from CoreComm
of (a) the tenth business day following a Limited's common stock and become exercisable
public announcement that a person or group following the earlier of (a) the tenth
has acquired or has obtained the right to business day following a public announcement
acquire 15% or more of our outstanding common that a person or group has acquired or has
stock or (b) the tenth business day, or a obtained the right to acquire 18% or more of
later date as may be determined by the action CoreComm Limited's outstanding common stock
of our board of directors prior to the time or (b) the tenth business day, or a later
that any person or group becomes an acquiring date as may be determined by the action of
person, after the commencement of, or CoreComm Limited's board of directors prior
announcement of an intention to make, a to the time that any person or group becomes
tender offer or exchange offer an
146
CORECOMM HOLDCO CORECOMM LIMITED
--------------------------------------------- ---------------------------------------------
for 15% or more of our outstanding common acquiring person, after the commencement of,
stock. There is an exception for (1) an or announcement of an intention to make, a
acquisition of shares of our common stock tender offer or exchange offer for 18% or
under or as permitted by the Exchange more of CoreComm Limited's outstanding common
Agreement and (2) beneficial owners of our stock. There is an exception for beneficial
common stock that, together with their owners of Limited common stock that, together
affiliates and associates, own 15% or more of with their affiliates and associates, own 18%
our outstanding common stock immediately or more of the outstanding Limited common
after the consummation of the transactions stock on the date of the rights agreement
contemplated by the exchange agreement unless unless and until that person or entity
and until that person or entity becomes the becomes the beneficial owner of an additional
beneficial owner of an additional 1% of our 1% of CoreComm Limited's outstanding common
outstanding common stock other than as stock.
permitted by the Exchange Agreement.
After the distribution date, each right will
After the distribution date, each right will entitle the holder, other than the acquiring
entitle the holder, other than the acquiring person or group, to purchase shares of
person or group, to purchase shares of our Limited common stock at a 50% discount to its
common stock at a 50% discount to its market market price as of the purchase date.
price as of the purchase date.
If after the rights become exercisable
If after the rights become exercisable we CoreComm Limited agrees to merge into another
agree to merge into another entity, another entity, another entity merges into CoreComm
entity merges into us or we sell or transfer Limited or CoreComm Limited sells or
more than 50% of our assets, each right will transfers more than 50% of its assets, each
entitle the holder to purchase a number of right will entitle the holder to purchase a
shares of common stock of the resulting number of shares of common stock of the
entity at a discount. resulting entity at a discount.
If after someone has acquired 15% or more of If after someone has acquired 18% or more of
our common stock or our board of directors CoreComm Limited's common stock or CoreComm
declares any person to be an adverse person Limited's board of directors declares any
upon a determination that a person has become person to be an adverse person upon a
the beneficial owner of a substantial amount determination that a person has become the
of our common stock, which shall in no event beneficial owner of a substantial amount of
be less than 5% of the outstanding common CoreComm Limited's common stock, which shall
stock, each holder of a right will be in no event be less than 5% of the
entitled to receive shares of our common outstanding common stock, each holder of a
stock at a discount. Any rights that are or right will be entitled to receive shares of
were owned by an acquirer of more than 15% of Limited common stock at a discount. Any
our outstanding common stock or any person rights that are or were owned by an acquirer
that our board of directors declares to be an of more than 18% of CoreComm Limited's
adverse person will be null and void. outstanding common stock or any person that
CoreComm Limited's board of directors
We may exchange the rights at a ratio of one declares to be an adverse person will be null
share of common stock for each right at any and void.
time after someone acquires 15% or more of
our common stock but before that person CoreComm Limited may exchange the rights at a
acquires 50% or more of our common stock. We ratio of one share of common stock for each
may also redeem the rights at our option at a right at any time after someone acquires 18%
price of $0.01 per right, subject to or more of CoreComm Limited's common stock
adjustment, at any time before the tenth but before that person acquires 50% or more
of CoreComm Limited's common stock. CoreComm
Limited may also redeem the rights at its
option at a price of
147
CORECOMM HOLDCO CORECOMM LIMITED
--------------------------------------------- ---------------------------------------------
day following the announcement that someone $0.01 per right, subject to adjustment, at
has acquired 15% or more of our common stock. any time before the tenth day following the
The rights expire on the earliest of December announcement that someone has acquired 18% or
17, 2011, an exchange or redemption of the more of CoreComm Limited's common stock. The
rights as described above, or the completion rights expire on the earliest of October 16,
of a merger as described above. The rights 2010, an exchange or redemption of the rights
distribution is not taxable to stockholders. as described above, or the completion of a
merger as described above. The rights
distribution is not taxable to stockholders.
CERTAIN BUSINESS COMBINATIONS
CORECOMM HOLDCO CORECOMM LIMITED
--------------------------------------------- ---------------------------------------------
Our charter provides that, in addition to any The CoreComm Limited charter provides that,
affirmative vote required by law, the in addition to any affirmative vote required
affirmative vote of holders of two-thirds of by law, the affirmative vote of holders of
the voting power of the our voting stock will two-thirds of the voting power of the
be necessary to approve any business CoreComm Limited voting stock will be
combination, proposed by an interested necessary to approve any business
stockholder in specified circumstances. combination, proposed by an interested
stockholder in specified circumstances.
An interested stockholder is defined as
anyone who is the beneficial owner of more An interested stockholder is defined as
than 15% of the voting power of the voting anyone who is the beneficial owner of more
stock, other than ourselves and any employee than 15% of the voting power of the voting
stock plans sponsored by us, and includes any stock, other than CoreComm Limited and any
person who is an assignee of or has succeeded employee stock plans sponsored by CoreComm
to any shares of voting stock in a Limited, and includes any person who is an
transaction not involving a public offering assignee of or has succeeded to any shares of
that were at any time within the prior voting stock in a transaction not involving a
two-year period beneficially owned by an public offering that were at any time within
interested stockholder. The term beneficial the prior two-year period beneficially owned
owner includes persons directly and by an interested stockholder. The term
indirectly owning or having the right to beneficial owner includes persons directly
acquire or vote the stock. Interested and indirectly owning or having the right to
stockholders participate fully in all acquire or vote the stock. Interested
stockholder voting. stockholders participate fully in all
stockholder voting.
A business combination includes the following
transactions: A business combination includes the following
transactions:
- merger or consolidation of us or any
subsidiary of ours with an interested - merger or consolidation of CoreComm
stockholder or with any other Limited or any subsidiary of CoreComm Limited
corporation or entity which is, or with an interested stockholder or with
after the merger or consolidation would any other corporation or entity which
be, an affiliate, associate or a is, or after the merger or
Schedule 13D related party of an consolidation would be, an affiliate or
interested stockholder; associate of an interested stockholder;
- the sale or other disposition by us or - the sale or other disposition by
a subsidiary of ours of assets having a CoreComm Limited or a subsidiary of CoreComm
fair market value of $10,000,000 or Limited of assets having a fair market
more if an interested stockholder, or value of $5,000,000 or more if an
an affiliate, an associate or a interested stockholder, or an affiliate
Schedule 13D related party of an or an associate of an interested
interested stockholder is a party to stockholder is a party to the
the transaction; transaction;
- the adoption of any plan or proposal - the adoption of any plan or proposal
for our for
148
CORECOMM HOLDCO CORECOMM LIMITED
--------------------------------------------- ---------------------------------------------
liquidation or dissolution proposed by CoreComm Limited's liquidation or
or on behalf of an interested dissolution proposed by or on behalf of
stockholder, or an affiliate, an an interested stockholder, or an
associate or a Schedule 13D related affiliate or an associate of an
party of an interested stockholder; or interested stockholder; or
- any reclassification of securities, - any reclassification of securities,
recapitalization, merger with a recapitalization, merger with a subsidiary,
subsidiary, or other transaction which or other transaction which has the
has the effect, directly or indirectly, effect, directly or indirectly, of
of increasing the proportionate share increasing the proportionate share of
of any class of our outstanding stock, any class of CoreComm Limited's
or securities convertible into stock, outstanding stock, or securities
or a subsidiary owned by an interested convertible into stock, or a subsidiary
stockholder, or an affiliate, an owned by an interested stockholder, or
associate or a Schedule 13D related an affiliate or an associate of an
party 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
--------------------------------------------- ---------------------------------------------
We are subject to Section 203 of the Delaware CoreComm Limited is subject to Section 203 of
General Corporation Law which prohibits a the Delaware General Corporation Law which
publicly held Delaware corporation from prohibits a publicly held Delaware
engaging in any business combination with an corporation from engaging in any business
interested stockholder for a period of three combination with an interested stockholder
years following the time that a stockholder for a period of three years following the
becomes an interested stockholder unless time that a stockholder becomes an interested
specified conditions are met. Please refer to stockholder unless specified conditions are
the section of the prospectus entitled met. Please refer to the section of the
"Description of Capital Stock -- Section 203 prospectus entitled "Description of Capital
of the Delaware General Corporation Law." Stock -- Section 203 of the Delaware General
Corporation Law."
149
DESCRIPTION OF PUBLIC NOTES
By tendering your public notes for shares of our 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 and the supplements governing the public notes. Please refer to the
section of the prospectus entitled "Where You Can Find More Information." In
addition, we encourage you to read the following risk factors: "Risk
Factors -- Risk factors relating to the exchange offers -- CoreComm Limited
would hold virtually no material assets following the completion of the Holdco
recapitalization and may not be able to meet its obligations under the public
notes," "Risk Factors -- Risk factors relating to the exchange offers -- Holders
of public notes could face reduced liquidity following the exchange offers" and
"Risk Factors -- Risk factors relating to the exchange offers -- Holders of
public notes that tender in the exchange offers will be giving up their rights
to receive interest."
PRINCIPAL, MATURITY AND INTEREST
CoreComm Limited issued public notes with a maximum aggregate principal
amount of $175.0 million. As a result of the first phase of the Holdco
recapitalization and prior conversions of public notes into shares of Limited
common stock, $4.75 million principal amount remains outstanding and not held by
us. 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 would hold
virtually no material assets following the completion of the Holdco
recapitalization and may not be able to meet its obligations under the public
notes."
CONVERSION
The holder of any public note has the right 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 $0.75,
previously $27.39, per share, 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. Immediately prior to completion of the merger, CoreComm Limited,
CoreComm Holdco and the trustee for the public notes will execute and deliver a
supplemental indenture to provide that any public notes not tendered or
converted will become convertible into CoreComm Holdco common stock and the
conversion price per share of the public notes will be adjusted based on the
exchange ratio for CoreComm Limited common stock.
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:
(1) full payment of amounts then due on all senior debt have been made
or duly provided for under the terms of the instrument governing senior
debt; and
150
(2) 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 under 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 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 Holdco recapitalization is 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
our outstanding capital stock, 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
151
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.
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 under the Investment
Company Act of 1940, as amended.
152
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.
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.
153
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.
The interest payment that was due under the outstanding public notes on
April 1, 2002 has not been made and CoreComm Limited is in default under the
public notes. Therefore the $4.75 million of convertible notes not held by
CoreComm Holdco has been classified as a current liability. The consideration we
are offering in our exchange offer for the public notes includes $30.00 in cash,
which represents the April 1, 2002 interest payment, for each $1,000 in
principal amount outstanding.
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.
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.
154
MATTERS RELATING TO OUTSTANDING SECURITIES
As of June 25, 2002, there were 141,655,388 shares of common stock, par
value $0.01 per share, of CoreComm Limited issued and outstanding. As of June
25, 2002, there was $164.75 million in aggregate principal amount of 6%
Convertible Subordinated Notes due 2006 issued and outstanding, including $160
million in principal amount held by CoreComm Holdco.
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 CORECOMM
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................. 254,922 0.18% 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)............... 0 0% 0 0%
Alan J. Patricof.................... 170,435 0.12% 0 0%
Warren Potash....................... 255,290 0.18% 0 0%
CoreComm Holdco, Inc.(5)............ 304,223,534 68.23% $160,000,000 97.12%
Michael Karp........................ 0 0% 0 0%
---------------
(1) Includes shares of CoreComm Limited common stock purchased upon the exercise
of options which are exercisable or become so in the next 60 days, warrants
and shares of CoreComm Limited common stock purchased upon the conversion of
the public 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 CoreComm
Limited common stock held by Mr. Gravina's minor children, as to which
shares Mr. Gravina disclaims beneficial ownership.
(3) Includes 4,455 shares of CoreComm Limited common stock owned by trusts for
the benefit of Mr. Blumenthal's children. An additional 6,750 shares of
CoreComm Limited 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 $160,000,000 in public notes, convertible into 213,333,334 shares
of CoreComm Limited common stock; 51,086 shares of Series A and A-1
Preferred Stock, convertible into 43,663,342 shares of CoreComm Limited
common stock; and 250,000 shares of Series B Preferred Stock, convertible
into 47,226,858 shares of CoreComm Limited common stock.
155
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 WHERE & HOW
INVOLVED DATE SHARES PRICE 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
PRICE PER $1,000
IN AGGREGATE
NAME OF PERSON AGGREGATE PRINCIPAL PRINCIPAL WHERE & HOW
INVOLVED DATE AMOUNT AMOUNT TRANSACTION EFFECTED
-------------- ---------- ------------------- ---------------- -----------------------
GEORGE S. BLUMENTHAL.... 12/17/2001 $7,250,000 $38.92(1) Exchanged in the first
phase of Holdco
recapitalization
BARCLAY KNAPP........... 12/17/2001 $ 300,000 $38.92(1) Exchanged in the first
phase of the Holdco
recapitalization
WARREN POTASH........... 12/17/2001 $ 250,000 $38.92(1) Exchanged in the first
phase of the Holdco
recapitalization
---------------
(1) $39.10 represents $30.00 in cash and 9.1047 shares of our common stock based
upon an estimated fair market value of $0.98 per share.
156
MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES
The following is the opinion of Skadden, Arps, Slate, Meagher & Flom
(Illinois), special federal income tax counsel to CoreComm Holdco, with regard
to the material U.S. federal income tax consequences to persons who exchange
outstanding securities for CoreComm Holdco common stock and cash, if any, under
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
holder or holders subject to special treatment under U.S. federal income tax
laws. This discussion is limited to persons who hold outstanding securities and
any CoreComm Holdco common stock as capital assets. We have not sought, and do
not intend to seek, a ruling from the IRS regarding any matter discussed herein.
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, a holder who is a U.S. person means any
one of the following:
- 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 thereof,
- an estate, the income of which is includible in gross income for U.S.
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.
If a partnership, including any entity treated as a partnership for U.S. federal
income tax purposes is a beneficial owner of outstanding securities or CoreComm
Holdco common stock, the U.S. federal income tax treatment of a partner in the
partnership will generally depend on the status of the partner and the
activities of the partnership.
For purposes of this discussion, the term U.S. holder means a holder that
is a U.S. person and the term non-U.S. holder means a holder who is not a U.S.
person.
U.S. HOLDERS
The exchange of CoreComm Limited common stock for CoreComm Holdco common
stock pursuant to the exchange offer should be tax free to U.S. holders as part
of the larger Section 351 of the Internal Revenue Code transaction that includes
the other contributions of property to CoreComm Holdco that have already been
completed in connection with the first phase of the Holdco recapitalization.
Alternatively, a U.S. holder's exchange of CoreComm Limited common stock
pursuant to the exchange offer should qualify as a tax-free stock-for-stock
reorganization for federal income tax purposes. No assurance can be given,
however, that the IRS could not successfully recharacterize the transactions
involved in the Holdco recapitalization, including a U.S. stockholder's exchange
of CoreComm Limited common stock, as a taxable liquidation of CoreComm Limited.
The tax treatment of the Holdco recapitalization depends upon all the facts and
circumstances and it is tax counsel's opinion that the IRS should not be
successful in any attempt to recharacterize this transaction. Thus, U.S. holders
who exchange CoreComm Limited common stock for CoreComm Holdco common stock
under the exchange offer should not be subject to U.S. federal income tax and
should have the same tax basis and holding period in the CoreComm Holdco common
stock received as they had immediately prior to the exchange in
157
the CoreComm Limited common stock exchanged therefor. Because there are no
clearly controlling legal precedents, the law regarding the tax treatment of the
Holdco recapitalization is uncertain, and tax counsel is unable to render a more
definitive opinion.
A U.S. holder's exchange of public notes for CoreComm Holdco common stock
and cash should be partially tax free, as discussed below, as part of the larger
Section 351 of the Internal Revenue Code transaction that includes the other
contributions of property to CoreComm Holdco that have already been completed in
connection with the first phase of the Holdco recapitalization. No assurance can
be given, however, that the IRS could not successfully recharacterize the
transactions involved in the Holdco recapitalization, including a U.S. holder's
exchange of public notes, as a taxable liquidation of CoreComm Limited. The tax
treatment of the Holdco recapitalization depends upon all the facts and
circumstances and it is tax counsel's opinion that the IRS should not be
successful in any attempt to recharacterize this transaction. Thus, U.S. holders
of public notes who exchange their public notes for CoreComm Holdco common stock
and cash under the exchange offer should recognize gain, but not loss, in an
amount equal to the lesser of (x) the amount of gain realized and (y) the cash
received in the exchange. A U.S. holder's realized gain is the excess of the
fair market value, as of the date of the exchange, of the CoreComm Holdco common
stock and cash received over the holder's adjusted tax basis in public notes
exchanged therefor. Although the issue is not free from doubt, a U.S. holder who
would otherwise recognize capital gain as a result of the receipt of cash in the
exchange should be required to report such gain as ordinary interest income to
the extent of any accrued market discount but may be required to recognize as
ordinary interest income any accrued market discount to the extent of any gain
realized, not limited by the amount of cash received. 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 CoreComm Holdco common stock received as such holder had
immediately prior to the exchange in the public notes exchanged therefor.
Because there are no clearly controlling legal precedents, the law regarding the
tax treatment of the Holdco recapitalization is uncertain, and tax counsel is
unable to render a more definitive opinion.
If, contrary to tax counsel's opinion, the exchange of outstanding
securities for CoreComm Holdco common stock were held to be part of a taxable
liquidation of CoreComm Limited for U.S. federal income tax purposes, exchanging
U.S. holders 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 sum of the fair market value of the CoreComm Holdco common stock, as of the
date of the exchange, and any cash received. If the outstanding securities
exchanged were held for more than one year, any resulting taxable capital gain
or loss should be long-term capital gain or loss. In a taxable exchange, a new
holding period for the CoreComm Holdco common stock would commence on the date
following the exchange and the tax basis of the CoreComm Holdco common stock
received would be its fair market value as of that date.
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 CoreComm Holdco common stock and cash, if any, under the exchange
offers.
A non-U.S. holder who exchanges outstanding securities for CoreComm Holdco
common stock and cash, if any, under the exchange offers will generally not be
subject to U.S. federal income tax in respect of any gain realized on the
exchange unless, contrary to tax counsel's opinion the exchange is otherwise a
taxable exchange for U.S. federal income tax purposes and:
- the gain is effectively connected with the conduct of a trade or business
of the non-U.S. holder within the United States;
158
- 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 certain other conditions 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. NON-U.S. HOLDERS ARE URGED TO CONSULT
THEIR U.S. TAX ADVISORS REGARDING THE TAX CONSEQUENCES OF INVESTING IN OUR
STOCK.
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. Skadden, Arps, Slate, Meagher & Flom (Illinois), special tax counsel for
CoreComm Holdco, will pass upon the tax consequences of these exchange offers.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements and schedules at December 31, 2001 and 2000 and for the
years ended December 31, 2001, 2000 and 1999, 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 CoreComm Limited's
consolidated financial statements and schedules at December 31, 2001 and 2000
and for the years ended December 31, 2001, 2000 and 1999, as set forth in their
reports (which contain an explanatory paragraph describing conditions that raise
doubt about the Company's ability to continue as a going concern as described in
note 1 to the consolidated financial statements). 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.
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 have
been audited by PricewaterhouseCoopers LLP, independent accountants, whose
report thereon appears herein. These financial statements, to the extent they
have been included in this prospectus, have been so included in reliance on the
report of such independent accountants given on the authority of said firm as
experts in auditing and accounting.
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 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. Some parts of the registration statement are omitted as
allowed by the rules and regulations of the SEC. We
159
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 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, 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. You can inspect and copy these reports and other information of our company
at the locations set forth above or download these reports from the SEC's
website set forth below. 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." For a discussion of the proposed
transfer of this Nasdaq listing, please refer to the section of the prospectus
entitled "The Exchange Offers -- Effect of the Exchange Offers -- Transfer of
Nasdaq Listing." 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
160
CORECOMM HOLDCO, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
CORECOMM HOLDCO, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheet -- March 31, 2002
(Unaudited)............................................... F-3
Condensed Consolidated Statements of Operations -- Three
months ended March 31, 2002 and 2001 (Unaudited).......... F-4
Condensed Consolidated Statement of Shareholder's Equity
(Deficiency) -- Three months ended March 31, 2002
(Unaudited)............................................... F-5
Condensed Consolidated Statements of Cash Flows -- Three
months ended March 31, 2002 and 2001 (Unaudited).......... F-6
Notes to Unaudited Condensed Consolidated Financial
Statements................................................ F-7
Report of Independent Auditors.............................. F-18
Consolidated Balance Sheets -- December 31, 2001 and 2000... F-19
Consolidated Statements of Operations -- Years Ended
December 31, 2001, 2000 and 1999.......................... F-20
Consolidated Statement of Shareholder's Equity -- Years
Ended December 31, 2001, 2000 and 1999.................... F-21
Consolidated Statements of Cash Flows -- Years Ended
December 31, 2001, 2000 and 1999.......................... F-22
Notes to Consolidated Financial Statements.................. F-23
VOYAGER.NET, INC.
Condensed Consolidated Balance Sheet -- June 30, 2000
(unaudited)............................................... F-50
Condensed Consolidated Statements of Operations -- Six
Months ended June 30, 1999 and 2000 (unaudited)........... F-51
Condensed Consolidated Statement of Stockholders'
Equity -- Six Months ended June 30, 2000 (unaudited)...... F-52
Condensed Consolidated Statements of Cash Flows -- Six
Months ended June 30, 1999 and 2000 (unaudited)........... F-53
Notes to Condensed Consolidated Financial Statements
(unaudited)............................................... F-54
Report of Independent Accountants........................... F-57
Consolidated Balance Sheets -- December 31, 1998 and 1999... F-58
Consolidated Statements of Operations -- Years ended
December 31, 1997, 1998 and 1999.......................... F-59
Consolidated Statements of Stockholders' Equity
(Deficit) -- Years ended December 31, 1997, 1998 and
1999...................................................... F-60
Consolidated Statements of Cash Flows -- Years ended
December 31, 1997, 1998 and 1999.......................... F-61
Notes to Consolidated Financial Statements.................. F-62
ATX TELECOMMUNICATIONS SERVICES, INC.
Balance Sheet -- June 30, 2000 (unaudited).................. F-73
Statements of Operations -- Six Months ended June 30, 2000
and 1999 (unaudited)...................................... F-74
Changes in Equity/Partners' Capital -- Six Months ended June
30, 2000 and 1999 (unaudited)............................. F-75
Cash Flows -- Six Months ended June 30, 2000 and 1999
(unaudited)............................................... F-76
Notes to Unaudited Financial Statements..................... F-77
Report of Independent Certified Public Accountants.......... F-79
Combined Balance Sheets -- December 31, 1999................ F-80
Combined Statements of Operations -- Years ended December
31, 1999 and 1998......................................... F-81
Combined Changes in Partners' Capital -- Years ended
December 31, 1999 and 1998................................ F-82
Combined Statements of Cash Flows -- Years ended December
31, 1999 and 1998......................................... F-83
Notes to Combined Financial Statements...................... F-84
F-1
CORECOMM LIMITED AND SUBSIDIARIES
Condensed Consolidated Balance Sheet -- March 31, 2002
(Unaudited)............................................... F-89
Condensed Consolidated Statements of Operations -- Three
months ended March 31, 2002 and 2001 (Unaudited).......... F-90
Condensed Consolidated Statement of Shareholders'
Deficiency -- Three months ended March 31, 2002
(Unaudited)............................................... F-91
Condensed Consolidated Statements of Cash Flows -- Three
months ended March 31, 2002 and 2001 (Unaudited).......... F-92
Notes to Unaudited Condensed Consolidated Financial
Statements................................................ F-93
Report of Independent Auditors.............................. F-105
Consolidated Balance Sheets -- December 31, 2001 and 2000... F-106
Consolidated Statements of Operations -- Years Ended
December 31, 2001, 2000 and 1999.......................... F-107
Consolidated Statement of Shareholder's Equity
(Deficiency) -- Years Ended December 31, 2001, 2000 and
1999...................................................... F-108
Consolidated Statements of Cash Flows -- Years Ended
December 31, 2001, 2000 and 1999.......................... F-109
Notes to Consolidated Financial Statements.................. F-110
F-2
CORECOMM HOLDCO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
MARCH 31, 2002
---------------
(UNAUDITED)
RESTATED*
ASSETS
Current assets:
Cash and cash equivalents................................. $ 26,841,000
Accounts receivable-trade, less allowance for doubtful
accounts of $8,388,000................................. 34,365,000
Due from CoreComm Limited................................. -
Other..................................................... 3,381,000
---------------
Total current assets........................................ 64,587,000
Fixed assets, net........................................... 80,339,000
Investment in CoreComm Limited.............................. 3,863,000
Goodwill.................................................... 147,380,000
Intangible assets, net...................................... 5,622,000
Other, net of accumulated amortization of $1,248,000........ 10,883,000
---------------
$ 312,674,000
===============
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable.......................................... $ 45,893,000
Accrued expenses.......................................... 68,229,000
Due to NTL Incorporated................................... 315,000
Due to CoreComm Limited................................... 254,000
Current portion of long-term debt and capital lease
obligations............................................ 9,426,000
Deferred revenue.......................................... 28,195,000
---------------
Total current liabilities................................... 152,312,000
Long-term debt.............................................. 144,748,000
Notes payable to related parties............................ 16,241,000
Capital lease obligations................................... 244,000
Commitments and contingent liabilities
Shareholders' deficiency:
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 30,000,000 shares....... 300,000
Additional paid-in capital.................................. 1,022,634,000
Deficit..................................................... (1,023,805,000)
---------------
(871,000)
---------------
$ 312,674,000
===============
* See Note 1
See accompanying notes to unaudited financial statements.
F-3
CORECOMM HOLDCO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
-----------------------------
2002 2001
------------ -------------
RESTATED*
REVENUES.................................................... $ 74,311,000 $ 72,811,000
COSTS AND EXPENSES
Operating................................................... 48,038,000 63,520,000
Selling, general and administrative......................... 22,313,000 30,795,000
Corporate................................................... 1,698,000 2,098,000
Non-cash compensation....................................... -- 3,234,000
Recapitalization costs...................................... 1,182,000 --
Other charges............................................... -- 119,000
Asset impairments........................................... -- 167,599,000
Depreciation................................................ 8,881,000 12,012,000
Amortization................................................ 84,000 31,509,000
------------ -------------
82,196,000 310,886,000
------------ -------------
Operating loss.............................................. (7,885,000) (238,075,000)
OTHER INCOME (EXPENSE)
Interest income and other, net.............................. 134,000 664,000
Interest expense............................................ (3,903,000) (4,141,000)
------------ -------------
Net loss.................................................... $(11,654,000) $(241,552,000)
============ =============
Basic and diluted net loss per common share................. $ (.39) $ (8.46)
============ =============
Weighted average number of shares........................... 30,000,000 28,542,000
============ =============
* See Note 1
See accompanying notes to unaudited financial statements.
F-4
CORECOMM HOLDCO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIENCY)
(UNAUDITED)
RESTATED -- SEE NOTE 1
COMMON STOCK
--------------------- ADDITIONAL PAID-
SHARES PAR IN CAPITAL DEFICIT
---------- -------- ---------------- ---------------
Balance, December 31, 2001............ 30,000,000 $300,000 $1,022,634,000 $(1,012,151,000)
Net loss.............................. (11,654,000)
---------- -------- -------------- ---------------
Balance, March 31, 2002............... 30,000,000 $300,000 $1,022,634,000 $(1,023,805,000)
========== ======== ============== ===============
The Condensed Consolidated Statement of Shareholders' Equity (Deficiency)
and shares outstanding for purposes of computing basic and diluted net loss per
common share reflects on a retroactive basis the 3-for-1 stock split by way of a
stock dividend paid on April 12, 2002.
See accompanying notes to unaudited financial statements.
F-5
CORECOMM HOLDCO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
----------------------------
2002 2001
------------ -------------
RESTATED*
Net cash provided by (used in) operating activities......... $ 4,544,000 $(18,555,000)
INVESTING ACTIVITIES
Purchase of fixed assets.................................... (2,405,000) (530,000)
Proceeds from sales of marketable securities................ -- 2,737,000
----------- ------------
Net cash provided by (used in) investing activities......... (2,405,000) 2,207,000
FINANCING ACTIVITIES
Proceeds from borrowing, net of financing costs............. -- 9,736,000
Principal payments.......................................... -- (1,559,000)
Principal payments of capital lease obligations............. (264,000) (4,560,000)
----------- ------------
Net cash provided by (used in) financing activities......... (264,000) 3,617,000
----------- ------------
Increase (decrease) in cash and cash equivalents............ 1,875,000 (12,731,000)
Cash and cash equivalents at beginning of period............ 24,966,000 22,773,000
----------- ------------
Cash and cash equivalents at end of period.................. $26,841,000 $ 10,042,000
=========== ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest.................................... $ 2,727,000 $ 1,110,000
=========== ============
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING ACTIVITIES
Liabilities incurred to acquire fixed assets.............. $ 93,000 $ 3,691,000
=========== ============
*See Note 1
See accompanying notes to unaudited financial statements.
F-6
CORECOMM HOLDCO, INC. 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 pursuant to the rules and regulations of the SEC.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three months ended March 31, 2002 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2002.
The Company originally accounted for the Holdco recapitalization (see Note
2) at fair value, but has determined that it was more appropriately accounted
for at historical cost. The principal effect of the restatement was to reduce
intangible assets, long-term debt and shareholders' equity (deficiency) by
$29,460,000, $11,710,000 and $17,750,000, respectively, at March 31, 2002 (and
$30,663,000, $12,054,000 and $18,609,000 at December 31, 2001). Additionally,
the net loss for the three months ended March 31, 2002 has been restated to
$11,654,000 from $12,513,000.
NOTE 2. HOLDCO RECAPITALIZATION
In April 2001, CoreComm Holdco Inc., referred to as the Company, and
CoreComm Limited completed a reevaluation of their business plan in light of
current market conditions and made significant modifications to the plans. The
Company streamlined its strategy and operations 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. The second is bundled local telephony and Internet products
efficiently sold, serviced and provisioned via Internet-centric interfaces to
the residential market.
Also in April 2001, the Company and CoreComm Limited commenced a process to
potentially sell their assets and businesses (now owned by the Company) that are
not directly related to their competitive local exchange carrier, referred to as
CLEC, business, and retained advisors for the purpose of conducting this sale.
The Company's CLEC assets and businesses include its local and toll-related
telephone services that compete with the incumbent local exchange carrier,
referred to as ILEC.
In October 2001, the Company and CoreComm Limited commenced the Holdco
recapitalization. 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 $4.8 million in the aggregate in cash and shares of the
Company's common stock. The exchange was completed in December 2001, including
the payment of the $4.8 million by CoreComm Limited.
On December 28, 2001, the Company completed the first 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 the Company and CoreComm
Limited as co-obligors and all of the outstanding preferred stock of CoreComm
Limited.
F-7
CORECOMM HOLDCO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 2. HOLDCO RECAPITALIZATION (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
STATED VALUE WHEN
DESCRIPTION DATE ISSUED ISSUER ISSUED
----------- -------------- ---------------- -------------------
10.75% Unsecured Convertible PIK Notes CoreComm Limited
due 2011............................. April 2001 and the Company $ 10.0 million
10.75% Senior Unsecured Convertible PIK CoreComm Limited
Notes Due 2010....................... December 2000 and 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 December 31, 2001, of which $160
million was exchanged.
As indicated above, 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 recorded an extraordinary gain of $25.7 million from the
extinguishment of these notes, and incurred costs of $2.7 million in connection
with the Holdco recapitalization. This gain is based on the fair value of
$0.9797 per share for the shares issued by the Company in exchange for the
notes. The Company incurred additional costs, which consist primarily of legal
fees, accounting fees and printing fees, in connection with the Holdco
recapitalization of $1,182,000 during the three months ended March 31, 2002.
As a result of the completed exchanges in December 2001, approximately 87%
of the Company's outstanding shares, or 26,056,806 shares, are owned by the
former holders of indebtedness of the Company and CoreComm Limited and the
former holders of CoreComm Limited preferred stock, and approximately 13% of the
Company's outstanding shares, or 3,943,248 shares, continue to be held by the
CoreComm Limited.
As part of the second phase of the Holdco recapitalization, on February 8,
2002, the Company launched registered public exchange offers whereby it is
offering to exchange its shares of common stock which will have been registered
under the Securities Act of 1933, as amended, pursuant to a Form S-4
registration statement to all holders of CoreComm Limited common stock and all
remaining holders of 6% Convertible Subordinated Notes due 2006 of CoreComm
Limited for their CoreComm Limited common stock and their notes, respectively.
As soon as practicable after accepting at least 90% of the outstanding shares of
CoreComm Limited common stock in the exchange offers, the Company plans to
transfer all such shares to a newly formed, wholly-owned subsidiary and to merge
this subsidiary into CoreComm Limited with CoreComm Limited surviving the merger
as a wholly-owned subsidiary of the Company.
As a result of the first phase of the Holdco recapitalization, the Company
holds $160 million principal amount of the CoreComm Limited's 6% Convertible
Subordinated 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 has agreed that it will surrender to the
Company the
F-8
CORECOMM HOLDCO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 2. HOLDCO RECAPITALIZATION (CONTINUED)
number of shares of the Company's common stock that the Company requests. The
Company intends to request that CoreComm Limited surrender, immediately
following the merger, all shares of the Company's common stock that it owns,
other than the number of shares of the Company's common stock deliverable upon
conversion of public notes not tendered in the exchange offer for public notes
or converted prior to the completion of the merger. Therefore, if the merger is
completed, CoreComm Limited will own little or no common stock of the Company,
and thus will own little or no material assets, since the common stock of the
Company is CoreComm Limited's only material asset. In exchange for CoreComm
Limited surrendering such shares of the Company's common stock, CoreComm Limited
and the Company have agreed to waivers and amendments to delay CoreComm Limited
from having to make any payments with respect to these securities through April
2003. If such a merger does not occur, CoreComm Limited does not anticipate that
it will have the financial resources to meet the obligations under its notes and
preferred stock if the Company requires it to do so.
Under the exchange offers, those shareholders and noteholders who exchange
their shares and notes, respectively, will receive shares of the Company, and
would no longer have securities of CoreComm Limited.
CoreComm Limited may lack the resources to meet the obligations of the
remaining $4.75 million principal amount of 6% Convertible Subordinated Notes
that are not held by the Company. CoreComm Limited also remains a party liable
under the $156.1 million senior secured credit facility, has no right to
withdraw any additional money under that facility, and does not expect to be
able to raise additional financing in the foreseeable future. CoreComm Limited
has a liquidity problem that raises substantial doubt about its ability to
continue as a going concern. CoreComm Limited intends to resolve its liquidity
problem through the completion of the Holdco recapitalization exchange offers,
however the exchange offers may not be completed.
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 CoreComm Limited's stockholders
because requiring a stockholder vote would seriously jeopardize CoreComm
Limited's financial viability. Pursuant to conversations with Nasdaq, the
Company and CoreComm Limited intend to transfer CoreComm Limited's current
listing to the Company following successful completion of the exchange offers.
The Company expects to become the Nasdaq listed entity and to be subject to the
continued inclusion requirements of the Nasdaq National Market.
On February 14, 2002, CoreComm Limited received written notification from
Nasdaq indicating that it failed to comply with the minimum market value of
publicly held shares and minimum bid price requirements for continued listing on
the Nasdaq National Market. CoreComm Limited has until May 15, 2002 to regain
compliance. If the Holdco recapitalization is not successfully completed and
CoreComm Limited does not regain compliance by this date, Nasdaq stated that it
will then provide CoreComm Limited written notification that its common stock
will be delisted from the Nasdaq National Market. CoreComm Limited has not yet
determined what actions will be taken if it receives this written notification.
If CoreComm Limited's common stock is delisted from the Nasdaq National Market,
shares may trade in the over-the-counter market and price quotations may be
reported by other sources. The extent of the public market and the availability
of quotations for shares of CoreComm Limited's 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 the common stock on the part of securities
firms, the possible termination of registration of the shares under the
Securities Exchange Act of 1934, and other factors.
F-9
CORECOMM HOLDCO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 2. HOLDCO RECAPITALIZATION (CONTINUED)
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. The Company's investment in CoreComm Limited notes and preferred
stock is $3,863,000.
NOTE 3. 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 adoption of this new standard had no
significant effect on the results of operations, financial condition or cash
flows of the company.
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 adopted SFAS No. 142
on January 1, 2002. The adoption of this new standard had no significant effect
on the results of operations, financial condition or cash flows of the Company,
other than amortization of goodwill ceased as of January 1, 2002.
Upon the adoption of SFAS No. 142, the Company performed an analysis of its
intangible assets acquired before July 1, 2001 to determine whether they should
be classified and accounted for as part of or separate from goodwill. As a
result of the analysis, the Company determined that its identifiable intangible
assets such as customer lists and LMDS licenses do not meet the indefinite life
criteria of SFAS No. 142. Additionally, the Company determined that, with
respect to these assets, no changes in the remaining useful lives of these
assets were required.
The Company also performed an evaluation for impairment of its goodwill as
of January 1, 2002, and determined that no impairment charge was required.
Absent any new indicators of impairment, the Company's next evaluation of
impairment will be the annual test on October 1, 2002.
F-10
CORECOMM HOLDCO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 3. RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
The following table shows the Company's net loss and our basic and diluted
loss per share, had SFAS No. 142 been in effect for the first quarter 2001.
THREE MONTHS ENDED MARCH 31,
----------------------------
2002 2001
------------ -------------
Net loss -- as reported................................. $(11,654,000) $(241,552,000)
Goodwill amortization................................... -- 31,369,000
Workforce amortization.................................. -- 31,000
------------ -------------
Net loss -- as adjusted................................. $(11,654,000) $(210,152,000)
============ =============
Basic and diluted loss per share:
Net loss per share -- as reported....................... $ (0.39) $ (8.46)
Goodwill amortization................................... -- 1.10
Workforce amortization.................................. -- --
------------ -------------
Net loss per share -- as adjusted....................... $ (0.39) $ (7.36)
============ =============
NOTE 4. REVENUES
THREE MONTHS ENDED MARCH 31,
-----------------------------
2002 2001
------------- -------------
Local exchange services.................................... $26,272,000 $23,865,000
Toll-related telephony services............................ 17,689,000 20,663,000
Internet, data and web-related services.................... 23,444,000 22,553,000
Other (a).................................................. 6,906,000 5,730,000
----------- -----------
$74,311,000 $72,811,000
=========== ===========
---------------
(a) Other includes wireless, paging and information services
NOTE 5. ASSET IMPAIRMENTS
At March 31, 2001, the Company reduced the carrying amount of goodwill
related to two of its 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 was 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.
F-11
CORECOMM HOLDCO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 6. INTANGIBLE ASSETS
Intangible assets consist of:
MARCH 31,
2002
-----------
(UNAUDITED)
LMDS license costs.......................................... $4,230,000
Customer lists, net of accumulated amortization of
$948,000.................................................. 1,392,000
----------
$5,622,000
==========
Future estimated aggregate amortization expense for intangible assets is as
follows: $250,000 (2002); $334,000 (2003); $334,000 (2004); $334,000 (2005) and
$140,000 (2006).
NOTE 7. FIXED ASSETS
Fixed assets consist of:
MARCH 31, 2002
--------------
(UNAUDITED)
Operating equipment......................................... $104,462,000
Computer hardware and software.............................. 53,413,000
Other equipment............................................. 13,066,000
Construction-in-progress.................................... 355,000
------------
171,296,000
Accumulated depreciation.................................... (90,957,000)
------------
$ 80,339,000
============
NOTE 8. ACCRUED EXPENSES
Accrued expenses consist of:
MARCH 31,
2002
-----------
(UNAUDITED)
Payroll and related......................................... $ 7,907,000
Professional fees........................................... 686,000
Taxes, including income taxes............................... 13,713,000
Accrued equipment purchases................................. 134,000
Toll and interconnect....................................... 30,743,000
Reorganization costs........................................ 6,653,000
Other....................................................... 8,393,000
-----------
$68,229,000
===========
F-12
CORECOMM HOLDCO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 9. LONG-TERM DEBT
At March 31, 2002, the amount outstanding under the Company's senior
secured credit facility, less the unamortized discount of $11,352,000, was
$144,748,000. The interest rate on the senior secured 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 plus 4.25%
per annum. In April 2001 the interest rate was amended 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 March
31, 2002, the effective interest rate on the amounts outstanding was 6.86%.
Effective April 13, 2002, the interest rate on the facility is 6.75%, which will
remain in effect until October 12, 2002.
NOTE 10. RELATED PARTY TRANSACTIONS
Some of the officers and directors of the Company are also officers or
directors of NTL Incorporated, referred to as 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. At
March 31, 2002, the total amount of the notes outstanding, less the unamortized
discount of $358,000, was $16,241,000.
NTL provided 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 consisted 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. It is not
practicable to determine the amounts of these expenses that would have been
incurred had the Company operated as an unaffiliated entity. In the opinion of
management, this allocation method is reasonable. For the three months ended
March 31, 2002 and 2001, NTL charged the Company $84,000 and $104,000, which is
included in corporate expenses.
The Company provided NTL with access to office space and equipment and the
use of supplies for which it charged NTL a percentage of the Company's total
rent and supplies expense. The Company ceased to provide NTL with access to
office space and supplies in the third quarter of 2001. 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 was reasonable. For the three months ended March 31, 2001, the
Company charged NTL $67,000, which reduced corporate expenses.
A subsidiary of the Company provides billing and software development
services to subsidiaries of NTL. The Company charges an amount in excess of its
costs to provide these services. General and
F-13
CORECOMM HOLDCO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 10. RELATED PARTY TRANSACTIONS (CONTINUED)
administrative expenses were reduced by $312,000 and $467,000 for the three
months ended March 31, 2002 and 2001, respectively, as a result of these
charges.
In 2001, the Company and NTL entered into a license agreement whereby NTL
was granted an exclusive, irrevocable, perpetual license to certain billing
software developed by the Company for telephony rating, digital television
events rating, fraud management and other tasks. The sales price was cash of
$12.8 million. The billing software was being used by NTL at the time of this
agreement, and was being maintained and modified by the Company under an ongoing
software maintenance and development outsourcing arrangement between the
companies. The Company recorded the aggregate $12.8 million as deferred revenue,
of which $1,068,000 was recognized during the three months ended March 31, 2002.
The Company leases office space from entities controlled by an individual
who owns 32% of the outstanding shares of the Company's common stock. Rent
expense for these leases for the three months ended March 31, 2002 and 2001 was
approximately $450,000 and $400,000, respectively.
NOTE 11. SHAREHOLDERS' EQUITY
STOCK SPLIT
On April 12, 2002, the Company declared a 3-for-1 stock split by way of a
stock dividend, which was paid on the declaration date. The condensed
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 Board of
Directors approved the issuance of options to purchase approximately 2,747,000
shares of CoreComm Limited's common stock to various employees 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 January 1, 2001 to March
31, 2001, $3.2 million of the deferred non-cash compensation was charged to
expense.
NOTE 12. OTHER CHARGES
Other charges of $119,000 for the three months ended March 31, 2001 are for
adjustments relating to the Company's announcement in December 2000 of a
reorganization of certain of its operations. These charges include additional
employee severance and related costs of $351,000, offset by a reversal of the
lease exit provision of $232,000.
F-14
CORECOMM HOLDCO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 12. OTHER CHARGES (CONTINUED)
The following table summarizes the reorganization charges utilized during
the three months ended March 31, 2002:
EMPLOYEE
SEVERANCE LEASE
AND RELATED EXIT AGREEMENT
COSTS COSTS TERMINATIONS TOTAL
----------- ------ ------------ ------
(IN THOUSANDS)
Balance, December 31, 2001.......................... $509 $3,106 $3,658 $7,273
Adjustments......................................... 60 2 (64) (2)
Utilized............................................ (267) (324) (27) (618)
---- ------ ------ ------
Balance, March 31, 2002............................. $302 $2,784 $3,567 $6,653
==== ====== ====== ======
NOTE 13. COMMITMENTS AND CONTINGENT LIABILITIES
As of March 31, 2002, the Company had purchase commitments of approximately
$5,700,000 outstanding.
The Company purchases 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. The Company also provides 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 the Company to costly litigation and
the diversion of its technical and/or management personnel. Additionally, any
liability from litigation that is not covered by the Company's insurance or
exceeds its coverage could have a material adverse effect on its business,
financial condition and/or operating results. Currently, the Company has the
following outstanding matters, which, if resolved unfavorably, could have a
material adverse effect on the Company's business, financial condition and/or
results of operations:
- CoreComm Newco, Inc., an indirect, wholly-owned subsidiary of the
Company, is currently in litigation with Ameritech Ohio, a supplier from
whom it purchases telecommunications products and services, over the
adequacy of Ameritech's performance under a 1998 contract between
CoreComm Newco and Ameritech, and related issues. This litigation began
in June 2001 when Ameritech threatened to stop processing new orders
following CoreComm Limited's exercise of its right under the contract to
withhold payments for Ameritech's performance failures. In response to
this threat, CoreComm Limited sought and received an order from an
official of the Public Utilities Commission of Ohio 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 CoreComm Limited of approximately $8,600,000 allegedly owed under
the contract. On August 8, 2001, Ameritech filed a second claim against
CoreComm Limited in Ohio state court, seeking an additional approximately
$4,300,000 in allegedly improperly withheld amounts. On August 28, 2001,
CoreComm Limited exercised its 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.
F-15
CORECOMM HOLDCO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 13. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
On December 26, 2001, CoreComm Newco filed its 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. In
lieu of filing an answer to CoreComm Newco's counterclaims, Ameritech
filed a series of motions on March 25, 2002, asking the Court to dismiss
several of CoreComm Newco's counterclaims. On April 17, 2002, CoreComm
Newco filed its opposition to Ameritech's requests for dismissal and
these items are now pending before the court for disposition.
The Company believes that CoreComm Newco has 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. For example, the figure specified in Ameritech's complaint
does not account for (a) more than $5.2 million in refunds that Ameritech
contends it has already credited to CoreComm Newco's accounts since the
filing its complaint, and (b) payments that were made by CoreComm Newco
in the ordinary course after the time of Ameritech's submission. However,
the Company cannot be certain how or when the matter will be resolved.
The Company also believe that, to the extent Ameritech prevails with
respect to any of its claims, Ameritech's award may be offset in whole or
in part by amounts that CoreComm Newco is seeking to obtain from
Ameritech under its counterclaims. However, it is impossible at this time
to predict the outcome of the litigation.
- On March 7, 2002, CoreComm Massachusetts, Inc. (an operating subsidiary
of the Company) filed a complaint and request for temporary restraining
order against Verizon New England d/b/a Verizon seeking to prevent
Verizon from proceeding with its threat to implement an embargo on the
ability of CoreComm Massachusetts to place orders for new services
pending the resolution of a dispute between the parties over the
legitimacy of various charges billed by Verizon in that state. On March
13, 2002, the court denied CoreComm's request for a TRO and Verizon
proceeded to implement the threatened service embargo. On April 1, 2002
Verizon filed an answer to CoreComm's complaint along with counterclaims
seeking approximately $1.4 million in payment for allegedly past due
charges. On April 10, 2002, CoreComm Massachusetts filed an answer to
these counterclaims denying the accuracy of Verizon's contentions. The
Company does not believe that the embargo will have a material adverse
affect on its business, financial condition and/or operating results, and
CoreComm Massachusetts intends to defend itself vigorously and pursue all
available claims and defenses. However, it is impossible at this time to
predict the outcome of this litigation.
- On December 3, 2001, General Electric Capital Corp. filed a lawsuit in
the Circuit Court of Cook County, Illinois against CoreComm Limited and
MegsINet, Inc., an indirect subsidiary of the Company, seeking
approximately $8 million in allegedly past due amounts and the return of
equipment 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. On February 19, 2002, the
defendants filed a motion to dismiss several of GECC's claims. In
response, GECC withdrew its original complaint and on May 1, 2002 filed
an amended complaint naming the Company as an additional defendant.
Defendants' response to dismiss the amended complaint is presently due on
June 5, 2002. Concurrently, on April 12, 2002, GECC filed a second
complaint in the Circuit Court of Cook County, Illinois against MegsINet,
CoreComm Limited and the Company seeking a court order allowing it to
take repossession of its alleged equipment. After a hearing on the matter
following defendants' opposition, GECC withdrew its complaint and filed a
new action on May 3, 2002, in an effort to supply the court with
additional information regarding its alleged rights to the equipment.
Defendant's response to dismiss the May 3 complaint is
F-16
CORECOMM HOLDCO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 13. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
currently due on or before May 23, 2002, and defendants intend to defend
themselves vigorously against both complaints and to pursue all available
claims and defenses. However, it is impossible at this time to predict
the outcome of the litigation.
- 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, primarily in
respect of alleged early termination liabilities, under a services
agreement and a co-location agreement with MegsINet. The defendants have
denied KMC's claims and have asserted that the contracts at issue were
signed without proper authorization, that KMC failed to perform under the
alleged contracts, and that the termination penalties are not
enforceable. The defendants have served discovery and intend to defend
themselves in coordination with one of their insurance carriers. On March
27, 2002, certain of the defendants initiated litigation against several
former principals of MegsINet seeking indemnification and contribution
against KMC's claims.
- On March 1, 2002, Easton Telecom Services, LLC., referred to as Easton
LLC, initiated litigation in the Northern District of Ohio against
CoreComm Internet Group, Inc. asserting that Easton LLC is the assignee
of several rights of Easton Telecom Services, Inc., referred to as Easton
Inc., under an asset purchase agreement approved as part of the
bankruptcy disposition of Teligent, Inc., and demanding payment of
approximately $4.9 million, primarily in respect of alleged early
termination penalties, for telecommunications services purportedly
provided under alleged contracts between Easton and MegsINet, Inc.
Subsequently, on April 18, 2002, Easton filed an amended complaint in the
above-referenced matter naming Voyager Information Networks, Inc. as an
additional defendant and increasing the amount in dispute to
approximately $5.1 million. On May 7, 2002, defendants' filed their
answer denying Easton LLC's allegations and asserting multiple defenses,
including defenses challenging the validity of the alleged contracts and
plaintiffs claim to alleged damages, Defendants intend to defend
themselves vigorously and pursue all available claims and defenses.
However, it is impossible at this time to predict the outcome of this
litigation.
F-17
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Directors
CoreComm Holdco, Inc.
We have audited the consolidated balance sheets of CoreComm Holdco, Inc.
and Subsidiaries as of December 31, 2001 and 2000, and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended December 31, 2001. 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, 2001 and 2000, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States.
The consolidated balance sheet at December 31, 2001 has been restated as
described in Note 1.
/s/ ERNST & YOUNG LLP
New York, New York
March 29, 2002, except for the first paragraph of Note 18,
as to which the date is April 12, 2002
F-18
CORECOMM HOLDCO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
--------------------------------
2001 2000
--------------- --------------
RESTATED*
ASSETS
Current assets:
Cash and cash equivalents................................. $ 24,966,000 $ 22,773,000
Marketable securities..................................... -- 2,686,000
Accounts receivable -- trade, less allowance for doubtful
accounts of $9,759,000 (2001) and $11,034,000 (2000)... 32,261,000 34,148,000
Due from CoreComm Limited................................. 646,000 638,000
Due from NTL Incorporated................................. -- 17,345,000
Other..................................................... 3,683,000 9,038,000
--------------- --------------
Total current assets........................................ 61,556,000 86,628,000
Fixed assets, net........................................... 86,722,000 179,379,000
Investment in CoreComm Limited.............................. 3,863,000 --
Goodwill, net of accumulated amortization of $120,242,000
(2001) and $42,028,000 (2000)............................. 147,380,000 600,859,000
Intangible assets, net...................................... 5,706,000 6,092,000
Other, net of accumulated amortization of 1,045,000 (2001)
and $211,000 (2000)....................................... 11,393,000 23,648,000
--------------- --------------
$ 316,620,000 $ 896,606,000
=============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 37,348,000 $ 72,876,000
Accrued expenses.......................................... 67,766,000 64,558,000
Due to NTL Incorporated................................... 917,000 --
Current portion of long-term debt, notes payable and
capital lease obligations.............................. 9,667,000 20,182,000
Deferred revenue.......................................... 29,652,000 29,696,000
--------------- --------------
Total current liabilities................................... 145,350,000 187,312,000
Long-term debt, less unamortized discount................... 144,413,000 91,127,000
Notes payable to related parties, less unamortized
discount.................................................. 15,807,000 16,170,000
Capital lease obligations................................... 267,000 2,693,000
Commitments and contingent liabilities
Shareholders' 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 30,000,000 (2001) and
28,542,000 (2000) shares............................... 300,000 285,000
Additional paid-in capital................................ 1,022,634,000 1,038,893,000
Deferred non-cash compensation............................ -- (21,638,000)
(Deficit)................................................. (1,012,151,000) (418,236,000)
--------------- --------------
10,783,000 599,304,000
--------------- --------------
$ 316,620,000 $ 896,606,000
=============== ==============
*See Note 1
See accompanying notes.
F-19
CORECOMM HOLDCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
---------------------------------------------
2001 2000 1999
------------- ------------- -------------
REVENUES........................................ $ 292,681,000 $ 131,526,000 $ 57,151,000
COSTS AND EXPENSES
Operating....................................... 224,807,000 142,323,000 57,551,000
Selling, general and administrative............. 96,854,000 109,197,000 72,821,000
Corporate....................................... 5,648,000 11,224,000 6,686,000
Non-cash compensation........................... 21,638,000 43,440,000 1,056,000
Other charges................................... 39,553,000 12,706,000 --
Asset impairments............................... 368,288,000 35,920,000 --
Depreciation.................................... 47,976,000 30,641,000 10,916,000
Amortization.................................... 97,388,000 42,396,000 8,630,000
------------- ------------- -------------
902,152,000 427,847,000 157,660,000
------------- ------------- -------------
Operating (loss)................................ (609,471,000) (296,321,000) (100,509,000)
OTHER INCOME (EXPENSE)
Interest income and other, net.................. 1,799,000 1,134,000 55,000
Interest expense................................ (25,647,000) (5,929,000) (2,624,000)
------------- ------------- -------------
(Loss) before income taxes and extraordinary
item.......................................... (633,319,000) (301,116,000) (103,078,000)
Income tax (provision).......................... (94,000) (125,000) (102,000)
------------- ------------- -------------
(Loss) before extraordinary item................ (633,413,000) (301,241,000) (103,180,000)
Gain from extinguishment of debt................ 39,498,000 -- --
------------- ------------- -------------
Net (loss)...................................... $(593,915,000) $(301,241,000) $(103,180,000)
============= ============= =============
Basic and diluted net (loss) per share:
(Loss) before extraordinary item................ $ (22.15) $ (10.55) $ (3.62)
Extraordinary item.............................. 1.38 -- --
------------- ------------- -------------
Net (loss)...................................... $ (20.77) $ (10.55) $ (3.62)
============= ============= =============
Weighted average number of shares............... 28,599,000 28,542,000 28,542,000
============= ============= =============
In the year ended December 31, 2001, non-cash compensation expense includes $3.9
million that would have been included in operating expense, $13.4 million that
would have been included in selling, general and administrative expense and $4.3
million that would have been included in corporate expense had the compensation
been paid in cash. 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-20
CORECOMM HOLDCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
COMMON STOCK DEFERRED
--------------------- ADDITIONAL NON-CASH
SHARES PAR PAID-IN CAPITAL COMPENSATION (DEFICIT)
---------- -------- --------------- ------------ ---------------
Balance, December 31,
1998...................... 28,542,000 $285,000 $ 49,808,000 $ (13,815,000)
Capital contributions....... 196,892,000
Net (loss) for the year
ended December 31, 1999... (103,180,000)
---------- -------- -------------- ------------ ---------------
Balance, December 31,
1999...................... 28,542,000 285,000 246,700,000 (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...................... 28,542,000 285,000 1,038,893,000 (21,638,000) (418,236,000)
Capital distributions....... (23,164,000)
Shares issued in Holdco
recapitalization.......... 1,458,000 15,000 1,413,000
Shares held by CoreComm
Limited issued in Holdco
recapitalization.......... 5,492,000
Non-cash compensation
expense................... 21,638,000
Net (loss) for the year
ended December 31, 2001... (593,915,000)
---------- -------- -------------- ------------ ---------------
Balance, December 31,
2001...................... 30,000,000 $300,000 $1,022,634,000 $ -- $(1,012,151,000)
========== ======== ============== ============ ===============
The Consolidated Statement of Shareholders' Equity reflects on a retroactive
basis the 3-for-1 stock split by way of a stock dividend paid on April 12, 2002.
See accompanying notes.
F-21
CORECOMM HOLDCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
---------------------------------------------
2001 2000 1999
------------- ------------- -------------
OPERATING ACTIVITIES
Net (loss)...................................... $(593,915,000) $(301,241,000) $(103,180,000)
Adjustments to reconcile net (loss) to net cash
(used in) operating activities:
Depreciation and amortization................ 145,364,000 73,037,000 19,546,000
Gain from extinguishment of debt............. (39,498,000) -- --
Reorganization charges....................... 26,932,000 -- --
Non-cash compensation........................ 21,638,000 43,440,000 1,056,000
Amortization of original issue discount...... 6,256,000 -- --
Provision for losses on accounts
receivable................................. 7,143,000 7,130,000 3,241,000
Asset impairments............................ 368,288,000 35,920,000 --
Accretion of interest on marketable
securities................................. (51,000) 24,000 --
Other........................................ (2,473,000) 996,000 19,000
Changes in operating assets and liabilities,
net of effect from business acquisitions:
Accounts receivable........................ (5,174,000) (7,405,000) 3,333,000
Due from affiliates........................ 18,140,000 (17,349,000) 1,193,000
Other current assets....................... 2,369,000 576,000 (3,152,000)
Other assets............................... 12,773,000 (1,249,000) (3,447,000)
Accounts payable........................... (25,594,000) 17,574,000 5,275,000
Accrued expenses........................... 21,073,000 (5,078,000) 3,388,000
Deferred revenue........................... (44,000) 17,213,000 (61,000)
------------- ------------- -------------
Net cash (used in) operating activities........... (36,773,000) (136,412,000) (72,789,000)
INVESTING ACTIVITIES
Purchase of fixed assets.......................... (5,221,000) (65,211,000) (20,296,000)
Acquisitions, net of cash acquired................ -- (98,613,000) (47,056,000)
Purchase of marketable securities................. -- (2,710,000) --
Proceeds from sale of marketable securities....... 2,737,000 -- --
------------- ------------- -------------
Net cash (used in) investing activities........... (2,484,000) (166,534,000) (67,352,000)
FINANCING ACTIVITIES
Capital contributions (distributions)............. (28,614,000) 232,472,000 151,885,000
Proceeds from borrowings, net of financing
costs........................................... 88,679,000 103,503,000 480,000
Principal payments................................ (10,508,000) (5,936,000) (3,469,000)
Principal payments of capital lease obligations... (8,107,000) (15,568,000) (2,379,000)
------------- ------------- -------------
Net cash provided by financing activities......... 41,450,000 314,471,000 146,517,000
------------- ------------- -------------
Increase in cash and cash equivalents............. 2,193,000 11,525,000 6,376,000
Cash and cash equivalents at beginning of
period.......................................... 22,773,000 11,248,000 4,872,000
------------- ------------- -------------
Cash and cash equivalents at end of period........ $ 24,966,000 $ 22,773,000 $ 11,248,000
============= ============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest............................ $ 13,197,000 $ 4,008,000 $ 2,032,000
Income taxes paid................................. -- 159,000 185,000
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING
ACTIVITIES
Capital contributions of non-cash net assets...... $ 5,450,000 $ 559,721,000 $ 45,007,000
Liabilities incurred to acquire fixed assets...... 6,595,000 35,626,000 19,621,000
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING
ACTIVITIES
Shares issued in the Holdco recapitalization...... $ 6,905,000 $ -- $ --
See accompanying notes.
F-22
CORECOMM HOLDCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS
ORGANIZATION
CoreComm Holdco, Inc., referred to as 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., referred to as CCPR, was formed in March
1998 in order to succeed to the businesses and assets that were operated by OCOM
Corporation. Operations commenced in April 1998. In September 1998, CCPR made a
cash contribution to CoreComm Limited of $150,000,000 and distributed 100% of
the outstanding shares of CoreComm Limited on a one-for-one basis to CCPR's
shareholders.
BUSINESS
The Company provides integrated local and toll-related telephone, Internet
and high-speed data 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.
BASIS OF PREPARATION
Effective with the completion of the first phase of the Holdco
recapitalization on December 28, 2001, CoreComm Limited began accounting for its
ownership of approximately 13% of the outstanding shares of the Company using
the equity method. CoreComm Limited accounted for the Company as a consolidated
subsidiary prior to that date. The Company originally accounted for this
transaction at fair value, but has determined it was more appropriately
accounted for at historical cost. This required the Company to restate its
balance sheet at December 31, 2001. The principal effect of the restatement was
to reduce intangible assets, long-term debt and shareholders' equity
(deficiency) by $30,663,000, $12,054,000 and $18,609,000, respectively.
LIQUIDITY
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 and its subsidiaries may not 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, (5) sales of assets or businesses or (6) 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.
F-23
CORECOMM HOLDCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. HOLDCO RECAPITALIZATION
In April 2001, the Company and CoreComm Limited completed a reevaluation of
their business plan in light of current market conditions and made significant
modifications to the plans. The Company streamlined its strategy and operations
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. The second is bundled local telephony and
Internet products efficiently sold, serviced and provisioned via
Internet-centric interfaces to the residential market.
Also in April 2001, the Company and CoreComm Limited commenced a process to
potentially sell their assets and businesses that are not directly related to
their competitive local exchange carrier, referred to as CLEC, business, and
retained advisors for the purpose of conducting this sale. The Company's CLEC
assets and businesses include its local and toll-related telephone services that
compete with the incumbent local exchange carrier, referred to as ILEC.
In October 2001, the Company and CoreComm Limited commenced the Holdco
recapitalization. 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 $4.8 million in the aggregate in cash and shares of the
Company's common stock. The exchange was completed in December 2001, including
the payment of the $4.8 million by CoreComm Limited.
On December 28, 2001, the Company completed the first 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 the Company and CoreComm
Limited as co-obligors and all of the outstanding preferred stock of CoreComm
Limited.
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 April 2001 CoreComm Limited $10.0 million
Notes due 2011 and the Company
10.75% Senior Unsecured Convertible December 2000 CoreComm Limited $16.1 million
PIK Notes Due 2010 and the Company
Senior Unsecured Notes Due September September 2000 CoreComm Limited $108.7 million
29, 2003
6% Convertible Subordinated Notes Due October 1999 CoreComm Limited $175.0 million(1)
2006
Series A and Series A-1 Preferred September 2000 CoreComm Limited $51.1 million
Stock
Series B Preferred Stock September 2000 CoreComm Limited $250.0 million
---------------
(1) $164.75 million was outstanding as of December 31, 2001, of which $160
million was exchanged.
As indicated above, 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 recorded an extraordinary gain of $25.7 million from the
extinguishment of these notes, and incurred costs of $2.7 million in connection
with the Holdco recapitalization. This gain is based on the fair value of
$0.9797 per share for the shares issued by the Company in exchange for the
notes.
F-24
CORECOMM HOLDCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As a result of the completed exchanges in December 2001, approximately 87%
of the Company's outstanding shares, or 26,056,806 shares, are owned by the
former holders of indebtedness of the Company and CoreComm Limited and the
former holders of CoreComm Limited preferred stock, and approximately 13% of the
Company's outstanding shares, or 3,943,248 shares, continue to be held by the
CoreComm Limited.
As part of the second phase of the Holdco recapitalization, on February 8,
2002, the Company launched registered public exchange offers whereby it is
offering to exchange its shares of common stock which will have been registered
under the Securities Act of 1933, as amended, pursuant to a Form S-4
registration statement to all holders of CoreComm Limited common stock and all
remaining holders of 6% Convertible Subordinated Notes due 2006 of CoreComm
Limited for their CoreComm Limited common stock and their notes, respectively.
As soon as practicable after accepting at least 90% of the outstanding shares of
CoreComm Limited common stock in the exchange offers, the Company plans to
transfer all such shares to a newly formed, wholly-owned subsidiary and to merge
this subsidiary into CoreComm Limited with CoreComm Limited surviving the merger
as a wholly-owned subsidiary of the Company.
As a result of the first phase of the Holdco recapitalization, the Company
holds $160 million principal amount of the CoreComm Limited's 6% Convertible
Subordinated 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 has agreed that it will surrender to the
Company, immediately following the merger, all shares of our common stock that
it owns, other than the number of shares of our common stock deliverable upon
conversion of public notes not tendered in the exchange offer for public notes
or converted prior to the completion of the merger. Therefore, if the merger is
completed, CoreComm Limited will own no common stock of the Company, and thus
will own no material assets, since the common stock of the Company is CoreComm
Limited's only material asset. In exchange for CoreComm Limited surrendering
such shares of the Company's common stock, CoreComm Limited and the Company have
agreed to waivers and amendments to delay CoreComm Limited from having to make
any payments with respect to these securities. If such a merger does not occur,
CoreComm Limited does not anticipate that it will have the financial resources
to meet the obligations under its notes and preferred stock if the Company
requires it to do so.
Under the exchange offer, those shareholders and noteholders who exchange
their shares and notes, respectively, will receive shares of the Company, and
would no longer have securities of CoreComm Limited.
CoreComm Limited may lack the resources to meet the obligations of the
remaining $4.75 million principal amount of 6% Convertible Subordinated Notes
that are not held by the Company. CoreComm Limited also remains a party liable
under the $156.1 million senior secured credit facility, has no right to
withdraw any additional money under that facility, and does not expect to be
able to raise additional financing in the foreseeable future. CoreComm Limited
has a liquidity problem that raises substantial doubt about its ability to
continue as a going concern. CoreComm Limited intends to resolve its liquidity
problem through the completion of the Holdco recapitalization exchange offers,
however the exchange offers may not be completed.
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. As of December 31, 2001, the Company's investment in CoreComm Limited
notes and preferred stock was $3,863,000 and amounts due from CoreComm Limited
were $646,000.
F-25
CORECOMM HOLDCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 CoreComm Limited's stockholders
because requiring a stockholder vote would seriously jeopardize CoreComm
Limited's financial viability. Pursuant to conversations with Nasdaq, the
Company and CoreComm Limited intend to transfer CoreComm Limited's current
listing to the Company following successful completion of the exchange offers.
The Company expects to become the Nasdaq listed entity and to be subject to the
continued inclusion requirements of the Nasdaq National Market.
On February 14, 2002, CoreComm Limited received written notification from
Nasdaq indicating that it failed to comply with the minimum market value of
publicly held shares and minimum bid price requirements for continued listing on
the Nasdaq National Market. CoreComm Limited has until May 15, 2002 to regain
compliance. If the Holdco recapitalization is not successfully completed and
CoreComm Limited does not regain compliance by this date, Nasdaq stated that it
will then provide CoreComm Limited written notification that its common stock
will be delisted from the Nasdaq National Market.
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 long-lived assets, 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 $24.3
million and $22 million at December 31, 2001 and 2000, respectively, and
consisted of corporate commercial paper.
MARKETABLE SECURITIES
Marketable securities are classified as available-for-sale, which are
carried at fair value. Unrealized holding gains and losses on securities, net of
tax, are carried as a separate component of shareholders' equity. The amortized
cost of debt securities is adjusted for amortization of premiums and accretion
of discounts to maturity. Such amortization is included in interest income.
Realized gains and losses and declines in value judged to be other than
temporary will be included in interest income. The cost of securities sold or
matured is based on the specific identification method. Interest on securities
is included in interest income.
Marketable securities at December 31, 2000 consisted of corporate
commercial paper. During the years ended December 31, 2001, 2000 and 1999 there
were no realized gains or losses on sales of securities.
F-26
CORECOMM HOLDCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company records an estimate of uncollectible accounts receivable based
on the current aging of its receivables and its prior collection experience.
FIXED ASSETS
Fixed assets are stated at cost. Depreciation is computed by the
straight-line method over the estimated useful lives of the assets. Estimated
useful lives are as follows: operating equipment -- 3 to 15 years, computer
hardware and software -- 3 or 5 years and other equipment -- 2 to 7 years,
except for leasehold improvements for which the estimated useful lives are the
term of the lease.
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. If the
sum of the expected future undiscounted cash flows is less than the carrying
amount of the asset, a loss is recognized for the difference between the fair
value and carrying value of the asset.
GOODWILL
Goodwill is the excess of the purchase price over the fair value of net
assets acquired in business combinations accounted for as purchases. Goodwill is
amortized on a straight-line basis over the period benefited, which is estimated
to be 5 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 is 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 is 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,
referred to as LMDS, licenses from the Federal Communications Commission,
referred to as 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.
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.
F-27
CORECOMM HOLDCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 Financial Accounting Standards Board, referred to as FASB,
Statement of Financial Accounting Standards, referred to as SFAS, No. 128,
"Earnings Per Share." The weighted average shares used in 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, 2001, 2000 and 1999 were
$3,581,000, $8,683,000 and $4,407,000, 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.
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 adoption of this new standard had no
significant effect on the results of operations, financial condition or cash
flows of the company.
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.
F-28
CORECOMM HOLDCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 adopted SFAS No. 142
on January 1, 2002. The adoption of this new standard will have no effect on the
results of operations, financial condition or cash flows of the Company, other
than amortization of goodwill will cease as of January 1, 2002.
Upon the adoption of SFAS No. 142, the Company performed an analysis of its
intangible assets acquired before July 1, 2001 to determine whether they should
be classified and accounted for as part of or separate from goodwill. As a
result of the analysis, the Company determined that its identifiable intangible
assets such as customer lists and LMDS licenses do not meet the indefinite life
criteria of SFAS No. 142. Additionally, the Company determined that, with
respect to these assets, no changes in the remaining useful lives of these
assets were required.
The Company also performed an evaluation for impairment of its goodwill as
of January 1, 2002, and determined that no impairment charge was required.
Absent any new indicators of impairment, the Company's next evaluation of
impairment will be the annual test on October 1, 2002.
The following table shows the Company's loss before extraordinary item and
net loss had SFAS No. 142 been in effect during the three years ended December
31, 2001. Additionally, the table presents the effect on the Company's basic and
diluted loss per share before extraordinary item and basic and diluted net loss
per share.
YEAR ENDED DECEMBER 31,
-----------------------------------------------
2001 2000 1999
------------- ------------- -------------
Loss before extraordinary item -- as
reported.................................... $(633,413,000) $(301,241,000) $(103,180,000)
Goodwill amortization......................... 96,973,000 39,330,000 6,841,000
Workforce amortization........................ 52,000 532,000 310,000
------------- ------------- -------------
Loss before extraordinary item -- as
adjusted.................................... $(536,388,000) $(261,379,000) $ (96,029,000)
============= ============= =============
Net loss -- as reported....................... $(593,915,000) $(301,241,000) $(103,180,000)
Goodwill amortization......................... 96,973,000 39,330,000 6,841,000
Workforce amortization........................ 52,000 532,000 310,000
------------- ------------- -------------
Net loss -- as adjusted....................... $(496,890,000) $(261,379,000) $ (96,029,000)
============= ============= =============
Basic and diluted per share information:
Loss before extraordinary item -- as
reported.................................... $ (22.15) $ (10.55) $ (3.62)
Goodwill amortization......................... 3.39 1.38 0.24
Workforce amortization........................ -- 0.02 0.01
------------- ------------- -------------
Loss before extraordinary item -- as
adjusted.................................... $ (18.76) $ (9.15) $ (3.37)
============= ============= =============
F-29
CORECOMM HOLDCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEAR ENDED DECEMBER 31,
-----------------------------------------------
2001 2000 1999
------------- ------------- -------------
Net loss per share -- as reported............. $ (20.77) $ (10.55) $ (3.62)
Goodwill amortization......................... 3.39 1.38 0.24
Workforce amortization........................ -- 0.02 0.01
------------- ------------- -------------
Net loss per share -- as adjusted............. $ (17.38) $ (9.15) $ (3.37)
============= ============= =============
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
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, the Company depends upon the ILECs for accurate and prompt
billing information in order for the Company to bill certain of 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 and the Microsoft Network, 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
YEAR ENDED DECEMBER 31,
-----------------------------------------
2001 2000 1999
------------ ------------ -----------
Local Exchange Services..................... $ 95,272,000 $ 62,960,000 $40,463,000
Toll-related Telephony Services............. 77,169,000 27,952,000 6,110,000
Internet, Data and Web-related Services..... 93,997,000 34,157,000 6,996,000
Other(a).................................... 26,243,000 6,457,000 3,582,000
------------ ------------ -----------
$292,681,000 $131,526,000 $57,151,000
============ ============ ===========
---------------
(a) Other includes wireless, paging and information services.
7. ASSET IMPAIRMENTS
As of December 31, 2001, the Company performed an analysis of the carrying
values of its long-lived assets including goodwill. During 1999 and 2000,
acquisitions were made against a background of increasing consolidation and
record valuations in the telecommunications industry. This analysis was
initiated because of the decline in the Company's stock price and significantly
lower valuations for companies within its industry. Additionally, at the time of
the Company's analysis, the book value of the
F-30
CORECOMM HOLDCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company's net assets significantly exceeded its market capitalization.
Accordingly, the Company performed an analysis of the recoverability of its
long-lived assets and associated goodwill. The fair value of the Company's
assets was determined by discounting the Company's estimates of the expected
future cash flows related to these assets when the non-discounted cash flows
indicated that the long-lived assets would not be recoverable. The Company
recorded a write-down of goodwill of $186,160,000 and a write-down of fixed
assets of $14,529,000 in the fourth quarter of 2001 as result of this analysis
and review.
At March 31, 2001, the Company reduced the carrying amount of goodwill
related to two of its 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 was 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.
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 the
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.
Also at December 31, 2000, in connection with the reevaluation of its
business plan announced in April 2001, the Company reduced the carrying amount
of its 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.
8. ACQUISITIONS
On September 29, 2000, CoreComm Limited completed two significant
acquisitions. CoreComm Limited acquired ATX Telecommunications Services, Inc.,
referred to as 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 $9.7 million.
CoreComm Limited also acquired Voyager.net, Inc., referred to as 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
F-31
CORECOMM HOLDCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 $613.2 million exceeded the estimated fair value
of net tangible assets acquired by $585.8 million, which was allocated to
goodwill.
The pro forma unaudited consolidated results of operations for the year
ended December 31, 2000 assuming consummation of the acquisitions as of January
1, 2000 is as follows:
Total revenue............................................... $ 297,850,000
Net (loss).................................................. (391,276,000)
Basic and diluted net (loss) per share...................... (41.13)
In May 1999, CoreComm Limited acquired 100% of the stock of MegsINet Inc.,
a national Internet Service Provider, referred to as 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.
F-32
CORECOMM HOLDCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. INTANGIBLE ASSETS
Intangible assets consist of:
DECEMBER 31,
-----------------------
2001 2000
---------- ----------
LMDS license costs.......................................... $4,230,000 $4,230,000
Workforce, net of accumulated amortization of $198,000
(2000).................................................... -- 52,000
Customer lists, net of accumulated amortization of $864,000
(2001) and $530,000 (2000)................................ 1,476,000 1,810,000
---------- ----------
$5,706,000 $6,092,000
========== ==========
10. FIXED ASSETS
Fixed assets consist of:
DECEMBER 31,
---------------------------
2001 2000
------------ ------------
Operating equipment...................................... $102,529,000 $124,335,000
Computer hardware and software........................... 53,313,000 53,092,000
Other equipment.......................................... 12,956,000 21,182,000
Construction-in-progress................................. -- 22,097,000
------------ ------------
168,798,000 220,706,000
Accumulated depreciation................................. (82,076,000) (41,327,000)
------------ ------------
$ 86,722,000 $179,379,000
============ ============
The change in the fixed asset balance from December 31, 2000 to December
31, 2001 is partially due to the 2001 reorganization, the settlement of certain
liabilities and the review of the recoverability of long-lived assets. The 2001
reorganization included fixed asset write-offs related to vacated offices of
$5.3 million and network assets in abandoned markets of $13.4 million. The
settlement of amounts due to one of the Company's equipment vendors included the
return of certain equipment with a net book value of $6.8 million. The Company
performed a review of the recoverability of its long-lived assets including
fixed assets that indicated that the $14.5 million carrying value of certain
fixed assets would not be recoverable.
F-33
CORECOMM HOLDCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. ACCRUED EXPENSES
Accrued expenses consist of:
DECEMBER 31,
-------------------------
2001 2000
----------- -----------
Payroll and related........................................ $ 7,517,000 $ 5,032,000
Professional fees.......................................... 935,000 2,331,000
Taxes, including income taxes.............................. 16,534,000 13,730,000
Accrued equipment purchases................................ 385,000 14,460,000
Toll and interconnect...................................... 28,668,000 20,628,000
Reorganization costs....................................... 7,273,000 1,835,000
Other...................................................... 6,454,000 6,542,000
----------- -----------
$67,766,000 $64,558,000
=========== ===========
12. LONG-TERM DEBT
Long-term debt consists of:
DECEMBER 31,
--------------------------
2001 2000
------------ -----------
Senior secured credit facility, less unamortized discount
of $11,687,000 (2001) and none (2000)................... $144,413,000 $91,100,000
Working capital promissory note, interest at 8.5%......... -- 1,496,000
Note payable for equipment, interest at 12.75%............ -- 3,331,000
Other..................................................... 33,000 160,000
------------ -----------
144,446,000 96,087,000
Less current portion...................................... 33,000 4,960,000
------------ -----------
$144,413,000 $91,127,000
============ ===========
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. CoreComm Limited and the Company have
unconditionally guaranteed payment under the facility. 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 entire amount available under the senior secured credit facility had
been borrowed.
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 CoreComm Limited's
remaining approximately $4.75 million principal amount 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 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
F-34
CORECOMM HOLDCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
plus 4.25% per annum. 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 December 31, 2001 and 2000, the effective interest rate on the amounts
outstanding was 6.86% and 10.982%, respectively. The rate at December 31, 2001
is in effect through April 12, 2002.
America Online, Inc., referred to as 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.
In 1998, MegsINet entered into a working capital promissory note and a note
payable for operating equipment. MegsINet was required to make monthly principal
and interest payments through January 2002 for the working capital note and
through September 2001 for the equipment note. In 2001, the holders of these
notes agreed to accept cash of $400,000 and $800,000 in full settlement of all
amounts due under the working capital note and certain capital leases and the
equipment note, respectively. Extraordinary gains aggregating $4,067,000 were
recorded as a result of these settlements.
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. In December 2001, the Company and the
vendor agreed to a modification of this arrangement in which the Company paid
$2,000,000 and returned certain of the equipment in full settlement of the
amount due. The Company recorded an extraordinary gain of $7,628,000 as a result
of this transaction.
In April 2001, the Company and CoreComm Limited as co-obligators issued to
Booth American Company $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's 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's 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.
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 (that were included in notes payable to
related parties) for shares of its common stock. The Company recorded an
extraordinary gain of $25,677,000 from the extinguishment of these notes. Costs
of $2,655,000 were incurred in connection with the Holdco recapitalization which
are included as an offset to the extraordinary gain. In addition, the Company
recorded an extraordinary gain of $4,781,000 related to the settlement of other
liabilities.
The senior secured credit facility restricts the payment of cash dividends
and loans to the Company. At December 31, 2001, restricted net assets were
approximately $11 million.
F-35
CORECOMM HOLDCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 2001, the aggregate principal amounts of long-term debt
scheduled for repayment are as follows:
Year Ending December 31,
2002...................................................... $ 33,000
2003...................................................... 1,950,000
2004...................................................... 9,750,000
2005...................................................... 25,350,000
2006...................................................... 50,700,000
Thereafter.................................................. 68,350,000
------------
$156,133,000
============
13. OTHER CHARGES
Other charges in 2001 include reorganization charges of $37,372,000 and an
adjustment to the reserve for notes receivable from former officers of Voyager
of $2,181,000. The reorganization charges 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. A total of $21,386,000 of these costs are for equipment and
other assets that will not require any future cash outlays. The employee
severance and related costs in 2001 were for approximately 630 employees to be
terminated, none of whom are still employed by the Company as of December 31,
2001. The major actions involved in the 2001 reorganization included: (1)
consolidation of functions such as network operations, customer service and
finance, (2) initiatives to increase gross margins and (3) agreements 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
$2.7 million for prepayments in respect of ILEC facilities in abandoned markets.
Other charges in 2000 include a reserve of $8,700,000 for notes receivable
from former officers of Voyager, and reorganization charges of $4,006,000. The
employee severance and related costs in 2000 were for approximately 250
employees to be terminated, none of whom were still employed by the Company as
of December 31, 2000.
F-36
CORECOMM HOLDCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes the reorganization charges incurred and
utilized in 2000 and 2001:
EMPLOYEE
SEVERANCE LEASE FIXED 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............ 3,409 6,928 6,572 21,772 38,681
Adjustments................... (996) 73 -- (386) (1,309)
Utilized...................... (3,218) (4,416) (2,914) (21,386) (31,934)
------- ------- ------- -------- --------
Balance, December 31, 2001.... $ 509 $ 3,106 $ 3,658 $ -- $ 7,273
======= ======= ======= ======== ========
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
other notes payable are estimated using discounted cash flow analyses, based on
the Company's incremental borrowing rates for similar types of borrowing
arrangements.
The carrying amounts and fair values of the Company's financial instruments
are as follows:
DECEMBER 31, 2001 DECEMBER 31, 2000
--------------------- ------------------
CARRYING CARRYING FAIR
AMOUNT FAIR VALUE AMOUNT VALUE
-------- ---------- -------- -------
(IN THOUSANDS)
Cash and cash equivalents.................... $ 24,966 $ 24,966 $22,773 $22,773
Long-term debt:
Working capital promissory note............ -- -- 1,496 1,392
Equipment note............................. -- -- 3,331 2,496
Senior secured credit facility............. 144,413 156,100 91,100 91,100
Notes payable to related parties........... 15,807 16,174 16,170 15,355
Other...................................... 33 33 160 138
F-37
CORECOMM HOLDCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. LEASES
The Company has capital leases for certain of its operating equipment.
Leased property included in operating equipment consists of:
DECEMBER 31,
-------------------------
2001 2000
----------- -----------
Operating equipment........................................ $14,145,000 $41,859,000
Accumulated depreciation................................... -- 14,699,000
----------- -----------
$14,145,000 $27,160,000
=========== ===========
Future minimum annual payments under these leases at December 31, 2001 are
as follows:
Year Ending December 31,
2002...................................................... $11,008,000
2003...................................................... 266,000
-----------
Total minimum lease payments.............................. 11,274,000
Less amount representing interest (at rates ranging from
8.5% to 26.44%)........................................ 1,373,000
-----------
Present value of net minimum obligations.................. 9,901,000
Current portion........................................... 9,634,000
-----------
$ 267,000
===========
As of December 31, 2001, the Company had leases for office space and
equipment which extend through 2013. Total rent expense for the years ended
December 31, 2001, 2000 and 1999 under operating leases was $8,791,000,
$7,764,000 and $5,151,000, respectively.
Future minimum annual lease payments under noncancellable operating leases
at December 31, 2001 are as follows: $7,704,000 (2002); $6,794,000 (2003);
$4,675,000 (2004); $3,652,000 (2005) $2,469,000 (2006) and $6,122,000
thereafter.
16. RELATED PARTY TRANSACTIONS
Notes payable to related parties consists of:
DECEMBER 31,
-------------------------
2001 2000
----------- -----------
10.75% Senior Unsecured Convertible PIK Notes Due December
2010, plus accrued interest.............................. $ -- $16,170,000
10.75% Unsecured Convertible PIK Notes Due April 2011, plus
accrued interest, less unamortized discount of $367,000
(2001)................................................... 15,807,000 --
----------- -----------
$15,807,000 $16,170,000
=========== ===========
In December 2000, the Company issued $16.1 million 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,
which commenced on 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 equal the interest payment that was then due. The notes
were convertible into CoreComm Limited common stock prior to
F-38
CORECOMM HOLDCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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's common stock in December 2001.
Some of the officers and directors of the Company are also officers or
directors of NTL Incorporated, referred to as 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 10.75% Unsecured Convertible PIK Notes Due April 2011 is at
an annual rate of 10.75% payable semiannually on October 15 and April 15 of each
year, which commenced on 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 CoreComm Limited's common stock
for a specified period. The notes are convertible into shares of CoreComm
Limited's common stock prior to maturity at a conversion price of $1.00 per
share, subject to adjustment. However, NTL and CoreComm Limited and the Company
have entered into an agreement relating to the conversion feature of the notes
following the Holdco recapitalization. Through that agreement, consistent with
the original terms of the notes, CoreComm Limited and the Company have agreed to
exercise their right under the notes such that, following the successful
completion of the exchange offer to the holders of CoreComm Limited's common
stock to exchange their shares for shares of the Company's common stock, the
convertibility feature of the notes will be altered so that rather than the
notes being convertible into shares of CoreComm Limited common stock, the notes
will become convertible into shares of the Company's common stock. At that time,
the conversion price of $1.00 will be equitably adjusted by applying the
exchange ratio in the exchange offer, which results in a new conversion price of
$116.70 per share of the Company's common stock. NTL 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 the exchange offer is not completed, the conversion feature
would remain into CoreComm Limited common stock. These notes are redeemable, in
whole or in part, at the Company'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 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.
It is not practicable to determine the amounts of these expenses that would have
been incurred had the Company operated as an unaffiliated entity. In the opinion
of management, this allocation method is reasonable. For the years ended
December 31, 2001, 2000 and 1999, NTL charged the Company $446,000, $1,186,000
and $2,330,000, respectively, which is included in corporate expenses.
F-39
CORECOMM HOLDCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (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 2001, 2000
and 1999, the Company charged NTL $121,000, $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 $1,883,000, $1,400,000 and $800,000 for the years ended December 31,
2001, 2000 and 1999, respectively, as a result of these charges.
In 2001, the Company and NTL entered into a license agreement whereby NTL
was granted an exclusive, irrevocable, perpetual license to certain billing
software developed by the Company for telephony rating, digital television
events rating, fraud management and other tasks. The sales price was cash of
$12.8 million. The billing software was being used by NTL at the time of this
agreement, and was being maintained and modified by the Company under an ongoing
software maintenance and development outsourcing arrangement between the
companies. The Company recorded the $12.8 million as deferred revenue to be
recognized over a period of three years, which was the estimated amount of time
the Company expected to provide service under this arrangement. The Company
recognized $2.5 million of this revenue in 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 that commenced operations in February 2001. The Company recognized
revenue of $327,000 for the network usage in the year ended December 31, 2001.
The Company leases office space from entities controlled by an individual
who owns 32% of the outstanding shares of the Company's common stock. Rent
expense for these leases for the year ended December 31, 2001 was approximately
$1.6 million.
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, 2001, 2000 and 1999 was $380,000, $486,000 and
$350,000, respectively.
18. SHAREHOLDERS' EQUITY
STOCK SPLITS
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. On April 12, 2002, the Company
declared a 3-for-1 stock split by way of a stock dividend, which was paid on the
declaration date. The Company's outstanding shares increased from 9,514,416 to
28,543,248. The consolidated financial statements and the notes thereto give
retroactive effect to the stock split.
NON-CASH COMPENSATION
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,
F-40
CORECOMM HOLDCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and the members of 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, CoreComm Limited and the Company are 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.
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, in April 2000, the Company recorded 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
2001, the remaining $21.6 million of the deferred non-cash compensation was
charged to expense.
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 CoreComm Limited's common
stock on the date of repurchase. The notes earned interest at a rate of 4.5% and
were redeemed by CoreComm Limited 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
stock option agreements granted to certain of the Company's employees.
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,
referred to as 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 a 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.
F-41
CORECOMM HOLDCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
WARRANTS
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 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 CoreComm Limited common stock
issued in December 2000 and January 2001 were canceled upon the issuance of
these new warrants.
CoreComm Limited had the following warrants outstanding as of December 31,
2001: (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 10,580,000 shares of
common stock at $.01 per share issued in 2001 that expire in April 2011. None of
these warrants were exercised in 2001 or 2000.
The Company has offered 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 the 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 8.7 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 7.74 million shares of the
Company's common stock, representing approximately 20% of the total fully
diluted shares. The exercise price of these options is $1.00 per share. 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 the Company's Board of Directors. Options are generally
exercisable as to 34% of the shares subject thereto on the date of grant and
become exercisable as to an additional 33% of the shares subject thereto on each
January 1 thereafter, while the optionee remains an employee of the Company or
its affiliates. Options will expire ten years after the date of the grant.
As of December 31, 2001, there were approximately 33,057,000 shares of
CoreComm Limited common stock reserved for issuance under the CoreComm Limited
stock option plans, referred to as the Limited Plans, and there were
approximately 8.4 million shares available for issuance. 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 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
F-42
CORECOMM HOLDCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
for shares of the Company's common stock. In the event that the Company is
successful in consummating the exchange offers, CoreComm Limited would become a
subsidiary of the Company. Subsequent to that time, the Company and CoreComm
Limited may agree to effect a merger between CoreComm Limited and a subsidiary
of the Company which would have the effect of converting holders of any
remaining outstanding shares of CoreComm Limited common stock not owned by the
Company into shares of the Company 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 the Company at
that exchange ratio. The Company may be required to record non-cash compensation
upon the ultimate resolution of the CoreComm Limited Stock options.
In connection with the distribution of CoreComm Limited to CCPR's
shareholders, CoreComm Limited issued options to purchase approximately
1,877,000 shares of CoreComm Limited common stock to holders of CCPR stock
options who elected to receive options. In addition, CoreComm Limited issued
warrants to purchase 6,153,000 shares of its common stock to holders of CCPR
stock options who elected to receive warrants. These warrants are referred to as
distribution warrants.
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 option pricing model with the following
weighted-average assumptions for 2001, 2000 and 1999: risk-free interest rate of
4.47%, 5.30% and 6.81%, respectively, dividend yield of 0%, volatility factor of
the expected market price of CoreComm Limited's common stock of 1.276, .804 and
..465, 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:
YEAR ENDED DECEMBER 31,
---------------------------------------------
2001 2000 1999
------------- ------------- -------------
Pro forma net (loss).................... $(678,921,000) $(376,557,000) $(128,451,000)
Pro forma net (loss) per share -- basic
and diluted........................... $(71.22) $(39.58) $(13.50)
F-43
CORECOMM HOLDCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 2001, 2000 and 1999 follows:
2001 2000 1999
---------------------- ---------------------- ----------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER OF EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
---------- --------- ---------- --------- ---------- ---------
Outstanding -- beginning of
period....................... 19,349,000 $13.69 10,754,000 $15.37 9,765,000 $ 5.51
Granted........................ 16,822,000 .65 10,404,000 10.98 7,925,000 19.56
Exercised...................... 3,000 1.49 1,640,000 7.61 5,606,000 6.27
Forfeited...................... 13,971,00 12.16 169,000 14.09 1,330,000 6.27
---------- ---------- ----------
Outstanding -- end of period... 22,197,000 $ 4.80 19,349,000 $13.69 10,754,000 $15.37
========== ========== ==========
Exercisable at end of period... 22,197,000 $ 4.80 10,112,000 $12.51 3,438,000 $10.11
========== ========== ==========
Weighted-average fair value of distribution warrants and options,
calculated using the Black-Scholes option pricing model, granted during 2001,
2000 and 1999 is $0.12, $14.04 and $14.28, respectively.
The following table summarizes the status of the CoreComm Limited
distribution warrants and stock options outstanding and exercisable at December
31, 2001, 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
---------------------------------------------- ---------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
RANGE OF NUMBER OF REMAINING AVERAGE NUMBER OF AVERAGE
EXERCISE PRICES OPTIONS CONTRACTUAL LIFE EXERCISE PRICE OPTIONS EXERCISE PRICE
---------------- ---------- ---------------- -------------- ---------- --------------
$ 0.02 to $ 3.03 17,012,000 8.7 years $ 0.632 17,012,000 $ 0.632
$ 5.86 to $ 7.94 576,000 6.6 years $ 6.261 576,000 $ 6.261
$12.96 to $14.55 299,000 8.3 years $13.909 299,000 $13.909
$18.78 to $22.33 4,310,000 7.5 years $20.491 4,310,000 $20.491
---------- ----------
Total 22,197,000 22,197,000
========== ==========
F-44
CORECOMM HOLDCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
19. INCOME TAXES
The provision for income taxes consists of the following:
YEAR ENDED DECEMBER 31,
-----------------------------
2001 2000 1999
------- -------- --------
Current:
Federal............................................. $ -- $ -- $ --
State and local..................................... 94,000 125,000 102,000
------- -------- --------
Total current......................................... 94,000 125,000 102,000
------- -------- --------
Deferred:
Federal............................................. -- -- --
State and local..................................... -- -- --
Total deferred........................................ -- -- --
------- -------- --------
$94,000 $125,000 $102,000
======= ======== ========
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
the Company's deferred tax assets are as follows:
DECEMBER 31,
-----------------------------
2001 2000
------------- -------------
Deferred tax assets:
Depreciation......................................... $ 8,503,000 $ 1,214,000
Net operating losses................................. 95,932,000 107,220,000
Allowance for doubtful accounts...................... 7,435,000 4,414,000
Amortization of goodwill............................. 11,140,000 7,405,000
Accrued expenses..................................... 17,336,000 35,820,000
Asset impairments.................................... 16,737,000 8,546,000
Other................................................ 562,000 174,000
------------- -------------
157,645,000 164,793,000
Valuation allowance for deferred tax assets............ (157,645,000) (164,793,000)
------------- -------------
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 $38 million which, if realized, would be accounted for as a reduction of
goodwill or an increase in equity.
Due to the completion of the debt cancellation in the first phase of the
Holdco recapitalization in December 2001, CoreComm Limited realized for tax
purposes approximately $265 million of income, most of which is not subject to
tax as a result of an exception set forth in the Internal Revenue Code. To the
extent that such amount is excluded from taxable income, taxable attributes of
the Company and subsidiaries, consisting of net operating loss, referred to as
NOL, carryforwards are subject to reduction. After reduction, NOL carryforwards
at December 31, 2001 are $230 million. Furthermore, the Holdco recapitalization
caused an ownership change pursuant to section 382 of the Internal Revenue Code,
which imposes an annual limitation on the utilization of NOL carryforwards.
Utilization of the Company's
F-45
CORECOMM HOLDCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
remaining NOL carryforwards will be significantly restricted by the section 382
limitation triggered by the ownership change.
The reconciliation of income taxes computed at U.S. federal statutory rates
to income tax expense is as follows:
YEAR ENDED DECEMBER 31,
--------------------------------------------
2001 2000 1999
------------- ------------- ------------
Benefit at federal statutory rate
(35%).................................. $(207,837,000) $(105,391,000) $(36,077,000)
State and local income taxes............. 94,000 125,000 102,000
Expenses not deductible for tax
purposes............................... 135,313,000 33,619,000 2,160,000
Foreign income not subject to U.S. tax... -- -- (362,000)
U.S. losses with no benefit.............. 72,524,000 71,772,000 34,279,000
------------- ------------- ------------
$ 94,000 $ 125,000 $ 102,000
============= ============= ============
20. COMMITMENTS AND CONTINGENT LIABILITIES
As of December 31, 2001, the Company had purchase commitments of
approximately $5,000,000 outstanding.
The Company is involved in various disputes, arising in the ordinary course
of its business, which may result in pending or threatened litigation. None of
these matters are expected to have a material adverse effect on the Company's
financial position, results of operations or cash flows. However, certain of
these matters, if resolved unfavorably to us, could have a material adverse
effect on the Company's business, financial condition and/or results of
operations:
- CoreComm Newco, Inc., an indirect, wholly-owned subsidiary of CoreComm
Holdco referred to as CoreComm Newco, is currently in litigation with
Ameritech Ohio, a supplier from whom it purchases telecommunications
products and services, over the adequacy of Ameritech's performance under
a 1998 contract between CoreComm Newco and Ameritech, and related issues.
This litigation began in June 2001 when Ameritech threatened to stop
processing new orders following CoreComm Newco's exercise of its right
under the contract to withhold payments for Ameritech's performance
failures. In response to this threat, CoreComm Newco sought and received
an order from an official of the Public Utilities Commission of Ohio,
referred to as the 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 CoreComm Newco of approximately $8,600,000 allegedly owed under the
contract. On August 8, 2001, Ameritech filed a second claim against
CoreComm Newco in Ohio state court, seeking an additional approximately
$4,300,000 in allegedly improperly withheld amounts. These claims were
subsequently consolidated in the United States District Court, with an
amended complaint from Ameritech seeking a total of approximately
$14,400,000.
On December 26, 2001, CoreComm Newco filed its 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. In
lieu of filing an answer to CoreComm Newco's counterclaims, Ameritech
filed a series of motions on March 25, 2002, asking the Court to dismiss
certain of CoreComm Newco's counterclaims. CoreComm Newco's response to
those motions is currently due on April 17, 2002 and it intends to oppose
Ameritech's requests for dismissal vigorously.
F-46
CORECOMM HOLDCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company believes that CoreComm Newco has 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. For example, the figure specified in Ameritech's complaint does
not account for (a) more than $4.1 million in refunds that Ameritech
contends it has already credited to CoreComm Newco's accounts since the
filing its complaint, and (b) payments that were made by CoreComm Newco in
the ordinary course after the time of Ameritech's submission. However, the
Company cannot be certain how the matter will be resolved. The Company
also believes that, to the extent Ameritech prevails with respect to any
of its claims, Ameritech's award may be offset in whole or in part by
amounts that CoreComm Newco is seeking to obtain from Ameritech under its
counterclaims. However, it is impossible at this time to predict the
outcome of the litigation.
- Certain operating subsidiaries of CoreComm Holdco are currently involved
in litigation with certain subsidiaries of Verizon Communications, Inc.,
referred to as Verizon, relating to the timeliness and accuracy of
Verizon's wholesale billing processes, the legitimacy of various charges
that have been levied by Verizon, and the propriety of Verizon's effort
to collect those charges by threatening to implement an account embargo
and service suspension on the ability of CoreComm Holdco's subsidiaries
to process new and pending service orders unless payment is made on the
amounts demanded.
On or about January 31, 2002, the subsidiaries of CoreComm Holdco
operating in Delaware, District of Columbia, Maryland, Massachusetts, New
York, Pennsylvania and received correspondence from Verizon claiming that
Verizon was owed a total of approximately $14 million for services
allegedly provided in those states and threatening to activate embargo
procedures on their accounts if payment of the alleged amounts was not
received. In response, the subsidiaries challenged the accuracy of
Verizon's figures and provided formal written notice to Verizon disputing
its claims and reiterating their several prior requests that Verizon
provide additional information to support its contentions and resolve a
variety of apparently systemic problems with its wholesale billing
systems. Additionally, the subsidiaries in Pennsylvania , New York and
Massachusetts proceeded to initiate litigation against Verizon before the
appropriate regulatory authorities and/or in civil court.
After further discussions and agreements between the parties, on February
28, 2002 Verizon withdrew its embargo threats in all states except
Massachusetts. In Massachusetts, Verizon filed an answer to the complaint
along with counterclaims seeking approximately $1.4 million in payment for
allegedly past due charges. CoreComm Massachusetts is currently preparing
an answer to these counterclaims that will dispute the accuracy of
Verizon's contentions and discussions regarding a mutually agreeable
resolution of the matter are continuing between the parties.
In Pennsylvania, litigation between ATX Telecommunications and Verizon is
continuing. In the meantime, on March 4, 2002, ATX received a letter from
Verizon asserting that Verizon is owed approximately $5.7 million in
allegedly past due charges and threatening to implement a service embargo.
ATX is currently reviewing Verizon's claims against its own billing
records and believes that the amount at issue could be substantially less
than the amount claimed by Verizon when taking into account (a) Verizon's
historical billing errors, (b) payments that have been or will be made in
the ordinary course, and (c) unresolved disputes over prior charges.
Accordingly, on March 29, 2002, ATX filed a petition with the Hearing
Examiner in its complaint case advising that the $5.7 million figure
alleged in Verizon's embargo letter has been placed into dispute by ATX
due to Verizon's billing errors, that approximately $3 million of
erroneous charges have already been found which ATX believes should be
deducted from the claimed amount, and asking the Hearing Examiner to issue
an order that would prevent Verizon from implementing a service
F-47
CORECOMM HOLDCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
embargo during the pendancy of the complaint proceeding. ATX intends to
vigorously litigate its complaint regarding Verizon's billing errors,
including the longstanding, apparently systemic problems that ATX has
experienced with Verizon's billing systems, and pursue all available
claims, counterclaims and offsets, including defending against any effort
to implement any embargo or service suspension. However, it 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
MegsINet, Inc., an indirect subsidiary of CoreComm Holdco, 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. On February 19, 2002, the defendants filed a motion to dismiss
certain of GECC's claims. GECC's response to the motion is currently due
on April 9, 2002, defendants' reply is presently due on April 26, 2002
and oral argument on the motions is presently scheduled for May 13, 2002.
CoreComm Holdco is currently in settlement discussions with GECC
regarding these claims.
- 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, primarily in
respect of alleged early termination liabilities, under a services
agreement and a collocation agreement with MegsINet. The defendants have
denied KMC's claims and have asserted that the contracts at issue were
signed without proper authorization, that KMC failed to perform under the
alleged contracts, and that the termination penalties are not
enforceable. The defendants have served discovery and intend to defend
themselves in coordination with one of their insurance carriers.
- On July 6, 2001, MCI initiated a compulsory arbitration action against
CoreComm Holdco's 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 a carrier agreement. MCI has subsequently
asserted that under one theory of the case premised on its reading of
provisions relating to alleged early termination penalties, its claims
could exceed $10 million, and under another theory involving a different
computation its claims could exceed $4.5 million. The defendant has
denied MCI's claims, asserting that the circuits were never ordered under
the contract and have been improperly billed by MCI, and the defendant
does not agree with MCI's various damages theories. MCI has admitted that
there are no signed written orders for a substantial majority of the
circuits, and the contract states that all orders must be submitted in
writing signed by the ordering party. Discovery in this matter has been
completed, and the case is currently scheduled for trial before the
arbitrator in April 2002. The defendant is litigating the suit vigorously
and pursuing all available claims and defenses.
- The Company received correspondence from a law firm on behalf of Weston
Telecommunications, L.L.C., referred to as Weston, asserting that Weston
is the assignee of certain rights of Easton Telecom Services, Inc.,
referred to as Easton, 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
F-48
CORECOMM HOLDCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Easton and MegsINet, Inc. On March 1, 2002, Easton Telecom Services,
LLC., formerly known as Weston, initiated litigation in the Northern
District of Ohio against CoreComm Internet Group, Inc. asserting the
claims discussed above. The defendant has investigated Weston's claims
and does not believe that they have merit. Defendant's answer to Easton's
complaint is presently due on April 24, 2001 and the Company intends to
defend itself vigorously and pursue all available claims and defenses,
including multiple defenses to the validity of the alleged contracts at
issue.
F-49
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-50
VOYAGER.NET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- --------------------------
2000 1999 2000 1999
----------- ----------- ------------ -----------
(UNAUDITED)
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-51
VOYAGER.NET, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
RECEIVABLES
FOR
PREFERRED
COMMON STOCK ADDITIONAL AND NOTES AND
------------------- PAID-IN COMMON INTEREST DEFERRED ACCUMULATED
SHARES AMOUNT CAPITAL STOCK RECEIVABLE COMPENSATION DEFICIT
---------- ------ ------------ ----------- ----------- ------------ ------------
(UNAUDITED)
Balance January 1, 2000........... 31,650,108 $2,712 $112,129,038 $(6,291,935) $(5,630,418) $111,420 $(27,221,126)
Interest on receivables........... -- -- -- (150,000) (138,000) -- --
Exercise of stock options......... 4,650 -- 22,506 -- -- -- --
Deferred compensation............. -- -- -- -- -- 50,000 --
Net loss.......................... -- -- -- -- -- -- (13,794,735)
---------- ------ ------------ ----------- ----------- -------- ------------
Balance June 30, 2000............. 31,654,758 $2,712 $112,151,544 $(6,441,935) $(5,768,418) $161,420 $(41,015,861)
========== ====== ============ =========== =========== ======== ============
TOTAL
STOCKHOLDERS'
EQUITY
-------------
(UNAUDITED)
Balance January 1, 2000........... $ 73,099,691
Interest on receivables........... (288,000)
Exercise of stock options......... 22,506
Deferred compensation............. 50,000
Net loss.......................... (13,794,735)
------------
Balance June 30, 2000............. $ 59,089,462
============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
F-52
VOYAGER.NET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30,
---------------------------
2000 1999
------------ ------------
(UNAUDITED)
Cash flows from operating activities:
Net loss.................................................. $(13,794,735) $ (7,756,073)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization............................. 18,377,773 8,531,777
Loss on disposal/sale of equipment........................ 124,878 4,572
Compensation charge for issuance of common stock and stock
options................................................ 50,000 2,509,000
Changes in assets and liabilities excluding effects of
business combinations, net............................. (3,105,198) 1,272,295
------------ ------------
Net cash provided by operating activities.............. 1,652,718 4,561,571
Cash flows used in investing activities:
Business acquisition costs, net of cash acquired.......... (5,290,361) (23,577,768)
Purchase of property and equipment........................ (4,793,294) (2,658,104)
------------ ------------
Net cash used in investing activities.................. (10,083,655) (26,235,872)
Cash flows provided by financing activities:
Payments on capital leases................................ (1,424,224) (262,767)
Loan/payments to related party............................ -- (500,000)
Payment of bank financing fees............................ -- (1,124,770)
Proceeds from issuance of debt............................ 4,100,000 25,200,000
Proceeds from common stock issuance....................... 22,506 248
Proceeds from preferred stock............................. -- 666,700
------------ ------------
Net cash provided by financing activities.............. 2,698,282 23,979,411
------------ ------------
Net (decrease) increase in cash and cash equivalents........ (5,732,655) 2,305,110
Cash and cash equivalents at beginning of period............ 18,062,396 2,350,292
------------ ------------
Cash and cash equivalents at end of period.................. $ 12,329,741 $ 4,655,402
============ ============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
F-53
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.
SIX MONTHS ENDED
JUNE 30,
-------------------------
2000 1999
----------- -----------
(IN THOUSANDS EXCEPT PER
SHARE DATA)
Revenues.................................................... $ 37,060 $ 31,223
Net loss.................................................... (13,900) (15,925)
Basic and diluted loss per share............................ (0.44) (0.70)
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%
F-54
VOYAGER.NET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
to 2.75% depending on the ratio of funded debt to EBITDA. The elected rate as of
June 30, 2000 is approximately 8.70%. Automatic and permanent reductions of the
maximum commitments begin June 30, 2001 and continue until maturity.
4. EARNINGS PER SHARE:
The impact of dilutive shares is not significant. Net loss per share is
computed using the weighted average number of common shares outstanding during
the period. Inclusion of common share equivalents of 3,983,847 would be
antidilutive and have been excluded from per share calculations.
5. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
The following is the supplemental cash flow information for all periods
presented:
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.
F-55
VOYAGER.NET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Although the Company is still in the process of reviewing SAB 101, it
believes that its revenue recognition practices are in substantial compliance
with SAB 101 for the year ending December 31, 2000 or that adoption of its
provisions would not be material to its annual or quarterly results of
operations.
8. MERGER AGREEMENT:
On March 12, 2000, the Company entered into an agreement to merge with
CoreComm Limited in a stock and cash transaction. The transaction is subject to
stockholder approval, certain regulatory approvals and other conditions.
F-56
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-57
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-58
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-59
VOYAGER.NET, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
PREFERRED STOCK COMMON STOCK RECEIVABLE FOR NOTES AND
--------------------- ------------------- ADDITIONAL PREFERRED AND INTEREST
SHARES AMOUNT SHARES AMOUNT PAID-IN CAPITAL COMMON STOCK RECEIVABLE
------- ----------- ---------- ------ --------------- -------------- -----------
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 (666,700) --
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 (666,700) --
Issuance of common stock.... -- -- 1,240,000 100 7,354,900 (6,291,935) --
Issuance of loans to
stockholders.............. -- -- -- -- -- -- (5,630,418)
Proceeds from initial public
offering.................. -- -- 7,425,000 743 99,454,156 -- --
Proceeds from preferred
stock..................... -- -- -- -- -- 666,700 --
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 $(6,291,935) $(5,630,418)
======= =========== ========== ====== ============ =========== ===========
TOTAL
DEFERRED ACCUMULATED STOCKHOLDERS'
COMPENSATION DEFICIT EQUITY (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.............. -- -- 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...................... 1,008,420 (10,556,918) 1,276,161
Issuance of common stock.... -- -- 1,063,065
Issuance of loans to
stockholders.............. -- -- (5,630,418)
Proceeds from initial public
offering.................. -- -- 99,454,899
Proceeds from preferred
stock..................... -- -- 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...................... $ 111,420 $(27,221,126) $ 73,099,691
=========== ============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
F-60
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-61
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-62
VOYAGER.NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (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
===========
F-63
VOYAGER.NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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).
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 share................. (1.43) (2.13) (0.91)
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 lease.......... 1,178,525 5,365,475 5
Vehicles........................................ 32,807 32,807 5
Building improvements........................... 860,526 1,386,534 7-10
----------- -----------
11,250,078 28,367,008
Less accumulated depreciation................... (1,721,706) (7,068,552)
----------- -----------
Property and equipment, net..................... $ 9,528,372 $21,298,456
=========== ===========
Depreciation expense of approximately $393,000, $842,000 and $4,992,000 was
charged to operations in 1997, 1998 and 1999, respectively.
F-64
VOYAGER.NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
=========== ============
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.
F-65
VOYAGER.NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. OTHER LIABILITIES
Other liabilities consist of the following:
1998 1999
-------- ----------
Accrued payroll and related expenses........................ $272,654 $ 983,197
Accrued expenses............................................ 465,732 2,697,350
Other....................................................... 117,341 16,298
-------- ----------
$855,727 $3,696,845
======== ==========
8. DEBT
In July 1999, the Company re-negotiated its revolving available credit
facility with its bank group concurrent with its initial public offering (see
Note 11) for a $60 million line of credit, with the option to extend to $70
million on similar terms and conditions. The credit facility matures on
September 30, 2005. At December 31, 1999, $19,650,000 was outstanding under the
credit facility. Interest is payable quarterly through maturity. The revolving
credit facility agreement allows the Company to elect an interest rate as of any
borrowing date based on either the (1) prime rate, or (2) LIBOR, plus a margin
ranging from 1.0% to 2.75% depending on the ratio of funded debt to EBITDA. The
elected rate as of December 31, 1999 is approximately 9.0% with an effective
weighted average rate of approximately 8.6% and 8.4% at December 31, 1998 and
1999, respectively. Commitment fees on the unused credit facility are 0.5%.
Automatic and permanent reductions of the maximum commitments begin April 2001
and continue until maturity. Based on the balance as of December 31, 1999, the
scheduled permanent reductions of long-term debt are as follows:
YEAR
----
2000........................................................ $ --
2001........................................................ 982,500
2002........................................................ 2,456,250
2003........................................................ 4,421,250
2004........................................................ 6,263,438
Thereafter.................................................. 5,526,562
-----------
$19,650,000
===========
The revolving credit facility is collateralized by all of the Company's
tangible and intangible personal property and fixtures as well as substantially
all of the issued and outstanding equity securities of the Company.
The revolving credit facility is subject to an agreement that contains,
among other provisions, certain financial covenants. These financial covenants
include maintenance of a minimum fixed charges ratio, a total interest coverage
ratio, and a leverage ratio.
F-66
VOYAGER.NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
F-67
VOYAGER.NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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-68
VOYAGER.NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (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
AVERAGE
NUMBER 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
F-69
VOYAGER.NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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%
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.
F-70
VOYAGER.NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
The following is the supplemental cash flow information for all periods
presented:
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.
16. SEGMENT REPORTING
The Company has a single operating segment, Internet access services. The
Company has no organizational structure dictated by product lines, geography or
customer type. Sales are substantially derived from one service line, Internet
access service, and are residential and business customers in the Midwestern
United States. The Company evaluates performance based on profit or loss from
operations before interest, income taxes, depreciation and amortization and
non-recurring, non-cash compensation charges.
F-71
VOYAGER.NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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-72
ATX TELECOMMUNICATIONS SERVICES, INC.
BALANCE SHEET
JUNE 30, 2000
-------------
(UNAUDITED)
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-73
ATX TELECOMMUNICATIONS, INC.
STATEMENTS OF OPERATIONS
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, 2000 JUNE 30, 1999 JUNE 30, 2000 JUNE 30, 1999
------------- ------------- ------------- -------------
(UNAUDITED)
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-74
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-75
ATX TELECOMMUNICATIONS SERVICES, INC.
STATEMENTS OF CASH FLOWS
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 2000 JUNE 30, 1999
------------- -------------
(UNAUDITED)
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-76
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, 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. These bonuses
represent compensation for the management of operations of the Company.
Accordingly, the Company has recorded $4,000,000 of compensation expense for
these bonuses, which have been 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.
F-77
ATX TELECOMMUNICATIONS SERVICES, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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-78
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-79
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 $1,909,000..................... 20,639,086
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-80
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-81
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-82
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
Depreciation and amortization.......................... 1,820,453 1,947,830
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-83
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, 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.
These bonuses represent compensation for the management of the operations
of the Company. Accordingly, the Company has recorded compensation expenses for
these bonuses, which have been 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.
F-84
ATX TELECOMMUNICATIONS SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
The Company generally recognizes revenue based on the customers' usage of
services. Charges for certain local service fees that are billed in advance are
deferred and recognized when earned. Revenue from certain non-recurring services
such as customer installations is recognized when earned. 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.
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.
F-85
ATX TELECOMMUNICATIONS SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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
F-86
ATX TELECOMMUNICATIONS SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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
==========
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.
F-87
ATX TELECOMMUNICATIONS SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
11. PHANTOM UNIT PLAN
During 1998, ATX adopted the 1998 Phantom Unit Plan (the "Plan"). The Plan
provides for the issuance of a total of 5,000,000 phantom units representing a
phantom 5% equity interest in ATX. Eligible employees may receive phantom units
or equivalent consideration as determined by a committee appointed by ATX to
administer the Plan. The committee has the authority at its sole discretion to
designate the employees eligible to participate in the Plan. In addition, the
committee may terminate or amend the Plan at its discretion. Termination or
amendment of the Plan shall not affect phantom awards previously granted.
Typically, the awards vest over a seven-year period from the date of grant;
however, an employee may receive credit for employment time prior to the date of
the award at the discretion of the committee. The Plan is unfunded.
The phantom units become payable to a participant on the earlier of his
termination of employment or a change of control. Upon termination of
employment, a participant is entitled to compensation under the Plan. Such
compensation is payable over a 36-month period beginning in the thirteenth month
after termination. The participant's compensation is determined by his
proportionate ownership of units and the Plan's formula for determining value,
which is 10 times average net cash income as defined in the Plan for the prior
three fiscal years.
The Company has recorded a noncash (benefit) charge of ($400,000) and
$1,800,000 for the years ended December 31, 1999 and 1998, respectively, related
to the issuance of the phantom units.
Upon a change in control as defined in the Plan, the participants will
become entitled to receive compensation based upon the exchange or transaction
value of ATX's equity. ATX, Inc. will record a compensation charge equal to the
fair market value of the consideration payable to the Plan participants less
amounts previously recorded. The consummation of the Merger Agreement, described
in Note 2 above, would result in a non-cash charge of approximately $44 million.
The following table contains information on phantom units for units granted
under the Plan from the date of adoption of the Plan through December 31, 1999:
NUMBER OF
PHANTOM UNITS
-------------
Outstanding at January 1, 1998.............................. --
Granted..................................................... 3,350,000
Cancelled................................................... (75,000)
---------
Outstanding at December 31, 1998............................ 3,275,000
Granted..................................................... 1,725,000
Cancelled................................................... --
---------
Outstanding at December 31, 1999............................ 5,000,000
=========
12. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Global financed $837,500 in 1997 related to the purchase of customer lists
and paid interest of $47,238 and $39,724 in 1999 and 1998, respectively, in
connection with this note.
F-88
CORECOMM LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
MARCH 31, 2002
---------------
RESTATED*
ASSETS
Current assets:
Cash and cash equivalents................................. $ 472,000
Other..................................................... 37,000
---------------
Total current assets........................................ 509,000
Fixed assets, net........................................... 113,000
Investment in CoreComm Holdco............................... 2,348,000
Other, net of accumulated amortization of $2,503,000........ 6,653,000
---------------
$ 9,623,000
===============
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable.......................................... $ 959,000
Accrued expenses.......................................... 348,000
Due to NTL Incorporated................................... 209,000
Due to CoreComm Holdco.................................... 31,834,000
Current portion of long-term debt......................... 4,750,000
---------------
Total current liabilities................................... 38,100,000
Long-term debt, including $258,087,000 due to CoreComm
Holdco.................................................... 258,087,000
Commitments and contingent liabilities
Shareholders' deficiency:
Series preferred stock -- $.01 par value, authorized
5,000,000 shares:
Series A, liquidation preference $56,750,000; issued
and outstanding 51,000 shares......................... --
Series B, liquidation preference $268,187,000; 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 141,655,000 shares...... 1,417,000
Additional paid-in capital.................................. 782,922,000
Deficit..................................................... (1,060,332,000)
---------------
(275,990,000)
Treasury stock at cost, 1,329,000 shares.................... (10,574,000)
---------------
(286,564,000)
---------------
$ 9,623,000
===============
---------------
* See Note 5.
See accompanying notes to unaudited financial statements.
F-89
CORECOMM LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
-----------------------------
2002 2001
------------ --------------
RESTATED*
REVENUES.................................................... $ 108,000 $ 72,937,000
COSTS AND EXPENSES
Operating................................................... -- 63,520,000
Selling, general and administrative......................... 68,000 31,599,000
Corporate................................................... -- 3,894,000
Non-cash compensation....................................... -- 3,234,000
Other charges............................................... -- 119,000
Asset impairments........................................... -- 167,599,000
Depreciation................................................ 33,000 12,045,000
Amortization................................................ -- 31,511,000
----------- -------------
101,000 313,521,000
----------- -------------
Operating income (loss)..................................... 7,000 (240,584,000)
OTHER INCOME (EXPENSE)
Interest income and other, net.............................. 7,000 776,000
Equity in net loss of CoreComm Holdco....................... (1,515,000) --
Interest expense............................................ (5,651,000) (9,838,000)
----------- -------------
Loss before income tax provision............................ (7,152,000) (249,646,000)
Income tax provision........................................ -- (15,000)
----------- -------------
Net loss.................................................... $(7,152,000) $(249,661,000)
=========== =============
Basic and diluted net loss per common share................. $ (0.09) $ (3.58)
=========== =============
---------------
* See Note 5.
See accompanying notes to unaudited financial statements.
F-90
CORECOMM LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' DEFICIENCY
(UNAUDITED)
SERIES A SERIES B
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
---------------- ---------------- ------------------------ ADDITIONAL
SHARES PAR SHARES PAR SHARES PAR PAID-IN CAPITAL DEFICIT
-------- ----- ------- ------ ----------- ---------- --------------- ---------------
Balance, December 31,
2001.................. 51,000 $-- 250,000 $3,000 141,655,000 $1,417,000 $787,434,000 $(1,053,180,000)
Accreted dividends on
preferred stock....... (4,512,000)
Net loss Restated*...... (7,152,000)
------ -- ------- ------ ----------- ---------- ------------ ---------------
Balance, March 31,
2002.................. 51,000 $-- 250,000 $3,000 141,655,000 $1,417,000 $782,922,000 $(1,060,332,000)
====== == ======= ====== =========== ========== ============ ===============
TREASURY STOCK
-------------------------
SHARES AMOUNT
---------- ------------
Balance, December 31,
2001.................. (1,329,000) $(10,574,000)
Accreted dividends on
preferred stock.......
Net loss Restated*......
---------- ------------
Balance, March 31,
2002.................. (1,329,000) $(10,574,000)
========== ============
---------------
* See Note 5
See accompanying notes to unaudited financial statements.
F-91
CORECOMM LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
-----------------------
2002 2001
-------- ------------
Net cash provided by (used in) operating activities......... $363,000 $(19,208,000)
INVESTING ACTIVITIES
Purchase of fixed assets.................................... -- (530,000)
Proceeds from sales of marketable securities................ -- 4,775,000
-------- ------------
Net cash provided by investing activities................... -- 4,245,000
FINANCING ACTIVITIES
Proceeds from borrowing, net of financing costs............. -- 9,736,000
Proceeds from exercise of stock options and warrants........ -- 4,000
Principal payments.......................................... -- (4,299,000)
Principal payments of capital lease obligations............. -- (4,560,000)
-------- ------------
Net cash provided by financing activities................... -- 881,000
-------- ------------
Increase (decrease) in cash and cash equivalents............ 363,000 (14,082,000)
Cash and cash equivalents at beginning of period............ 109,000 25,802,000
-------- ------------
Cash and cash equivalents at end of period.................. $472,000 $ 11,720,000
======== ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest...................................... $ -- $ 1,110,000
======== ============
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING ACTIVITIES
Liabilities incurred to acquire fixed assets................ $ -- $ 3,703,000
======== ============
See accompanying notes to unaudited financial statements.
F-92
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 pursuant to the rules and regulations of the SEC.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three months ended March 31, 2002 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2002
The Company's only material asset is its ownership of approximately 13% of
the outstanding capital stock of CoreComm Holdco, Inc., referred to as CoreComm
Holdco. The Company owned 100% of the outstanding capital stock of CoreComm
Holdco until the consummation of transactions as part of the Holdco
recapitalization in December 2001. CoreComm Holdco provides integrated local and
toll-related telephone, Internet and high-speed data 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.
Effective with the completion of the first phase of the Holdco
recapitalization on December 28, 2001, the Company began accounting for its
ownership of approximately 13% of the outstanding shares of CoreComm Holdco
using the equity method. The Company consolidated CoreComm Holdco prior to that
date. This transition from consolidation to equity method accounting is referred
to as the deconsolidation in the consolidated financial statements. As a result
of the deconsolidation, the assets and liabilities of CoreComm Holdco are not
included in the Company's consolidated balance sheet at December 31, 2001. In
addition, the results of operations and cash flows of CoreComm Holdco, which
represented substantially all of the Company's operations and cash flows, are
not included in the Company's consolidated statement of operations and statement
of cash flows beginning January 1, 2002.
The Company has a liquidity problem that raises substantial doubt about its
ability to continue as a going concern. The Company intends to resolve its
liquidity problem through the completion of the Holdco recapitalization exchange
offers, although the exchange offers may not be completed.
NOTE 2. HOLDCO RECAPITALIZATION
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 streamlined its strategy and operations 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. The second is bundled local telephony and Internet products
efficiently sold, serviced and provisioned via Internet-centric interfaces to
the residential market.
Also in April 2001, the Company commenced a process to potentially sell its
assets and businesses that are not directly related to its competitive local
exchange carrier, referred to as CLEC, business, and retained advisors for the
purpose of conducting this sale. At the time, the Company's CLEC assets and
businesses were CoreComm Holdco's local and toll-related telephone services that
compete with the incumbent local exchange carrier, referred to as ILEC.
In October 2001, the Company and CoreComm Holdco commenced the Holdco
recapitalization. The Company 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 $4.8 million in the aggregate in cash and shares of CoreComm
F-93
CORECOMM LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 2. HOLDCO RECAPITALIZATION (CONTINUED)
Holdco common stock. The exchange was completed in December 2001, including the
payment of the $4.8 million by the Company.
On December 28, 2001, CoreComm Holdco completed the first 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 the Company and CoreComm
Holdco as co-obligors and all of the outstanding preferred stock of the Company.
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 due 2011.................. April 2001 CoreComm Holdco $ 10.0 million
and the Company
10.75% Senior Unsecured
Convertible PIK Notes Due
2010............................ December 2000 CoreComm Holdco $ 16.1 million
and the Company
Senior Unsecured Notes Due
September 29, 2003.............. September 2000 The Company $108.7 million
6% Convertible Subordinated Notes
Due 2006........................ October 1999 The Company $175.0 million(1)
Series A and Series A-1 Preferred
Stock........................... September 2000 The Company $ 51.1 million
Series B Preferred Stock.......... September 2000 The Company $250.0 million
---------------
(1) $164.75 million was outstanding as of December 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 26,056,806 shares, are owned by the
former holders of indebtedness of the Company and CoreComm Holdco and the former
holders of preferred stock of the Company, and approximately 13% of CoreComm
Holdco's outstanding shares, or 3,943,248 shares, continue to be held by the
Company.
As part of the second phase of the Holdco recapitalization, on February 8,
2002, CoreComm Holdco launched registered public exchange offers whereby it is
offering to exchange shares of CoreComm Holdco common stock which will have been
registered under the Securities Act of 1933, as amended, pursuant to a Form S-4
registration statement to all holders of the Company's common stock and all
remaining holders of the Company's 6% Convertible Subordinated Notes due 2006
for their shares of the Company's common stock and their notes, respectively. As
soon as practicable after accepting at least 90% of the outstanding shares of
the Company's common stock in the exchange offers, CoreComm Holdco plans to
transfer all such shares to a newly formed, wholly-owned subsidiary and to merge
this subsidiary into the Company with the Company surviving the merger as a
wholly-owned subsidiary of CoreComm Holdco.
As a result of the first phase of the Holdco recapitalization, CoreComm
Holdco holds $160 million principal amount of the Company's 6% Convertible
Subordinated Notes, approximately $105.7 million principal amount of the
Company's Senior Unsecured Notes and all of the Company's outstanding preferred
stock. The Company has agreed that it will surrender to CoreComm Holdco the
number of shares of CoreComm Holdco common stock that CoreComm Holdco requests.
CoreComm Holdco intends
F-94
CORECOMM LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 2. HOLDCO RECAPITALIZATION (CONTINUED)
to request that the Company surrender, immediately following the merger, all
shares of CoreComm Holdco common stock that it owns, other than the number of
shares of CoreComm Holdco common stock deliverable upon conversion of public
notes not tendered in the exchange offer for public notes or converted prior to
the completion of the merger. (Therefore, if the merger is completed, the
Company will own little or no common stock of CoreComm Holdco, and thus will own
little or no material assets, since CoreComm Holdco common stock is the
Company's only material asset.) In exchange for the Company surrendering such
shares of CoreComm Holdco common stock, the Company and CoreComm Holdco have
agreed to waivers and amendments to delay the Company from having to make any
payments with respect to these securities. If such a merger does not occur, the
Company does not anticipate that it will have the financial resources to meet
the obligations under its notes and preferred stock if CoreComm Holdco requires
it to do so.
Under the exchange offers, those shareholders and noteholders who exchange
their shares and notes, respectively, will receive shares of CoreComm Holdco,
and would no longer have securities of the Company.
The Company may lack the resources to meet the obligations of the remaining
$4.75 million principal amount of 6% Convertible Subordinated Notes that are not
held by CoreComm Holdco. The Company also remains a party liable under the
$156.1 million senior secured credit facility, has no right to withdraw any
additional money under that facility, and does not expect to be able to raise
additional financing in the foreseeable future.
On December 17, 2001, Nasdaq granted the Company an exception to Nasdaq's
stockholder approval requirements permitting the Holdco recapitalization to
proceed without a vote of the Company's stockholders because requiring a
stockholder vote would seriously jeopardize the Company's financial viability.
Pursuant to conversations with Nasdaq, the Company and CoreComm Holdco intend to
transfer the Company's current listing to CoreComm Holdco following successful
completion of the exchange offers. The Company cannot predict whether remaining
shares of the Company's common stock will continue to trade publicly thereafter.
On February 14, 2002, the Company received written notification from Nasdaq
indicating that it failed to comply with the minimum market value of publicly
held shares and minimum bid price requirements for continued listing on the
Nasdaq National Market. The Company has until May 15, 2002 to regain compliance.
If the Holdco recapitalization is not successfully completed and the Company
does not regain compliance by this date, Nasdaq stated that it will then provide
the Company with written notification that its common stock will be delisted
from the Nasdaq National Market. The Company has not yet determined what actions
will be taken if it receives this written notification. If the Company's common
stock is delisted from the Nasdaq National Market, shares may trade in the
over-the-counter market and price quotations may be reported by other sources.
The extent of the public market and the availability of quotations for shares of
the Company's 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
the common stock on the part of securities firms, the possible termination of
registration of the shares under the Securities Exchange Act of 1934, and other
factors.
NOTE 3. RECENT ACCOUNTING PRONOUNCEMENTS
In August 2001, the Financial Accounting Standards Board, referred to as
FASB, issued Statement of Financial Accounting Standards, referred to as SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets,"
effective for the Company on January 1, 2002. This Statement supercedes
F-95
CORECOMM LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 3. RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
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
adoption of this new standard had no significant effect on the results of
operations, financial condition or cash flows of the Company.
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 adopted SFAS No. 142
on January 1, 2002. The adoption of this new standard had no significant effect
on the results of operations, financial condition or cash flows of the Company.
NOTE 4. ASSET IMPAIRMENTS
At March 31, 2001, the Company reduced the carrying amount of goodwill
related to two of its 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 was 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.
NOTE 5. INVESTMENT IN CORECOMM HOLDCO
Effective with the completion of the first phase of the Holdco
recapitalization on December 28, 2001, the Company began accounting for its
ownership of approximately 13% of the outstanding shares of CoreComm Holdco
using the equity method. The Company consolidated CoreComm Holdco prior to that
date. The amounts have been restated to reflect CoreComm Holdco's use of
carryover basis in the assets. CoreComm Holdco's net loss for the three months
ended March 31, 2002 has been restated to $11,654,000 from $12,513,000.
Therefore CoreComm Limited's equity in net loss of CoreCom Holdco was restated
from $1,627,000.
Following is the Company's investment in CoreComm Holdco:
Balance at December 31, 2001................................ $ 3,863,000
Equity in net loss of CoreComm Holdco (unaudited)........... (1,515,000)
-----------
Balance at March 31, 2002 (unaudited)....................... $ 2,348,000
===========
F-96
CORECOMM LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 5. INVESTMENT IN CORECOMM HOLDCO (CONTINUED)
Following is the condensed financial information of CoreComm Holdco and
subsidiaries as of and for the three months ended March 31, 2002:
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31,
2002
------------
(UNAUDITED)
ASSETS
Current assets.............................................. $ 64,587,000
Fixed assets, net........................................... 80,339,000
Intangible assets, net...................................... 153,002,000
Other assets, net........................................... 14,746,000
------------
$312,674,000
============
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
Current liabilities......................................... $152,312,000
Long-term debt and capital lease obligations................ 161,233,000
Shareholders' deficiency.................................... (871,000)
------------
$312,674,000
============
F-97
CORECOMM LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 5. INVESTMENT IN CORECOMM HOLDCO (CONTINUED)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
----------------------------
2002 2001
------------ -------------
REVENUES................................................ $ 74,311,000 $ 72,811,000
COSTS AND EXPENSES
Operating............................................... 48,038,000 63,520,000
Selling, general and administrative..................... 22,313,000 30,795,000
Corporate............................................... 1,698,000 2,098,000
Non-cash compensation................................... -- 3,234,000
Recapitalization costs.................................. 1,182,000 --
Other charges........................................... -- 119,000
Asset impairments....................................... -- 167,599,000
Depreciation............................................ 8,881,000 12,012,000
Amortization............................................ 84,000 31,509,000
------------ -------------
82,196,000 310,886,000
------------ -------------
Operating loss.......................................... (7,885,000) (238,075,000)
OTHER INCOME (EXPENSE)
Interest income and other, net.......................... 134,000 664,000
Interest expense........................................ (3,903,000) (4,141,000)
------------ -------------
Net loss................................................ $(11,654,000) $(241,552,000)
============ =============
NOTE 6. FIXED ASSETS
Fixed assets consist of:
MARCH 31,
2002
-----------
(UNAUDITED)
Computer hardware and software.............................. $386,000
Other equipment............................................. 10,000
--------
396,000
Accumulated depreciation.................................... (283,000)
--------
$113,000
========
F-98
CORECOMM LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 7. ACCRUED EXPENSES
Accrued expenses consist of:
MARCH 31,
2002
-----------
(UNAUDITED)
Taxes, including income taxes............................... $205,000
Interest.................................................... 143,000
--------
$348,000
========
NOTE 8. LONG-TERM DEBT
Long-term debt consists of:
MARCH 31,
2002
------------
(UNAUDITED)
6% Convertible Subordinated Notes........................... $164,750,000
Senior Unsecured Notes Due 2003, less unamortized discount
of $7,592,000............................................. 98,087,000
------------
262,837,000
Less current portion........................................ 4,750,000
------------
$258,087,000
============
At March 31, 2002, all of the Senior Unsecured Notes Due 2003 and
$160,000,000 aggregate principal amount of the 6% Convertible Subordinated Notes
were held by CoreComm Holdco.
The interest payment that was due under the outstanding 6% Convertible
Subordinated Notes on April 1, 2002 has not been made and the Company is in
default under these notes. The consideration CoreComm Holdco is offering in its
exchange offer for the 6% Convertible Subordinated Notes includes $30.00 in
cash, which represents the April 1, 2002 interest payment, for each $1,000 in
principal amount outstanding.
NOTE 9. RELATED PARTY TRANSACTIONS
The balance due to CoreComm Holdco at March 31, 2002 includes 6%
Convertible Subordinated Notes and Senior Unsecured Notes Due 2003 interest
payable of $8,238,000 and preferred stock dividends payable of $23,850,000, net
of other amounts due from CoreComm Holdco of $254,000.
Some of the officers and directors of the Company are also officers or
directors of NTL Incorporated, referred to as NTL. NTL provided CoreComm Holdco
with management, financial, legal and technical services, access to office space
and equipment and use of supplies. Amounts charged to CoreComm Holdco by NTL
consisted of salaries and direct costs allocated to CoreComm Holdco where
identifiable, and a percentage of the portion of NTL's corporate overhead, which
cannot be specifically allocated to NTL. It is not practicable to determine the
amounts of these expenses that would have been incurred had the Company operated
as an unaffiliated entity. In the opinion of management, this allocation method
is reasonable. For the three months ended March 31, 2001, NTL charged CoreComm
Holdco $104,000, which is included in corporate expenses. NTL did not provide
any services to the Company during the three months ended March 31, 2002.
F-99
CORECOMM LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 9. RELATED PARTY TRANSACTIONS (CONTINUED)
Until August, 2001, CoreComm Holdco provided NTL with access to office
space and equipment and the use of supplies. It is not practicable to determine
the amounts of these expenses that would have been incurred had CoreComm Holdco
operated as an unaffiliated entity. In the opinion of management, this
allocation method is reasonable. For the three months ended March 31, 2001,
CoreComm Holdco charged NTL $67,000, which reduced corporate expenses.
CoreComm Holdco provides billing and software development services to
subsidiaries of NTL. General and administrative expenses were reduced by
$467,000 for the three months ended March 31, 2001, as a result of these
charges.
NOTE 10. OTHER CHARGES
Other charges of $119,000 for the three months ended March 31, 2001 are for
adjustments relating to the Company's announcement in December 2000 of a
reorganization of certain of its operations. These charges include additional
employee severance and related costs of $351,000, offset by a reversal of the
lease exit provision of $232,000.
NOTE 11. 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 the Company's common stock to various employees at an exercise price
of $14.55, which was less than the fair market value of the Company's common
stock on the date of the grant. In accordance with APB Opinion No. 25,
"Accounting for Stock Issued to Employees," in April 2000, the Company recorded
a non-cash compensation expense of approximately $29.0 million and a non-cash
deferred expense of approximately $31.3 million. From January 1, 2001 to March
31, 2001, $3.2 million of the deferred non-cash compensation was charged to
expense.
NOTE 12. NET LOSS PER COMMON SHARE
The following table sets forth the computation of basic and diluted net
loss per common share:
THREE MONTHS ENDED MARCH 31,
----------------------------
2002 2001
------------ -------------
Numerator:
Net loss................................................ $ (7,152,000) $(249,661,000)
Preferred stock dividend................................ (4,512,000) (4,417,000)
Preferred stock accretion to Redemption value........... (1,192,000) (1,117,000)
------------ -------------
Loss available to common Shareholders................... (12,856,000) (255,195,000)
------------ -------------
Denominator for basic and diluted net loss per common
share................................................. 140,327,000 71,232,000
------------ -------------
Basic and diluted net loss per common share............. $ (0.09) $ (3.58)
============ =============
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 March 31,
2002, the Company had 93.4 million shares issuable upon the exercise of stock
options and warrants and the conversion of convertible securities.
F-100
CORECOMM LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 13. COMMITMENTS AND CONTINGENT LIABILITIES
Fiberstream, Inc. ("FiberCo"), a wholly-owned subsidiary of the Company,
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 the Company's
financial position, results of operations or cash flows. However, certain of
these matters, if resolved unfavorably to us, could have a material adverse
effect on the Company's business, financial condition and/or results of
operations:
- CoreComm Newco, Inc., an indirect, wholly-owned subsidiary of CoreComm
Holdco, is currently in litigation with Ameritech Ohio, a supplier from
whom it purchases telecommunications products and services, over the
adequacy of Ameritech's performance under a 1998 contract between
CoreComm Newco and Ameritech, and related issues. This litigation began
in June 2001 when Ameritech threatened to stop processing new orders
following the Company's exercise of its right under the contract to
withhold payments for Ameritech's performance failures. In response to
this threat, the Company sought and received an order from an official of
the Public Utilities Commission of Ohio 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 the Company of approximately $8,600,000 allegedly owed under the
contract. On August 8, 2001, Ameritech filed a second claim against
CoreComm Limited in Ohio state court, seeking an additional approximately
$4,300,000 in allegedly improperly withheld amounts. On August 28, 2001,
the Company exercised its 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, CoreComm Newco filed its 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. In
lieu of filing an answer to CoreComm Newco's counterclaims, Ameritech
filed a series of motions on March 25, 2002, asking the Court to dismiss
several of CoreComm Newco's counterclaims. On April 17, 2002, CoreComm
Newco filed its opposition to Ameritech's requests for dismissal and these
items are now pending before the court for disposition.
The Company believes that CoreComm Newco has 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. For example, the figure specified in Ameritech's complaint does
not account for (a) more than $5.2 million in refunds that Ameritech
contends it has already credited to CoreComm Newco's accounts since the
filing its complaint, and (b) payments that were made by CoreComm Newco in
the ordinary course after the time of Ameritech's submission. However, the
Company cannot be certain how or when the matter will be resolved. The
Company also believes that, to the extent Ameritech prevails with respect
to any of
F-101
CORECOMM LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 13. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
its claims, Ameritech's award may be offset in whole or in part by amounts
that CoreComm Newco is seeking to obtain from Ameritech under its
counterclaims. However, it is impossible at this time to predict the
outcome of the litigation.
- On March 7, 2002, CoreComm Massachusetts, Inc. (an operating subsidiary
of CoreComm Holdco) filed a complaint and request for temporary
restraining order against Verizon New England d/b/a Verizon Massachusetts
seeking to prevent Verizon from proceeding with its threat to implement
an embargo on the ability of CoreComm Massachusetts to place orders for
new services pending the resolution of a dispute between the parties over
the legitimacy of various charges billed by Verizon in that state. On
March 13, 2002, the court denied CoreComm's request for a TRO and Verizon
proceeded to implement the threatened service embargo. On April 1, 2002
Verizon filed an answer to CoreComm's complaint along with counterclaims
seeking approximately $1.4 million in payment for allegedly past due
charges. On April 10, 2002, CoreComm Massachusetts filed an answer to
these counterclaims denying the accuracy of Verizon's contentions. The
Company does not believe that the embargo will have a material adverse
affect on its business, financial condition and/or operating results, and
CoreComm Massachusetts intends to defend itself vigorously and pursue all
available claims and defenses. However, it is impossible at this time to
predict the outcome of this litigation.
- On December 3, 2001, General Electric Capital Corp. filed a lawsuit in
the Circuit Court of Cook County, Illinois against the Company and
MegsINet, Inc., an indirect subsidiary of CoreComm Holdco, seeking
approximately $8 million in allegedly past due amounts and the return of
equipment 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. On February 19, 2002, the
defendants filed a motion to dismiss several of GECC's claims. In
response, GECC withdrew its original complaint and on May 1, 2002 filed
an amended complaint, naming CoreComm Holdco as an additional defendant.
Defendants' response to dismiss the amended complaint is presently due on
June 5, 2002. Concurrently, on April 12, 2002, GECC filed a second
complaint in the Circuit Court of Cook County, Illinois against MegsINet,
the Company and CoreComm Holdco seeking a court order allowing it to take
repossession of its alleged equipment. After a hearing on the matter
following defendants' opposition, GECC withdrew its complaint and filed a
new action on May 3, 2002, in an effort to supply the court with
additional information regarding its alleged rights to the equipment.
Defendant's response to dismiss the May 3 complaint is currently due on
or before May 23, 2002. Defendants intend to defend themselves vigorously
against both complaints and to pursue all available claims and defenses.
However, it is impossible at this time to predict the outcome of the
litigation.
- 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 the Company, 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, primarily in
respect of alleged early termination liabilities, under a services
agreement and a co-location agreement with MegsINet. The defendants have
denied KMC's claims and have asserted that the contracts at issue were
signed without proper authorization, that KMC failed to perform under the
alleged contracts, and that the termination penalties are not
enforceable. The defendants have served discovery and intend to defend
themselves in coordination with one of their
F-102
CORECOMM LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 13. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
insurance carriers. On March 27, 2002, certain of the defendants
initiated litigation against several former principals of MegsINet
seeking indemnification and contribution against KMC's claims.
- On March 1, 2002, Easton Telecom Services, LLC., referred to as Easton
LLC, initiated litigation in the Northern District of Ohio against
CoreComm Internet Group, Inc. asserting that Easton LLC is the assignee
of several rights of Easton Telecom Services, Inc., referred to as
Easton, Inc., under an asset purchase agreement approved as part of the
bankruptcy disposition of Teligent, Inc., and demanding payment of
approximately $4.9 million, primarily in respect of alleged early
termination penalities, for telecommunications services purportedly
provided under alleged contracts between Easton and MegsINet, Inc..
Subsequently, on April 18, 2002, Easton filed an amended complaint in the
above-referenced matter naming Voyager Information Networks, Inc. as an
additional defendant and increasing the amount in dispute to
approximately $5.1 million. On May 7, 2002, defendants' filed their
answer denying Easton LLC's allegations and asserting multiple defenses,
including defenses challenging the validity of the alleged contracts and
plaintiffs claims as to alleged damages, Defendants intend to defend
themselves vigorously and pursue all available claims and defenses.
However, it is impossible at this time to predict the outcome of this
litigation.
- Fiberstream, Inc., a direct subsidiary of the Company, has been in
communications with Metromedia Fiber Networks, Inc., referred to as MFN,
regarding a dispute between the parties under a General Agreement dated
September 29, 2000 and a related Product Order of the same date. The
dispute centers around the accuracy of certain statements that were made
by MFN concerning the nature of its network at the time of contracting,
the timeliness of the installation of the circuits by MFN under the
agreement, and Fiberstream's obligation, if any, to make payments in
respect of those circuits. MFN has indicated that unless payment is made
for the circuits, it may initiate arbitration under the agreement and
seek early termination penalties in excess of approximately $1.1 million.
Fiberstream has rejected MFN's demands and has advised that it will
defend itself vigorously and pursue all available counterclaims,
including claims for fraudulent inducement relating to the execution of
the contract and damages arising from MFN's alleged failure to perform
under the contract. The parties have discussed the prospect of settling
their respective claims without resort to litigation and those
discussions are presently ongoing.
- On October 9, 2001, Enavis Networks, Inc. filed an action in the Circuit
Court of Pinellas County, Florida against the Company asserting that
Enavis is owed approximately $420,000 relating to the alleged sale and
installation of telecommunications equipment by Enavis. The Company filed
a motion to dismiss this action for lack of personal jurisdiction over
the Company in Florida and this motion is still pending. Upon resolution
of the motion to dismiss in Florida and assuming that the matter proceeds
in litigation, the Company intends to defend this action vigorously and
assert counterclaims against Enavis arising from Enavis' failure to
provide equipment complying with CoreComm's specifications.
- On or about September 14, 2001, a lawsuit was filed by WXII/Far Yale
Gen-Par, LLC, as General Partner of WXII/Far Yale Real Estate Limited
Partnership, referred to as Yale, against CoreComm Communications, Inc.,
a direct, wholly-owned subsidiary of CoreComm Holdco, and the Company
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 the Company 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
F-103
CORECOMM LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 13. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
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. On February
27, 2002, Yale's motion for a preliminary injunction was denied subject
to the substitution of CoreComm Holdco for the Company as guarantor on
the lease and Yale's motion to specify the revised figure of $404,290.87
was granted. The defendants are currently proceeding to make the
substitution relating to the guarantee and are litigating the matter
vigorously.
F-104
CORECOMM LIMITED AND SUBSIDIARIES
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, 2001 and 2000, and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended December 31, 2001. 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 Limited and Subsidiaries at December 31, 2001 and 2000, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2001 in conformity with accounting
principles generally accepted in the United States.
The accompanying consolidated financial statements have been prepared
assuming that CoreComm Limited will continue as a going concern. As discussed in
Note 1 to the consolidated financial statements, CoreComm Limited may not be
able to meet its obligations as they become due which raises substantial doubt
about its ability to continue as a going concern. Management's plans in regards
to this matter are also described in Note 1. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ Ernst & Young LLP
New York, New York
March 29, 2002, except for the last paragraph of Note 2,
as to which the date is April 12, 2002
F-105
CORECOMM LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-------------------------------
2001 2000
--------------- -------------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 109,000 $ 25,802,000
Marketable securities..................................... -- 4,715,000
Accounts receivable-trade, less allowance for doubtful
accounts of $11,034,000 (2000)......................... -- 34,344,000
Due from NTL Incorporated................................. -- 17,206,000
Other..................................................... 45,000 10,289,000
--------------- -------------
Total current assets........................................ 154,000 92,356,000
Fixed assets, net........................................... 146,000 179,651,000
Investment in CoreComm Holdco............................... 3,863,000 --
Goodwill, net of accumulated amortization of $42,028,000
(2000).................................................... -- 600,859,000
Intangible assets, net...................................... -- 6,092,000
Other, net of accumulated amortization of $2,251,000 (2001)
and $1,480,000 (2000)..................................... 8,260,000 30,805,000
--------------- -------------
$ 12,423,000 $ 909,763,000
=============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable.......................................... $ 959,000 $ 73,133,000
Accrued expenses.......................................... 419,000 90,243,000
Due to NTL Incorporated................................... 209,000 --
Due to CoreComm Holdco.................................... 24,112,000 --
Current portion of long-term debt and capital lease
obligations............................................ -- 22,921,000
Deferred revenue.......................................... -- 29,701,000
--------------- -------------
Total current liabilities................................... 25,699,000 215,998,000
Long-term debt, including $256,874,000 (2001) due to
CoreComm Holdco........................................... 261,624,000 358,624,000
Notes payable to related parties............................ -- 16,170,000
Capital lease obligations................................... -- 2,693,000
Commitments and contingent liabilities
Shareholders' equity (deficiency):
Series preferred stock -- $.01 par value, authorized
5,000,000 shares:
Series A, liquidation preference $55,569,000; issued
and outstanding 51,000 shares........................ -- --
Series B, liquidation preference $264,855,000; issued
and outstanding 250,000 shares....................... 3,000 3,000
Series C, none issued or outstanding................... -- --
Common stock -- $.01 par value; authorized 600,000,000
shares; issued and outstanding 141,655,000 (2001) and
72,029,000 (2000) shares.................................. 1,417,000 720,000
Additional paid-in capital.................................. 787,434,000 781,357,000
Deferred non-cash compensation.............................. -- (21,638,000)
(Deficit)................................................... (1,053,180,000) (433,590,000)
--------------- -------------
(264,326,000) 326,852,000
Treasury stock at cost, 1,329,000 shares.................... (10,574,000) (10,574,000)
--------------- -------------
(274,900,000) 316,278,000
--------------- -------------
$ 12,423,000 $ 909,763,000
=============== =============
See accompanying notes.
F-106
CORECOMM LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
---------------------------------------------
2001 2000 1999
------------- ------------- -------------
REVENUES........................................ $ 293,207,000 $ 132,122,000 $ 58,151,000
COSTS AND EXPENSES
Operating....................................... 224,807,000 142,323,000 58,561,000
Selling, general and administrative............. 97,759,000 111,010,000 74,185,000
Corporate....................................... 8,335,000 12,884,000 7,996,000
Non-cash compensation........................... 21,638,000 43,440,000 1,056,000
Other charges................................... 39,514,000 12,706,000 --
Asset impairments............................... 368,288,000 35,920,000 --
Depreciation.................................... 48,110,000 30,746,000 10,945,000
Amortization.................................... 97,389,000 42,420,000 8,633,000
------------- ------------- -------------
905,840,000 431,449,000 161,376,000
------------- ------------- -------------
Operating (loss)................................ (612,633,000) (299,327,000) (103,225,000)
OTHER INCOME (EXPENSE)
Interest income and other, net.................. 1,957,000 6,223,000 5,773,000
Interest expense................................ (48,314,000) (20,457,000) (5,341,000)
------------- ------------- -------------
(Loss) before income taxes and extraordinary
item.......................................... (658,990,000) (313,561,000) (102,793,000)
Income tax (provision).......................... (98,000) (250,000) (731,000)
------------- ------------- -------------
(Loss) before extraordinary item................ (659,088,000) (313,811,000) (103,524,000)
Gain from extinguishment of debt................ 39,498,000 -- --
------------- ------------- -------------
Net (loss)...................................... $(619,590,000) $(313,811,000) $(103,524,000)
============= ============= =============
Basic and diluted net (loss) per share:
(Loss) before extraordinary item.............. $ (6.77) $ (6.73) $ (3.03)
Extraordinary item............................ 0.39 -- --
------------- ------------- -------------
Net (loss).................................... $ (6.38) $ (6.73) $ (3.03)
============= ============= =============
In the year ended December 31, 2001, non-cash compensation expense includes $3.9
million that would have been included in operating expense, $13.4 million that
would have been included in selling, general and administrative expense and $4.3
million that would have been included in corporate expense had the compensation
been paid in cash. 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-107
CORECOMM LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIENCY)
PREFERRED
STOCK PREFERRED STOCK COMMON STOCK
------------ ---------------- ------------------------ PAID-IN NON-CASH
SHARES PAR SHARES PAR SHARES PAR CAPITAL COMPENSATION
------ --- ------- ------ ----------- ---------- ------------ ------------
Balance, December 31, 1998...... 29,697,000 $ 297,000 $185,255,000
Exercise of stock options....... 804,000 8,000 5,232,000
Exercise of warrants............ 4,810,000 48,000 10,857,000
Common stock issued for
acquisition................... 3,245,000 33,000 30,792,000
Stock options issued for
acquisition................... 4,027,000
Warrants issued for
acquisition................... 9,100,000
Non-cash compensation expense... 1,056,000
Net (loss) for the year ended
December 31, 1999.............
------ --- ------- ------ ----------- ---------- ------------ ------------
Balance, December 31, 1999...... 38,556,000 386,000 246,319,000
------ --- ------- ------ ----------- ---------- ------------ ------------
Exercise of stock options....... 2,276,000 23,000 18,967,000
Exercise of warrants............ 35,000 -- 276,000
Common stock issued for
acquisitions.................. 31,833,000 318,000 333,049,000
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.............
------ --- ------- ------ ----------- ---------- ------------ ------------
Balance, December 31, 2000...... 51,000 -- 250,000 3,000 72,029,000 720,000 781,357,000 (21,638,000)
------ --- ------- ------ ----------- ---------- ------------ ------------
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......................... (17,808,000)
Common stock issued for interest
on senior unsecured notes..... 68,936,000 689,000 6,351,000
Conversion of 6% convertible
subordinated notes............ 374,000 4,000 10,246,000
Warrants issued in connection
with financing................ 5,451,000
Common stock cancelled as
payment for notes
receivable.................... (229,000) (2,000) (36,000)
Non-cash compensation expense... 21,638,000
Net (loss) for the year ended
December 31, 2001.............
------ --- ------- ------ ----------- ---------- ------------ ------------
Balance, December 31, 2001...... 51,000 $-- 250,000 $3,000 141,655,000 $1,417,000 $787,434,000 $ --
====== === ======= ====== =========== ========== ============ ============
TREASURY STOCK
-------------------------
(DEFICIT) SHARES AMOUNT
--------------- ---------- ------------
Balance, December 31, 1998...... $ (16,255,000)
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............. (103,524,000)
--------------- ---------- ------------
Balance, December 31, 1999...... (119,779,000)
--------------- ---------- ------------
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............. (313,811,000)
--------------- ---------- ------------
Balance, December 31, 2000...... (433,590,000) (1,329,000) (10,574,000)
--------------- ---------- ------------
Exercise of stock options.......
Common stock issued for dividend
on preferred stock............
Accreted dividends on preferred
stock.........................
Common stock issued for interest
on senior unsecured notes.....
Conversion of 6% convertible
subordinated notes............
Warrants issued in connection
with financing................
Common stock cancelled as
payment for notes
receivable....................
Non-cash compensation expense...
Net (loss) for the year ended
December 31, 2001............. (619,590,000)
--------------- ---------- ------------
Balance, December 31, 2001...... $(1,053,180,000) (1,329,000) $(10,574,000)
=============== ========== ============
The Consolidated Statement of Shareholders' Equity (Deficiency) 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-108
CORECOMM LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
---------------------------------------------
2001 2000 1999
------------- ------------- -------------
OPERATING ACTIVITIES
Net (loss)............................................. $(619,590,000) $(313,811,000) $(103,524,000)
Adjustments to reconcile net (loss) to net cash (used
in) operating activities:
Depreciation and amortization....................... 145,499,000 73,166,000 19,578,000
Gain from extinguishment of debt.................... (39,498,000) -- --
Reorganization charges.............................. 26,932,000 -- --
Non-cash compensation............................... 21,638,000 43,440,000 1,056,000
Amortization of original issue discount............. 10,883,000 1,221,000 --
Provision for losses on accounts receivable......... 7,143,000 7,130,000 3,241,000
Asset impairments................................... 368,288,000 35,920,000 --
Accretion of interest on marketable securities...... (60,000) (2,440,000) (3,053,000)
Other............................................... (1,461,000) 2,043,000 239,000
Changes in operating assets and liabilities, net of
effect from deconsolidation and business
acquisitions:
Accounts receivable............................... (4,979,000) (7,383,000) 3,115,000
Due from affiliates............................... 16,191,000 (17,011,000) 1,759,000
Other current assets.............................. 3,541,000 (70,000) (3,488,000)
Other assets...................................... 14,738,000 (2,238,000) (2,783,000)
Accounts payable.................................. (22,862,000) 17,716,000 5,390,000
Accrued expenses.................................. 6,297,000 14,097,000 6,114,000
Deferred revenue.................................. (49,000) 17,218,000 (61,000)
------------- ------------- -------------
Net cash (used in) operating activities................ (67,349,000) (131,002,000) (72,417,000)
INVESTING ACTIVITIES
Purchase of fixed assets................................. (5,231,000) (65,321,000) (20,575,000)
Cash of deconsolidated subsidiaries...................... (24,966,000) -- --
Acquisitions, net of cash acquired....................... -- (98,613,000) (47,056,000)
Purchase of marketable securities........................ -- (38,730,000) (142,922,000)
Proceeds from sale of marketable securities.............. 4,775,000 128,496,000 164,652,000
------------- ------------- -------------
Net cash (used in) investing activities.................. (25,422,000) (74,168,000) (45,901,000)
FINANCING ACTIVITIES
Proceeds from borrowings, net of financing costs......... 88,679,000 103,328,000 168,545,000
Proceeds from issuance of preferred stock................ -- 50,000,000 --
Proceeds from exercise of stock options and warrants..... 4,000 12,463,000 16,145,000
Principal payments....................................... (13,498,000) (5,936,000) (3,469,000)
Principal payments of capital lease obligations.......... (8,107,000) (15,568,000) (2,379,000)
------------- ------------- -------------
Net cash provided by financing activities................ 67,078,000 144,287,000 178,842,000
------------- ------------- -------------
(Decrease) increase in cash and cash equivalents......... (25,693,000) (60,883,000) 60,524,000
Cash and cash equivalents at beginning of period......... 25,802,000 86,685,000 26,161,000
------------- ------------- -------------
Cash and cash equivalents at end of period............... $ 109,000 $ 25,802,000 $ 86,685,000
============= ============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest................................... $ 23,273,000 $ 14,362,000 $ 2,032,000
Income taxes paid........................................ -- 369,000 1,421,000
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING ACTIVITIES
Liabilities incurred to acquire fixed assets............. $ 6,595,000 $ 35,626,000 $ 19,621,000
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 --
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.................................................. 7,040,000 -- --
Conversion of convertible notes.......................... 10,250,000 -- --
Warrants issued in connection with financing............. 5,451,000 -- --
See accompanying notes.
F-109
CORECOMM LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS
ORGANIZATION
CoreComm Limited, referred to as the Company, formerly a wholly-owned
subsidiary of Cellular Communications of Puerto Rico, Inc., referred to as CCPR,
was formed in March 1998 in order to succeed to the businesses and assets that
were operated by OCOM Corporation. Operations commenced in April 1998. In
September 1998, CCPR made a cash contribution to the Company of $150,000,000 and
distributed 100% of the outstanding shares of the Company on a one-for-one basis
to CCPR's shareholders.
In September 2000, the Company, 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., referred to
as ATX, with ATX being the surviving corporation and changing its name to
CoreComm Limited. For accounting purposes, the Company's predecessor is CoreComm
Limited, the Bermuda corporation.
BUSINESS
The Company's only material asset is its ownership of approximately 13% of
the outstanding capital stock of CoreComm Holdco, Inc., referred to as CoreComm
Holdco. The Company owned 100% of the outstanding capital stock of CoreComm
Holdco until the consummation of transactions as part of the Holdco
recapitalization on December 28, 2001. CoreComm Holdco provides integrated local
and toll-related telephone, Internet and high-speed data 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.
BASIS OF PREPARATION
Effective with the completion of the first phase of the Holdco
recapitalization on December 28, 2001, the Company began accounting for its
ownership of approximately 13% of the outstanding shares of CoreComm Holdco
using the equity method. The Company consolidated CoreComm Holdco prior to that
date. This transition from consolidation to equity method accounting is referred
to as the deconsolidation in the consolidated financial statements. As a result
of the deconsolidation, the assets and liabilities of CoreComm Holdco are not
included in the Company's consolidated balance sheet at December 31, 2001. In
addition, the results of operations and cash flows of CoreComm Holdco, which
represent substantially all of the Company's operations and cash flows, will not
be included in the Company's consolidated statement of operations and statement
of cash flows beginning January 1, 2002. CoreComm Holdco's result of operations
and cash flows for the period from December 28, 2001 to December 31, 2001 were
not material.
LIQUIDITY
As a result of the first phase of the Holdco recapitalization, the Company,
which formerly owned 100% of CoreComm Holdco's outstanding capital stock, now
owns only approximately 13% of CoreComm Holdco's outstanding capital stock.
CoreComm Holdco owns 100% of the business operations which the Company formerly
owned indirectly through CoreComm Holdco. However, the Company remains a party
liable under the $156.1 million senior secured credit facility and has no right
to withdraw any additional money under that facility. In addition, the Company
has obligations of approximately $600 million in debt and preferred securities
now held by CoreComm Holdco, the $4.75 million principal amount of 6%
Convertible Subordinated Notes that are not held by CoreComm Holdco and other
liabilities. As a result of its condition, the Company currently lacks the
resources to meet its obligations as they become due.
F-110
CORECOMM LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's liquidity problem raises substantial doubt about its ability
to continue as a going concern. The Company intends to resolve its liquidity
problem through the completion of the Holdco recapitalization exchange offers
whereby the Company will exchange the shares of CoreComm Holdco common stock it
presently owns for its shares held by the Company's stockholders and for the
Company's 6% Convertible Subordinated Notes held by third parties. If the
exchange offers are successfully completed, the Company will become a subsidiary
of CoreComm Holdco. There can be no assurance that the exchange offers will be
completed.
2. HOLDCO RECAPITALIZATION
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 streamlined its strategy and operations 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. The second is bundled local telephony and Internet products
efficiently sold, serviced and provisioned via Internet-centric interfaces to
the residential market.
Also in April 2001, the Company commenced a process to potentially sell its
assets and businesses that are not directly related to its competitive local
exchange carrier, referred to as CLEC, business, and retained advisors for the
purpose of conducting this sale. At the time, the Company's CLEC assets and
businesses were CoreComm Holdco's local and toll-related telephone services that
compete with the incumbent local exchange carrier, referred to as ILEC.
In October 2001, the Company and CoreComm Holdco commenced the Holdco
recapitalization. The Company 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 $4.8 million in the aggregate in cash and shares of CoreComm
Holdco common stock. The exchange was completed in December 2001, including the
payment of the $4.8 million by the Company.
On December 28, 2001, CoreComm Holdco completed the first 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 the Company and CoreComm
Holdco as co-obligors and all of the outstanding preferred stock of the Company.
F-111
CORECOMM LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (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 due 2011 April 2001 CoreComm Holdco $ 10.0 million
and the Company
10.75% Senior Unsecured Convertible
PIK Notes Due 2010 December 2000 CoreComm Holdco $ 16.1 million
and the Company
Senior Unsecured Notes Due
September 29, 2003 September 2000 The Company $108.7 million
6% Convertible Subordinated Notes
Due 2006 October 1999 The Company $175.0 million(1)
Series A and Series A-1 Preferred
Stock September 2000 The Company $ 51.1 million
Series B Preferred Stock September 2000 The Company $250.0 million
---------------
(1) $164.75 million was outstanding as of December 2001, of which $160 million
was exchanged.
As indicated above, 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 recorded an extraordinary gain of $25.7 million from the
extinguishment of these notes, and incurred costs of $2.7 million in connection
with the Holdco recapitalization. This gain is based on the fair value of
$0.9797 per share for the shares issued by CoreComm Holdco in exchange for the
notes.
As a result of the completed exchanges in December 2001, approximately 87%
of CoreComm Holdco's outstanding shares, or 26,056,806 shares, are owned by the
former holders of indebtedness of the Company and CoreComm Holdco and the former
holders of preferred stock of the Company, and approximately 13% of CoreComm
Holdco's outstanding shares, or 3,943,248 shares, continue to be held by the
Company.
As part of the second phase of the Holdco recapitalization, on February 8,
2002, CoreComm Holdco launched registered public exchange offers whereby it is
offering to exchange shares of CoreComm Holdco common stock which will have been
registered under the Securities Act of 1933, as amended, pursuant to a Form S-4
registration statement to all holders of the Company's common stock and all
remaining holders of the Company's 6% Convertible Subordinated Notes due 2006
for their shares of the Company's common stock and their notes, respectively. As
soon as practicable after accepting at least 90% of the outstanding shares of
the Company's common stock in the exchange offers, CoreComm Holdco plans to
transfer all such shares to a newly formed, wholly-owned subsidiary and to merge
this subsidiary into the Company with the Company surviving the merger as a
wholly-owned subsidiary of CoreComm Holdco.
As a result of the first phase of the Holdco recapitalization, CoreComm
Holdco holds $160 million principal amount of the Company's 6% Convertible
Subordinated Notes, approximately $105.7 million principal amount of the
Company's Senior Unsecured Notes and all of the Company's outstanding preferred
stock. The Company has agreed that it will surrender to CoreComm Holdco the
number of shares of CoreComm Holdco common stock that CoreComm Holdco requests.
CoreComm Holdco intends to request that the Company surrender, immediately
following the merger, all shares of CoreComm Holdco common stock that it owns,
other than the number of shares of CoreComm Holdco common stock deliverable upon
conversion of public notes not tendered in the exchange offer for public notes
or
F-112
CORECOMM LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
converted prior to the completion of the merger. (Therefore, if the merger is
completed, the Company will own little or no common stock of CoreComm Holdco,
and thus will own little or no material assets, since CoreComm Holdco common
stock is the Company's only material asset.) In exchange for the Company
surrendering such shares of CoreComm Holdco common stock, the Company and
CoreComm Holdco have agreed to waivers and amendments to delay the Company from
having to make any payments with respect to these securities. If such a merger
does not occur, the Company does not anticipate that it will have the financial
resources to meet the obligations under its notes and preferred stock if
CoreComm Holdco requires it to do so.
Under the exchange offer, those shareholders and noteholders who exchange
their shares and notes, respectively, will receive shares of CoreComm Holdco,
and would no longer have securities of the Company.
The Company may lack the resources to meet the obligations of the remaining
$4.75 million principal amount of 6% Convertible Subordinated Notes that are not
held by CoreComm Holdco.
On December 17, 2001, Nasdaq granted the Company an exception to Nasdaq's
stockholder approval requirements permitting the Holdco recapitalization to
proceed without a vote of the Company's stockholders because requiring a
stockholder vote would seriously jeopardize the Company's financial viability.
Pursuant to conversations with Nasdaq, the Company and CoreComm Holdco intend to
transfer the Company's current listing to CoreComm Holdco following successful
completion of the exchange offers. The Company cannot predict whether remaining
shares of the Company's common stock will continue to trade publicly thereafter.
On February 14, 2002, the Company received written notification from Nasdaq
indicating that it failed to comply with the minimum market value of publicly
held shares and minimum bid price requirements for continued listing on the
Nasdaq National Market. The Company has until May 15, 2002 to regain compliance.
If the Holdco recapitalization is not successfully completed and the Company
does not regain compliance by this date, Nasdaq stated that it will then provide
the Company written notification that its common stock will be delisted from the
Nasdaq National Market.
On April 12, 2002, the Holdco declared a 3-for-1 stock split by way of a
stock dividend, which was paid on the declaration date. The notes to
consolidated financial statements, which make reference to CoreComm Holdco's
share data, give retroactive effect to the CoreComm Holdco stock split.
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 long-lived assets, 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.
F-113
CORECOMM LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
EQUITY METHOD INVESTMENTS
All investments in which the Company has the ability to exercise
significant influence over the investee, but less than a controlling voting
interest, are accounted for using the equity method. Equity method investments
are recorded at original cost and adjusted periodically to recognize the
Company's proportionate share of the investees' net income or losses after the
date of the investment, additional contributions made and dividends received.
The Company evaluates the carrying value of its equity method investments and
tests for impairment in accordance with APB Opinion No. 18.
CASH EQUIVALENTS
Cash equivalents are short-term highly liquid investments purchased with a
maturity of three months or less. Cash equivalents were none and approximately
$25.5 million at December 31, 2001 and 2000, respectively, and consisted of
corporate commercial paper.
MARKETABLE SECURITIES
Marketable securities are classified as available-for-sale, which are
carried at fair value. Unrealized holding gains and losses on securities, net of
tax, are carried as a separate component of shareholders' equity. The amortized
cost of debt securities is adjusted for amortization of premiums and accretion
of discounts to maturity. Such amortization is included in interest income.
Realized gains and losses and declines in value judged to be other than
temporary will be included in interest income. The cost of securities sold or
matured is based on the specific identification method. Interest on securities
is included in interest income.
Marketable securities at December 31, 2000 consisted of corporate
commercial paper. During the years ended December 31, 2001, 2000 and 1999, there
were no realized gains or losses on sales of securities.
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
F-114
CORECOMM LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 is adjusted to the
present value of the future operating cash flows if the undiscounted cash flow
analysis indicates it cannot be recovered over its remaining life. The present
value of the future operating cash flows is 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 is allocated to the asset 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,
referred to as LMDS, licenses from the Federal Communications Commission,
referred to as 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.
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 included 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 earned 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 Financial Accounting Standards Board, referred to as FASB,
Statement of Financial Accounting Standards, referred to as SFAS, No. 128,
"Earnings Per Share."
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.
F-115
CORECOMM LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ADVERTISING EXPENSE
The Company charges the cost of advertising to expense as incurred.
Advertising costs for the years ended December 31, 2001, 2000 and 1999, were
$3,581,000, $8,683,000 and $4,407,000, respectively.
STOCK-BASED COMPENSATION
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." The Company applies APB Opinion No.
25, "Accounting for Stock Issued to Employees" and related interpretations in
accounting for its stock option plans.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current
year presentation.
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 adoption of this new standard had no
significant effect on the results of operations, financial condition or cash
flows of the company.
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 adopted SFAS No. 142
on January 1, 2002. The adoption of this new standard had no significant effect
on the results of operations, financial condition or cash flows of the Company.
Upon the adoption of SFAS No. 142, CoreComm Holdco performed an analysis of
its intangible assets acquired before July 1, 2001 to determine whether they
should be classified and accounted for as part of or separate from goodwill. As
a result of the analysis, CoreComm Holdco determined that its identifiable
intangible assets such as customer lists and LMDS licenses do not meet the
indefinite life criteria of SFAS No. 142. Additionally, CoreComm Holdco
determined that, with respect to these assets, no changes in the remaining
useful lives of these assets were required.
CoreComm Holdco also performed an evaluation for impairment of its goodwill
as of January 1, 2002, and determined that no impairment charge was required.
Absent any new indicators of impairment, CoreComm Holdco's next evaluation of
impairment will be the annual test on October 1, 2002.
F-116
CORECOMM LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table shows the Company's loss before extraordinary item and
net loss had SFAS No. 142 been in effect during the three years ended December
31, 2001. Additionally, the table presents the effect on the Company's basic and
diluted loss per share before extraordinary item and basic and diluted net loss
per share.
YEAR ENDED DECEMBER 31,
---------------------------------------------
2001 2000 1999
------------- ------------- -------------
Loss before extraordinary item -- as
reported.............................. $(659,088,000) $(313,811,000) $(103,524,000)
Goodwill amortization................... 96,973,000 39,354,000 6,844,000
Workforce amortization.................. 52,000 532,000 310,000
------------- ------------- -------------
Loss before extraordinary item -- as
adjusted.............................. $(562,063,000) $(273,925,000) $ (96,370,000)
============= ============= =============
Net loss -- as reported................. $(619,590,000) $(313,811,000) $(103,524,000)
Goodwill amortization................... 96,973,000 39,354,000 6,844,000
Workforce amortization.................. 52,000 532,000 310,000
------------- ------------- -------------
Net loss -- as adjusted................. $(522,565,000) $(273,925,000) $ (96,370,000)
============= ============= =============
Basic and diluted per share information:
Loss before extraordinary item -- as
reported.............................. $ (6.77) $ (6.73) $ (3.03)
Goodwill amortization................... 0.96 0.83 0.20
Workforce amortization.................. -- 0.01 0.01
------------- ------------- -------------
Loss before extraordinary item -- as
adjusted.............................. $ (5.81) $ (5.89) $ (2.82)
============= ============= =============
Net loss per share -- as reported....... $ (6.38) $ (6.73) $ (3.03)
Goodwill amortization................... 0.96 0.83 0.20
Workforce amortization.................. -- 0.01 0.01
------------- ------------- -------------
Net loss per share -- as adjusted....... $ (5.42) $ (5.89) $ (2.82)
============= ============= =============
5. REVENUES
The following is the revenues from external customers for each of the
Company's communication services:
YEAR ENDED DECEMBER 31,
-----------------------------------------
2001 2000 1999
------------ ------------ -----------
Local Exchange Services..................... $ 95,272,000 $ 62,960,000 $40,463,000
Toll-related Telephony Services............. 77,169,000 27,952,000 6,110,000
Internet Data and Web-related Services...... 93,997,000 34,157,000 6,996,000
Other (a)................................... 26,769,000 7,053,000 4,582,000
------------ ------------ -----------
$293,207,000 $132,122,000 $58,151,000
============ ============ ===========
---------------
(a) Other includes wireless, paging and information services.
6. ASSET IMPAIRMENTS
As of December 31, 2001, the Company performed an analysis of the carrying
values of its long-lived assets including goodwill. During 1999 and 2000,
acquisitions were made against a background of
F-117
CORECOMM LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
increasing consolidation and record valuations in the telecommunications
industry. This analysis was initiated because of the decline in the Company's
stock price and significantly lower valuations for companies within its
industry. Additionally, at the time of the Company's analysis, the book value of
the Company's net assets significantly exceeded its market capitalization.
Accordingly, the Company performed an analysis of the recoverability of its
long-lived assets and associated goodwill. The fair value of the Company's
assets was determined by discounting the Company's estimates of the expected
future cash flows related to these assets when the non-discounted cash flows
indicated that the long-lived assets would not be recoverable. CoreComm Holdco
recorded a write-down of goodwill of $186,160,000 and a write-down of fixed
assets of $14,529,000 in the fourth quarter of 2001 prior to the deconsolidation
as result of this analysis and review.
At March 31, 2001, the Company reduced the carrying amount of goodwill
related to two of its 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 was 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.
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 the
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.
Also at December 31, 2000, in connection with the reevaluation of its
business plan announced in April 2001, the Company reduced the carrying amount
of its 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.
7. ACQUISITIONS
On September 29, 2000, the Company completed two significant acquisitions.
The Company 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 $108.7 million principal amount of the Company's senior
unsecured notes due 2003, 12,398,000 shares of the Company's common stock and
250,000 shares of the Company'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, the Company incurred acquisition related costs of approximately
$9.7 million.
The Company also acquired Voyager.net, Inc., referred to as Voyager, a
large independent Internet communications company focused on the Midwestern
United States. Voyager was acquired for
F-118
CORECOMM LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
approximately $36.1 million in cash and 19,435,000 shares of the Company'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, the Company 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 CoreComm
Holdco.
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 $613.2 million exceeded the estimated fair value
of net tangible assets acquired by $585.8 million, which was allocated to
goodwill.
The pro forma unaudited consolidated results of operations for the year
ended December 31, 2000 assuming consummation of these acquisitions as of
January 1, 2000 is as follows:
Total revenue............................................... $ 298,446,000
Net (loss).................................................. (403,846,000)
Basic and diluted net (loss) per share...................... (6.06)
In May 1999, the Company acquired 100% of the stock of MegsINet Inc., a
national Internet Service Provider, referred to as ISP, in Chicago for a total
consideration of $16.8 million in cash and 3,245,000 shares of the Company's
common stock. In addition, the Company exchanged MegsINet stock options for
options to purchase 444,000 shares of the Company's common stock, repaid $2.0
million of MegsINet debt and incurred acquisition related costs of $1.2 million.
The common stock portion of the consideration was valued at $30.8 million, the
fair value on the date prior to the announcement. The stock options were valued
at $4.0 million using the Black-Scholes option pricing model.
Also in May 1999, the Company acquired the wireline assets of USN
Communications, Inc., which was a CLEC that operated on a resale basis, for a
cash payment of $26.4 million, warrants to purchase 563,000 shares of the
Company's common stock at a price of $13.33 per share and 225,000 shares at a
price of $22.22 per share, and a potential contingent cash payment 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, the Company incurred acquisition
related costs of $1.0 million.
The assets of MegsINet and USN were contributed to subsidiaries of CoreComm
Holdco.
These acquisitions have been accounted for as purchases, and, accordingly,
the net assets and results of operations of the acquired businesses were
included in the consolidated financial statements from the dates of acquisition.
The 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.
8. EQUITY METHOD INVESTMENTS
Effective with the completion of the first phase of the Holdco
recapitalization on December 28, 2001, the Company began accounting for its
ownership of approximately 13% of the outstanding shares of CoreComm Holdco
using the equity method. The Company consolidated CoreComm Holdco prior to that
date. The financial information of CoreComm Holdco as of December 31, 2001 has
been restated to reflect CoreComm Holdco's use of carryover basis.
F-119
CORECOMM LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Following is the condensed financial information of CoreComm Holdco and
subsidiaries as of December 31, 2001 and 2000 and for the years ended December
31, 2001, 2000 and 1999:
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, DECEMBER 31,
2001 2000
------------ ------------
ASSETS
Current assets........................................... $ 61,556,000 $ 86,628,000
Fixed assets, net........................................ 86,722,000 179,379,000
Intangible assets, net................................... 153,086,000 606,951,000
Other assets, net........................................ 15,256,000 23,648,000
------------ ------------
$316,620,000 $896,606,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities...................................... $145,350,000 $187,312,000
Long-term debt and capital lease obligations............. 160,487,000 109,990,000
Shareholders' equity..................................... 10,783,000 599,304,000
------------ ------------
$316,620,000 $896,606,000
============ ============
F-120
CORECOMM LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2001 2000 1999
------------- ------------- -------------
REVENUES........................................ $ 292,681,000 $ 131,526,000 $ 57,151,000
COSTS AND EXPENSES
Operating....................................... 224,807,000 142,323,000 57,551,000
Selling, general and administrative............. 96,854,000 109,197,000 72,821,000
Corporate....................................... 5,648,000 11,224,000 6,686,000
Non-cash compensation........................... 21,638,000 43,440,000 1,056,000
Other charges................................... 39,553,000 12,706,000 --
Asset impairments............................... 368,288,000 35,920,000 --
Depreciation and amortization................... 145,364,000 73,037,000 19,546,000
------------- ------------- -------------
902,152,000 427,847,000 157,660,000
------------- ------------- -------------
Operating (loss)................................ (609,471,000) (296,321,000) (100,509,000)
OTHER INCOME (EXPENSE)
Interest income and other, net.................. 1,799,000 1,134,000 55,000
Interest expense................................ (25,647,000) (5,929,000) (2,624,000)
------------- ------------- -------------
(Loss) before income taxes and extraordinary
item.......................................... (633,319,000) (301,116,000) (103,078,000)
Income tax provision............................ (94,000) (125,000) (102,000)
------------- ------------- -------------
(Loss) before extraordinary item................ (633,413,000) (301,241,000) (103,180,000)
Gain from extinguishment of debt................ 39,498,000 -- --
------------- ------------- -------------
Net (loss)...................................... $(593,915,000) $(301,241,000) $(103,180,000)
============= ============= =============
9. INTANGIBLE ASSETS
Intangible assets consist of:
DECEMBER 31,
------------------
2001 2000
----- ----------
LMDS license costs.......................................... $ -- $4,230,000
Workforce, net of accumulated amortization of none and
$198,000 (2000)........................................... -- 52,000
Customer lists, net of accumulated amortization of none and
$530,000 (2000)........................................... -- 1,810,000
----- ----------
$ -- $6,092,000
===== ==========
F-121
CORECOMM LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. FIXED ASSETS
Fixed assets consist of:
DECEMBER 31,
------------------------
2001 2000
--------- ------------
Operating equipment........................................ $ -- $124,335,000
Computer hardware and software............................. 386,000 53,471,000
Other equipment............................................ 10,000 21,192,000
Construction-in-progress................................... -- 22,097,000
--------- ------------
396,000 221,095,000
Accumulated depreciation................................... (250,000) (41,444,000)
--------- ------------
$ 146,000 $179,651,000
========= ============
11. ACCRUED EXPENSES
Accrued expenses consist of:
DECEMBER 31,
----------------------
2001 2000
-------- -----------
Payroll and related......................................... $ -- $ 5,032,000
Professional fees........................................... -- 2,995,000
Taxes, including income taxes............................... 205,000 14,829,000
Accrued equipment purchases................................. -- 14,460,000
Toll and interconnect....................................... -- 20,628,000
Interest.................................................... 214,000 4,495,000
Dividends................................................... -- 3,405,000
Acquisition costs........................................... -- 16,090,000
Other....................................................... -- 8,309,000
-------- -----------
$419,000 $90,243,000
======== ===========
F-122
CORECOMM LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. LONG-TERM DEBT
Long-term debt consists of:
DECEMBER 31,
---------------------------
2001 2000
------------ ------------
6% Convertible Subordinated Notes........................ $164,750,000 $175,000,000
Senior unsecured notes due 2003, less unamortized
discount of $8,805,000 (2001) and $13,433,000 (2000)... 96,874,000 95,236,000
Senior secured credit facility........................... -- 91,100,000
Working capital promissory note, interest at 8.5%........ -- 1,496,000
Note payable for equipment, interest at 12.75%........... -- 3,331,000
Other.................................................... -- 160,000
------------ ------------
261,624,000 366,323,000
Less current portion..................................... -- 7,699,000
------------ ------------
$261,624,000 $358,624,000
============ ============
At December 31, 2001, all of the senior unsecured notes due 2003 and
$160,000,000 aggregate principal amount of the 6% Convertible Subordinated Notes
were held by CoreComm Holdco.
In October 1999, the Company issued $175,000,000 principal amount of 6%
Convertible Subordinated Notes due October 1, 2006, referred to as the
Convertible Notes. Interest on the Convertible Notes is payable semiannually on
April 1 and October 1 of each year, which commenced on April 1, 2000. The
Convertible Notes are unsecured obligations convertible into common stock prior
to maturity at a conversion price of $27.39 per share, subject to adjustment.
There are approximately 6,015,000 shares of common stock reserved for issuance
upon conversion of the Convertible Notes. The Convertible Notes are redeemable,
in whole or in part, at the option of the Company, at any time on or after
October 1, 2002, at a redemption price of 103.429% that declines annually to
100% in 2006, in each case together with accrued and unpaid interest to the
redemption date. The Company incurred $7,040,000 in fees and expenses in
connection with the issuance of the Convertible Notes, which is included in
deferred financing costs. In April 2001, $10,250,000 aggregate principal amount
of the 6% Convertible Subordinated Notes were converted into approximately
374,000 shares of the Company's common stock.
In September 2000, the Company issued approximately $108,669,000 aggregate
principal amount of 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 the
Company's election, on October 1 and April 1 of each year, which commenced on
April 1, 2001. In 2001, the Company made principal payments of $2,990,000.
In September 2000, subsidiaries of CoreComm Holdco entered into a senior
secured credit facility with The Chase Manhattan Bank as lender, administrative
agent and collateral agent. The Company has unconditionally guaranteed payment
under the facility. 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 entire amount available
under the senior secured credit facility had been borrowed.
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
F-123
CORECOMM LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 2003 with a termination date on September 22, 2008. In the event
the remaining $4.75 million principal amount Convertible Notes held by third
parties 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 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
plus 4.25% per annum. In April 2001, the interest rate was amended 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 December 31, 2001 and 2000, the effective interest rate on the amounts
outstanding was 6.86% and 10.982%, respectively. The rate at December 31, 2001
is in effect through April 12, 2002.
America Online, Inc., referred to as 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, the Company 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.
In 1998, MegsINet entered into a working capital promissory note and a note
payable for operating equipment. MegsINet was required to make monthly principal
and interest payments through January 2002 for the working capital note and
through September 2001 for the equipment note. In 2001, the holders of these
notes agreed to accept cash of $400,000 and $800,000 in full settlement of all
amounts due under the working capital note and certain capital leases and the
equipment note, respectively. Extraordinary gains aggregating $4,067,000 were
recorded as a result of these settlements.
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. In December 2001, the Company and the
vendor agreed to a modification of this arrangement in which the Company paid
$2,000,000 and returned certain of the equipment in full settlement of the
amount due. The Company recorded an extraordinary gain of $7,628,000 as a result
of this transaction.
In April 2001, the Company and CoreComm Holdco as co-obligators issued to
Booth American Company $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 the Company's 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 the Company's common stock for a specified
period. All of the outstanding 10.75% Unsecured Convertible PIK Notes Due April
2011 were exchanged for shares of CoreComm Holdco in December 2001.
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 (that were included in notes payable to
related parties) for shares of its common stock. CoreComm Holdco recorded an
extraordinary gain of $25,677,000 from the extinguishment of these notes. Costs
of $2,655,000 were
F-124
CORECOMM LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
incurred in connection with the Holdco recapitalization which are included as an
offset to the extraordinary gain. In addition, CoreComm Holdco recorded an
extraordinary gain of $4,781,000 related to the settlement of other liabilities.
13. OTHER CHARGES
Other charges in 2001 include reorganization charges of $37,372,000 and an
adjustment to the reserve for notes receivable from former offices of Voyager of
$2,142,000. The reorganization charges 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. A total of $21,386,000 of these costs are for equipment and other
assets that did not require any future cash outlays. The employee severance and
related costs in 2001 were for approximately 630 employees to be terminated,
none of whom were still employed by the Company as of December 31, 2001. The
major actions involved in the 2001 reorganization included: (1) consolidation of
functions such as network operations, customer service and finance, (2)
initiatives to increase gross margins and (3) agreements 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 $2.7 million for prepayments
in respect of ILEC facilities in abandoned markets.
Other charges in 2000 include a reserve of $8,700,000 for notes receivable
from former officers of Voyager, and reorganization charges of $4,006,000. The
employee severance and related costs in 2000 were for approximately 250
employees to be terminated, none of whom were still employed by the Company as
of December 31, 2000.
The following table summarizes the reorganization charges incurred and
utilized in 2000 and 2001:
EMPLOYEE
SEVERANCE LEASE FIXED 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........... 3,409 6,928 6,572 21,772 38,681
Adjustments.................. (996) 73 -- (386) (1,309)
Utilized..................... (3,218) (4,416) (2,914) (21,386) (31,934)
Deconsolidation of CoreComm
Holdco..................... (509) (3,106) (3,658) -- (7,273)
------- ------- ------- -------- --------
Balance, December 31, 2001... $ -- $ -- $ -- $ -- $ --
======= ======= ======= ======== ========
F-125
CORECOMM LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 fair value of the Company's convertible 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 the
Company's other notes payable are estimated using discounted cash flow analyses,
based on the Company's current incremental borrowing rates for similar types of
borrowing arrangements. The fair value at December 31, 2001 is based on the fair
value of $0.9797 per share for the shares issued by CoreComm Holdco in exchange
for the notes.
The carrying amounts and fair values of the Company's financial instruments
are as follows:
DECEMBER 31, 2001 DECEMBER 31, 2000
----------------- ------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------ -------- -------
(IN THOUSANDS)
Cash and cash equivalents...................... $ 109 $ 109 $25,802 $25,802
Long-term debt:
Convertible notes.............................. 164,750 1,427 175,000 55,125
Working capital promissory note................ -- -- 1,496 1,392
Equipment note................................. -- -- 3,331 2,496
Senior secured credit facility................. -- -- 91,100 91,100
Senior unsecured notes due 2003................ 96,874 4,661 95,236 95,236
Notes payable to related parties............... -- -- 16,170 15,355
Other.......................................... -- -- 160 138
15. LEASES
CoreComm Holdco has capital leases for certain of its operating equipment.
Leased property included in operating equipment consisted of:
DECEMBER 31,
-------------------
2001 2000
----- -----------
Operating equipment......................................... $ -- $41,859,000
Accumulated depreciation.................................... -- 14,699,000
$ -- $27,160,000
===== ===========
As of December 31, 2001, the Company no longer has any operating leases.
CoreComm Holdco has leases for office space and equipment which extend through
2013. Total rent expense for the years ended December 31, 2001, 2000 and 1999
under operating leases was $8,791,000, $7,764,000 and $5,151,000, respectively.
16. RELATED PARTY TRANSACTIONS
The due to CoreComm Holdco balance at December 31, 2001 includes 6%
Convertible Subordinated Notes and Senior Unsecured Notes Due 2003 interest
payable of $4,128,000 and preferred stock dividends payable of $19,338,000.
F-126
CORECOMM LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In December 2000, CoreComm Holdco issued $16.1 million aggregate principal
amount of 10.75% Senior Unsecured Convertible PIK Notes Due December 2010, which
were a joint obligation of the Company and CoreComm Holdco, to officers and
directors of the Company and CoreComm Holdco. Interest on the notes was at an
annual rate of 10.75% payable semiannually on January 1 and July 1 of each year,
which commenced on 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 equal to the interest payment that was then due. The
notes were 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 had an initial conversion price equal to 120% of the weighted average
closing price of the Company'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 CoreComm Holdco common stock in December 2001.
Some of the officers and directors of the Company are also officers or
directors of NTL Incorporated, referred to as NTL. In April 2001, the Company
and CoreComm Holdco 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, the Company issued warrants to NTL, and the Company and CoreComm
Holdco 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, CoreComm Holdco 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.
At December 31, 2001, CoreComm Holdco's liability for the 10.75% Unsecured
Convertible PIK Notes Due April 2011, less unamortized discount of $367,000, was
$15,807,000. Interest on the 10.75% Unsecured Convertible PIK Notes Due April
2011 is at an annual rate of 10.75% payable semiannually on October 15 and April
15 of each year, which commenced on 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 equal to 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 Company's common
stock for a specified period. The notes are convertible into the Company's
common stock prior to maturity at a conversion price of $1.00 per share, subject
to adjustment. However, NTL and the Company and CoreComm Holdco have entered
into an agreement relating to the conversion feature of the notes following the
Holdco recapitalization. Through that agreement, consistent with the original
terms of the notes, the Company and CoreComm Holdco have agreed to exercise
their right under the notes such that, following the successful completion of
the exchange offer to the holders of the Company's common stock to exchange
their shares for shares of CoreComm Holdco common stock, the convertibility
feature of the notes will be altered so that rather than the note being
convertible into shares of the Company's common stock, the notes will become
convertible into shares of CoreComm Holdco common stock. At that time, the
conversion price of $1.00 per share will be equitably adjusted by applying the
exchange ratio in the exchange offer, which results in a new conversion price of
$38.90 per share of CoreComm Holdco common stock. NTL has agreed not to exercise
its rights to convert into the Company's 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 the exchange offer is not completed, the conversion feature
would remain into the Company's common stock. These notes are redeemable, in
whole or in part, at the Company'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 CoreComm Holdco with management, financial, legal and
technical services, access to office space and equipment and use of supplies.
Amounts charged to CoreComm Holdco by NTL consist of salaries and direct costs
allocated to the Company where identifiable, and a percentage of the portion of
F-127
CORECOMM LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 CoreComm Holdco operated as an unaffiliated
entity. In the opinion of management, this allocation method is reasonable. For
the years ended December 31, 2001, 2000 and 1999, NTL charged the Company
$446,000, $1,186,000 and $2,330,000, respectively, which is included in
corporate expenses.
CoreComm Holdco provided NTL with access to office space and equipment and
the use of supplies until August 2001. In the fourth quarter of 1999, CoreComm
Holdco 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 CoreComm Holdco operated as an unaffiliated entity.
In the opinion of management, this allocation method is reasonable. In 2001,
2000 and 1999, CoreComm Holdco charged NTL $121,000, $267,000 and $62,000,
respectively, which reduced corporate expenses.
CoreComm Holdco provides billing and software development services to
subsidiaries of NTL. General and administrative expenses were reduced by
$1,883,000, $1,400,000 and $800,000 for the years ended December 31, 2001, 2000
and 1999, respectively, as a result of these charges.
In 2001, CoreComm Holdco and NTL entered into a license agreement whereby
NTL was granted an exclusive, irrevocable, perpetual license to certain billing
software developed by CoreComm Holdco for telephony rating, digital television
events rating, fraud management and other tasks. The sales price was cash of
$12.8 million. The billing software was being used by NTL at the time of this
agreement, and was being maintained and modified by CoreComm Holdco under an
ongoing software maintenance and development outsourcing arrangement between the
companies. CoreComm Holdco recorded the $12.8 million as deferred revenue to be
recognized over a period of three years which was the estimated amount of time
the Company expected to provide service under this arrangement. CoreComm Holdco
recognized $2.5 million of this revenue in 2001.
In March 2000, CoreComm Holdco and NTL announced that they had entered into
an agreement to link their networks in order to create an international Internet
backbone that commenced operations in February 2001. The Company recognized
revenue of $327,000 for the network usage in the year ended December 31, 2001.
CoreComm Holdco leases office space from entities controlled by an
individual who owns 32% of the outstanding CoreComm Holdco shares. Rent expense
for these leases for the year ended December 31, 2001 was approximately $1.6
million.
F-128
CORECOMM LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
17. NET LOSS PER COMMON SHARE
The following table sets forth the computation of basic and diluted net
loss per common share:
YEAR ENDED DECEMBER 31,
---------------------------------------------
2001 2000 1999
------------- ------------- -------------
Numerator:
(Loss) before extraordinary item........ $(659,088,000) $(313,811,000) $(103,524,000)
Preferred stock dividend................ (17,808,000) (4,491,000) --
Preferred stock accretion to redemption
value................................. (4,579,000) (1,099,000) --
------------- ------------- -------------
(Loss) available to common shareholders
before extraordinary item............. (681,475,000) (319,401,000) (103,524,000)
Extraordinary item...................... 39,498,000 -- --
------------- ------------- -------------
Net (loss) available to common
shareholders.......................... $(641,977,000) $(319,401,000) $(103,524,000)
------------- ------------- -------------
Denominator for basic net loss per
common share.......................... 100,669,000 47,480,000 34,189,000
Effect of dilutive securities........... -- -- --
------------- ------------- -------------
Denominator for diluted net loss per
common share.......................... 100,669,000 47,480,000 34,189,000
------------- ------------- -------------
Basic and diluted net loss per common
share:
(Loss) before extraordinary item........ $ (6.77)
Extraordinary item...................... 0.39 -- --
------------- ------------- -------------
Net (loss) per common share............. $ (6.38) $ (6.73) $ (3.03)
============= ============= =============
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, 2001, 2000 and 1999, the Company had 94.3 million, 41.7 million and 18.0
million shares, respectively, issuable upon the exercise of stock options and
warrants and the conversion of convertible securities.
18. 401(k) PLAN
CoreComm Holdco 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.
CoreComm Holdco'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, 2001, 2000 and 1999 was $380,000, $486,000 and
$350,000, respectively.
19. SHAREHOLDERS' EQUITY
STOCK SPLITS
In August 1999, the Company declared a 3-for-2 stock split by way of a
stock dividend, which was paid on September 2, 1999. In January 2000, the
Company declared a 3-for-2 stock split by way of a stock dividend, which was
paid on February 2, 2000. The consolidated financial statements and the notes
thereto give retroactive effect to the stock splits.
F-129
CORECOMM LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PREFERRED STOCK
In September 2000, the Company 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 the
Company'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 were 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. In connection with the issuance of
10.75% Unsecured Convertible PIK Notes in April 2001, the Company amended the
conversion price of the Series A preferred stock 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 the Company'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. 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 the Company's common stock for a specified period. On
September 29, 2010, the Company will be required to redeem any shares of Series
A preferred stock outstanding for $1,000 per share plus accrued and unpaid
dividends. At the Company's discretion, the redemption price may be paid either
in cash or in shares of common stock. The Company 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 the Company'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 the Company's common
stock exceeds certain targets. In addition, the Series A preferred stock may be
redeemed by the Company 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 the Company's stockholders.
In September 2000, the Company 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 the Company's discretion, dividends may be
paid either in cash or in shares of common stock. The annual dividend increased
to $50 per share on September 29, 2001 as a result of Senior Unsecured Notes due
2003 remaining outstanding on that date. The annual dividend will increase 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, the Company
will be required to redeem any shares of Series B preferred stock outstanding
for $1,000 per share plus accrued and unpaid dividends. At the Company'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 the Company's stockholders.
As of December 31, 2001, there were 38,561,000 shares of common stock
reserved for issuance upon conversion of preferred stock.
In December 2001, the holders of the Series A and Series B preferred stock
exchanged all of the outstanding shares of the Company's preferred stock for
shares of CoreComm Holdco common stock issued by CoreComm Holdco.
F-130
CORECOMM LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NON-CASH COMPENSATION
In June 2001, the Company's Board of Directors approved the repricing of
certain stock options granted to employees. George Blumenthal, the then Chairman
of the Board, Barclay Knapp, the then President, and the members of the Board of
Directors did not participate in the repricing. Options to purchase an aggregate
of approximately 10.2 million shares of the Company'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. CoreComm Holdco will recognize non-cash compensation
expense for the difference between the quoted market price of the Company'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 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 the Company's common stock to various employees at an exercise price
of $14.55, which was less than the fair market value of the Company's common
stock on the date of the grant. In accordance with APB Opinion No. 25, in April
2000, CoreComm Holdco recorded 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 2001, the remaining $21.6 million of the
deferred non-cash compensation was charged to expense.
In November 2000, the Board of Directors approved the rescission of certain
previously exercised employee stock options. The Company 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 the Company's
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 employee stock option
agreements.
SHAREHOLDER RIGHTS PLAN
The Company adopted a shareholder rights plan in September 2000. In
connection with the shareholder 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
certain potential takeover events, to purchase from the Company one
one-hundredth of a share of Series C Junior Participating Preferred Stock,
referred to as 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
F-131
CORECOMM LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
times the amount received per share of common stock. The rights are protected by
customary antidilution provisions.
WARRANTS
In connection with the amendment and restatement of the senior unsecured
credit facility in April 2001, the Company 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.
The Company had the following warrants outstanding as of December 31, 2001:
(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 10,580,000 shares of common stock at
$0.01 per share issued in 2001 that expire in April 2011. None of these warrants
were exercised in 2001 or 2000.
CoreComm Holdco has offered its common stock to the Company's stockholders
through a registered public exchange offer. If this exchange offer and the
subsequent merger are consummated, the Company's warrants will be exercisable
into common shares of CoreComm Holdco on an as-converted basis, subject to the
exchange ratio in the exchange offer.
STOCK OPTIONS
As of December 31, 2001, there were approximately 33,057,000 shares of
common stock reserved for issuance under the Company stock option plans,
referred to as the Plans, and there were approximately 8.4 million shares
available for issuance. The Plans provide that incentive stock options be
granted at the fair market value of the Company's common stock on the date of
grant, and nonqualified stock options be granted at a price determined by the
Compensation and Option Committee. Options are generally exercisable as to 20%
of the shares subject thereto on the date of grant and become exercisable as to
an additional 20% of the shares subject thereto on each January 1 thereafter,
while the optionee remains an employee of the Company. Options will expire ten
years after the date of the grant.
In December 2001, the Company's Board of Directors, in connection with the
Holdco recapitalization, accelerated all outstanding options to acquire shares
of the Company's common stock so that all are presently fully vested and
exercisable. The Company recognized $8.7 million of deferred non-cash
compensation as a result of the acceleration of the vesting.
The Company's 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, the Company would become a subsidiary of CoreComm Holdco.
Subsequent to that time, CoreComm Holdco and the Company intend to effect a
merger between the Company and a subsidiary of CoreComm Holdco which would have
the effect of converting holders of any remaining outstanding shares of the
Company's 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 the Company's options exercise
their options, they would, at the time of a merger, have the same rights as
other holders of the Company's common stock to have their shares of the Company
converted into shares of CoreComm Holdco at that exchange ratio. CoreComm Holdco
may be required to record non-cash compensation upon the ultimate resolution of
the Company's stock options.
F-132
CORECOMM LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In connection with the distribution of the Company to CCPR's shareholders,
the Company issued options to purchase approximately 1,877,000 shares of the
Company's common stock to holders of CCPR stock options who elected to receive
options. In addition, the Company issued warrants to purchase 6,153,000 shares
of common stock to holders of CCPR stock options who elected to receive
warrants. These warrants are referred to as distribution warrants.
Pro forma information regarding net loss and net loss per share is required
by SFAS No. 123, and has been determined as if the Company had accounted for its
employee warrants and stock options under the fair value method of that
Statement. The fair value for these warrants and options was estimated at the
date of grant using the Black-Scholes option pricing model with the following
weighted-average assumptions for 2001, 2000 and 1999: risk-free interest rate of
4.47%, 5.30% and 6.81%, respectively, dividend yield of 0%, volatility factor of
the expected market price of the Company's common stock of 1.276, .804 and .465,
respectively, and a weighted-average expected life of the warrants and options
of 10 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's distribution warrants and stock options have
characteristics significantly different from those of traded options and because
changes in the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its distribution warrants
and stock options.
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:
YEAR ENDED DECEMBER 31,
---------------------------------------------
2001 2000 1999
------------- ------------- -------------
Pro forma net (loss)............................ $(704,596,000) $(389,127,000) $(128,795,000)
Pro forma net (loss) per share -- basic and
diluted....................................... $ (7.22) $ (8.31) $ (3.77)
A summary of the Company's distribution warrants and stock option activity
and related information for the years ended December 31, 2001, 2000 and 1999
follows:
2001 2000 1999
---------------------- ---------------------- ----------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER OF EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
---------- --------- ---------- --------- ---------- ---------
Outstanding -- beginning of
period..................... 19,349,000 $13.69 10,754,000 $15.37 9,765,000 $ 5.51
Granted...................... 16,822,000 0.65 10,404,000 10.98 7,925,000 19.56
Exercised.................... 3,000 1.49 1,640,000 7.61 5,606,000 6.27
Forfeited.................... 13,971,000 12.16 169,000 14.09 1,330,000 6.27
---------- ---------- ----------
Outstanding -- end of
period..................... 22,197,000 $ 4.80 19,349,000 $13.69 10,754,000 $15.37
========== ========== ==========
Exercisable at end of
period..................... 22,197,000 $ 4.80 10,112,000 $12.51 3,438,000 $10.11
========== ========== ==========
Weighted-average fair value of distribution warrants and options,
calculated using the Black-Scholes option pricing model, granted during 2001,
2000 and 1999 is $0.12, $14.04, and $14.28, respectively.
F-133
CORECOMM LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes the status of the distribution warrants and
stock options outstanding and exercisable at December 31, 2001:
WARRANTS AND STOCK OPTIONS OUTSTANDING WARRANTS AND STOCK OPTIONS
--------------------------------------------- EXERCISABLE
WEIGHTED- ----------------------------
RANGE OF REMAINING WEIGHTED- WEIGHTED-
EXERCISE NUMBER OF CONTRACTUAL AVERAGE NUMBER OF AVERAGE
PRICES OPTIONS LIFE EXERCISE PRICE OPTIONS EXERCISE PRICE
-------- ---------- --------------- -------------- ----------- --------------
$0.02 to $3.03 17,012,000 8.7 years $ 0.632 $ 7,012,000 $ 0.632
$5.86 to $7.94 576,000 6.6 years $ 6.261 576,000 $ 6.261
$12.96 to $14.55 299,000 8.3 years $13.909 299,000 $13.909
$18.78 to $22.33 4,310,000 7.5 years $20.491 4,310,000 $20.491
---------- -----------
Total 22,197,000 22,197,000
========== ===========
20. INCOME TAXES
The provision for income taxes consists of the following:
YEAR ENDED DECEMBER 31,
-----------------------------
2001 2000 1999
------- -------- --------
Current:
Federal............................................. $ -- $ -- $106,000
State and local..................................... 98,000 250,000 625,000
------- -------- --------
Total current......................................... 98,000 250,000 731,000
------- -------- --------
Deferred:
Federal............................................. -- -- --
State and local..................................... -- -- --
------- -------- --------
Total deferred........................................ -- -- --
------- -------- --------
$98,000 $250,000 $731,000
======= ======== ========
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. As a result of the Holdco
recapitalization, the Company's only material asset at December 31,
F-134
CORECOMM LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2001 is its investment in CoreComm Holdco. The Company had no other deferred tax
assets or liabilities at December 31, 2001. Significant components of the
Company's deferred tax assets are as follows:
DECEMBER 31,
-----------------------------
2001 2000
------------- -------------
Deferred tax assets:
Investment in subsidiaries........................... $ 209,000,000 $ --
Depreciation......................................... -- 1,226,000
Net operating losses................................. -- 109,245,000
Allowance for doubtful accounts...................... -- 4,414,000
Amortization of goodwill............................. -- 7,405,000
Accrued expenses..................................... -- 35,820,000
Asset impairments.................................... -- 8,546,000
Other................................................ -- 174,000
------------- -------------
209,000,000 166,830,000
Valuation allowance for deferred tax assets............ (209,000,000) (166,830,000)
------------- -------------
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.
Due to the completion of the debt cancellation in first phase of the Holdco
recapitalization in December 2001, the Company realized for tax purposes
approximately $265 million of income, most of which is not subject to tax as a
result of an exception set forth in the Internal Revenue Code. To the extent
that such amount is excluded from taxable income, the Company's tax attributes,
consisting of net operating loss, referred to as NOL, carryforwards, including
NOL carryforwards of subsidiaries which were part of the consolidated group, of
which the Company was parent at the time of income realization, are subject to
reduction. After reduction, the Company's NOL carryforwards are reduced to zero.
The reconciliation of income taxes computed at U.S. federal statutory rates
to income tax expense is as follows:
DECEMBER 31,
--------------------------------------------
2001 2000 1999
------------- ------------- ------------
Benefit at federal statutory rate
(35%).................................. $(216,822,000) $(109,746,000) $(35,978,000)
State and local income taxes............. 98,000 250,000 625,000
Expenses not deductible for tax
purposes............................... 135,311,000 34,429,000 2,160,000
Foreign income not subject to U.S. tax... - - (399,000)
U.S. losses with no benefit.............. 81,511,000 75,317,000 34,323,000
------------- ------------- ------------
$ 98,000 $ 250,000 $ 731,000
============= ============= ============
21. COMMITMENTS AND CONTINGENT LIABILITIES
Fiberstream, Inc., a wholly-owned subsidiary of the Company, 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 on
the earlier of (a) the date that Fiberstream completes construction of its
initial backbone or (b) November 2002.
F-135
CORECOMM LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Additionally, Fiberstream 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 the Company's
financial position, results of operations or cash flows. However, certain of
these matters, if resolved unfavorably to us, could have a material adverse
effect on the Company's business, financial condition and/or results of
operations:
- CoreComm Newco, Inc., an indirect, wholly-owned subsidiary of CoreComm
Holdco referred to as CoreComm Newco, is currently in litigation with
Ameritech Ohio, a supplier from whom it purchases telecommunications
products and services, over the adequacy of Ameritech's performance under
a 1998 contract between CoreComm Newco and Ameritech, and related issues.
This litigation began in June 2001 when Ameritech threatened to stop
processing new orders following CoreComm Newco's exercise of its right
under the contract to withhold payments for Ameritech's performance
failures. In response to this threat, CoreComm Newco sought and received
an order from an official of the Public Utilities Commission of Ohio,
referred to as the 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 CoreComm Newco of approximately $8,600,000 allegedly owed under the
contract. On August 8, 2001, Ameritech filed a second claim against
CoreComm Newco in Ohio state court, seeking an additional approximately
$4,300,000 in allegedly improperly withheld amounts. These claims were
subsequently consolidated in the United States District Court, with an
amended complaint from Ameritech seeking a total of approximately
$14,400,000.
- On December 26, 2001, CoreComm Newco filed its 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. In
lieu of filing an answer to CoreComm Newco's counterclaims, Ameritech
filed a series of motions on March 25, 2002, asking the Court to dismiss
certain of CoreComm Newco's counterclaims. CoreComm Newco's response to
those motions is currently due on April 17, 2002 and it intends to oppose
Ameritech's requests for dismissal vigorously.
The Company believes that CoreComm Newco has 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. For example, the figure specified in Ameritech's complaint
does not account for (a) more than $4.1 million in refunds that Ameritech
contends it has already credited to CoreComm Newco's accounts since
filing its complaint, and (b) payments that were made by CoreComm Newco
in the ordinary course after the time of Ameritech's submission. However,
the Company cannot be certain how the matter will be resolved. The
Company also believes that, to the extent Ameritech prevails with respect
to any of its claims, Ameritech's award may be offset in whole or in part
by amounts that CoreComm Newco is seeking to obtain from Ameritech under
its counterclaims. However, it is impossible at this time to predict the
outcome of the litigation.
- Certain operating subsidiaries of CoreComm Holdco are currently involved
in litigation with certain subsidiaries of Verizon Communications, Inc.,
referred to as Verizon, relating to the timeliness and accuracy of
Verizon's wholesale billing processes, the legitimacy of various charges
that have been levied by Verizon, and the propriety of Verizon's effort
to collect those charges by threatening to implement an account embargo
and service suspension on the ability of CoreComm Holdco's
F-136
CORECOMM LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
subsidiaries to process new and pending service orders unless payment is made on
the amounts demanded.
On or about January 31, 2002, the subsidiaries of CoreComm Holdco
operating in Delaware, District of Columbia, Maryland, Massachusetts, New
York, Pennsylvania and received correspondence from Verizon claiming that
Verizon was owed a total of approximately $14 million for services
allegedly provided in those states and threatening to activate embargo
procedures on their accounts if payment of the alleged amounts was not
received. In response, the subsidiaries challenged the accuracy of
Verizon's figures and provided formal written notice to Verizon disputing
its claims and reiterating their several prior requests that Verizon
provide additional information to support its contentions and resolve a
variety of apparently systemic problems with its wholesale billing
systems. Additionally, the subsidiaries in Pennsylvania, New York and
Massachusetts proceeded to initiate litigation against Verizon before the
appropriate regulatory authorities and/or in civil court.
After further discussions and agreements between the parties, on February
28, 2002 Verizon withdrew its embargo threats in all states except
Massachusetts. In Massachusetts, Verizon filed an answer to the complaint
along with counterclaims seeking approximately $1.4 million in payment
for allegedly past due charges. CoreComm Massachusetts is currently
preparing an answer to these counterclaims that will dispute the accuracy
of Verizon's contentions and discussions regarding a mutually agreeable
resolution of the matter are continuing between the parties.
In Pennsylvania, litigation between ATX Telecommunications and Verizon is
continuing. In the meantime, on March 4, 2002 ATX received a letter from
Verizon asserting that Verizon is owed approximately $5.7 million in
allegedly past due charges and threatening to implement a service
embargo. ATX is currently reviewing Verizon's claims against its own
billing records and believes that the amount at issue could be
substantially less than the amount claimed by Verizon when taking into
account (a) Verizon's historical billing errors, (b) payments that have
been or will be made in the ordinary course, and (c) unresolved disputes
over prior charges. Accordingly, on March 29, 2002, ATX filed a petition
with the Hearing Examiner in its complaint case advising that the $5.7
million figure alleged in Verizon's embargo letter has been placed into
dispute by ATX due to Verizon's billing errors, that approximately $3
million of erroneous charges have already been found which ATX believes
should be deducted from the claimed amount, and asking the Hearing
Examiner to issue an order that would prevent Verizon from implementing a
service embargo during the pendancy of the complaint proceeding. ATX
intends to vigorously litigate its complaint regarding Verizon's billing
errors, including the longstanding, apparently systemic problems that ATX
has experienced with Verizon's billing systems, and pursue all available
claims, counterclaims and offsets, including defending against any effort
to implement any embargo or service suspension. However, it 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
MegsINet, Inc., an indirect subsidiary of CoreComm Holdco, 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. On February 19, 2002, the defendants filed a motion to dismiss
certain of GECC's claims. GECC's response to the motion is currently due
on April 9, 2002, defendants' reply is presently due on April 26, 2002
and oral
F-137
CORECOMM LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
argument on the motions is presently scheduled for May 13, 2002. CoreComm
Holdco is currently in settlement discussions with GECC regarding these
claims.
- 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, primarily in
respect of alleged early termination liabilities, under a services
agreement and a collocation agreement with MegsINet. The defendants have
denied KMC's claims and have asserted that the contracts at issue were
signed without proper authorization, that KMC failed to perform under the
alleged contracts, and that the termination penalties are not
enforceable. The defendants have served discovery and intend to defend
themselves in coordination with one of their insurance carriers.
- On July 6, 2001, MCI initiated a compulsory arbitration action against
CoreComm Holdco's 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 a carrier agreement. MCI has subsequently
asserted that under one theory of the case premised on its reading of
provisions relating to alleged early termination penalties, its claims
could exceed $10 million, and under another theory involving a different
computation its claims could exceed $4.5 million. The defendant has
denied MCI's claims, asserting that the circuits were never ordered under
the contract and have been improperly billed by MCI, and the defendant
does not agree with MCI's various damages theories. MCI has admitted that
there are no signed written orders for a substantial majority of the
circuits, and the contract states that all orders must be submitted in
writing signed by the ordering party. Discovery in this matter has been
completed, and the case is currently scheduled for trial before the
arbitrator in April 2002. The defendant is litigating the suit vigorously
and pursuing all available claims and defenses.
- The Company received correspondence from a law firm on behalf of Weston
Telecommunications, L.L.C., referred to as Weston, asserting that Weston
is the assignee of certain rights of Easton Telecom Services, Inc.,
referred to as Easton, 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 MegsINet, Inc. On
March 1, 2002, Easton Telecom Services, LLC., formerly known as Weston,
initiated litigation in the Northern District of Ohio against CoreComm
Internet Group, Inc. asserting the claims discussed above. The defendant
has investigated Weston's claims and does not believe that they have
merit. Defendant's answer to Easton's complaint is presently due on April
24, 2001 and the Company intends to defend itself vigorously and pursue
all available claims and defenses, including multiple defenses to the
validity of the alleged contracts at issue.
- Fiberstream, Inc., a direct subsidiary of CoreComm Limited, has been in
communications with Metromedia Fiber Networks, Inc., referred to as MFN,
regarding a dispute between the parties under a General Agreement dated
September 29, 2000 and a related Product Order of the same date. The
dispute centers around the accuracy of certain statements that were made
by MFN concerning the nature of its network at the time of contracting,
the timeliness of the installation of the circuits by MFN under the
agreement, and Fiberstream's obligation, if any, to make payments in
respect of those circuits. MFN has indicated that unless payment is made
for the circuits, it may initiate arbitration under the agreement and
seek early termination penalties in excess of
F-138
CORECOMM LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
approximately $1.1 million. Fiberstream has rejected MFN's demands and
has advised that it will defend itself vigorously and pursue all
available counterclaims, including claims for fraudulent inducement
relating to the execution of the contract and damages arising from MFN's
alleged failure to perform under the contract. The parties have discussed
the prospect of settling their respective claims without resort to
litigation and those discussions are presently ongoing.
- On October 9, 2001, Enavis Networks, Inc. filed an action in the Circuit
Court of Pinellas County, Florida against CoreComm Limited asserting that
Enavis is owed approximately $420,000 relating to the alleged sale and
installation of telecommunications equipment by Enavis. The Company filed
a motion to dismiss this action for lack of personal jurisdiction over
the Company in Florida and this motion is still pending. Upon resolution
of the motion to dismiss in Florida and assuming that the matter proceeds
in litigation, the Company intends to defend this action vigorously and
assert counterclaims against Enavis arising from Enavis' failure to
provide equipment complying with CoreComm's specifications.
- 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, referred to as Yale, against CoreComm Communications, Inc.,
a direct, wholly-owned subsidiary of CoreComm Holdco, 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. On February 27, 2002, Yale's motion for a preliminary
injunction was denied subject to the substitution of CoreComm Holdco for
CoreComm Limited as guarantor on the lease and Yale's motion to specify
the revised figure of $404, 290.87 was granted. The defendants are
currently proceeding to make the substitution relating to the guarantee
and are litigating the matter vigorously.
F-139
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 Only)
17 Battery Place (212) 616-7610 17 Battery Place
New York, New York 10004 Attn: Reorganization Department 8th Floor
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:
breaches of the duty of loyalty;
acts or omissions not in good faith or that involve intentional misconduct
or knowing violations of law;
unlawful payments of dividends, stock purchases or redemptions; or
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:
(i) that, for purposes of determining any liability under the
Securities Act, each filing of the registrant's annual report under Section
13(a) or 15(d) of the Exchange Act (and, where applicable, each filing of
an employee benefit plan's annual report under 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; and
(ii) insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant under the foregoing provisions,
II-1
or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(b) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus under 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.
(c) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-2
INDEX TO FINANCIAL SCHEDULES
CORECOMM HOLDCO
Report of Independent Auditor on Schedules.................. S-2
Schedule I -- Condensed Financial Information of CoreComm S-3
Holdco, Inc. .............................................
Schedule II -- Valuation and Qualifying Accounts............ S-8
CORECOMM LIMITED
Report of Independent Auditor on Schedule................... S-9
Schedule II -- Valuation and Qualifying Accounts............ S-10
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, 2001 and 2000 and for each of the three years in the
period ended December 31, 2001 and have issued our report thereon dated March
29, 2002, except for the first paragraph of Note 18 as to which the date is
April 12, 2002 (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 29, 2002, except for the last paragraph of Note 5, as to
which the date is April 12, 2002
S-2
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF CORECOMM HOLDCO, INC.
CONDENSED BALANCE SHEETS
DECEMBER 31,
--------------------------------
2001 2000
--------------- --------------
RESTATED*
ASSETS
Current assets:
Cash and cash equivalents................................. $ -- $ 6,198,000
Marketable securities..................................... -- 1,343,000
Other..................................................... 476,000 1,600,000
--------------- --------------
Total current assets........................................ 476,000 9,141,000
Investments in and loans to subsidiaries.................... 21,151,000 605,274,000
Investment in CoreComm Limited.............................. 3,863,000 --
Other....................................................... 1,100,000 1,059,000
--------------- --------------
$ 26,590,000 $ 615,474,000
=============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable to related parties............................ $ 15,807,000 $ 16,170,000
Commitments and contingent liabilities
Shareholder's equity:
Common stock.............................................. 300,000 285,000
Additional paid-in capital................................ 1,022,634,000 1,038,893,000
Deferred non-cash compensation............................ -- (21,638,000)
(Deficit)................................................. (1,012,151,000) (418,236,000)
--------------- --------------
10,783,000 599,304,000
--------------- --------------
$ 26,590,000 $ 615,474,000
=============== ==============
* See Note 2
See accompanying notes.
S-3
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF CORECOMM HOLDCO, INC.
CONDENSED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
---------------------------------------------
2001 2000 1999
------------- ------------- -------------
COSTS AND EXPENSES
Corporate expense............................... $ -- $ -- $ 13,000
------------- ------------- -------------
Operating (loss).............................. -- -- (13,000)
OTHER INCOME (EXPENSE)
Interest income and other, net.................. 4,025,000 2,787,000 1,638,000
Interest expense................................ (3,767,000) (70,000) --
------------- ------------- -------------
Income before income taxes, equity in net (loss)
of subsidiaries and extraordinary item........ 258,000 2,717,000 1,625,000
Income tax provision............................ -- -- (7,000)
------------- ------------- -------------
Income before equity in net (loss) of
subsidiaries and extraordinary item........... 258,000 2,717,000 1,618,000
Equity in net (loss) of subsidiaries............ (619,850,000) (303,958,000) (104,798,000)
------------- ------------- -------------
(Loss) before extraordinary item................ (619,592,000) (301,241,000) (103,180,000)
Gain from extinguishment of debt................ 25,677,000 -- --
------------- ------------- -------------
Net (loss)...................................... $(593,915,000) $(301,241,000) $(103,180,000)
============= ============= =============
See accompanying notes.
S-4
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF CORECOMM HOLDCO, INC.
CONDENSED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
--------------------------------------------
2001 2000 1999
------------ ------------- -------------
Net cash provided by operating activities........ $ 4,712,000 $ 539,000 $ 2,320,000
INVESTING ACTIVITIES
Acquisitions, net of cash acquired............... -- (98,613,000) (47,056,000)
Purchase of marketable securities................ -- (1,343,000) --
Proceeds from sale of marketable securities...... 1,343,000 -- --
Increase in investments in and loans to
subsidiaries................................... (14,089,000) (144,909,000) (105,267,000)
------------ ------------- -------------
Net cash (used in) investing activities.......... (12,746,000) (244,865,000) (152,323,000)
FINANCING ACTIVITIES
Capital contributions (distributions)............ (23,164,000) 232,472,000 151,885,000
Proceeds from borrowings, net of financing
costs.......................................... 25,000,000 16,170,000 --
------------ ------------- -------------
Net cash provided by financing activities........ 1,836,000 248,642,000 151,885,000
------------ ------------- -------------
Increase (decrease) in cash and cash
equivalents.................................... (6,198,000) 4,316,000 1,882,000
Cash and cash equivalents at beginning of
period......................................... 6,198,000 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
See accompanying notes.
S-5
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF CORECOMM HOLDCO, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. ORGANIZATION
CoreComm Holdco, Inc., referred to as the Company, was formed in May 1998
as a Bermuda corporation. It was a wholly-owned subsidiary of CoreComm Limited,
referred to as CoreComm Limited or 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.
Effective with the completion of the first phase of the Holdco
recapitalization on December 28, 2001, CoreComm Limited began accounting for its
ownership of approximately 13% of the outstanding shares of the Company using
the equity method. The Company accounted for this transaction at fair value, but
has determined it was more appropriately accounted for at historical cost. This
required the Company to restate its balance sheet at December 31, 2001. The
principal effect of the restatement was to reduce investments in and loans to
subsidiaries, long-term debt and shareholders' equity (deficiency) by
$30,663,000, $12,054,000 and $18,609,000, respectively.
3. NOTES PAYABLE
In December 2000, the Company issued $16.1 million 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 equal to the interest payment that was 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 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's common stock in December 2001.
Some of the officers and directors of the Company are also officers or
directors of NTL Incorporated, referred to as 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, which commenced on 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 equal to the
interest payment that is then due. Additional notes issued for interest will
have a conversion price equal to 120% of the weighted average closing price of
CoreComm Limited's 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, NTL and CoreComm
Limited and the Company have entered into an agreement relating to the
conversion feature of the notes following the Holdco recapitalization. Through
that agreement, consistent with the original terms of the notes, CoreComm
Limited and the Company have agreed to exercise their right under the notes such
that, following the completion of the exchange offer to the holders of CoreComm
Limited common stock to exchange their shares for shares of the Company's common
stock, the convertibility feature of the notes will be altered so that rather
than the notes being convertible into shares of CoreComm Limited common stock,
the notes
S-6
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF CORECOMM HOLDCO, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
will become convertible into shares of the Company's 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 $38.90 per share of the Company's common stock. NTL 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 the exchange offer is not completed, the conversion
feature would remain into CoreComm Limited common stock. These notes are
redeemable, in whole or in part, at the Company'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.
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 has unconditionally
guaranteed payment under the facility.
5. OTHER
No cash dividends were paid to the registrant by subsidiaries from January
1, 1999 through December 31, 2001.
On April 12, 2002 CoreComm Holdco declared a 3-for-1 stock split by way of
a stock dividend. The condensed financial statements and the notes thereto give
retroactive effect to the stock split.
S-7
CORECOMM HOLDCO, INC.
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, 2001:
Allowance for doubtful
accounts................... $11,034,000 $7,143,000 $ -- $(8,418,000)(a) $ 9,759,000
Year ended December 31, 2000:
Allowance for doubtful
accounts................... $ 3,949,000 $7,130,000 $ -- $ (45,000)(b) $11,034,000
Year ended December 31, 1999:
Allowance for doubtful
accounts................... $ 742,000 $3,241,000 $ -- $ (34,000)(c) $ 3,949,000
---------------
(a) Uncollectible accounts written-off, net of recoveries.
(b) 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.
(c) 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.
S-8
REPORT OF INDEPENDENT AUDITOR ON SCHEDULE
We have audited the consolidated financial statements of CoreComm Limited
as of December 31, 2001 and 2000 and for each of the three years in the period
ended December 31, 2001 and have issued our report thereon dated March 29, 2002,
except for the last paragraph of Note 2 as to which the date is April 12, 2002
(included elsewhere in this Registration Statement). Our audits 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 audits.
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
March 29, 2002 except for the last paragraph of Note 2 as
to which the date is April 12, 2002
S-9
CORECOMM LIMITED
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, 2001:
Allowance for doubtful
accounts................... $11,034,000 $7,143,000 $ -- $(18,177,000)(a) $ --
Year ended December 31, 2000:
Allowance for doubtful
accounts................... $ 3,949,000 $7,130,000 $ -- $ (45,000)(b) $11,034,000
Year ended December 31, 1999:
Allowance for doubtful
accounts................... $ 742,000 $3,241,000 $ -- $ (34,000)(c) $ 3,949,000
---------------
(a) Uncollectible accounts written-off, net of recoveries, of $8,418,000 and
deconsolidation of $9,759,000 of allowance for doubtful accounts of CoreComm
Holdco.
(b) 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.
(c) 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.
S-10
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this Amendment No. 4 to the 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 June 26, 2002.
CORECOMM HOLDCO, INC.
By: /s/ MICHAEL A. PETERSON
--------------------------------------
Name: Michael A. Peterson
Title: Executive Vice President --
Chief Operating Officer and
Chief Financial Officer
Pursuant to the requirements of the Securities Act, this Amendment No. 4 to
the registration statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
* Chairman of the Board of Directors June 26, 2002
------------------------------------------------
Barclay Knapp
* President and Chief Executive June 26, 2002
------------------------------------------------ Officer (Principal Executive
Thomas Gravina Officer); Director
* Executive Vice President -- Chief June 26, 2002
------------------------------------------------ Operating Officer and Chief
Michael A. Peterson Financial Officer (Principal
Financial Officer); Director
* Senior Vice President -- Controller June 26, 2002
------------------------------------------------ and Treasurer
Gregg N. Gorelick
* Director, Chairman Emeritus June 26, 2002
------------------------------------------------
George S. Blumenthal
* Director June 26, 2002
------------------------------------------------
Ralph H. Booth, II
* Director June 26, 2002
------------------------------------------------
Alan J. Patricof
* Director June 26, 2002
------------------------------------------------
Warren Potash
*By: /s/ MICHAEL A. PETERSON
-----------------------------------------
Michael A. Peterson
Attorney-in-fact
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, file no. 333-82402)
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, file no.
333-82402)
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, file no. 333-82402)
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,
file no. 333-82402)
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, file no. 333-82402)
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, file no.
333-82402)
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, file no.
333-82402)
5.1 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP*
8.1 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP
(Illinois)*
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, file no.
333-82402)
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, file no.
333-82402)
10.3 First Amendment to Exchange Agreement, entered into as of
April 5, 2002, by and between CoreComm Limited and CoreComm
Holdco, Inc. (incorporated by reference to Exhibit 10.63 to
CoreComm Limited's annual report filed on Form 10-K for the
year ended December 31, 2001, file no. 000-31359)
10.4 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 10.1 to CoreComm Limited's Form 8-K,
filed April 13, 2001)
10.5 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, file no. 333-82402)
10.6 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 Collateral Agent
(incorporated by reference to Exhibit 10.5 to CoreComm
Holdco, Inc.'s registration statement on Form S-1, file no.
333-82402)
E-1
EXHIBITS DESCRIPTION
-------- -----------
10.7 Third Amendment dated as of March 29, 2002 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 and by the
Second Amendment dated as of December 14, 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 10.55 to CoreComm
Limited's annual report filed on Form 10-K for the year
ended December 31, 2001, file no. 000-31359)
10.8 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)
10.9 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)
10.10 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)
10.11 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)
10.12 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)
10.13 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)
10.14 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)
10.15 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)
10.16 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)
10.17 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)
10.18 Summary of Principal Terms of Employment Arrangements with
Thomas J. Gravina and Michael A. Peterson*
10.19 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)
10.20 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)
10.21 10.75% Unsecured Convertible PIK Note due 2011, dated as of
October 15, 2001, made jointly by CoreComm Holdco, Inc. and
CoreComm Limited*
E-2
EXHIBITS DESCRIPTION
-------- -----------
10.22 10.75% Unsecured Convertible PIK Note due 2011, dated as of
April 15, 2002, made jointly by CoreComm Holdco, Inc. and
CoreComm Limited*
10.23 Letter Agreement, dated February 5, 2002, among CoreComm
Limited, CoreComm Holdco, Inc. and NTL Incorporated*
10.24 Letter Agreement, dated February 5, 2002, among CoreComm
Limited, CoreComm Holdco, Inc. and NTL Incorporated*
10.25 Second Amendment to Exchange Agreement, entered into as of
May 10, 2002, by and between CoreComm Limited and CoreComm
Holdco, Inc.*
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, file no. 333-82402)
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, file no. 333-82402)
23.1 Consent of Ernst & Young LLP
23.2 Consent of Ernst & Young LLP
23.3 Consent of BDO Seidman LLP
23.4 Consent of PricewaterhouseCoopers LLP
23.5 Consent of Skadden, Arps, Slate, Meagher & Flom LLP
(included in Exhibit 5.1)
23.6 Consent of Skadden, Arps, Slate, Meagher & Flom (Illinois)
(included in Exhibit 8.1)
24.1 Powers of Attorney*
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 CoreComm 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*
---------------
* Previously filed on Form S-4.
E-3