The information in this prospectus supplement may change. We may not complete
the exchange offers until the registration statement filed with the Securities
and Exchange Commission is effective. This prospectus supplement 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.
Filed by CoreComm Holdco, Inc.
Pursuant to Rule 425 under
the Securities
Act of 1933, as amended
Subject Company: CoreComm Limited
Commission File No. 333-82400
Date: May 16, 2002
The following prospectus supplement was disseminated by CoreComm Holdco, Inc.:
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 MIDNIGHT, NEW YORK CITY TIME, ON MAY 21,
2002, UNLESS EXTENDED.
In connection with CoreComm Holdco, Inc.'s preliminary prospectus which
forms a part of CoreComm Holdco's Registration Statement on Form S-4 filed with
the Securities and Exchange Commission on February 8, 2002, as amended by
Amendment No. 1 to Form S-4, dated April 15, 2002, and Amendment No. 2 to Form
S-4, dated May 15, 2002, this prospectus supplement includes (1) CoreComm
Limited's Form 10-Q for the period ended March 31, 2002, as filed with the
Securities and Exchange Commission on May 15, 2002, and (2) the section of the
preliminary prospectus entitled "The Exchange Offers," which has been updated.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS SUPPLEMENT IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
***
The references to the exchange offers contained in this prospectus
supplement shall not constitute an offer to sell or the solicitation of an offer
to buy, nor shall there be any sale of shares of common stock of CoreComm Holdco
in any state in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such state.
Investors and security holders are urged to read the following documents,
including amendments that may be made to them, regarding the exchange offers
because they contain important information:
- CoreComm Holdco's preliminary prospectus, prospectus
supplements and final prospectus;
- CoreComm Holdco's registration statement on Form S-4,
containing such documents and other information; and
- CoreComm Holdco's Schedule TO.
These documents and amendments and supplements to these documents have
been and will continue to be filed, as they may be amended and supplemented,
with the Securities and Exchange Commission. When these and other documents are
filed with the SEC, they may be obtained free at the
SEC's web site at www.sec.gov. You may also obtain for free each of these
documents, when available, from CoreComm Holdco by directing your request to the
number listed below.
For further information regarding the exchange offers, including
obtaining additional copies of the exchange offer materials, we encourage you to
contact the information agent:
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
The date of this prospectus supplement is May 15, 2002
2
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2002 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 000-31359
CORECOMM LIMITED
(Exact name of registrant as specified in its charter)
Delaware 23-3032245
(State or other jurisdiction of incorporation (I.R.S. Employer Identification No.)
or organization)
110 East 59th Street, New York, New York 10022
(Address of principal executive offices) (Zip Code)
(212) 906-8485
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes /X/ No / /
The number of shares outstanding of the issuer's common stock as of March 31,
2002 was 141,655,388.
CoreComm Limited and Subsidiaries
Index
PART I. FINANCIAL INFORMATION Page
----
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
March 31, 2002 (Unaudited) and December 31, 2001 .......... 2
Condensed Consolidated Statements of Operations -
Three months ended March 31, 2002 and 2001 (Unaudited) .... 3
Condensed Consolidated Statement of Shareholders' Deficiency -
Three months ended March 31, 2002 (Unaudited) ............. 4
Condensed Consolidated Statements of Cash Flows -
Three months ended March 31, 2002 and 2001 (Unaudited) .... 5
Notes to Unaudited Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition ....................... 19
Item 3. Quantitative and Qualitative Disclosures about Market Risk ... 25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ............................................ 26
Item 3. Defaults upon Senior Securities .............................. 29
Item 5. Other Information ............................................ 30
Item 6. Exhibits and Reports on Form 8-K ............................. 31
SIGNATURES ............................................................ 32
Corecomm Holdco. Inc. and Subsidiaries Index to Financial Information . S-1
CoreComm Limited and Subsidiaries
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets
MARCH 31, DECEMBER 31,
2002 2001
--------------- ---------------
(Unaudited) (See Note)
ASSETS
Current assets:
Cash and cash equivalents $ 472,000 $ 109,000
Other 37,000 45,000
--------------- ---------------
Total current assets 509,000 154,000
Fixed assets, net 113,000 146,000
Investment in CoreComm Holdco 2,236,000 3,863,000
Other, net of accumulated amortization of $2,503,000 (2002) and
$2,251,000 (2001) 6,653,000 8,260,000
--------------- ---------------
$ 9,511,000 $ 12,423,000
=============== ===============
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable $ 959,000 $ 959,000
Accrued expenses 348,000 419,000
Due to NTL Incorporated 209,000 209,000
Due to CoreComm Holdco 31,834,000 24,112,000
Current portion of long-term debt 4,750,000 --
--------------- ---------------
Total current liabilities 38,100,000 25,699,000
Long-term debt, including $258,087,000 (2002) and $256,874,000 (2001)
due to CoreComm Holdco 258,087,000 261,624,000
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 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 1,417,000
Additional paid-in capital 782,922,000 787,434,000
Deficit (1,060,444,000) (1,053,180,000)
--------------- ---------------
(276,102,000) (264,326,000)
Treasury stock at cost, 1,329,000 shares (10,574,000) (10,574,000)
--------------- ---------------
(286,676,000) (274,900,000)
--------------- ---------------
$ 9,511,000 $ 12,423,000
=============== ===============
Note: The balance sheet at December 31, 2001 has been derived from the
audited balance sheet at that date.
See accompanying notes.
2
CoreComm Limited and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
THREE MONTHS ENDED MARCH 31,
2002 2001
------------- -------------
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 (1,627,000) --
Interest expense (5,651,000) (9,838,000)
------------- -------------
Loss before income tax provision (7,264,000) (249,646,000)
Income tax provision -- (15,000)
------------- -------------
Net loss $ (7,264,000) $(249,661,000)
============= =============
Basic and diluted net loss per common share $ (0.09) $ (3.58)
============= =============
See accompanying notes.
3
CoreComm Limited and Subsidiaries
Condensed Consolidated Statement of Shareholders' Deficiency
(Unaudited)
SERIES A PREFERRED SERIES B
STOCK PREFERRED STOCK COMMON STOCK ADDITIONAL
------------------ ---------------- -------------------- PAID-IN
SHARES PAR SHARES PAR SHARES PAR CAPITAL
------------------------------------------------------------------------------------------------
Balance, December 31, 2001 51,000 $ -- 250,000 $ 3,000 141,655,000 $ 1,417,000 $ 787,434,000
Accreted dividends on
preferred stock (4,512,000)
Net loss
------------------------------------------------------------------------------------------------
Balance, March 31, 2002 51,000 $ -- 250,000 $ 3,000 141,655,000 $ 1,417,000 $ 782,922,000
================================================================================================
TREASURY STOCK
---------------------------
DEFICIT SHARES AMOUNT
-----------------------------------------------
Balance, December 31, 2001 $(1,053,180,000) (1,329,000) $(10,574,000)
Accreted dividends on
preferred stock
Net loss (7,264,000)
-----------------------------------------------
Balance, March 31, 2002 $(1,060,444,000) (1,329,000) $(10,574,000)
===============================================
See accompanying notes.
4
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.
5
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. For further information, refer to the consolidated financial statements
and footnotes thereto included in the Company's annual report on Form 10-K for
the year ended December 31, 2001.
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.
6
CoreComm Limited and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
NOTE 2. HOLDCO RECAPITALIZATION (CONTINUED)
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.
The following summarizes the indebtedness and preferred stock that was exchanged
for shares of CoreComm Holdco's common stock in December 2001:
PRINCIPAL AMOUNT OR
DESCRIPTION DATE ISSUED ISSUER STATED VALUE WHEN ISSUED
---------------------------------------------------------------------------------------------------------------------
10.75% Unsecured Convertible PIK Notes CoreComm Holdco and
due 2011 April 2001 the Company $10.0 million
10.75% Senior Unsecured Convertible PIK CoreComm Holdco and
Notes Due 2010 December 2000 the Company $16.1 million
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.
7
CoreComm Limited and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
NOTE 2. HOLDCO RECAPITALIZATION (CONTINUED)
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 oustanding 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 issues in the
exchange offers and the merger. (Therefore, if the merger is completed, the
Company will own no common stock of CoreComm Holdco, and thus will own 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.
8
CoreComm Limited and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
NOTE 2. HOLDCO RECAPITALIZATION (CONTINUED)
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 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.
9
CoreComm Limited and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
NOTE 3. RECENT ACCOUNTING PRONOUNCEMENTS (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 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.
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) (1,627,000)
----------
Balance at March 31, 2002 (unaudited) $2,236,000
==========
10
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 March 31, 2002 and December 31, 2001 and for the three months
ended March 31, 2002 and 2001:
Condensed Consolidated Balance Sheets
MARCH 31, DECEMBER 31,
2002 2001
(UNAUDITED)
------------ ------------
ASSETS
Current assets $ 64,587,000 $ 61,556,000
Fixed assets, net 80,339,000 86,722,000
Intangible assets, net 182,462,000 183,749,000
Other assets, net 14,746,000 15,256,000
------------ ------------
$342,134,000 $347,283,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities $152,312,000 $145,350,000
Long-term debt and capital lease obligations 172,943,000 172,541,000
Shareholders' equity 16,879,000 29,392,000
------------ ------------
$342,134,000 $347,283,000
============ ============
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 1,287,000 31,509,000
------------- -------------
83,399,000 310,886,000
------------- -------------
Operating loss (9,088,000) (238,075,000)
OTHER INCOME (EXPENSE)
Interest income and other, net 134,000 664,000
Interest expense (3,559,000) (4,141,000)
------------- -------------
Net loss $ (12,513,000) $(241,552,000)
============= =============
11
CoreComm Limited and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
NOTE 6. FIXED ASSETS
Fixed assets consist of:
MARCH 31, DECEMBER 31,
2002 2001
(Unaudited)
--------- ---------
Computer hardware and software $ 386,000 $ 386,000
Other equipment 10,000 10,000
--------- ---------
396,000 396,000
Accumulated depreciation (283,000) (250,000)
--------- ---------
$ 113,000 $ 146,000
========= =========
NOTE 7. ACCRUED EXPENSES
Accrued expenses consist of:
MARCH 31, DECEMBER 31,
2002 2001
(Unaudited)
-------- --------
Taxes, including income taxes $205,000 $205,000
Interest 143,000 214,000
-------- --------
$348,000 $419,000
======== ========
NOTE 8. LONG-TERM DEBT
Long-term debt consists of:
MARCH 31, DECEMBER 31,
2002 2001
(Unaudited)
------------ ------------
6% Convertible Subordinated Notes $164,750,000 $164,750,000
Senior Unsecured Notes Due 2003,
less unamortized discount of
$7,592,000 (2002) and
$8,805,000 (2001) 98,087,000 96,874,000
------------ ------------
262,837,000 261,624,000
Less current portion 4,750,000 --
------------ ------------
$258,087,000 $261,624,000
============ ============
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 we are offering in our 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.
12
CoreComm Limited and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
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.
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.
13
CoreComm Limited and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
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 $ (7,264,000) $(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 (12,968,000) (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.
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.
LEGAL PROCEEDINGS
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:
14
CoreComm Limited and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
NOTE 13. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
- 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 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.
15
CoreComm Limited and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
NOTE 13. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
- 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.
16
CoreComm Limited and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
NOTE 13. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
- 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 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.
17
CoreComm Limited and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
NOTE 13. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
- 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 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.
18
CoreComm Limited and Subsidiaries
Item 2. 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, we, who formerly
owned 100% of CoreComm Holdco's outstanding capital stock, now own only
approximately 13% of CoreComm Holdco's outstanding capital stock. CoreComm
Holdco owns substantially all of the business operations, which we formerly
owned indirectly through CoreComm Holdco. However, we remain a party liable
under the $156.1 million senior secured credit facility and have no right to
withdraw any additional money under that facility. Additionally, we are
co-obligors with CoreComm Holdco for its 10.75% Unsecured Convertible PIK Notes
due April 2011 of $16,599,000, including accrued PIK interest. In addition, as
of March 31, 2002, we had obligations of approximately $591 million of debt and
preferred securities now held by CoreComm Holdco, the $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 us. As a result of
these financial conditions, we currently lack the resources to meet our
obligations as they become due.
Our auditors included a going concern explanatory paragraph in their audit
report for the year ended December 31, 2001, which states that our liquidity
conditions raise substantial doubt about our ability to continue as a going
concern.
We do 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 our public notes, approximately $105.7
million principal amount of our Senior Unsecured Notes and all of our
outstanding preferred stock. We do not have the financial resources to meet the
obligations under these notes and preferred stock if CoreComm Holdco requires us
to do so. We have agreed that we will surrender to Holdco the number of shares
of Holdco common stock that Holdco issues in the exchange offers and the merger.
Therefore, if the merger is completed, we will own no common stock of Holdco,
and thus will own no material assets, since Holdco common stock is our only
material asset. In exchange for surrendering such shares of Holdco common stock,
both CoreComm Holdco and us have agreed to waivers and amendments to delay our
having to make any payments with respect to these securities.
Under the exchange offers, those stockholders and noteholders who exchange their
shares and notes, respectively, will receive shares of CoreComm Holdco, and
would no longer hold our securities.
We 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. We did
not pay any interest that was due on the public notes on October 1, 2001 until
December 2001 at which time we paid such 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 we are in default under those notes. The
consideration we are offering in our 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.
19
CoreComm Limited and Subsidiaries
On February 14, 2002, we received written notification from Nasdaq indicating
that we 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 we would have until May 15, 2002 to regain compliance. If the
Holdco recapitalization is not successfully completed and we do not regain
compliance by this date, Nasdaq stated that it will then provide us with written
notification that our common stock will be delisted from the Nasdaq National
Market. We have not yet determined what actions will be taken if we receive this
written notification. If our 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 our 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 our 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.
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 certain views of the
Securities and Exchange Commission regarding disclosure that should be
considered by registrants. Our contractual obligations and commercial
commitments are summarized below.
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) $ 270,429 $ 4,750 $105,679 $160,000 $ --
Capital Lease
Obligations none -- -- -- --
Operating Leases none -- -- -- --
Unconditional
Purchase none -- -- -- --
Obligations
Other Long-Term
Obligations none -- -- -- --
--------- -------- -------- -------- ---------
Total Contractual
Cash Obligations $ 270,429 $ 4,750 $105,679 $160,000 $ --
========= ======== ======== ======== =========
20
CoreComm Limited and Subsidiaries
The following table includes aggregate information about our commercial
commitments as of March 31, 2002. Commercial commitments are items that we could
be obligated to pay in the future. They are not required to be included in the
condensed 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 (3) 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 us 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
Holdco and us are co-obligors.
(3) Fiberstream Inc.'s obligations to the City of New York have been excluded.
21
CoreComm Limited and Subsidiaries
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, our only material asset is its ownership of approximately 13%
of the outstanding capital stock of CoreComm Holdco. Our operating results for
the three months ended March 31, 2001 include the operations of CoreComm Holdco.
For the three months ended March 31, 2002, we accounted for all of CoreComm
Holdco's operations using the equity method. We do not have any significant
operations of our own.
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 our quarterly financial
statements.
CORECOMM HOLDCO CORECOMM LIMITED CORECOMM LIMITED
AND SUBSIDIARIES WITHOUT CORECOMM AND SUBSIDIARIES
HOLDCO
------------- ------------- -------------
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)
============= ============= =============
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 our 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 our operating results for the three months ended March 31, 2002 and our
operating results (excluding CoreComm Holdco's operations) for the three months
ended March 31, 2001 are discussed herein.
THREE MONTHS ENDED MARCH 31, 2002 AND 2001
One of our 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.
22
CoreComm Limited and Subsidiaries
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, we
incurred legal and other professional fees of approximately $363,000 due to our
financing related activities that culminated in additional financing in April
2001. Also in the three months ended March 31, 2001, our wholly owned subsidiary
Fiberstream, Inc. incurred costs of $367,000. We substantially reduced
Fiberstream's operations as a result of the modifications to our business plan
in April 2001. Finally, in the three months ended March 31, 2001, our 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 our
billing services subsidiary and $8,000 from Fiberstream.
Corporate expenses included 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. In 2002, CoreComm Holdco
incurs all corporate expenses other than those directly related to us. 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 our corporate
expenses was due to our 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 our 6%
Convertible Subordinated Notes and our Senior Unsecured Notes Due 2003.
The income tax provision of $15,000 in 2001 was for state and local income tax.
CONDENSED CONSOLIDATED STATEMENTS 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. We have limited operations and do not
expect to generate any significant cash from operations in the future.
For the three months ended March 31, 2002, we did not have any cash flow from
investing activities. Our 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, we did not have any cash flow from
financing activities. We do not contemplate raising any additional financing in
the foreseeable future.
For the three months ended March 31, 2002 we had a cash flow deficit of
$1,351,000 (excluding Corecomm Holdco's cash deficit).
RECENT ACCOUNTING PRONOUNCEMENTS
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," effective for us on January 1, 2002. This
Statement supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" and other related accounting
guidance. The adoption of this new standard had no significant effect on our
results of operations, financial condition or cash flows.
23
CoreComm Limited and Subsidiaries
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations," effective for us on January 1, 2003. This Statement addresses
financial accounting and reporting for obligations associated with the
retirement of tangible fixed assets and the associated asset retirement costs.
We are in the process of evaluating the financial statement impact of the
adoption of SFAS No. 143.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations," and No.
142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001. Use of the pooling-of-interests method is no longer
permitted. SFAS No. 141 also includes guidance on the initial recognition and
measurement of goodwill and other intangible assets acquired in a business
combination that is completed after June 30, 2001. SFAS No. 142 ends the
amortization of goodwill and indefinite-lived intangible assets. Instead, these
assets must be reviewed annually (or more frequently under 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." 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.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements contained herein, specifically excluding references to the
exchange offers, constitute "forward-looking statements" as that term is defined
under the Private Securities Litigation Reform Act of 1995. When used herein,
the words, "believe," "anticipate," "plan," "will," "expects," "estimates,"
"projects," "positioned," "strategy," and similar expressions identify such
forward-looking statements. All references in this Safe Harbor legend to the
Company shall be deemed to include CoreComm Limited and its subsidiaries and
affiliates. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performance
or achievements of the Company, or industry results, to be materially different
from those contemplated, projected, forecasted, estimated or budgeted, whether
expressed or implied, by such forward-looking statements. Such factors include
the following: The Company's ability to continue as a going concern; the
Company's continued viability if the Holdco recapitalization is not consummated
on a timely basis; the Company's ability to obtain trade credit shipments and
terms with vendors and service providers for current orders; the Company's
ability to maintain contracts that are critical to its operations; potential
adverse developments with respect to the Company's liquidity or results of
operations; the Company's ability to fund and execute its business plan; the
Company's ability to attract, retain and compensate key executives and
employees; the Company's ability to attract and retain customers; the potential
delisting of the Company's common stock from the Nasdaq National Market; general
economic and business conditions; industry trends; technological developments;
the Company's ability to continue to design and build its network, 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; assumptions about customer
acceptance, churn rates, overall market penetration and competition from
providers of alternative services; the impact of restructuring and integration
actions; the impact of new business opportunities requiring significant up-front
investment; interest rate fluctuations; and availability, terms and deployment
of capital. The Company assumes no obligation to update the forward-looking
statements contained herein to reflect actual results, changes in assumptions or
changes in factors affecting such statements.
24
CoreComm Limited and Subsidiaries
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The SEC's rule related to market risk disclosure requires that we describe and
quantify our potential losses from market risk sensitive instruments
attributable to reasonably possible market changes. Market risk sensitive
instruments include all financial or commodity instruments and other financial
instruments, such as investments and debt, that are sensitive to future changes
in interest rates, currency exchange rates, commodity prices or other market
factors. We are not exposed to market risks from changes in foreign currency
exchange rates or commodity prices. We do not hold derivative financial
instruments nor do we hold securities for trading or speculative purposes. Under
our current policies, we do not use interest rate derivative instruments to
manage our exposure to interest rate changes.
The fair market value of long-term fixed interest rate debt is subject to
interest rate risk. Generally the fair market value of fixed interest rate debt
will increase as interest rates fall and decrease as interest rates rise.
INTEREST RATE SENSITIVITY
AS OF MARCH 31, 2002
PRINCIPAL AMOUNT BY EXPECTED MATURITY
AVERAGE INTEREST RATE
FOR THE
NINE
MONTHS
ENDING
DECEMBER 31, FOR THE YEARS ENDING DECEMBER 31, FAIR VALUE
2002 2003 2004 2005 2006 THEREAFTER TOTAL 3/31/02
-------- -------- ----- ----- -------- ----- -------- ----
Long-term debt,
including current
Portion
Fixed rate $ 4,750 $105,679 $ - $ - $164,000 $ - $270,429 $ -(a)
Average interest rate 6.00% 6.47% 6.00%
(a) Amount not determinable because of financial difficulty of CoreComm Limited.
25
CoreComm Limited and Subsidiaries
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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 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.
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.
26
CoreComm Limited and Subsidiaries
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 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. We do not believe that
the embargo will have a material adverse affect on our
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
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, 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 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.
27
CoreComm Limited and Subsidiaries
- 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 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 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.
- 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 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.
28
CoreComm Limited and Subsidiaries
- 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
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.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Since March 31, 2001, the Company has failed to declare dividends on any series
of preferred stock. Thus, no quarterly dividends have been paid on the 8.5%
Senior Convertible Preferred Stock, Series A (the "Series A Preferred"), or the
Company's Series B Senior Convertible Exchangeable Preferred Stock (the "Series
B Preferred") since December 31, 2000. The total arrearage on the unpaid
dividends on the Series A Preferred is equal to $5.7 million which would have
been payable either in the form of additional shares of preferred or common
stock, at the Company's option; the total arrearage on the unpaid dividends on
the Series B Preferred is equal to $18.2 million, which would have been payable
either in the form of common stock or cash, at the Company's option. The unpaid
dividends on each class of preferred stock continue to accrue until paid. These
securities are currently held by CoreComm Holdco.
29
CoreComm Limited and Subsidiaries
ITEM 5. OTHER INFORMATION
(a) 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 and that it would have
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 action it will take 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 Company's 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.
(b) The CoreComm Holdco, Inc. and Subsidiaries Consolidated Financial
Statements, Management's Discussion and Analysis of Results of
Operations and Financial Condition and Quantitative and Qualitative
Disclosures about Market Risk are included in Item 5 of Part II-see the
Index on page S-1.
30
CoreComm Limited and Subsidiaries
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
None
(b) Reports on Form 8-K.
During the quarter ended March 31, 2002, the Company filed the
following reports on Form 8-K:
(i) Report dated January 8, 2002, reporting
under Item 5, Other Events, that CoreComm
issued a press release announcing closing of
recapitalization transactions, which it had
announced on December 18, 2001.
(ii) Report dated January 18, 2002, reporting
under Item 5, Other Events, that CoreComm
issued a press release voicing its strong
support for the FCC's action proposing a $6
million fine against SBC Communications for
refusing to provide competitors with
non-discriminatory access to SBC's shared
transport network.
(iii) Report dated February 8, 2002, reporting
under Item 5, Other Events, that CoreComm
issued a press release announcing that its
formerly wholly-owned subsidiary CoreComm
Holdco, Inc. had filed registration
statements with the Securities and Exchange
Commission, launched the previously
announced registered public exchange offers
and that the Companies had made changes in
the management roles of certain of their
senior executives.
(iv) Report dated March 8, 2002, reporting under
Item 5, Other Events, that CoreComm issued a
press release with its formerly wholly-owned
subsidiary CoreComm Holdco, Inc. announcing
the extension of the expiration date of the
registered public exchange offers by
CoreComm Holdco until 5 PM., New York City
time, on April 8, 2002.
No financial statements were filed with these reports.
31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CORECOMM LIMITED
Date: May 15, 2002 By: /s/ Michael A. Peterson
-------------------------
Michael A. Peterson
Executive Vice President,
Chief Operating Officer and
Chief Financial Officer
Date: May 15, 2002 By: /s/ Gregg N. Gorelick
--------------------------
Gregg N. Gorelick
Senior Vice President-Controller and
Treasurer (Principal Accounting Officer)
32
CoreComm Holdco, Inc. and Subsidiaries
INDEX TO FINANCIAL INFORMATION
The following financial information of CoreComm Holdco, Inc. and Subsidiaries is
included in Item 5 of Part II:
Index to Financial Information of CoreComm Holdco, Inc. and Subsidiaries S-1
Condensed Consolidated Balance Sheets - March 31, 2002 (Unaudited)
and December 31, 2001 ............................................. S-2
Condensed Consolidated Statements of Operations -
Three months ended March 31, 2002 and 2001 (Unaudited) ............ S-3
Condensed Consolidated Statement of Shareholders' Equity -
Three months ended March 31, 2002 (Unaudited) ..................... S-4
Condensed Consolidated Statements of Cash Flows -
Three months ended March 31, 2002 and 2001 (Unaudited) ............ S-5
Notes to Unaudited Condensed Consolidated Financial Statements ......... S-6
Management's Discussion and Analysis of Results of
Operations and Financial Condition ................................ S-19
Quantitative and Qualitative Disclosures about Market Risk ............. S-30
S-1
CoreComm Holdco, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
MARCH 31, DECEMBER 31,
2002 2001
------------- -------------
(Unaudited) (See Note)
ASSETS
Current assets:
Cash and cash equivalents $ 26,841,000 $ 24,966,000
Accounts receivable-trade, less allowance for doubtful accounts
of $8,388,000 (2002) and $9,759,000 (2001) 34,365,000 32,261,000
Due from CoreComm Limited -- 646,000
Other 3,381,000 3,683,000
------------- -------------
Total current assets 64,587,000 61,556,000
Fixed assets, net 80,339,000 86,722,000
Investment in CoreComm Limited 3,863,000 3,863,000
Goodwill 152,889,000 152,889,000
Intangible assets, net 29,573,000 30,860,000
Other, net of accumulated amortization of $203,000 (2002) and none (2001) 10,883,000 11,393,000
------------- -------------
$ 342,134,000 $ 347,283,000
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities:
Accounts payable $ 45,893,000 $ 37,348,000
Accrued expenses 68,229,000 67,766,000
Due to NTL Incorporated 315,000 917,000
Due to CoreComm Limited 254,000 --
Current portion of long-term debt and capital lease obligations 9,426,000 9,667,000
Deferred revenue 28,195,000 29,652,000
------------- -------------
Total current liabilities 152,312,000 145,350,000
Long-term debt 156,100,000 156,100,000
Notes payable to related parties 16,599,000 16,174,000
Capital lease obligations 244,000 267,000
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 shares 300,000 300,000
Additional paid-in capital 29,092,000 29,092,000
Deficit (12,513,000) --
------------- -------------
16,879,000 29,392,000
------------- -------------
$ 342,134,000 $ 347,283,000
============= =============
Note: The balance sheet at December 31, 2001 has been derived from the audited
balance sheet at that date.
See accompanying notes.
S-2
CoreComm Holdco, Inc. and Subsidiaries
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 1,287,000 31,509,000
------------- -------------
83,399,000 310,886,000
------------- -------------
Operating loss (9,088,000) (238,075,000)
OTHER INCOME (EXPENSE)
Interest income and other, net 134,000 664,000
Interest expense (3,559,000) (4,141,000)
------------- -------------
Net loss $ (12,513,000) $(241,552,000)
------------- -------------
Basic and diluted net loss per common share $ (.42) $ (8.46)
============= =============
Weighted average number of shares 30,000,000 28,542,000
============= =============
See accompanying notes.
S-3
CoreComm Holdco, Inc. and Subsidiaries
Condensed Consolidated Statement of Shareholders' Equity
(Unaudited)
COMMON STOCK ADDITIONAL
SHARES PAR PAID-IN CAPITAL DEFICIT
---------- ------------ ------------ ------------
Balance, December 31, 2001 30,000,000 $ 300,000 $ 29,092,000 $ -
Net loss (12,513,000)
---------- ------------ ------------ ------------
Balance, March 31, 2002 30,000,000 $ 300,000 $ 29,092,000 $(12,513,000)
========== ============ ============ ============
The Condensed Consolidated Statement of Shareholders' Equity 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.
S-4
CoreComm Holdco, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
THREE MONTHS ENDED MARCH 31,
2002 2001
------------ ------------
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 accompanying notes.
S-5
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. For further information, refer to the consolidated financial statements
and footnotes thereto included in Item 14(d) of CoreComm Limited's annual report
on Form 10-K for the year ended December 31, 2001.
NOTE 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 (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.
S-6
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
DESCRIPTION DATE ISSUED ISSUER STATED VALUE WHEN ISSUED
----------- ----------- ------ ------------------------
10.75% Unsecured Convertible PIK Notes CoreComm Limited and the
due 2011 April 2001 Company $10.0 million
10.75% Senior Unsecured Convertible PIK CoreComm Limited and the
Notes Due 2010 December 2000 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 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.
S-7
CoreComm Holdco, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
NOTE 2. HOLDCO RECAPITALIZATION (CONTINUED)
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 number of shares of the Company's common stock that the Company
issues in the exchange offers and 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 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.
S-8
CoreComm Holdco, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
NOTE 2. HOLDCO RECAPITALIZATION (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. 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.
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.
S-9
CoreComm Holdco, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
NOTE 3. RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
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.
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
S-10
CoreComm Holdco, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
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.
NOTE 6. INTANGIBLE ASSETS
Intangible assets consist of:
MARCH 31, DECEMBER 31,
2002 2001
----------- -----------
(unaudited)
LMDS license costs $ 4,230,000 $ 4,230,000
Customer lists, net of accumulated amortization of $1,287,000 (2002)
and none (2001)
25,343,000 26,630,000
----------- -----------
$29,573,000 $30,860,000
=========== ===========
NOTE 7. FIXED ASSETS
Fixed assets consist of:
MARCH 31, DECEMBER 31,
2002 2001
------------ ------------
(unaudited)
Operating equipment $ 37,321,000 $ 35,388,000
Computer hardware and software 33,792,000 33,692,000
Other equipment 17,752,000 17,642,000
Construction-in-progress 355,000 --
------------ ------------
89,220,000 86,722,000
Accumulated depreciation (8,881,000) --
------------ ------------
$ 80,339,000 $ 86,722,000
============ ============
S-11
CoreComm Holdco, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
NOTE 8. ACCRUED EXPENSES
Accrued expenses consist of:
MARCH 31, DECEMBER 31,
2002 2001
----------- -----------
(unaudited)
Payroll and related $ 7,907,000 $ 7,517,000
Professional fees 686,000 935,000
Taxes, including income taxes 13,713,000 16,534,000
Accrued equipment purchases 134,000 385,000
Toll and interconnect 30,743,000 28,668,000
Reorganization costs 6,653,000 7,273,000
Other 8,393,000 6,454,000
----------- -----------
$68,229,000 $67,766,000
=========== ===========
NOTE 9. LONG-TERM DEBT
Long-term debt consists of:
MARCH 31, DECEMBER 31,
2002 2001
------------ ------------
(unaudited)
Senior secured credit facility $156,100,000 $156,100,000
Other -- 33,000
------------ ------------
156,100,000 156,133,000
Less current portion -- 33,000
------------ ------------
$156,100,000 $156,100,000
============ ============
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 and
December 31, 2001, 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.
S-12
CoreComm Holdco, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
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 and
December 31, 2001, the total amount of the notes outstanding was $16,599,000 and
$16,174,000, respectively.
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 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.
S-13
CoreComm Holdco, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
NOTE 10. RELATED PARTY TRANSACTIONS (CONTINUED)
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
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. 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.
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
CoreComm Holdco, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
NOTE 13. COMMITMENTS AND CONTINGENT LIABILITIES
As of March 31, 2002, the Company had purchase commitments of approximately
$5,700,000 outstanding.
LEGAL PROCEEDINGS
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.
S-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 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.
- 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 Massachusetts 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.
S-16
CoreComm Holdco, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
NOTE 13. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
- 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. Defendants' response to dismiss the May 3
complaint is 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.
S-17
CoreComm Holdco, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
NOTE 13. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
- 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 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.
S-18
CoreComm Holdco, Inc. and Subsidiaries
Management's Discussion and Analysis of Results of Operations and Financial
Condition
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 --------------------------
Q4'00-Q1'02 MARCH 31, DECEMBER 31,
----------- 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
S-19
CoreComm Holdco, Inc. and Subsidiaries
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.
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 $12.3 million, $10.5 million of
which is in cash, based on interest rates as of April 13, 2002. As a result of
adjusting our assets to fair value in conjunction with the Holdco
recapitalization our depreciation and amortization expenses have been reduced.
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 in connection with our recapitalization of
$1,182,000 during the three months ended March 31, 2002.
S-20
CoreComm Holdco, Inc. and Subsidiaries
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 conjunction with the Holdco
recapitalization.
Amortization expense decreased to $1,287,000 from $31,509,000 due to the
reduction in the carrying value our of intangible assets as determined by a fair
value analysis performed in conjunction with the Holdco recapitalization as well
as our adoption of SFAS 142 "Goodwill and Intangible Assets" on January 1, 2002,
which required us to cease amortizing goodwill. Amortization expense on our
goodwill during the three months ended March 31, 2001 was $31,369,000. 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 $3,559,000 from $4,141,000 primarily due to a
reduction in the effective interest rate on our 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.
RECENT ACCOUNTING PRONOUNCEMENTS
In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," effective for us on January 1, 2002. This
statement supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" and other related accounting
guidance. 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 us on January 1, 2003. This statement addresses
financial accounting and reporting for obligations associated with the
retirement of tangible fixed assets and the associated asset retirement costs.
We are in the process of evaluating the financial statement impact of the
adoption of SFAS No. 143.
S-21
CoreComm Holdco, Inc. and Subsidiaries
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 conditions or cash flows other than
amortization of goodwill ceased on January 1, 2002.
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.
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.
S-22
CoreComm Holdco, Inc. and Subsidiaries
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 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. This represents an improvement in cash from operations of
approximately $92 million on an annualized basis as compared to the first
quarter of 2001. 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;
S-23
CoreComm Holdco, Inc. and Subsidiaries
(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.
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. Accordingly, we may be required to consider a number
of measures, including: (a) refinancing all or a portion of this indebtedness,
(b) seeking modifications to the terms of this indebtedness, (c) seeking
additional debt financing, which may be subject to obtaining necessary lender
consents, (d) seeking additional equity financing, or (e) a combination of the
foregoing. We are 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 $7.8 $10.5 $10.2 Cash and cash equivalents on hand and cash
existing Long-term debt (1) 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 - 1.95 9.75 For 2002 and 2003, Cash and cash equivalents
Long-term debt (3) 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.
S-24
CoreComm Holdco, Inc. and Subsidiaries
(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.
(5) Approximately $8 million of the capital lease obligations of MegsINet,
Inc. are the subject of current litigation.
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); $23,550,000
(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.
S-25
CoreComm Holdco, Inc. and Subsidiaries
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 note
5, dated October 15, 2001 and April 15, 2002, were issued in the principal
amount of approximately $0.8 million and $0.9 million, respectively, as an
interest payment. 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 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 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 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.
S-26
CoreComm Holdco, Inc. and Subsidiaries
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.
S-27
CoreComm Holdco, Inc. and Subsidiaries
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. 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
OTHER EXPIRATION PER PERIOD
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 - - -
======================================================================================
S-28
CoreComm Holdco, Inc. and Subsidiaries
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.
S-29
CoreComm Holdco, Inc. and Subsidiaries
Quantitative and Qualitative Disclosures about Market Risk
The SEC's rule related to market risk disclosure requires that we describe and
quantify our potential losses from market risk sensitive instruments
attributable to reasonably possible market changes. Market risk sensitive
instruments include all financial or commodity instruments and other financial
instruments, such as investments and debt, that are sensitive to future changes
in interest rates, currency exchange rates, commodity prices or other market
factors. We are not exposed to market risks from changes in foreign currency
exchange rates or commodity prices. We do not hold derivative financial
instruments nor do we hold securities for trading or speculative purposes. Under
our current policies, we do not use interest rate derivative instruments to
manage our exposure to interest rate changes.
The fair market value of long-term fixed interest rate debt is subject to
interest rate risk. Generally the fair market value of fixed interest rate debt
will increase as interest rates fall and decrease as interest rates rise. The
carrying amount of the variable rate senior secured credit facility approximates
the fair value. The fair value of our other notes payable are estimated using
discounted cash flow analyses, based on our current incremental borrowing rates
for similar types of borrowing arrangements.
INTEREST RATE SENSITIVITY
AS OF MARCH 31, 2002
PRINCIPAL AMOUNT BY EXPECTED MATURITY
AVERAGE INTEREST RATE
(IN THOUSANDS)
FOR THE
NINE
MONTHS
ENDING
DECEMBER 31, FOR THE YEARS ENDING DECEMBER 31, FAIR VALUE
2002 2003 2004 2005 2006 THEREAFTER TOTAL 3/31/02
----------------------------------------------------------------------------------------------------------
Long-term debt,
including current
Portion Fixed rate $ - $ - $ - $ - $ - $ 16,599 $ 16,599 $ 16,599
Average interest rate 10.75%
Fixed 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%
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
25
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.
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 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
26
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 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
27
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....................... 4,328,262 862,500 5,190,762 16.82%
All directors as a group...................... 11,156,550 854,499 12,011,049 38.93%
All affiliates as a group..................... 24,596,550 919,497 25,516,047 82.52%
---------------
(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.
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.
28
- 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 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."
29
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 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."
30
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.
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
31
common stock to cease, trading on the Nasdaq National Market on the business day
following the date on which the merger is consummated.
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
The parties that obtained shares of CoreComm Holdco common stock in the
first phase of the Holdco recapitalization received more than 80% of the
outstanding shares of CoreComm Holdco common stock. As a result of this,
CoreComm Holdco performed an analysis of the fair value of its net tangible
assets as if a purchase business combination occurred.
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 Midnight, New York City time, on May 21,
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 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.
32
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
issued upon conversion of convertible securities that are 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 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.
33
RECOMMENDATION
Each of CoreComm Holdco and CoreComm Limited recommends that you tender
your outstanding securities in the exchange offers so that we can complete the
Holdco recapitalization. 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, 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.
34
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.
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.
35
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 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
36
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, 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.
37
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.
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.
38
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.
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;
39
- 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.
As of May 10, 2002, approximately 98 million shares of CoreComm Limited
common stock, representing approximately 70% of the outstanding shares, were
tendered and not withdrawn. In the event that, shortly before the expiration of
the exchange offer for shares of CoreComm Limited common stock, the minimum
condition has not been met because less than 90% of the outstanding shares of
CoreComm Limited common stock are tendered, we intend to 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 closing of the exchange offer, 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 has 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 has 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
currently has a conversion price of $27.39 per share.
40
In order to induce conversion of the public notes into shares of CoreComm
Limited common stock and to facilitate completion of the short form merger of a
wholly-owned subsidiary of CoreComm Holdco into CoreComm Limited, CoreComm
Limited may reduce the conversion price of the public notes from $27.39, as
permitted by the current indenture governing the public notes. Any decrease in
the conversion price would increase the number of shares of CoreComm Limited
common stock into which the public notes are convertible. For example, if the
conversion price were lowered to $0.75, the total principal amount outstanding
of $164.75 million would be convertible into approximately 219.7 million shares
of CoreComm Limited common stock. In the event that the conversion price of the
public notes is reduced, notice will be provided to the holders of public notes
as provided in the indenture governing the public notes and the exchange offer
for the public notes will be extended for five business days from the date the
conversion price is reduced. We do not intend, however, to extend the exchange
offer for shares of CoreComm Limited common stock.
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.
In the event that, shortly before the expiration of the exchange offer for
shares of CoreComm Limited common stock, less than 90% of the outstanding shares
of CoreComm Limited common stock are tendered, we intend to 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 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.
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 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.
41
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.
Neither the information agent nor the exchange agent has been retained to
make solicitations or recommendations. The fees they receive will not be based
on the number of outstanding securities tendered under the exchange offers;
however, the exchange agent will be compensated in part on the basis of the
number of letters of transmittal received and the number of account statements
distributed.
42