<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number ___________
ONEPOINT COMMUNICATIONS CORP.
(Exact name of Registrant as specified in its charter)
STATE OF DELAWARE 2201 WAUKEGAN ROAD, 36-4225811
(State or other jurisdiction of SUITE E-200 (IRS Employer I.D. No.)
Incorporation or Organization) BANNOCKBURN, ILLINOIS
(Address of principal
executive offices)
60015 847-374-3700
(Zip code) (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, and (2) has been subject to such filing for the past 90
days.
Yes [ ] No [ X ]
Indicate the number of shares outstanding of issuer's classes of common stock as
of the latest practicable date.
Class Outstanding at November 16, 1998
----- ---------------------------------
Common Stock, $0.01 par value 1,000,000 shares
-1-
<PAGE>
ONEPOINT COMMUNICATIONS CORP.
TABLE OF CONTENTS
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Unaudited Condensed Consolidated Balance Sheets as of
September 30, 1998 (unaudited) and December 31, 1997 (restated) 3
Unaudited Condensed Consolidated Statements of Operations
for the three months and nine months ended September 30, 1998
and September 30, 1997 4
Unaudited Condensed Consolidated Statements of Cash Flows
for the nine months ended September 30, 1998 and September 30, 1997 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 13
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Changes in Securities 21
Item 3. Defaults Upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
</TABLE>
Signatures
Exhibit Index
-2-
<PAGE>
PART I. FINANCIAL INFORMATION
ONEPOINT COMMUNICATIONS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Dollars in thousands)
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
(Unaudited) (Note)
------------------ -----------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 5,053 $ 5,463
Restricted cash 127 --
Investment in government securities, current 47,656 --
Accounts receivable, net 1,585 31
Affiliate receivable 271 113
Prepaid expenses 1,183 1,132
-------- --------
Total current assets 55,875 6,739
Investment in government securities, non-current
($80,386 restricted) 86,625 --
Investments in unconsolidated subsidiaries 7,781 10,061
Property and equipment, net of accumulated
depreciation 8,571 2,704
Intangible assets, net of accumulated depreciation 14,286 --
Other assets 5,779 257
-------- --------
Total assets $178,917 $ 19,761
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expense $ 7,692 $ 2,808
Accrued interest payable 9,178 --
-------- --------
Total current liabilities 16,870 2,808
Notes payable, non-current 175,000 --
Stockholders' equity
Common stock, $0.01 par value,
2,000,000 shares authorized, 1,000,000
shares issued and outstanding at
September 30, 1998 and December 31,
1997, respectively 10 10
Preferred stock, $1.00 par value,
35,000 shares authorized, 35,000 shares
issued and outstanding at September 30,
1998 and December 31, 1997, respectively 35 35
Additional capital 35,035 35,035
Accumulated deficit (48,263) (18,127)
Unrealized gains on securities 230 --
-------- --------
Total stockholders' equity (12,953) 16,953
-------- --------
Total liabilities and stockholders' equity $178,917 $ 19,761
======== ========
</TABLE>
Note: The balance sheet at December 31, 1997 has been derived from the audited
financial statements at that date and restated as discussed in Note 1 in
the accompanying notes.
The accompanying notes are an integral part of these financial statements.
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<PAGE>
ONEPOINT COMMUNICATIONS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
-------------------------------------------------
<S> <C> <C> <C> <C>
Revenue $ 2,765 $ 2 $ 3,440 $ 2
Cost of revenue 2,916 3 4,822 3
-------------------------------------------------
Gross margin (loss) (151) (1) (1,382) (1)
Expenses:
Selling, general and administrative 8,880 3,436 17,745 8,858
Depreciation and amortization 462 187 773 369
-------------------------------------------------
Loss from operations (9,493) (3,624) (19,900) (9,228)
Other income (expense):
Interest income 1,046 7 1,674 41
Interest expense (6,697) -- (9,647) --
Other income -- -- 17 --
-------------------------------------------------
Loss before losses in investments in (15,144) (3,617) (27,856) (9,187)
unconsolidated subsidiaries
Loss in investments in unconsolidated (714) (775) (2,280) (1,900)
subsidiaries
-------------------------------------------------
Loss before taxes (15,858) (4,392) (30,136) (11,087)
Income tax expense (benefit) -- -- -- --
-------------------------------------------------
Net loss $ (15,858) $(4,392) $ (30,136) $(11,087)
=================================================
Net loss per common share--Primary $ (15.86) $ (30.14)
========== ==========
Shares used in computing loss per share:
Weighted average common shares --
Primary 1,000,000 1,000,000
========= =========
</TABLE>
The accompanying notes are an integral part of these financial
statements.
-4-
<PAGE>
ONEPOINT COMMUNICATIONS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1998 1997
---------- ---------
<S> <C> <C>
Net cash (used) in operating activities:
Net loss $ (30,136) $(10,918)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 773 181
Amortization of discounts on debt issued included in interest
expense 54 --
Loss in investment in unconsolidated subsidiaries 2,280 1,900
Effect of unrealized gain on governmental securities 230 --
Changes in operating assets and liabilities:
Accounts receivable (1,554) (16)
Prepaid expenses (51) (99)
Other assets (5,522) 287
Affiliate receivable (158) (58)
Accounts payable and accrued expenses 4,884 1,327
Affiliate payable -- 138
Accrued interest 9,177 --
Deferred taxes -- --
--------- ---------
Net cash used in operating activities (20,023) (7,258)
Investing activities:
Restricted cash (127) 13,000
Investment in unconsolidated subsidiary -- (12,382)
Proceeds from sale of marketable securities 35,309 --
Purchase of marketable securities (169,425) --
Acquisition of intangible assets (5,279) --
Acquisition of property and equipment (6,397) (1,510)
--------- ---------
Net cash (used in) provided by investing activities (145,919) (892)
Cash flows from financing activities:
Proceeds from unit offering 175,000 --
Other debt issuance costs (9,468) --
Other long term debt 4,300 --
Repayment of long term debt (4,300) --
Unitholder contribution -- 8,519
--------- ---------
Net cash provided by financing activities 165,532 8,519
--------- ---------
Net (decrease) increase in cash (410) 369
Cash at the beginning of period 5,463 103
--------- ---------
Cash at the end of period $ 5,053 $ 472
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE>
ONEPOINT COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
(Dollars in thousands, except per share data)
Note 1 - Basis of Presentation
The financial statements for the three months and nine months ended
September 30, 1998, and September 30, 1997 and the related footnote information
are unaudited and have been prepared on a basis consistent with the audited
consolidated financial statements of OnePoint Communications, LLC, and
subsidiaries (collectively, the "Predecessor Company") as of and for the year
ended December 31, 1997 included in Registration Statement on Form S-4, filed
with the Securities and Exchange Commission on September 18, 1998 (the
"Registration Statement") of OnePoint Communications Corp. ("OnePoint" or the
"Company"). These financial statements should be read in conjunction with the
audited consolidated financial statements and the related notes to consolidated
financial statements of the Predecessor Company as of and for the year ended
December 31, 1997 included in the Registration Statement. In the opinion of
management, the accompanying unaudited financial statements contain all
adjustments (consisting of normal recurring adjustments), which management
considers necessary to present fairly the consolidated financial position of the
Company at September 30, 1998 and the results of their operations and their cash
flows for the quarter and nine months ended September 30, 1998, and September
30, 1997. Operating results for the nine month period ended September 30, 1998
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1998.
In April 1998, in order to convert the Predecessor Company into a
corporation, VenCom, L.L.C. and Ventures in Communications, L.L.C. ("VIC")
contributed their membership interests in the Predecessor Company and a $1,500
promissory note payable by the Predecessor Company to VIC to Ventures in
Communications II, LLC ("VIC2") in exchange for membership interest of VIC2.
Subsequently, the Predecessor Company merged with and into the Company, with the
Predecessor Company's outstanding membership interests and its $1,500 promissory
note payable to VIC exchanged for shares of the Company's common stock and
preferred stock. As a result of the merger transactions, the Company became a
Delaware corporation which is wholly owned by VIC2. The financial position of
the Predecessor Company as of December 31, 1997 has been restated to reflect
this change in entity.
As of November 6, 1998, the date on which the Notes and the Warrants
described in the Registration Statement became separable, the Company will
recognize a discount on the book value of the Notes relating to the Warrants and
will amortize this amount over the life of the Notes. Accordingly, no
amortization of the discount of the Notes resulting from the issuance of the
Warrants has been recorded in the financial statements for the periods ended
September 30, 1998.
Note 2 - Acquisitions
On February 23, 1998, the Company purchased certain cable television
right-of-entry ("ROE") contracts and satellite cable television equipment from
U.S. Online Communications, LLC. The purchase resulted in the addition of 425
cable television subscribers located in two properties in Atlanta, Georgia. The
purchase price was approximately $399 in cash.
On June 9, 1998, the Company entered into a definitive agreement to acquire
certain cable television ROE contracts and microwave cable television equipment
of Preferred Entertainment, Inc., a subsidiary of People's Choice - TV Corp.
("PCTV"), a private cable television provider. On July 1, 1998, August 10, 1998
and October 1, 1998, the Company completed closings acquiring such assets of
PCTV for a total consideration of $12,436. The PCTV acquisitions provided
contractual rights to serve 28,270 multiple dwelling units ("MDU") passings in
160 properties in the Chicago market. A Report on Form 8-K with respect to this
acquisition was distributed to the note holders on September 17, 1998 and was
filed with the Securities and Exchange Commission on November 16, 1998.
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<PAGE>
ONEPOINT COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
(Dollars in thousands, except per share data)
Note 2-- Acquisitions (continued)
ONEPOINT COMMUNICATIONS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
PROFORMA
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
ProForma
OnePoint Adjustment OnePoint
Nine Months Adjustment Adjustment to Reflect Nine Months
Ended to Reflect Reflect August October 1, Ended
September 30, July 1, 1998 10, 1998 1998 September 30,
1998 Acquisition Acquisition Acquisition 1998
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue $ 3,440 $ 2,267 $ 304 $ 61 $ 6,072
Cost of revenue 4,822 1,538 206 41 6,608
-------------------------------------------------------------------------------------
Gross margin (loss) (1,382) 729 98 20 (536)
Expenses:
Selling, general and administrative 17,745 843 113 23 18,724
Depreciation and amortization 773 969 130 26 1,898
-------------------------------------------------------------------------------------
Loss from operations (19,900) (1,083) (145) (29) (21,158)
Other income (expense):
Interest income 1,674 -- -- -- 1,674
Interest expense (9,647) -- -- -- (9,647)
Other income (loss) 17 -- -- -- 17
-------------------------------------------------------------------------------------
Loss before losses in investments in (27,856) (1,083) (145) (29) (29,114)
unconsolidated subsidiaries
Loss in investments in unconsolidated
subsidiaries (2,280) -- -- -- (2,280)
-------------------------------------------------------------------------------------
Loss before taxes (30,136) (1,083) (145) (29) (31,394)
Income tax expense (benefit) -- -- -- --
-------------------------------------------------------------------------------------
Net loss $ (30,136) $ (1,083) $ (145) $ (29) $ (31,394)
=====================================================================================
Net loss per common share--Basic $ (30.14) $ (1.08) $ (0.15) $ (0.03) $ (31.40)
=====================================================================================
Shares used in computing loss per share:
Weighted average common shares 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000
=====================================================================================
</TABLE>
As a result of the October 1, 1998 closing of the PCTV acquisition, the
Company paid approximately $200, of which, substantially all was allocated to
intangible assets acquired.
The assets associated with the above transactions were recorded at their
respective fair market values.
On June 23, 1998, the Company entered into letters of intent to acquire
certain cable television ROE contracts and related equipment of three companies
in North Carolina. During November of 1998, the Company ceased negotiations for
the acquisition of these assets.
During October of 1998 the Company ceased negotiations for the acquisition
of MDU assets and ROE agreements from PCTV in the Phoenix market which were
previously covered by a letter of intent.
-7-
<PAGE>
ONEPOINT COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
(Dollars in thousands, except per share data)
Note 3 - Summarized Income Statement Information of Affiliates
The Company has investments ranging from 41-50% in three companies and
accounts for those investments using the equity method. The combined results of
operations and financial position of the Company's equity-basis affiliates are
summarized below (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------------------------------------
1998 1997 1998 1997
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Condensed Operating Information
Net sales $ 4,103 $ 3,582 $11,548 $10,677
Loss from operations $ 1,057 $ 870 $ 2,069 $ 1,703
Net loss $(1,702) $(1,057) $(3,632) $(1,924)
</TABLE>
Note 4 - Unit Offering
During May 1998 the Company sold 175,000 Units consisting of 14 1/2% Senior
Notes due 2008 (the "Notes") and Warrants to purchase 111,125 shares of Common
Stock (the "Warrants") for gross proceeds of $175,000. Each Warrant entitles
the holder to purchase 0.635 shares of Common Stock of the Company at an
exercise price of $0.01 per share. Unless exercised, the Warrants expire on
June 1, 2008. The Warrants separated from the Notes and thus became exercisable
on November 6, 1998.
The Notes bear interest annually at 14 1/2% from the date of issuance.
Interest payments are due on June 1 and December 1 of each year, commencing on
December 1, 1998. The Company is not required to make mandatory redemption or
sinking fund payments under the Notes. The Notes are generally not redeemable
at the option of the Company at any time prior to June 1, 2003. Thereafter, the
Notes will be subject to redemption at any time at the option of the Company, in
whole or in part, at the redemption prices (expressed as percentages of
principal amount) set forth below, plus any unpaid interest and Liquidated
Damages, if any.
<TABLE>
<CAPTION>
Percentage
------------------
<S> <C>
June 1, 2003 to May 31, 2004 107.250%
June 1, 2004 to May 31, 2005 104.833%
June 1, 2005 to May 31, 2006 102.417%
June 1, 2006 and thereafter 100.000%
</TABLE>
In addition, the Company may redeem up to 35% of the aggregate principal
amount of issued Notes at a redemption price of 114.5% of the principal amount,
plus unpaid interest and liquidated damages, if any, with the net cash proceeds
of one or more public or private offerings of Common Stock generating net cash
proceeds to the Company of at least $20,000; provided at least 65% of the
aggregate principal amount of Notes issued on the Closing Date remain
outstanding immediately after such redemption.
In connection with the unit offering, the Company purchased $80,500 of
government securities. These investments will be used to fund the first seven
scheduled interest payments on the Notes. These securities are pledged to the
trustee for the benefit of the holders of the Notes, and secure a portion of the
Company's obligations under the Indenture with respect to the Notes (the
"Indenture").
-8-
<PAGE>
ONEPOINT COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
(Dollars in thousands, except per share data)
Note 4 - Unit Offering (continued)
Pursuant to a change in control, as defined in the Indenture, the Company
will be required to make an offer to each Note holder to repurchase all or any
part of the Notes at 101% of the aggregate principal amount, plus unpaid
interest and liquidated damages, if any.
Amounts outstanding under the notes were $175,000 at September 30, 1998.
Interest accrued under the notes at September 30, 1998 was $9,177.
In connection with the unit offering, the Company is required to comply
with specified covenants. These covenants include, among other things,
limitations on sales of subsidiaries and certain assets, mergers, and other
activities.
The Company has not yet satisfied the requirement in the Registration
Rights Agreement to have the Exchange Offer Registration Statement declared
effective and believes the Company will begin to accrue Liquidated Damages on
November 17, 1998. Refer to Note 10 -- Subsequent Events.
Note 5 - Term Note
On March 25, 1998, the Company entered into a term note with a bank (the
"Bank Facility"). Under the terms of the Bank Facility, the Company may borrow
up to $9,000. Principal payments on amounts borrowed begin on January 1, 1999
with all balances payable on or before January 1, 2003. The Bank Facility has
mandatory repayment provisions upon certain events. The Bank Facility is
secured by certain of the Company's assets and is guaranteed by SBC
Communications Inc. As of September 30, 1998 the amount available to the
Company under the Bank Facility is $8,555 due to the issuance of two letters of
credit by the bank totaling $445 which remained outstanding as of September 30,
1998.
Note 6 - Equity
Pursuant to the Company's recapitalization as described in Note 1, the
Company authorized 2,000,000 shares of $0.01 par value Common Stock, and 35,000
shares of $1.00 par value Preferred Stock.
Upon liquidation, dissolution or winding up of the Company, the holders of
Common Stock are entitled to receive pro rata the assets of the Company which
are legally available for distribution, after payment of all debts and other
liabilities and subject to the prior rights of any holders of Preferred Stock.
Each outstanding share of Common Stock is entitled to vote on all matters
submitted to a vote of stockholders. Subject to the prior rights of the
holders of Preferred Stock, the holders of outstanding shares of Common Stock
are entitled to receive dividends as determined, from time to time, by the Board
of Directors. The Indenture restricts the ability of the Company to pay
dividends on the Common Stock.
Upon liquidation, dissolution or winding up of the Company, each holder of
Preferred Stock is entitled to be paid before any distribution or payment is
made with respect to any other class of the Company's capital stock, an amount
in cash equal to the aggregate of all shares held by such holder that is equal
to the initial price paid to the Company for such shares at issuance. The
Preferred Stock does not accrue dividends, and is not convertible into any other
class of capital stock. The Preferred Stock may be redeemed by the Company, in
whole or in part, at any time, but is not subject to mandatory redemption.
-9-
<PAGE>
ONEPOINT COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
(Dollars in thousands, except per share data)
Note 7 - Changes in Non-owner Equity
Beginning in the first quarter of 1998, compliance with SFAS No. 130,
"Reporting Comprehensive Income" was required. In accordance with the
requirements of this standard, the components of changes in non-owner equity,
net of related tax for the three and nine months ended September 30, 1998 are as
follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 1998 September 30, 1998
---------------------------------------------
<S> <C> <C>
Net Loss $(15,858) $(30,136)
Unrealized gain on securities 223 230
---------------------------------------------
Changes in non-owner equity $(15,635) $(29,906)
=============================================
</TABLE>
There were no items which affected non-owner equity in the three and nine months
ended September 30, 1997.
Note 8 - Supplemental Cash Flow Data
The Company made cash payments of $22 and $0 for interest and income taxes,
respectively, and recapitalized long-term debt totaling $1,500 through the
issuance of stock during the nine months ended September 30, 1998. During the
nine months ended September 30, 1997, the Company made no cash payments for
interest or income taxes.
Note 9 - Arbitration Proceedings
On August 6, 1998 OnePoint Communications Holdings, LLC filed a demand for
arbitration of certain disputes arising under the Mid-Atlantic operating and
management agreements. The arbitration demand seeks resolution of the following
questions: (i) whether OnePoint is entitled to obtain and disclose Mid-
Atlantic's results in connection with the Exchange Offer; (ii) whether Mid-
Atlantic Holdings, the other owner of membership interests in Mid-Atlantic, and
John Norcutt, the Business Manager of Mid-Atlantic and a principal of Mid-
Atlantic Holdings, breached their contractual and fiduciary obligations to
OnePoint by delaying and then conditioning the release of Mid-Atlantic's 1997
audited financial statements on a grant of business concessions from OnePoint;
(iii) whether Mid-Atlantic Holdings and Norcutt breached their contractual and
fiduciary obligations to Mid-Atlantic and OnePoint by rejecting an offer of
financing from OnePoint in favor of an inferior offer from an unaffiliated
financing source; (iv) whether Mid-Atlantic Holdings and Norcutt violated their
contractual and fiduciary duties to OnePoint by imposing on OnePoint a four-day
deadline to meet a June 1998 capital call for Mid-Atlantic; and (v) whether Mid-
Atlantic Holdings and Norcutt are liable for damages to OnePoint resulting from
the breaches of contractual and fiduciary duties described above. On August 27,
1998, Mid-Atlantic Holdings filed a motion in Circuit Court in Lake County,
Illinois seeking to enjoin the Company from participating in the arbitration
with respect to the first question on the grounds that the Company is not a
party to the Mid-Atlantic Operating and Management Agreements. On October 1,
1998 this motion was granted in part, staying the Company from participating in
the arbitration, but allowing OnePoint Communications Holdings, LLC to pursue
its claims, including those relating to the first questions stated above. The
Company is continuing to seek resolution of all of these issues.
-10-
<PAGE>
ONEPOINT COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
(Dollars in thousands, except per share data)
Note 10 - Subsequent Events
The Company's Notes and Warrants were separated on November 6, 1998. The
Company completed open market purchases of Notes having an aggregate principal
amount of $35,750 between November 9 and November 12, 1998 at various prices
at a total cost of $17,432, including accrued interest and transaction fees. The
Company is seeking to have a proportionate amount of the restricted securities
(which it estimates to be approximately $16,445) released in accordance with the
terms of the pledge agreement.
On October 1, 1998, the Company acquired certain additional assets of PCTV
for a total consideration of $200. This PCTV acquisition provided contractual
rights to serve 450 MDU passings in one property in the Chicago market. Unless
additional PCTV obtains ROE consents with respect to an additional 76 passings
originally intended to be acquired by the Company, this will be the final
closing with respect to the PCTV acquisition. During October of 1998 the Company
ceased negotiations for the acquisition of MDU assets and ROE agreements from
PCTV in the Phoenix market which were previously covered by a letter of intent.
During November of 1998, the Company ceased negotiations for the acquisition of
certain private cable assets located in North Carolina which were previously
covered by a letter of intent.
In connection with the offering of the Units in May 1998, the Company
entered into a Registration Rights Agreement (the "Registration Rights
Agreement") pursuant to which it agreed to file and use its best efforts to
cause to become effective the Registration Statement relating to an offer to
exchange the Notes (the "Exchange Offer") for substantially identical notes
which are not subject to the restrictions on transfer that are applicable to the
Notes. The Company filed the Registration Statement on September 18, 1998, as
required under the Registration Rights Agreement. The Registration Rights
Agreement provides, however, that if the Registration Statement has not been
declared effective by the Securities and Exchange Commission (the "Commission")
on or before November 17, 1998, then Liquidated Damages will accrue with respect
to the Notes. Such Liquidated Damages accrue at a rate of $0.05 per week per
$1,000 principal amount of Notes for the first 90 days beyond November 17, 1998,
and thereafter increase by $0.05 per week per $1,000 principal amount of Notes
each 90 day period, up to a maximum of $0.50 per week per $1,000 principal
amount of Notes. Liquidated Damages cease to accrue when the Registration
Statement is declared effective. The Company does not believe the Registration
Statement will be declared effective by November 17, 1998, and, accordingly,
believes that the Company will begin accruing Liquidated Damages on that date.
As a condition to the effectiveness of the Registration Statement, the Company
is required to file as an exhibit to the Registration Statement the consent of
the independent auditors of Mid-Atlantic Telcom Plus, LLC ("Mid-Atlantic") to
the inclusion of their report with respect to Mid-Atlantic's financial
statements in the Registration Statement. Mid-Atlantic has refused to supply its
independent auditors with information necessary for them to provide such
consent. The Company has requested that the Commission waive the requirement
that Mid-Atlantic's financial statements be included in the Registration
Statement, but has not received a response from the Commission. There can be no
assurance as to whether or when the Company will be able to obtain such a waiver
or will obtain the required consent from Mid-Atlantic's independent auditors
(Refer to Note 9 Arbitration Proceedings).
-11-
<PAGE>
ONEPOINT COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
(Dollars in thousands, except per share data)
Note 10 - Subsequent Events (continued)
The Mid-Atlantic operating results included in the losses in investments in
unconsolidated subsidiaries in this Form 10-Q are based on Mid-Atlantic's
internal unaudited financial results as reported to the Company for periods
through September 30, 1998. Since the arbitration demand was filed, the Manager
of Mid-Atlantic has delayed certain financial and operating reporting and failed
to respond to a written request for inspection of its records. The Company
believes that the Manager's refusal to provide this information violates its
legal and contractual obligations to the Company and to OnePoint Communications
Holdings, LLC, a subsidiary of the Company. The Company has and will continue to
use all remedies available to obtain this information. Further, the Company has
become aware that Mid-Atlantic completed an acquisition of private cable assets
in the Philadelphia metropolitan area from CAI Wireless Systems, Inc. on
September 24, 1998 for cash consideration of approximately $5,239.
-12-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Dollars in thousands)
The following discussion should be read in conjunction with the
accompanying unaudited Consolidated Financial Statements and associated Notes
thereto and the audited Consolidated Financial Statements, the Notes thereto and
Management's Discussion and Analysis of Financial Condition and Results of
Operations of the Predecessor Company as of and for the year ended December 31,
1997 included in the Registration Statement. This discussion includes certain
forward-looking statements. Actual results could differ materially from the
forward-looking statements as a result of a number of factors. For a discussion
of the risk factors that could cause actual results to differ materially from
the forward-looking statements, see "Risk Factors" included in the Registration
Statement.
GENERAL
OnePoint is a rapidly growing provider of bundled telephony and video
services to residents of multiple dwelling units ("MDUs") in high growth,
densely populated urban and suburban markets. The Company offers a wide range
of residential telephony and video services, including local and long-distance
telephony services and video subscription services in six regional markets.
From its inception in 1996 until January 1998, the Company's principal
activities consisted of procuring governmental authorizations, negotiating
telephony and video ROE contracts for MDUs, hiring management and other key
personnel, raising capital, developing, acquiring and integrating customer
service, billing and other back office systems, identifying potential
acquisition targets, and negotiating resale agreements. The Company commenced
active marketing efforts in January 1998 in the Washington/Baltimore/
Philadelphia metropolitan area, in February 1998 in Atlanta and Chicago, and in
March 1998 in Charlotte/Raleigh/Durham, Denver and Phoenix. While continuing to
evaluate new potential markets for expansion, the Company has no current plans
to expand into new markets within the next 12 months.
Through September 1998, the Company had entered long term contracts
providing preferential access to approximately 242,200 telephony or video
passings in 1,115 MDUs in the Company's targeted markets. Through September
1998, the Company had 12,045 telephony and 16,383 video subscribers, and had
commenced marketing of services to 144,600 telephony and 28,900 video passings
in six target markets. Through September 1998, the Company had 311 internet
subscribers through its high-speed internet trial launched during the third
quarter. Through September 1998, the Company's proportional ownership share of
Mid-Atlantic represented an additional 20,697 video subscribers and 36,700 video
passings.
On February 23, 1998, the Company purchased certain cable television ROE
contracts and satellite cable television equipment from U.S. Online
Communications, LLC. The purchase resulted in the addition of 425 cable
television subscribers located in two properties in Atlanta, Georgia. On July 1,
1998, August 10, 1998 and October 1, 1998, the Registrant completed closings
acquiring certain assets of PCTV for a total consideration of $12,436. In
total, the PCTV acquisitions provided contractual rights to serve 28,270 MDU
passings in 160 properties in the Chicago market.
ISSUANCE OF NOTES AND WARRANTS
On May 21, 1998, the Company completed its offering of $175,000 aggregate
principal amount of Units consisting of 14.5% Senior Notes due 2008 and Warrants
to purchase 111,125 shares of Common Stock. The Units were issued and sold in
accordance with Rule 144A and Regulation S under the Securities Act.
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The Notes are general unsecured obligations of the Company ranking pari
passu in right of payment to all existing and future unsubordinated indebtedness
of the Company and senior in right of payment to all existing and future
subordinated indebtedness of the Company.
The Notes mature on June 1, 2008. Interest on the Notes is payable semi-
annually on June 1 and December 1, of each year, commencing December 1, 1998.
The Notes are redeemable at the option of the Company, in whole or in part, at
any time on or after June 1 of 2003, 2004, 2004, and 2005 at approximately 107%,
105%, 102%, and 100% of the principal amount thereof, respectively, in each
case, plus accrued and unpaid interest to the date of redemption. In addition,
on or prior to June 1, 2003, the Company may redeem up to 35% of the original
aggregate principal amount of the Notes at a redemption price of 101% of the
principal amount thereof, plus accrued and unpaid interest to the date of
redemption, with the net cash proceeds of certain private or public equity
offerings of the sale of Common stock of at least $20,000; provided that at
least 65% of the original aggregate principal amount of the Notes remain
outstanding immediately after such redemption. Upon the occurrence of a certain
change of control events, the Company will be required to make an offer to
purchase the Notes at a purchase price equal to 101% of the principal amount
thereof, plus accrued and unpaid interest, if any, to the date of repurchase.
The net proceeds of the Offering, after deducting discounts and commissions
and expenses payable by the Company, were approximately $169,425. Concurrent
with the closing of the offering the Company used $80,500 of such net proceeds
to purchase governmental securities, which, together with the proceeds thereof,
will be used to pay the first seven semi-annual interest payments on the Notes.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 AS COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1997 (Dollars in thousands, except per subscriber amounts)
TOTAL REVENUES. Total revenues for the third quarter of 1998 were $2,765
compared to $2 for the same period in 1997. Telephony revenues and cable
television revenues in the third quarter of 1998 were $1,524 and $1,241,
respectively. Minimal revenue was generated in the third quarter of 1997 as the
Company commenced limited operations in September of 1997 and more broadly
initiated service during 1998. Total revenue per weighted average billed
subscriber during September was approximately $70.91 for telephony services and
$25.59 for video services, including all subscribers residing in MDUs covered by
a bulk pricing arrangement. Monthly subscription fees are lower for MDUs
covered by a bulk pricing arrangement. Monthly revenue per weighted average
billed subscriber is impacted by the relative proportion of new subscribers
incurring installation charges.
COST OF SERVICES. Cost of services (programming, telecommunications service and
payments to owners and employees of MDUs) were $2,916 in the quarter ended
September 30, 1998. Cost of services in the third quarter of 1998 exceeded
revenues by $151 primarily because payments to certain MDU owners are structured
on a per-passing basis and because of higher costs during a customer's
installation period. The Company anticipates improvement in the relationship
between costs of services and revenue as subscriber penetration increases and
the relative proportion of new customers decreases.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses were
$8,880 for the third quarter of 1998 compared to $3,436 in the third quarter of
1997, an increase of $5,444. This was primarily the result of increases in
personnel and related costs associated with the initiation of service in three
new regions and the increased volume of subscribers for the Company's services.
The Company continues to experience higher than anticipated customer activation
costs as it currently provides service through a resale agreement with the
incumbent local exchange carrier (the "ILEC") and is dependent on the ILEC for
the efficiency of order processing and installation. The reserve for bad debts
was increased
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in September from 4% to 8% of telephony revenue as the Company has recently
experienced an increased volume of non-pay disconnects.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased by $275
to $462 for the third quarter of 1998 from $187 in the same period in 1997. The
increase is primarily attributable to an increase in cable and telephone systems
and intangible assets resulting from purchases and installation of such
equipment.
INTEREST INCOME AND EXPENSE. Interest expense was $6,697 for the third quarter
of 1998 compared to $0 for the third quarter of 1997. The increase represents
interest accrued on senior notes and premiums amortized on unrestricted
marketable securities. The interest on senior notes accrues at a rate of 14.5%
per year, payable semi-annually on June 1 and December 1, of each year,
commencing December 1, 1998. Refer to Issuance of Notes and Warrants section in
the Management Discussion and Analysis. Interest income was $1,046 for the
third quarter of 1998, an increase of $1,039 over the same quarter of 1997. The
increase reflects interest income derived from the short-term investment of
proceeds from the Offering.
LOSSES IN EQUITY OF INVESTMENTS IN UNCONSOLIDATED SUBSIDIARIES. The Company
recognized an equity loss of $714 from the operations of Mid-Atlantic during the
three months ended September 30, 1998.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 1997 (Dollars in thousands, except per subscriber amounts)
TOTAL REVENUES. Total revenues for the nine months ended September 30, 1998,
were $3,440 compared to $2 for the same period in 1997. Minimal revenue was
generated for the nine-month period ended September 30, 1997 as the Company did
not commence operations until September of 1997. Telephony revenues and cable
television revenues for the nine months ended September 30, 1998 were $2,158 and
$1,282, respectively. Total revenue per weighted average billed subscriber
during September was approximately $70.91 for telephony services and $25.59 for
video services, including all subscribers residing in MDUs covered by a bulk
pricing arrangement. Monthly subscription fees are lower for MDUs covered by a
bulk pricing arrangement. Monthly revenue per weighted average billed subscriber
is impacted by the relative proportion of new subscribers incurring installation
charges.
COST OF SERVICES. Cost of services (programming, telecommunication service
costs and payments to owners and employees of MDUs) were $4,822 in the nine
months ended September 30, 1998. Cost of services for the nine months ended
September 30, 1998 exceeded revenues by $1,382 primarily because payments to
certain MDU owners are structured on a per-passing basis and because of higher
costs during a customer's installation period. The Company anticipates
improvement in the relationship between costs of services and revenue as
subscriber penetration increases and the relative proportion of new customers
decreases.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses were
$17,745 for the nine months ended September 30, 1998 compared to $8,858 in the
comparable period of last year, an increase of $8,887, or 100%. This was
primarily the result of increases in personnel and related costs associated with
the initiation of service in three new regions and the increased volume of
subscribers for the Company's communications services. The Company continues to
experience higher than anticipated customer activation costs as it currently
provides service through a resale agreement with the incumbent local exchange
carrier (the "ILEC") and is dependent on the ILEC for the efficiency of order
processing and installation. The reserve for bad debts was increased in
September from 4% to 8% of telephony revenue as the Company has recently
experienced an increased volume of non-pay disconnects.
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DEPRECIATION AND AMORTIZATION. Depreciation and amortization was $773 for the
first nine months of 1998 compared to $369 in the comparable period of 1997, an
increase of $404, or 109%. The increase is primarily attributable to an
increase in cable and telephone systems and intangible assets resulting from
purchases and construction of such equipment.
INTEREST INCOME AND EXPENSE. Interest expense was $9,647 for the nine months
ended September 30, 1998, compared to $0 for the same period in 1997. The
increase represents the interest accrued on senior notes and premiums amortized
on marketable securities. The interest on senior debt accrues at a rate of
14.5% per year, payable semi-annually on June 1 and December 1, of each year,
commencing December 1, 1998. Refer to Issuance of Notes and Warrants section in
the Management Discussion and Analysis. Interest income was $1,674 for the nine
months ended September 30, 1998, compared to $41 in the same period in 1997.
The increase reflects interest income from short-term investment of the proceeds
from the Offering.
LOSSES IN EQUITY OF INVESTMENTS IN UNCONSOLIDATED SUBSIDIARIES. The Company
recognized an equity loss of $2,280 from the operations of Mid-Atlantic Telcom
Plus, LLC during the nine months ended September 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company has generated net losses since its inception, resulting in an
accumulated deficit of $48,263 as of September 30, 1998. During the past year,
the Company has required external funds to finance capital expenditures,
acquisitions and operating activities. Net cash used in the Company's purchase
and acquisition of assets was $6,397 for the first nine months of 1998 compared
to $1,510 for the first nine months of 1997.
From inception and until the issuance of the Notes, the Company relied
primarily on investments from its principal stockholder in the form of equity to
fund its operations. The Company has a Bank Facility of $9,000, pursuant to
which $8,555 million was available to the Company as of September 30, 1998.
Availability is reduced by two outstanding Letters of Credit issued by the bank.
In May 1998, the Company issued the Units for gross proceeds of $175,000.
Of this amount, approximately $80,500 was used to purchase government
securities, which, together with the proceeds of the investment thereof, will be
used to make the first seven semi-annual interest payments on the Notes.
Cash flows used in operating activities were $20,023 and $7,258 for the
nine months ended September 30, 1998 and 1997, respectively, an increase of
$12,765 or 176%. The rollout and expansion of business operations during 1998
precipitated this increase. Cash flows used in operating activities can vary
significantly from period to period depending upon the timing of operating cash
receipts and payments, especially accounts receivable, prepaid expenses and
other assets, and accounts payable and accrued liabilities.
Cash flows used in investing activities for the nine months ended
September 30, 1998 was $145,919. Cash flows provided in investing activities
for the nine months ended September 30, 1997 was $892. Cash flows provided by
financing activities was $165,532 and $8,519 for the nine months ended September
30, 1998 and 1997, respectively. As of September 30, 1998 the Company had
$5,053 of cash and cash equivalents.
The Company completed open market purchases of Notes having an aggregate
principal amount of $35,750 between November 9 and November 12, 1998 at various
prices at a total cost of $17,432,
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including accrued interest and transaction fees. The Company is seeking to have
a proportionate amount of the restricted securities (which it estimates to be
approximately $16,445) released in accordance with the terms of the pledge
agreement. Based on market conditions, the Company will continue to evaluate the
repurchase of Notes and may continue to utilize existing cash to fund additional
purchases.
The Company currently anticipates incurring liquidated damages resulting
from its failure to have the Exchange Offer Registration Statement declared
effective by the Commission by November 17, 1998 (Refer to Note 10 -- Subsequent
Events). The Company estimates the liquidated damages, based on the Notes
outstanding at November 13, 1998, will be $7 per week through February 17, 1999
and escalating each 90 day period thereafter in an amount equal to $7 per week,
up to a maximum penalty of $70 per week until the Exchange Offer Registration
Statement is declared effective.
The Company's future results of operations will be materially impacted by
its ability to finance its planned business strategies. The Company expects that
its current financing will be sufficient to meet its operational rollout plans
for the next twelve months. A considerable portion of the Company's capital
expenditure requirements are scaleable dependent upon the number of ROE
contracts the Company enters into. Capital expenditures may be larger or
smaller depending whether the Company is able to achieve its targeted market
share.
Depending on market conditions and the availability of acquisitions on
favorable terms, the Company may determine to raise additional capital. The
Company may obtain additional funding through the sale of public or private debt
and/or equity securities or through additional borrowings from banks or other
lending institutions.
The Company expects significant cash requirements for at least the next
several years due to continued expansion of its customer base and the need to
invest in facilities and equipment to support telephony and video services. The
Company's future cash requirements will depend on a number of factors including
(i) the rate at which the Company secures ROE (ii) the level of penetration
achieved for telephony and video services and the pricing of such services (iii)
the availability of private cable acquisitions on favorable terms, (iv) the rate
at which the Company deploys telephony facilities, the cost of equipment
required to do so, and its ability to aggregate traffic onto the Company's
facilities, (v) the expansion to additional markets, if any, and (vi) the
repayment of the Notes in accordance with the terms thereof (including
liquidated damages).
CAPITAL STRUCTURE
The Company's capital structure consists of notes payable (including the
Notes), Preferred Stock and Common Stock.
Total borrowings as of September 30, 1998 were $175,000, all of which was
related to the Notes. As of September 30, 1998, the balance outstanding on the
Bank Facility was $0; however, outstanding letters of credit issued by the bank
as of that date totaled $445.
The Indenture governing the Notes contains certain financial covenants with
which the Company must comply relating to, among other things, the following
matters: limitation on the Company's payment of cash dividends, repurchase of
capital stock, payment of principal on subordinated indebtedness and making of
certain investments, unless after giving effect to each such payment, repurchase
or investment, certain operating cash flow coverage tests are met, excluding
certain permitted payments and investments.
The $9,000 Bank Facility contains a number of covenants, including
covenants requiring the Company to notify the bank of changes in its name or the
locations of the collateral, maintain insurance,
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defend the collateral from claims of others, execute financing statements and
other necessary documents, deliver certificates of documents of title, furnish
evidence of ownership of collateral, maintain the collateral in good condition,
make appropriate entries upon the Company's financial statements, books and
records disclosing the bank's interest in the collateral, and notify the bank of
any material loss or depreciation in the value of the collateral. The Bank
Facility also prevents the company from selling, transferring or otherwise
disposing of collateral without Northern Trust's consent.
YEAR 2000 DATA CONVERSION
The year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Computer programs
that have date-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities.
The Company's Program. The Company has undertaken a program to address the
Year 2000 issue with respect to the following: (i) the Company's information
technology and operating and support systems (including its customer care,
trouble tracking, billing and provisioning systems); (ii) the Company's non-
information technology systems; and (iii) certain systems of the Company's major
suppliers and material service providers (insofar as such systems relate to the
Company's business activities with such parties). As described below, the
Company's Year 2000 program involves (i) an assessment of the Year 2000 problems
that may affect the Company, (ii) the development of remedies to address the
problems discovered in the assessment phase, (iii) the testing of such remedies
and (iv) the preparation of contingency plans to deal with worst case scenarios.
Assessment Phase. As part of the assessment phase of its program, the
Company has and will continue to attempt to identify substantially all of the
major components of the systems described above. In order to determine the
extent to which such systems are vulnerable to the Year 2000 issue, the Company
continuously evaluates its internally developed software applications. From the
outset of operations, the Company's intent has been to procure hardware and
software that is Year 2000 compliant. The Company has requested Year 2000
Compliance statements from the equipment, billing and communications carriers
from which it procures equipment and services, and has either received written
confirmation of their compliance or their intention to become compliant before
the Year 2000. Every piece of computer equipment utilized by the Company was
purchased in new condition after January 1, 1997. The servers (HP, Sun, and
Compaq) are all either running a version of their operating systems which is
certified by the manufacturer to be Year 2000 compliant, or the patch/upgrade
has been identified and we are planning the upgrade. Each of the desktop
computers is a Compaq Deskpro-line PC running either Windows 95 or Windows NT
4.0, which are either compliant or will be soon. The BIOS of each of these
machines has been updated. The customer care and billing system, provided by
CSG Systems, Inc. of Denver, CO, is Year 2000 compliant and has been tested.
The telephony provisioning system, provided by Beechwood Data Systems of Clark,
NJ, is reported to be Year 2000 compliant. The Company has obtained written
certifications from its underlying local and long distance service providers
that all provisioning applications and interfaces to/from its underlying
carriers will be Year 2000 compliant before the year 2000. With respect to the
operation of their network, these local and long distance service providers have
indicated that they have had Year 2000 projects underway for several years and
expect to complete all Year 2000 upgrades during 1999, with time before year-end
for system testing and quality assurance. The majority of equipment suppliers
(i.e. HP, Sun, Compaq, Dell, Microsoft, and Novell) have directed the Company to
their Internet web sites where they have posted product information relative to
Year 2000 compliance. The Company has downloaded this information and has
identified those systems that are compliant, as well as those systems that will
have to be upgraded or replaced to become compliant. The Company has not
reviewed the legal status of assurances regarding
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Year 2000 compliance. The Company also relies on the information regarding Year
2000 compliance of its local and long-distance service providers as supplied to
Public Service Commissions in each state.
Remediation and Testing Phase. Based on the ongoing results of its
assessment efforts, the Company will undertake remediation and testing
activities. The activities conducted during the remediation and testing phase
are intended to address information technology systems and non-information
technology systems in an attempt to demonstrate that this software will be made
substantially Year 2000 compliant on a timely basis. In this phase, the Company
evaluates program applications and, if a potential Year 2000 problem is
identified, takes steps to attempt to remediate the problem and to test the
application to confirm that the remediating changes are effective and have not
adversely affected the functionality of the application. The Company has
historically tested systems utilizing internal resources. Testing is
accomplished by setting system clocks ahead and then running these systems as in
real operations. The results have proven that the customer care and billing
system is compliant, the long distance provisioning software is compliant, and
applicable SUN and SCO patches will bring the UNIX servers up to Year 2000
compliance. The lone application developed internally has been tested and is
compliant. In addition to the individual testing of system components, the
Company is testing integrated systems in order to test Year 2000 issues which
may arise through a combination of individual systems. The Company is also
exploring extending the integrated testing with EDI partners.
Contingency Plans. The Company intends to develop contingency plans to handle
the most reasonably likely worst case Year 2000 scenarios. Mission-critical
failure would relate to those systems which are vital to the provision of voice
switching, processing, and transport services to our customers. Examples of
mission-critical systems include those network and essential operating
supporting systems provided and provisioned by the Company's underlying carriers
that enable the Company to offer its customers local and long distance switched
telecommunications services. As the Company initially operates under a resale
arrangement from what is effectively a monopoly provider of certain network
services, it has not as yet identified a timely and cost-effective contingency
plan in the event of a pervasive and extended failure by its underlying
carriers. If the underlying systems experience errors short of failure, these
errors may prevent correct billing and/or provisioning of new service to the
Company's customers. If any or all of our internal systems fail, but those of
our underlying carriers do not, then service to existing customers would not be
disturbed, although this failure may prevent correct billing and/or provisioning
of new services. The Company intends to complete its worst case contingency
plans after it has monitored and evaluated progress made by the communications
carriers referred to above.
Costs Related to the Year 2000 Issue: To date, the Company has incurred no
explicit costs for its Year 2000 program, aside from indirect management costs
related to the research of internal and vendors' systems, plans and procedures.
While the Company anticipates relatively low direct costs related to its
internal systems, total costs related to the Year 2000 issue will be a function
of its vendors ability to make progress against their intended compliance before
the year 2000.
Risks related to the Year 2000 Issue. Although the Company's Year 2000
efforts are intended to minimize the adverse effects of the Year 2000 issue on
the Company's business and operations, the actual effects of the issue and the
success or failure of the Company's efforts described above cannot be known
until the Year 2000. Failure by the Company or its major suppliers to address
adequately their respective Year 2000 issues in a timely manner (insofar as such
issues relate to the Company's business) could have a material adverse effect on
the Company's business, results of operations and financial condition.
The foregoing includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"). All statements other than statements
of historical fact including, without limitation, statements regarding the
Company's future financial position, business strategy, budgets, projected
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costs and plans and objectives of management for future operations, are forward-
looking statements. In addition, forward-looking statements generally can be
identified by the use of forward-looking terminology such as "may," "will,"
"expect," "intend," "estimate", "anticipate," "believe," "should," "plans," or
"continue" or the negative thereof or variations thereon or similar terminology.
Although the Company believes that the expectations reflected in such forward-
looking statements are reasonable, it can give no assurance that such
expectations will prove to have been correct. Important factors that could
cause actual results to differ materially from the Company's expectations are
disclosed under "Risk Factors" and elsewhere in the Registration Statement,
including, without limitation, the Company's limited history, early stage of
operations, negative cash flow and operating losses, substantial leverage and
debt service requirements, significant capital requirements, dependence on its
affiliations with SBC and restrictions relating thereto, risks associated with
MDU Rights of Entry, dependence on products and services of others, regulatory
requirements and developments, difficulties implementing local exchange and long
distance telephony services, availability of transmission sites, subscriber
turnover rates, market acceptance of the Company's services, ability to procure
programming services, dependence on billing and customer care and information
systems, dependence on key personnel, competition, technological changes and
market development patterns and the other factors noted in the offering
memorandum with respect to the Company's business ("Cautionary Statements").
All subsequent written and oral forward-looking statements attributable to the
Company, or persons acting on its behalf, are expressly qualified in their
entirety by the Cautionary Statements.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, the Company has been and is involved in various legal
proceedings, all of which management believes are routine in nature and
incidental to the conduct of its business. The ultimate legal and financial
liability of the Company with respect to such proceedings cannot be estimated
with certainty, but the Company believes, based on its examination of such
matters, that none of such proceedings, if determined adversely to the Company,
would have a material adverse effect on the Company's results of operations and
financial condition and its ability to meet its obligations under the Notes.
On August 6, 1998 OnePoint Communications Holdings, LLC filed a demand for
arbitration of certain disputes arising under the Mid-Atlantic Operating and
Management Agreements. The arbitration demand seeks resolution of the following
questions: (i) whether OnePoint is entitled to obtain and disclose Mid-
Atlantic's results in connection with the Exchange Offer; (ii) whether the Mid-
Atlantic Holdings, the other owner of membership interests in Mid-Atlantic, and
Norcutt, the Business Manager of Mid-Atlantic and a principal of Mid-Atlantic
Holdings, breached their contractual and fiduciary obligations to OnePoint by
delaying and then conditioning the release of Mid-Atlantic's 1997 audited
financial statements on a grant of business concessions from OnePoint; (iii)
whether the Mid-Atlantic Holdings and Norcutt breached their contractual and
fiduciary obligations to Mid-Atlantic and OnePoint by rejecting an offer of
financing from OnePoint in favor of an inferior offer from an unaffiliated
financing source; (iv) whether Mid-Atlantic Holdings and Norcutt violated their
contractual and fiduciary duties to OnePoint by imposing on OnePoint a four-day
deadline to meet a June 1998 capital call for Mid-Atlantic; and (v) whether Mid-
Atlantic Holdings and Norcutt are liable for damages to OnePoint resulting from
the breaches of contractual and fiduciary duties described above. On August 27,
1998, Mid-Atlantic Holdings filed a motion in Circuit Court in Lake County,
Illinois seeking to enjoin the Company from participating in the arbitration
with respect to the first question on the grounds that the Company is not a
party to the Mid-Atlantic Operating and Management Agreements. On October 1,
1998 this motion was granted in part, staying the Company from participating in
the arbitration, but allowing OnePoint Communications Holdings, LLC to pursue
its claims, including those relating to the first questions stated above. The
Company is continuing to seek resolution of all of these issues.
ITEM 2. CHANGES IN SECURITIES
In April 1998, pursuant to the Company's recapitalization, as described in
Note 1 and in the Registration Statement, the Company authorized 2,000,000
shares of $0.01 par value Common Stock, of which 1,000,000 shares were issued,
and the Company authorized 35,000 shares of $1.00 par value Preferred Stock, of
which all shares were issued.
In April 1998, in order to convert the Predecessor Company into a
corporation, VenCom, L.L.C. and Ventures in Communications, L.L.C. ("VIC")
contributed their membership interests in the Predecessor Company and a $1,500
promissory note payable by the Predecessor Company to VIC to Ventures in
Communications II, LLC ("VIC2") in exchange for membership interest of VIC2.
Subsequently, the Predecessor Company merged with and into OnePoint
Communications Corp., with the Predecessor Company's outstanding membership
interests and its $1,500 promissory note payable to VIC exchanged for shares of
the Company's Common Stock and Preferred Stock. As a result of the merger
transactions, the Company became a Delaware corporation which is wholly owned by
VIC2. The financial position of the Predecessor Company as of December 31, 1997
has been restated to reflect this change in entity.
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
On August 25, 1998, the Board of Directors approved and implemented a Stock
Appreciation Rights Plan, pursuant to which employees of the Company received
contractual rights to receive a portion of the appreciation of the market value
of the Company. Pegged to a multiple of historical EBIT or a qualifying
triggering event, these rights are subject to vesting requirements and broad
discretion of the Compensation Committee of the Board of Directors.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
On September 17, 1998, the Company distributed to its note holders a report
on Form 8-K that disclosed certain information regarding the acquisition of
certain assets of PCTV that was effected July 1, 1998 and August 10, 1998. A
report on the Form 8-K with respect to the acquisition was distributed to the
note holders on September 17, 1998 and was filed with the Commission on November
16, 1998.
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ONEPOINT COMMUNICATIONS CORP.
FORM 10-Q
September 30, 1998
SIGNATURE
Pursuant to the requirements of the Indenture Agreement, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
Date: November 16, 1998
-----------------
ONEPOINT COMMUNICATIONS CORP.
BY /s/JOHN D. STAVIG
-----------------------
John D. Stavig
Chief Financial Officer
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<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from
THE CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1998 AND BY THE CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1998 and is
qualified in its entirety by reference to such financial statements.
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0
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